US House of Representatives Committee on Financial Services Holds Hearing on Stablecoin Regulation | Practical Law

US House of Representatives Committee on Financial Services Holds Hearing on Stablecoin Regulation | Practical Law

The US House of Representatives Committee on Financial Services held a hearing to address regulation of stablecoins in response to the President's Working Group (PWG) on Financial Markets report on stablecoins.

US House of Representatives Committee on Financial Services Holds Hearing on Stablecoin Regulation

by Practical Law Finance
Published on 15 Feb 2022 • USA (National/Federal)
The US House of Representatives Committee on Financial Services held a hearing to address regulation of stablecoins in response to the President's Working Group (PWG) on Financial Markets report on stablecoins.
On February 8, 2022, the US House of Representatives Committee on Financial Services held a hearing on digital assets and the President's Working Group (PWG) on Financial Markets report (PWG report) on stablecoins (see Legal Update: President's Working Group on Financial Markets Issues Report Supporting Federal Regulation of Stablecoins and Urging Congressional Action). Testimony was provided by Under Secretary for Domestic Finance Nellie Liang.
A related memorandum issued by the committee noted that the market value of the digital asset ecosystem has risen from $500 billion in 2020 to almost $3 trillion as of November 2021, dipping to 1.63 trillion in January 2022. The hearing focused on stablecoins, even though they compose a relatively small subsection of the total value of the digital asset industry, because of their exponential growth and potential impact on the US financial system. Citing information from a statement by SEC Chair Gary Gensler on the PWG report, the memorandum noted that as of October 31, 2021, stablecoins represented only 5% of digital assets, though they facilitated more than 75% of trading on all digital asset trading platforms.
The memorandum then reviewed the PWG's findings and recommendations, and indicated that the PWG report's emphasis on the need for congressional action was partly responsible for the hearing. In her statement before the committee, Secretary Liang indicated that "stablecoins are part of an emerging set of digital assets, activities, and services that could have profound implications for the US financial system and economy." She noted that stablecoins raise policy concerns, including:
  • Illicit finance.
  • User protection.
  • Systemic risk.
According to Secretary Liang's testimony, the US Treasury believes stablecoins should be regulated to mitigate these risks. Secretary Liang also indicated that the issues raised and recommendations made by the PWG report were a significant step in that direction. Secretary Liang also noted the prudential risks of stablecoins, which are not currently addressed by regulation, including:
  • Risk of stablecoin runs. This refers to the loss of confidence in a stablecoin that leads to a wave of redemptions, which could then be followed by distressed sales of the reserved assets of the stablecoin. Secretary Liang's statement indicated the first such run was in June 2021, "when a sharp drop in the price of the assets used to back the stablecoin set off a negative feedback loop of stablecoin redemptions and further price declines."
  • Payment systems risks. This refers to the disruption of the mechanisms used to store or transfer value, which could interfere with the ability of users to make or settle payments. Custodial wallet providers are one point of payment system risk, as the failure of such a wallet could deprive users access to their stablecoins. This risk distinguishes stablecoins from other investment vehicles that are not designed to serve as a means of payment.
  • Concentration of economic power:
    • the connection between a stablecoin, or stablecoin wallet provider, and a commercial company could be used to put the commercial company at an unfair competitive advantage; and
    • a stablecoin issuer could become a dominant provider of payment services through sufficiently wide adoption of the stablecoin as a means of payment. This could lead to reduced incentives for investment in other payment innovations or higher prices for payment services.
Secretary Liang urged that the recommendations of the PWG report be adopted – specifically, the recommendation that stablecoin issuers be insured depository institutions, because those institutions are subject to regulatory and supervisory frameworks. If these frameworks were applied to stablecoin issuers, according to Liang's testimony, they would help mitigate prudential risks and regulatory gaps that currently exist in the financial system.
The Secretary further noted that the Biden administration is working with multiple agencies to develop a "holistic" strategy for managing digital assets to accomplish its goals of:
  • Combatting illicit finance.
  • Addressing risks related to financial stability and consumer and investor protection.
  • Furthering financial inclusion and the continued leadership of the global financial system.
For more information on cryptocurrency and VC regulation, see Cryptocurrency and Virtual Currency Regulatory Tracker.