House Financial Services Subcommittee on Digital Assets holds hearing on stablecoins; Summary of “McWaters” draft stablecoin proposal; SEC Chair Gary Gensler testifies before HFSC for SEC Oversight Hearing
April 21, 2022
Good morning and happy Friday.
Please note the next edition of Cap Hill Crypto will come on Monday, May 1 and include highlights from Consensus. If you'll be in Austin next week and would like to connect, please don't hesitate to reach out!
Top Points
House Financial Services Subcommittee on Digital Assets holds hearing on stablecoins.
While there is bipartisan agreement that legislation is needed, both sides head back to the drawing board as Ranking Member Maxine Waters said Democrats will "start from scratch," scrapping a draft proposal negotiated between her and Chairman Patrick McHenry prior to the FTX collapse.
SEC Chair Gensler testified before the full House Financial Services Committee ("HFSC"), where Members pushed back against his view that existing securities laws clearly apply to virtually all crypto assets and intermediaries.
Digital Asset Subcommittee Stablecoin Hearing
On Wednesday, the House Financial Services Subcommittee on Digital Assets held a hearing focusing on the need for stablecoin legislation.
Background: Republicans had attached a draft stablecoin bill (discussed further below) to the hearing notice. The draft represented the fruits of negotiations between then HFSC Chairwoman Maxine Waters (D-CA) and then Ranking Member Patrick McHenry's (R-NC) last year. Near the start of the hearing, however, now Ranking Member Waters pushed back against the draft proposal, saying Democrats will "start from scratch," in part because the bill predates FTX's collapse.
See also @FSCDems follow up tweet:
The Hearing
Key Takeaway: While there is bipartisan agreement Congress needs to act on stablecoins, the prospects of legislation passing any time soon remains unlikely. The summary below focuses on areas where Members appeared most in agreement and key issues to be hashed out.
Areas of Agreement
Republicans and Democrats (particularly Reps. Ritchie Torres (D-NY) and Wiley Nickel (D-NC)) largely agreed that passing bipartisan stablecoin legislation, if done right, could help: (1) protect consumers, (2) keep innovation in the U.S., and (3) maintain USD primacy.
(1) Protecting customers
There was broad agreement that a payment stablecoin bill including the following provisions would protect consumers:
Reserve requirements ensuring stablecoins are backed 1-to-1 with cash or highly liquid assets (e.g., short-term treasury bonds)
Disclosure requirements around what reserve assets an issuer holds
Prohibitions against commingling customer and company funds
Prohibition against lending out customer funds
Promoting innovation in the U.S.
Members and witnesses generally agreed that payment stablecoins offer faster and cheaper payments and were concerned firms will move to foreign jurisdictions where tailored regulatory frameworks are already being implemented, like Europe, unless and until Congress acts.
Specific beneficial use cases cited included sending money to loved ones overseas and providing aid to Ukraine faster and cheaper relative to traditional payment methods.
Ensuring USD primacy
Several members, including Rep. French Hill (R-AR), Chairman of the Subcommittee, keyed in on how a digital dollar might help ensure $USD remains the dominant global reserve currency.
Issues To be Hashed Out
Balancing the role of state and federal regulators
There's bipartisan agreement that a dual state and federal regulatory framework could apply to stablecoins, with many Members and witnesses citing the success of the dual framework applied to banks. But specifics on the extent to which federal or state rules should control remains in debate.
For example, Reps. Stephen Lynch (D-MA) and Brad Sherman (D-CA) expressed concern that a state option could lead to a "race to the bottom." (Though, to be clear, Rep. Sherman is unlikely to support any legislation legitimatizing crypto.)
Rep. Ritchie Torres (D-NY) stated that he will not support any bill that allows a federal regime to preempt New York state's current stablecoin rules.
How to treat non-bank v. bank issuers
The extent to which banks and non-bank issuers should be subject to the same regulations and have access to Federal Reserve services (e.g., Federal Reserve discount window) was another recurring debate.
Rep. Torres (D-NY) noted that non-bank stablecoin issuers are fundamentally different from banks—namely, they generally do not engage in lending and would be fully backed by reserves.
