US senators and expert witnesses with knowledge of stablecoins expressed differing views on stablecoins regulation at a hearing of the Senate Banking Committee.
Tuesday's hearing was entitled: “Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks? Participants included the following expert witnesses: Hillary Allen, professor at American University Washington College of Law, Alexis Goldstein, director of financial policy at Open Markets, Jai Massari, partner of Davis Polk and Wardwell, and Dante Disparte, chief Circle's strategy officer and head of global policy. Lawmakers in attendance included Senators Sherrod Brown, Elizabeth Warren, and Patrick Toomey.
Stablecoins regulation is “impractical” 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 his opinion, has made stablecoins usable in converting ransomware payments from one cryptocurrency to another.
While Massari agreed on the need for oversight, he was of the opinion that lawmakers should consider letting stablecoin issuers operate under a "new and well-designed federal charter." Regulating these actors as an FDIC-insured bank is "impractical" and "useless". In their defense, he said stablecoin firms are already capable of managing their own risk. This includes having short-term reserves with liquid assets, and which are on par with the number of stablecoins in circulation.
Lawmakers urged to support innovation and "do no harm" to the industry
Meanwhile, Disparte, the only witness with a direct connection to a stablecoin broadcaster, highlighted the positive impact of digital activities. They include the empowerment of women and minority entrepreneurs, and the provision of 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, didn't seem as optimistic as the others. He was of the opinion that stablecoins represent a "real threat to financial stability" in the United States. They could grow to move enough US dollars, limiting the Fed's ability to react to inflation.
"This is another reason to avoid policies that encourage the growth of stablecoins," he added.
Similarly, Senator Warren has called for a crackdown on digital assets. They are "propping up one of the shadiest parts of the cryptocurrency world - DeFi - where consumers are least protected from being scammed," he said.
Senator Brown agreed, saying stablecoins are neither decentralized nor transparent and risk losing all investor money. Calling digital currencies "wild financial speculation", he added that blockchain technology can never "democratize money".
These mixed views come at a time when stablecoin broadcaster Tether is facing its second class-action this year. The allegations, which have been made earlier, are a false representation of its stablecoin support.
