Stablecoin Hearing | Keeping stablecoins, introducing regulations gradually becoming regulatory consensus, several legislators claim unclear stablecoin reserves

The U.S. House Financial Services Committee held a hearing following the release of the stablecoin report by the President's Working Group on Financial Markets (PWG) at the end of last year. Nellie Liang, Under Secretary for Domestic Finance at the U.S. Department of the Treasury, was the sole witness facing inquiries from over fifty members of Congress. However, the hearing seemed more like a market status inquiry, with no specific outcomes or policy proposals.

According to real-time coverage by Coindesk, the hearing focused on stablecoin regulation, and it is expected that the Senate Banking Committee will hold another hearing next week to discuss stablecoin risks and attempt to propose a concrete regulatory framework.

Previously reported, Nellie Liang actually believes that while stablecoins pose risks, they also have potential and could see widespread adoption in payment applications. The government's role should be to regulate stablecoins rather than outright ban them.

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In this hearing, the risks of stablecoins raised by members of Congress include the following, with Tether USDT being criticized multiple times:

• Lack of 100% collateral, opaque reserve assets.
• Lack of investor protection mechanisms.
• Threat to financial stability.
• Does it fall under securities laws?

Congressional Comments

Chairwoman of the House Financial Services Committee, Maxine Waters: Stablecoins pose potential risks to the financial system while also presenting opportunities. Many "stablecoins" are not fully backed and are heavily used for speculative trading, lacking investor protection.

Congresswoman Ann Wagner: We need to ensure that all regulatory frameworks are clear and responsive to market needs, rather than simply applying traditional banking regulations to stablecoins.

Congressman Blaine Luetkemeyer: Can we incentivize stablecoin issuers to use the US dollar as a reserve to ensure stability? Luetkemeyer responded:

Stablecoin issuers have a natural incentive to use the US dollar as it is a global currency. I believe the incentive we need is to ensure they continue this mechanism.

Congressman Bill Huizenga: Why did the President's Working Group on Financial Markets (PWG) report not analyze the potential securities law implications of stablecoins?

Luetkemeyer believes this should be assessed by the SEC, and whether stablecoins should fall under the Commodity Futures Trading Commission (CFTC) should also be determined by the CFTC.

Congressman Jim A. Himes: The focus is not on whether to allow stablecoins, but on how to regulate without stifling innovation. There is a fundamental difference between stablecoins fully backed by the dollar and high-risk cryptocurrencies, indicating the need for different regulatory approaches.

Luetkemeyer also stated that stablecoins need to take on more responsibility to provide higher financial stability when necessary.

Congressman French Hill: Is there a possibility of granting stablecoins a federal money transmitter license? Luetkemeyer believes this is definitely worth discussing.

Congresswoman Joyce Beatty: I once thought stablecoins/cryptocurrencies were the wild west, now I realize it is the frontier of the future, and I do not want to stifle innovation. Congressman Brian Steil expressed a similar view.

Congressman Tom Emmer: Stablecoins account for only 5% of the total cryptocurrency market value but represent over 75% of the trading volume, which is a significant factor. Banking regulatory frameworks are not suitable for stablecoins, and the PWG report even failed to define stablecoins, wrongly suggesting that stablecoin risks span different jurisdictions.

Witness Responses

Former Federal Reserve economist and current Deputy Under Secretary for Domestic Finance at the U.S. Department of the Treasury, Nellie Liang, maintains the same position on stablecoins as before. She, including the PWG, believes stablecoins are beginning to play a core role in the cryptocurrency space and sees them as the foundation of future crypto services.

However, Liang also expressed concerns:

Stablecoins exhibit characteristics of both banking and investment products, which is the main reason for regulatory loopholes. Stablecoins are not fully backed under any circumstances, and I am genuinely concerned about the opacity of issuers' reserve assets. Assuming there are high-quality assets as reserves, the risks could be significantly reduced, making them a cornerstone of the payment system.

In addition to Tether USDT facing criticism, CBDCs and Facebook's Diem project were also frequently mentioned in the hearings, with lawmakers expressing concerns about tech companies wielding privacy data through stablecoin issuance, a point on which Liang agrees.

Although no concrete results were reached, it is still a positive development for the crypto industry. Most lawmakers agree on the direction of retaining stablecoins and introducing regulatory oversight. What's even more encouraging is that the driving force behind this is Liang, who has repeatedly emphasized that stablecoins are the core of the future payment system, making the possibility of a dedicated regulatory framework for stablecoins highly likely to emerge.