Other Democrats, like Rep. Lynch (D-MA), Ranking Member of the Subcommittee, worried that giving non-bank stablecoin issuers, who are not subject to the same prudential regulations as banks, access to Fed services could threaten financial stability.
Public v. Private Blockchains
At the start of the hearing, Rep. Lynch (D-MA) pondered whether private stabelcoins might even be necessary considering public sector options such as FedNow and a CBDC.
Rep. Bill Foster (D-IL) believes the only way to ensure crypto transactions are not related to illicit activity is to ensure every wallet address is traceable to a secure digital identity (analogizing to license plates for cars).
Rep. Warren Davidson (R-OH) emphasized the importance of private and permissionless blockchains, which as Blockchain Association's Chief Policy Officer Jake Chervinksy noted, can allow properties of cash transactions to be replicated on the blockchain.
Read full witness testimony and watch the full hearing here.
Draft Stablecoin Bill
As mentioned above, Republicans released the draft text for last year's stablecoin bill negotiated between then Chairwoman Maxine Waters and then Ranking Member Patrick McHenry.
Though the bill may now be scrapped, highlights are summarized below to shed some light on how Members were thinking about some of the issues discussed at the hearing.
Full text here.
Definition
payment stablecoin--
(A) Means a digital asset—(i) that is or is designed to be used as a means of payment or settlement; and (ii) the issuer of which—
(I) is obligated to convert, redeem, or repurchase for a fixed amount of monetary value; or
(II) represents will maintain or creates the reasonable expectation that it will maintain a stable value relative to the value of a fixed amount of monetary value; and
(B) that is not—(i) national currency; or (ii) a security issued by an investment company registered under section 8(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-8(a)). § 101.
State and Federal Registration
Requires payment stablecoin issuers to register with the appropriate federal agency or a state based regulator. § 102. However, state registrants would still be subject to federal reserve oversight and regulations. See § 103(d).
Authorizes both banks and non-bank entities to issue payment stablecoins. See § 102.
Reserve Requirements
Requires issuers to maintain reserves backing outstanding payment stablecoins on at least a one-to-one basis. Reserves may include:
U.S. coins and currency (including Federal reserve notes)
Funds held as insured demand deposits
Treasury bills with a maturity of 90 days or less
Repurchase agreements with a maturity of 7 days or less that are backed by Treasury bills with a maturity of 90 days or less
Central bank reserve deposits. See § 102(d).
Moratorium on Endogenously Collateralized Stablecoins
Prohibits issuance of certain algorithmic stablecoins--defined as "endogenously collateralized stablecoins" for two years. During this period, the treasury would study and report to Congress on types and uses of non-payment stablecoins. See § 106.
"Endogenously collateralized stablecoins" are defined to include stablecoins that are backed by digital assets that are issued by the same issuer of that stablecoin. See § 106.
Title II - Digital Dollar Study
Requires the Fed to study a U.S. CBDC and its potential impact on monetary policy, the US financial system, payments, and stablecoin markets, among other items. See § 201.
SEC Chair Gensler Testifies Before HFSC
On Tuesday, Chair Gensler testified before the full HFSC for an SEC oversight hearing. While topics ranged from climate disclosures to security-swaps, the summary below focuses on crypto highlights.
Key Takeaway: The hearing primarily focused on Republicans, along with a few Democrats (e.g., Rep. Ritchie Torres (D-NY) and Josh Gottheimer (D-NJ)) challenging SEC Chair Gensler on whether new laws and rules specifically tailored to digital assets are necessary, if not preferable, to applying existing securities law to virtually all crypto assets.
Chair Gensler avoided providing specific rationales, but remained steadfast in his view that most crypto assets are securities and that the industry is "rife with noncompliance."
Here are some highlights:
Regulatory Clarity
Is ETH a Security?
Chairman McHenry kicked off his questioning by asking whether Ether is a security or commodity, noting the contrasting takes by federal and state agency heads.
Chair Gensler refused to answer directly, citing agency policy not to "prejudge" any one digital asset.
