The US Senate Committee on Banking, Housing and Urban Affairs considered testimony on the regulation of stablecoins and the risks they pose to the US financial system.
Testimony included:
- Alexis Goldstein, director of Financial Policy, Open Markets Institute, who recommended that Congress “continue to examine if there are regulatory gaps that require new legislation to ensure consumer and investor protection as it relates to stablecoins,” and that regulators should continue to “monitor stablecoins and ensure compliance with existing laws.”
- Jai Massari, a partner at Davis Polk & Wardwell LLP, who focused her testimony on “true” stablecoins (i.e., non-interest-bearing financial instruments “designed to maintain stable value against a reference fiat currency”). Massari argued that true stablecoins are a form of “narrow bank” because, like narrow banks, they do not have functions that engage in maturity and liquidity transformation. She argued against the recommendation of the President’s Working Group on Financial Markets (PWG) that stablecoin issuers be required to be insured depository institutions. She emphasized that requiring stablecoin issuers to be insured depository institutions is “unnecessary because stablecoins can be structured and regulated to avoid the risks that require deposit insurance and the application of traditional banking oversight in the first place.”
- Hilary Allen, professor of Law at American University Washington College of Law, who argued that, with respect to crypto regulation, “Congress’s most important goal should be to ensure that crypto does not cause a financial crisis.” She also expressed disagreement with the PWG recommendation that stablecoin issuers be required to be insured depository institutions because such regulatory treatment would provide legitimacy for stablecoins and further advance the growth of DeFi. Allen noted that, in her view, the principal use of stablecoins is to “support the DeFi ecosystem,” which she called a “type of shadow banking system with fragilities that could . . . disrupt our real economy.”
In a commentary on the proceedings, Sebastian Souchet, a law clerk at law firm Cadwalader wrote: “While Ms. Massari identifies several economic and regulatory issues posed by applying the insured depository institution framework to the stablecoin business model, Ms. Allen emphasizes the various systemic consequences and risks of regulating stablecoin issuers under that framework. On the whole, US policymakers and financial regulators should pay particular attention to the testimony of both Ms. Massari and Ms. Allen, as they not only raise important questions about what proper regulation of stablecoins looks like, but also consider several interesting policy alternatives.”