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Senate Banking Committee Considers Testimony on Stablecoin Regulation and Risks's picture
Commentary by Sebastian Souchet

The U.S. Senate Committee on Banking, Housing and Urban Affairs considered testimony on the regulation of stablecoins and the risks they pose to the U.S. financial system.

The Committee considered the testimony of:

  • Alexis Goldstein, Director of Financial Policy, Open Markets Institute, who provided, among other things, (i) an overview of the distinction between asset-backed stablecoins (i.e., crypto assets backed by a fiat currency, a basket of fiat currencies or other stable-value assets) and algorithmic stablecoins ("uncollateralized crypto assets that attempt to maintain a stable value through a variety of means"); and (ii) an analysis of the role of stablecoins in the cryptocurrency ("crypto") ecosystem. Mr. Goldstein highlighted, in particular, a recent finding by the World Economic Forum that, "where regulation is evenly applied, stablecoins are subject to the same adoption and inclusion hurdles as other forms of retail finance." Additionally, Mr. Goldstein noted the fact that stablecoins are (i) integral to decentralized finance ("DeFi") markets and (ii) pose concerns with respect to usability, investor protection, national security and climate change. Mr. Goldstein recommended that Congress "continue to examine if there are regulatory gaps that require new legislation to ensure consumer and investor protection as it relates to stablecoins," and that regulators should continue to "monitor stablecoins and ensure compliance with existing laws."
  • Jai Massari, Partner, Davis Polk & Wardwell LLP, who focused her testimony on "true" stablecoins (i.e., non-interest-bearing financial instruments "designed to maintain stable value against a reference fiat currency"). Ms. Massari argued that true stablecoins are a form of "narrow bank" because, like narrow banks, they do not have functions that engage in maturity and liquidity transformation. However, she noted, stablecoin issuers also provide "new benefits," such as potential use for retail payment services. Ms. Massari emphasized that there appears to be "broad agreement" among U.S. policymakers, financial regulators and market participants on the "general principles" of stablecoin regulation, which include (i) limits on the types of reserve assets backing a stablecoin, (ii) the use of audits and other transparency mechanisms, (iii) requirements to prevent illicit financing and violations of U.S. and global sanctions, (iv) limitations preventing maturity and liquidity transformation, and (v) regulations focused on operational risks related to settlement of transfers on the blockchain. Ms. Massari also argued against the recommendation of the President's Working Group on Financial Markets ("PWG") that stablecoin issuers be required to be insured depository institutions. She emphasized that requiring stablecoin issuers to be insured depository institutions is "unnecessary because stablecoins can be structured and regulated to avoid the risks that require deposit insurance and the application of traditional banking oversight in the first place."
  • Dante Disparte, Chief Strategy Officer and Head of Global Policy, Circle, who highlighted, among other things, Circle's efforts to foster inclusivity in payment systems through its issuance of USD Coin ("USDC"). In particular, Mr. Disparte emphasized the recent announcement of the Circle Impact Initiative, which includes as part of Circle's efforts (i) facilitating the development of learning and "hands-on approaches to entrepreneurialism" through collaborative Digital Financial Literacy initiatives with Historically Black Colleges and Universities; and (ii) advancing public-private partnerships to "mobilize blockchain-based payments and USDC to deliver corruption-resistant, real-time aid and relief."
  • Hilary J. Allen, Professor of Law, American University Washington College of Law, who argued that, with respect to crypto regulation, "Congress's most important goal should be to ensure that crypto does not cause a financial crisis." Ms. Allen emphasized that, while she agrees with the PWG's concerns about the potential impact of crypto on financial stability, she disagrees with its recommendation that stablecoin issuers be required to be insured depository institutions. Ms. Allen noted that, in her view, the principal use of stablecoins is to "support the DeFi ecosystem," which she called a "type of shadow banking system with fragilities that could . . . disrupt our real economy." She expressed concern that the regulatory treatment of stablecoin issuers as insured depository institutions would provide legitimacy for stablecoins and further advance the growth of DeFi.


Ms. Massari and Ms. Allen reject - each for separate (but not unrelated) reasons - the recommendation of the PWG to regulate stablecoin issuers as insured depository institutions. While Ms. Massari identifies several economic and regulatory issues posed by applying the insured depository institution framework to the stablecoin business model, Ms. Allen emphasizes the various systemic consequences and risks of regulating stablecoin issuers under that framework. On the whole, U.S. policymakers and financial regulators should pay particular attention to the testimony of both Ms. Massari and Ms. Allen, as they not only raise important questions about what proper regulation of stablecoins looks like, but also consider several interesting policy alternatives.

Sebastian Souchet is a law clerk in the Financial Services Practice. Fried Frank's Steven Lofchie contributed to this comment.

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