The exchange mirrored much of the hearing, with Members raising an issue of regulatory ambiguity, and the Chair reiterating his general position that securities laws provide the SEC with broad authority and that most crypto assets are securities because there are a group of entrepreneurs in the middle from whom the public expects to profit.
Regulation by Enforcement vs. Issuing Rules
Majority Whip Top Emmer (R-MN) emphasized that while SEC has brought 55 enforcement actions in the crypto space, the SEC has finalized zero rules with which blockchain companies can comply, as they lack the flexibility and nuance necessary to make sense for blockchain firms.
Chair Gensler responded that the "rules are already on the books."
Democrats Reps. Josh Gottheimer (D-NJ) and Rep. Torres (D-NY) also criticized the SEC's current enforcement approach.
Rep. Gottheimer questioned whether the lack of formal rulemaking may ultimately hurt innovation and put customers at risk.
Rep. Torres questioned the agency's enforcement priorities– specifically, the targeting of onshore, regulated companies like Coinbase and Paxos, rather than "offshore, deregulated, over-leveraged companies" like Tether and Binance.
Several Members also grilled Chair Gensler on how he missed FTX, despite claiming he has oversight authority over crypto intermediaries.
To these concerns, Chair Gensler responded that he can't comment on SEC investigations, occasionally referencing an action brought against FTX at the end of last year.
Stablecoins
Rep. French Hill (R-AR), Chair of the Subcommittee on Digital Assets, appeared to get Chair Gensler to concede that he supported Congressional efforts to develop stablecoin legislation–as recommended by the President's Working Group on Financial Markets ("PWG"), of which Chair Gensler was a member. But the Chair quickly qualified his remarks, noting any legislation must not undermine the SEC's existing authority over, say, money market funds.
See that PWG Report and Press Release here, finding:
"To address the risks of payment stablecoins, the agencies recommend that Congress act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal framework on a consistent and comprehensive basis."
Staff Accounting Bulletin 121 ("SAB 121")
Reps. Mike Flood (R-NE) and Andy Barr (R-KY) reiterated previous concerns that SAB 121 will effectively prohibit publicly listed banks from providing customers digital asset custody services.
Chair Gensler defended SAB 121 saying the SEC consulted with the Big 4 accounting firms in drafting it.
See Rep. Mike Flood's recent letter to Chair Gensler providing more detail on SAB 121 concerns here.
Look Ahead
Bitcoin Policy Institute hosts the Bitcoin Policy Summit - a one-day, invite only policy conference exploring Bitcoin as a strategic opportunity for the United States.
When: 8:30am ET - 7pm ET, Wednesday, April 26th
Details here.
House Agriculture Subcommittee on Commodity Markets, Digital Assets, and Rural Development Hearing
"The Future of Digital Assets: Identifying the Regulatory Gaps in Spot Market Regulation"
Thursday, April 27, 2023 - 2PM
Details here.
Quick Hits
All Republican Members on the HFSC sign letter to SEC Chair Gensler urging the SEC to change its approach to digital assets and work with Congress to enact new laws specifically tailored to digital assets.
Letter.
"The Current SEC Disclosure Framework is Unfit for Crypto"
Essay. (Rodrigo Seira, Justin Slaughter, Katie Biber; Paradigm)
On Friday, the SEC reopened the comment period for a proposal to amend rules for alternative trading systems ("Reg ATS").
Helpful thread breaking down potential implications for crypto & DeFi 👇
SEC Charges Bittrex, Inc. with operating as an unregistered national securities exchange, broker, and clearing agency.
See full summary of Complaint and dozens more crypto case summaries @ CHC+ 👇
Use Case of the Week
The Digital Chamber's new "Crypto Chronicles" series highlights the human impact of how blockchain can improve disaster relief efforts.
Trivia
Last Week's A: India had the highest per capita NFT adoption as of September 2022. More from Finder's NFT Adoption Index here.
This Week's Q: In 2014, which NBA sports franchise became the first pro basketball team in the U.S. to accept Bitcoin as payment?
Thank you for reading and please enjoy your weekend.
Sincerely,
GSL
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