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“We’re at a really interesting moment in time. We’re seeing this infrastructure layer, these blockchains, proliferate globally at incredible speed. It seems likely that the ability to access and interact with these blockchain networks will reach billions of users over the next two to three years, and the question is: In that timeframe, will the United States support the dollar and digital dollar in the form of stablecoins—because they are in the market and operational today—to help the U.S. dollar be the competitive currency of the internet?” — Jeremy Allaire, CEO, Circle
On December 8th and 14th, the U.S. House Committee on Financial Services and the U.S. Senate Committee on Banking, Housing, and Urban Affairs brought together crypto CEOs, industry leaders, and subject-matter experts to deepen lawmakers’ understanding of the cryptocurrency landscape, specifically the role of stablecoins. Here are the main takeaways:
Digital Assets and the Future of Finance
U.S. House Committee on Financial Services hearing, Dec. 8
There’s bipartisan consensus that maintaining U.S. dollar primacy in the international financial system is a top national security and economic priority.
The United States cannot take the dollar’s primacy in the international financial and digital currency space for granted. Currently, the top stablecoins by market capitalization are backed by the dollar, but some stablecoin experts argue that increased competition in the cryptocurrency sector could lead to consumers seeking out alternative cryptocurrencies that are not backed. The ability to access the benefits of blockchain technology, including faster payments, transparency, and lower fees via these assets, could lead to less global reliance on the dollar if they were to become widely adopted.
Amid the proliferation of cryptocurrencies, stablecoin proponents contend that they can actually provide a way for the dollar to maintain its centrality and suggest that regulations crafted to support infrastructure development could lead to more dollar use globally. Lawmakers have questioned this assertion, as some consider issuing a digital dollar controlled by the Fed instead. In 2020, the United States launched Project Hamilton, an initiative researching the possibility of a digital dollar, but lawmakers are still divided on the matter. Some raised concerns that a digital dollar could pose financial stability risks and questioned whether it is necessary, while others pointed to the need to keep pace with China’s digital yuan and other central bank digital currencies that are under development. The current division, and investments in research and technology necessary to issue a digital dollar, make it unlikely that a decision will be made in the immediate future.
Stablecoin leaders seek “parity” between digital and traditional financial assets in the regulatory system.
Throughout the House hearing, industry leaders called for digital assets to be treated the same as traditional assets within current regulatory frameworks. Bitfury CEO Brian Brooks argued that cryptocurrency is like equity and debt in that it is “a risk-on asset that people want to invest in … as part of asset diversification.” Thus, existing rules and regulations can be applied to digital currencies to protect investors and consumers. By facilitating price discovery and additional liquidity, such regulations can support innovation and potentially mitigate the steep losses that consumers experience due to cryptocurrencys' notorious price fluctuations.
In addition to parity, industry leaders called for clarity regarding the legal definitions that apply to cryptocurrency and the federal agencies that are primarily responsible for developing and implementing regulations. Currently, the industry relies on the Crypto Rating Council (CRC), an industry-owned organization that is not registered with the SEC or any other federal authority, to assess whether a crypto asset falls under U.S. federal securities law.
Ensuring that stablecoins are backed with cash is one concrete step that lawmakers can take to address risks to consumer protection and financial stability.
Following recent incidents where firms lied about their reserves, some lawmakers remain skeptical about the integrity of stablecoins’ backings. While some companies have voluntarily shared information regarding their reserve compositions, there is currently not a federally mandated, standardized way for stablecoin issuers to disclose the assets that back their coins. FTX co-founder and CEO Sam Bankman-Fried shared concerns that stablecoins that are not backed by dollars could pose international financial stability risks in the event of a stablecoin run.
One concrete step that lawmakers could take to help minimize volatility and protect consumers would be to ensure that stablecoins are backed at a one-to-one ratio with cash or cash equivalents. Possible approaches could include passing legislation that would allow federal agencies to oversee third-party audits, which confirm that stablecoins are backed with appropriate assets and requiring routine reports from stablecoin issuers on their reserve compositions. Coinbase CEO Alesia Jeanne Haas also recommended that a single federal regulator and a dedicated self-regulatory organization (SRO) that would be responsible for granular oversight of the cryptocurrency industry could create a more robust disclosure regime to address the full range of services offered in this space and “ensure efficient and streamlined regulation and oversight.”
Stablecoins: How They Work, How Are They Used, and What Are Their Risks?
U.S. Senate Committee on Banking, Housing, and Urban Affairs hearing, Dec. 14
Federal regulation on stablecoins can standardize data reporting and disclosure requirements.
