On February 8, 2022, the U.S. House Committee on Financial Services (“HFS”) hosted a virtual hearing entitled, “Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins.”  The hearing focused on the Report on Stablecoins, which are crypto-assets pegged to real assets (usually the U.S. dollar), that the President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (the “PWG Report”) issued in November 2021.

Nellie Liang, Under Secretary for Domestic Finance at the U.S. Department of the Treasury (“Treasury”) was the sole witness at the hearing, which was well-attended by committee members (based on the number of members that attended against the total numbers of committee members). (Liang also testified before the U.S. Senate Banking Committee on the PWG Report on February 15, 2022, which we will discuss in a future post.)  Liang’s opening statement summarized the PWG report, supporting “clear and consistent” regulation of stablecoins and noting that, although Treasury supports “responsible innovation,” stablecoins also raise policy concerns, including those related to illicit finance, user protection and systemic risk.

Liang responded to legislators’ questions regarding the PWG report, which outlined the potential risks associated with stablecoin, its rapid adoption and the absence of regulatory safeguards.  The PWG report proposed several recommendations designed to address, among other concerns, potential risks to investors and the financial system posed by stablecoins.  Notably, the report recommended that Congress pass legislation requiring all stablecoin issuers to be insured depository institutions (“IDIs”).

Potential Congressional Action

Liang highlighted the administration’s view that the need for stablecoin legislation is “urgent” and necessary to “close the regulatory gap.”

Members of both parties, including HFS Ranking Member Patrick McHenry (R-NC), have advocated for stablecoin legislation and some legislators have taken initial steps toward introducing legislation on stablecoins.  During the hearing, Rep. Josh Gottheimer (D-NJ) mentioned that he is proposing draft legislation that would establish “guardrails” for stablecoins, including those issued both by IDIs and non-IDIs, and noted that he is seeking bipartisan support.  In an interview prior to the hearing, Liang mentioned that she is “very supportive” of Gottheimer’s general ideas, although she noted that she has not reviewed the details of the draft legislation yet.  (Gottheimer’s draft legislation has since been released and will also be discussed in a future post).  Sen. Pat Toomey (R-PA) also outlined a proposed framework for stablecoin legislation last year.  In addition to pursuing legislation on stablecoins, Congress could also hold additional hearings, send oversight requests to stablecoin issuers, conduct depositions, refer matters to executive agencies for civil enforcement or criminal prosecution, or write a report regarding stablecoins.

Key Issues

Legislators’ questions and remarks addressed the core findings and recommendations of the PWG report. These questions and remarks may provide insight into the core themes that will animate legislators’ consideration of stablecoin legislation.

  • Permitted Stablecoin Issuers. HFS Chair Maxine Waters (D-CA) supports restricting the authority to issue stablecoins to certain entities, noting the risks associated with Facebook’s recently abandoned proposal to issue the Libra or Diem coin.  This suggests that Waters may support the PWG’s recommendation to require issuers to be IDIs.  However, several members from both parties—including Rep. Ritchie Torres (D-NY), Rep. Jim Himes (D-CT), Rep. Gregory Meeks (D-NY), Rep. Jake Auchincloss (D-MA), Gottheimer, Rep. Trey Hollingsworth (R-IN)—indicated that the PWG proposal may be too restrictive.  This suggests that passing legislation to implement the PWG recommendation would likely be challenging.
  • Financial Stability. Waters and other Democrats, including Rep. Joyce Beatty (D-OH) and Rep. Madeleine Dean (D-PA), expressed concerns that stablecoins may not maintain stable value during times of stress—for example, this may occur if these stablecoins are not adequately reserved or if there is a loss of investor confidence in the stablecoins. These legislators noted that a “run” on stablecoins could pose systemic risk.  Nydia Velázquez (D-NY), Beatty and Rep. Bill Posey (R-FL) highlighted that stablecoins may not always be fully reserved.  Rep. Brad Sherman (D-NY) and Beatty also asked about the risks of stablecoins to minority communities, which often invest in crypto-assets and may bear the burden of a collapse in stablecoin value.
  • Investor Protection. Members of both parties, including Rep. Emanuel Cleaver (D-MO) and Posey, emphasized the need for strong stablecoin investor protections. Cleaver compared stablecoins to Ponzi schemes, while Posey emphasized that consumers need to be aware that stablecoins, as currently structured, are not perfect substitutes for cash or bank deposits.
  • Excessive Regulation. Several Republican members—including Rep. Huizenga (R-MI), Rep. David Kustoff (R-TN) and Rep. Roger Williams (R-TX)—conveyed concern that excessive regulation of stablecoins to prevent potential impacts to financial stability could, unintentionally, stifle innovation. Andy Barr (R-KY) also expressed concern that excessive regulation could drive stablecoin activities overseas to more crypto-asset-friendly jurisdictions.
  • Financial Inclusion. Several members, including Wagner, Rep. David Scott (D-GA), see the potential for stablecoins to improve financial inclusion by lowering the transaction costs of payments. Others, such as Sherman, were more skeptical of such benefits, noting that none of these benefits have yet materialized.

Given the current lack of consensus among HFS members regarding stablecoin issues and the ideal extent of regulation, we believe that it is currently unlikely that bipartisan legislation would pass.  However, given both parties’ strong interest in pursuing legislation, negotiations regarding potential legislation may progress quickly.  Legislators could also use their oversight and investigations authorities, which generally do not require bipartisan consensus, in the near future.  We therefore recommend that stablecoin issuers continue to monitor actions in Congress.

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For more discussion on stablecoins and the PWG report see our other posts:

 

 

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Author

Carter Burwell is a litigation counsel and a member of Debevoise's White Collar & Regulatory Defense Group. He formerly served as a senior counsel at the Treasury Department and on the Senate Judiciary Committee and can be reached at cburwell@debevoise.com.

Author

Caroline Swett is a corporate counsel and a member of Debevoise’s Financial Institutions and Banking Groups. She can be reached at cnswett@debevoise.com.

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Jonathan Steinberg is a corporate associate and a member of Debevoise's Financial Institutions Group. He can be reached at jrsteinb@debevoise.com.

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Lily D. Vo is a corporate associate and a member of Debevoise's Financial Institutions Group. She formerly served as an attorney at the Treasury Department, a senior counsel at the Securities and Exchange Commission, and a congressional fellow for U.S. Sen. Sherrod Brown, and she can be reached at ldvo@debevoise.com.

Author

Justice Walters is a corporate associate and a member of Debevoise's Financial Institutions Group. He can be reached at jwalters@debevoise.com.