Conflicting views emerge in Senate hearing on stablecoins regulation

  • The Senate Banking Committee on Tuesday held a hearing to discuss stablecoins’ issuance, uses, and risks.
  • Lawmakers and witnesses had clashing thoughts regarding the benefits and risks of digital assets, and importantly their regulation.

US Senators and expert witnesses with knowledge of stablecoins have expressed differing views on the regulation of stablecoins in a Senate Banking Committee hearing.

The Tuesday hearing was entitled: “Stablecoins: How do They Work, How Are They Used, and What Are Their Risks?” Among the attendees were the following expert witnesses: Hillary Allen, a professor at the American University Washington College of Law, Alexis Goldstein, director of financial policy at Open Markets, Jai Massari, partner at Davis Polk and Wardwell, and Dante Disparte, chief strategy officer and head of global policy at Circle. Lawmakers present included Senators Sherrod Brown, Elizabeth Warren, and Patrick Toomey.

Stablecoins regulation is “unworkable” and “unnecessary”

In written testimony, Goldstein said decentralized finance (DeFi) projects were “largely out of compliance” with various regulations. These include Know Your Customer (KYC), Anti-Money Laundering (AML), Countering the Financing of Terrorism, and current US sanctions. The lack of these, in her opinion, made stablecoins usable in converting ransomware payments from one cryptocurrency to another.

While Massari agreed on the need for oversight, she was of the opinion that lawmakers should consider having stablecoin issuers operate under a “new and well-designed federal charter”. Regulating these players like an FDIC-insured bank is “unworkable” and “unnecessary.” In their defense, she said stablecoin firms are already capable of managing their own risk. This includes having short-term reserves with liquid assets, and which are at par with the number of outstanding stablecoins.

Lawmakers urged to support innovation and “do no harm” to the industry

Meanwhile, Disparte, the only witness with a direct connection to a stablecoin issuer, highlighted the positive impact of digital assets. They included empowering women and minority entrepreneurs, and delivering aid. He hinted at a change in the regulatory approach of stablecoins. However, he urged lawmakers to encourage innovation and “do no harm” to the industry.

Senator Toomey echoed Disparte’s view, saying stablecoins increase transaction speed, lower transaction costs, and increase access to payment systems. Regulation should be introduced to address financial risks and consumer protection, but these should not stifle innovation in the global digital economy, he added.

The last witness, Allen, did not seem as optimistic as the rest. She was of the opinion that stablecoins pose a “real threat to financial stability” in the US. They could grow to displace enough US dollars, limiting the Fed’s ability to react to inflation.

“This is yet another reason to avoid policies that encourage the growth of stablecoins,” she added.

Similarly, Senator Warren called on a clampdown of the digital assets. They are “propping up one of the shadiest parts of the crypto world – DeFi – where consumers are least protected from being scammed,” she said.

Related: US Sen. Elizabeth Warren calls for speedy regulatory action on crypto

Senator Brown concurred, saying stablecoins are neither decentralized nor transparent and they risk losing all investors’ money. Calling the digital coins “wild financial speculation,” he added that blockchain technology will never “democratize money.”

These contrasting views come at a time when stablecoin issuer Tether is facing its second class-action lawsuit this year. The accusations, which have been made before, are a false representation of its stablecoin backing.