Echoing the House Committee on Financial Services’ hearing, expert witnesses at the Senate Banking Committee’s hearing called for clarity on stablecoins’ backing as well as disclosure, reporting, and liquidity requirements to improve users’ confidence and protection in the market. Today, issuers are regulated primarily at the state level under money transmitter licensing regimes with differing reporting standards. The lack of a federal framework creates regulatory gaps in the payment system’s licensing process, particularly as many firms operate across state borders and provide cross-border transactions and remittance services.
Expert witnesses disagreed with the Treasury Department’s stablecoin report’s recommendation to treat stablecoin issuers as banks. Some expressed concern about the potential consequences that such a designation could have on future regulatory decisions, particularly as they relate to decentralized finance (DeFi), while others argued that stablecoins could be structured and regulated in a way that would not require deposit insurance and traditional banking oversight. Jai Massari, partner at Davis Polk & Wardwell, LLP, proposed such an approach in her testimony, advocating for a new federal charter designed to ensure that stablecoins would be fully backed by short-term, liquid assets, meet reserve asset composition requirements, and restrict issuers from engaging in risky activities. (For an alternative perspective, see the American Bank Association’s testimony, which advocates for stablecoins to be issued through banks.)
The Office of Financial Research has a bigger role to play.
As policymakers seek answers to inform what regulations will govern the stablecoin sector, another actionable next step could be to strengthen the role of the Office of Financial Research (OFR), an independent bureau within the Treasury Department that was created to address data gaps within the financial system following the 2008 financial crisis. As financial services integrate new technologies into existing infrastructure, the OFR could provide further insight in the cryptocurrency ecosystem and identify opportunities to create standardized data reporting, transparency, and disclosure requirements.
Some experts are skeptical about crypto’s low transaction fees and ability to help the unbanked.
One of the major benefits that stablecoin proponents highlight is cryptocurrencies’ ability to conduct faster payments with lower transaction fees than traditional payment rails, particularly for remittances, due to efficiencies with blockchain technology. Director of financial policy at the Open Markets Institute Alexis Goldstein questioned the veracity of this claim, stating that if users try to convert their stablecoin into fiat currency, there can be an accumulation of fees from sending funds to a wallet, engaging with a cryptocurrency exchange, and depositing money into a local bank. In some cases, this makes traditional payment rails more attractive than cryptocurrencies. In addition, limited ability to purchase goods and services with stablecoins requires users to have a bank account to convert their stablecoins to fiat currencies. Such shortcomings make stablecoins “subject to the same adoption and inclusion hurdles as other forms of retail finance,” according to a World Economic Forum report, bringing into question whether stablecoins can support financial inclusion efforts.
In response to these concerns, Circle’s chief strategy officer and head of global policy Dante Disparte argued that the cryptocurrency industry is in the nascent stages of development and that continued innovation will likely improve current cost structures and transactions. Thus, ensuring that regulations do not stifle innovation and create high barriers to entry for start-ups is vital for the sector’s long-term growth.
The House and Senate hearings are the first of many discussions between Congress and the cryptocurrency industry. Issues that warrant further attention include environmental sustainability, stablecoin-to-cash withdrawals, and quantum computing, which could potentially crack the cryptography that underpins the crypto economy’s security.
Outside the United States, one key process to watch is the European Council and Parliament negotiations on the Regulation on Markets in Crypto Assets (MiCA) and the Digital Operational Resilience Act (DORA), which are designed, in part, to protect consumers and investors and to mitigate cyber threats regarding digital currencies and distributed ledger technology.
Cryptocurrencies hold tremendous potential to improve the financial system, but absent decisive action by regulators, they might not receive the oversight and regulatory clarity they need, which could pose serious risks to global monetary stability. For a deeper dive, FP Analytics’ three-part Future of Money Power Map series examines the new technologies, economic power shifts, and geopolitical tensions driving changes in the international financial system.
The Future of Money
The development of new financial technologies and their adoption by nation states and private actors is unleashing transformative effects on the international financial system. Though the dollar remains the dominant international currency today, there is contentious debate over whether it can be, or is in the process of being, replaced.
While another fiat currency replacing the dollar in the short term remains unlikely, the development of digital currencies in the form of central bank digital currencies (CBDCs), de-centralized cryptocurrencies, and private-sector digital currencies all pose threats to the U.S.’s ability to continue capturing gains from current systems, leveraging dollar centrality to enforce sanctions, and otherwise influence international financial transactions over the longer term.
Our 3-part series, The Future of Money, breaks down the technologies and geopolitical forces shaping the global financial landscape and is a critical resource for those looking to better understand and navigate its rapid transformation.
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