On February 15, 2022, the U.S. Senate Committee on Banking, Housing and Urban Affairs (“Senate Banking Committee”) hosted a virtual hearing entitled, “Examining the President’s Working Group on Financial Markets Report on Stablecoins.” The hearing focused on the Report on Stablecoins (crypto-assets pegged to real assets, usually the U.S. dollar), that was issued by the President’s Working Group on Financial Markets (“PWG”), the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (the “PWG Report”) 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. Liang’s opening statement, available here, did not depart meaningfully from the statement she delivered in the U.S. House Committee on Financial Services’ hearing on the PWG Report on February 8, 2022.

Throughout the hearing, Liang emphasized the need for congressional action on stablecoin, asserting that existing regulatory frameworks alone do not provide federal agencies with enough oversight and enforcement authorities to close the “regulatory gaps” and address the systemic, prudential and other risks posed by stablecoins.

Potential Congressional Action:

Most senators in attendance supported collaboration between Congress and regulatory agencies on stablecoin legislation. Senate Banking Committee Ranking Member Pat Toomey (R-PA) and Sen. Elizabeth Warren (D-MA) each discussed legislation they are drafting. Sen. Warren indicated that her bill would provide “guardrails” for the entire digital assets market, including stablecoins. The outline of Ranking Member Toomey’s bill is discussed below.

Senators from both parties noted that any proposed legislation needs to balance concerns of consumer protection with a desire to promote, and not stifle, innovation.

Overall, there appeared to be general bipartisan consensus among Senate Banking Committee members that stablecoin legislation was necessary, unlike with the U.S. House Committee on Financial Services members. However, there was much disagreement regarding the ideal scope of such legislation.

Key Issues:

The following outlines key issues highlighted during the hearing.

  • Charter Type. Ranking Member Toomey’s legislation, which he has outlined but not yet formally proposed, would provide for the establishment of a new charter type for federal stablecoin issuers. Issuers would be required to obtain the new charter, or be chartered or licensed as an insured depository institution, state money service business or money transmitter. Ranking Member Toomey noted that he “strongly disagreed” with the PWG Report’s recommendation that Congress pass legislation requiring all stablecoin issuers to be IDIs and also emphasized the role of state regulatory regimes in his bill. Sen. Chris Van Hollen (D-MD) and Sen. Catherine Cortez-Masto (D-NV) conveyed preference for granting the power to regulate stablecoins to a single federal regulator over relying on state regulatory regimes.
  • Immediate Action by the FSOC or other Federal Regulatory Agencies. Sen. Warren strongly urged Liang and the Financial Stability Oversight Counsel (the “FSOC“) to regulate the stablecoin market immediately, before stablecoins become a systemic risk, rather than wait for congressional action. Sen. Warren noted the FSOC has a regulatory mandate to “identify emerging threats” to the financial system and use regulatory tools to handle those threats.Asked if federal regulators currently had the authority to issue and/or were planning on issuing regulations regarding stablecoins, Liang stated that the current position of the FSOC, consistent with the PWG Report, is that the FSOC does not currently have the authority to take all steps recommended in the PWG Report. Additionally, in response to a question by Sen. Bill Hagerty (R-TN) about the potential for the FSOC to designate stablecoins as a “systemically important financial utility” under Title VIII of the Dodd-Frank Act, which would allow the FSOC to implement regulations regarding the stablecoin industry, Liang noted that the FSOC did not currently have plans to make such a designation and would have to consider such designations on a case-by-case basis.
  • Stablecoin Reserves. Senate Banking Committee Chairman Sherrod Brown (D-OH) asserted that stablecoins, in their current form, are designed for speculation, and expressed concern over the lack of transparency from stablecoin issuers regarding the assets used for reserves. Throughout the hearing, senators from both parties—including Chairman Brown, Sen. Mark Warner (D-VA), Sen. Robert Menendez (D-NJ), Sen. Warren and Sen. Cynthia Lummis (R-WY)—underlined the importance of protecting consumers by enacting legislation and/or promulgating regulation requiring transparency from stablecoin issuers regarding their reserves, as well as providing guidelines on what issuers can use to back their stablecoins.Several senators, including Sen. Hagerty, Sen. Lummis and Sen. Van Hollen, asked whether stablecoins should be backed by federal deposit insurance to provide an additional layer of consumer protection, but Liang noted that, without legislative changes, stablecoins cannot be backed by federal deposit insurance.
  • Illicit Finance. Sen. Menendez and Sen. Hagerty expressed concerns that, without proper regulation, stablecoins could be used to support criminal activity, such as terrorism and circumventing international sanctions.
  • Overregulation. Approximately half of the senators attending the hearing—Ranking Member Toomey, Sen. Mike Rounds (R-SD), Sen. Hagerty, Sen. Van Hollen, Sen. Steve Daines (R-MT) and Sen. Kyrsten Sinema (D-AZ)—expressed that while regulation of stablecoins is needed,  it should be flexible enough to avoid stifling innovation.  Ranking Member Toomey and Sen. Daines expressed confidence that bipartisan agreement on such a flexible regulatory framework could be reached.

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

 

 

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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.

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

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.

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Ezra Newman a corporate associate and a member of Debevoise's Financial Institutions Group. He can be reached at enewman@debevoise.com.