[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                       UNDERSTANDING STABLECOINS'
                        ROLE IN PAYMENTS AND THE
                          NEED FOR LEGISLATION

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON DIGITAL ASSETS,
                         FINANCIAL TECHNOLOGY,
                             AND INCLUSION

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 19, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-15                           
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________

                                
                    U.S. GOVERNMENT PUBLISHING OFFICE                    
52-393 PDF                  WASHINGTON : 2023                    
          
-----------------------------------------------------------------------------------     
               HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio                JUAN VARGAS, California
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
YOUNG KIM, California                SYLVIA GARCIA, Texas
BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                    SUBCOMMITTEE ON DIGITAL ASSETS, 
                  FINANCIAL TECHNOLOGY, AND INCLUSION

                    FRENCH HILL, Arkansas, Chairman

FRANK D. LUCAS, Oklahoma             STEPHEN F. LYNCH, Massachusetts, 
TOM EMMER, Minnesota                     Ranking Member
WARREN DAVIDSON, Ohio                BILL FOSTER, Illinois
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               RITCHIE TORRES, New York
WILLIAM TIMMONS, South Carolina      BRAD SHERMAN, California
BYRON DONALDS, Florida               AL GREEN, Texas
MIKE FLOOD, Nebraska                 SEAN CASTEN, Illinois
ERIN HOUCHIN, Indiana                WILEY NICKEL, North Carolina
                           
                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 19, 2023...............................................     1
Appendix:
    April 19, 2023...............................................    35

                               WITNESSES
                       Wednesday, April 19, 2023

Campbell, J. Austin, Managing Partner, Zero Knowledge Consulting, 
  and Adjunct Professor, Columbia Business School................     7
Chervinsky, Jake, Chief Policy Officer, Blockchain Association...     9
Disparte, Dante Alighieri, Chief Strategy Officer and Head of 
  Global Policy, Circle..........................................    10
Hand, Delicia Reynolds, Director, Financial Fairness, Consumer 
  Reports........................................................    12
Harris, Hon. Adrienne A., Superintendent, New York State 
  Department of Financial Services...............................     6

                                APPENDIX

Prepared statements:
    Campbell, J. Austin..........................................    36
    Chervinsky, Jake.............................................    51
    Disparte, Dante Alighieri....................................    63
    Hand, Delicia Reynolds.......................................    73
    Harris, Adrienne A...........................................    80

              Additional Material Submitted for the Record

Hill, Hon. French:
    Written statement of the Crypto Council for Innovation.......    92
Davidson, Hon. Warren:
    Written statement of the Electronic Transactions Association 
      (ETA)......................................................    94
Waters, Hon. Maxine:
    Written statement of Americans for Financial Reform (AFR)....    96
    Written statement of the Bank Policy Institute (BPI).........   100
    Written statement of the Credit Union National Association 
      (CUNA).....................................................   102
    Written statement of the Independent Community Bankers of 
      America (ICBA).............................................   104
    Written statement of the National Association of Federally-
      Insured Credit Unions (NAFCU)..............................   108
    Written statement of Public Citizen..........................   110
    Written responses to questions for the record submitted to 
      Adrienne A. Harris.........................................   127
    Written statement of various undersigned organizations 
      expressing concern about stablecoin risks..................   128

 
                       UNDERSTANDING STABLECOINS'
                        ROLE IN PAYMENTS AND THE
                          NEED FOR LEGISLATION

                              ----------                              


                       Wednesday, April 19, 2023

             U.S. House of Representatives,
                    Subcommittee on Digital Assets,
                              Financial Technology,
                                     and Inclusion,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. French Hill 
[chairman of the subcommittee] presiding.
    Members present: Representatives Hill, Lucas, Davidson, 
Rose, Steil, Timmons, Donalds, Flood, Houchin; Lynch, Foster, 
Gottheimer, Torres, Sherman, Casten, and Nickel.
    Ex officio present: Representatives McHenry and Waters.
    Also present: Representative Himes.
    Chairman Hill. Good morning. Welcome to our first hearing 
on stablecoins, entitled, ``Understanding Stablecoins' Role in 
Payments and the Need for Legislation.''
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    I want to thank all of our witnesses for being here today, 
and I now recognize myself for 4 minutes for an opening 
statement.
    Today's hearing marks the official resumption of the House 
Financial Services Committee's efforts to enact payment 
stablecoin legislation. Last Congress, Democrats and 
Republicans worked together on a proposal to bring payment 
stablecoin issuers under a regulatory framework in the United 
States, and to allow stablecoins to unlock their potential as a 
contributor to a modern payment system. That proposal from 
September was noticed for today's hearing.
    Last year, Members from both sides of the aisle reviewed 
the proposal, provided feedback, and worked to reach a 
compromise, but the clock ran out on those efforts due to the 
fall elections. That bill is an infant. It is a baby. It is not 
necessarily a beautiful baby, but it is our baby, and it is 
named, ``Maxine McHenry.'' And it is here today for both sides 
of the aisle to review and consider and to hear from our 
panelists, so today, we are going to discuss it, and think 
about revisions.
    How do we address the benefits and risks described in the 
Biden Administration's 2021 report on stablecoins? The 
Financial Stability Oversight Council (FSOC) recommended that 
Congress pass a legal framework, and Chairman McHenry and I are 
committed to working across the aisle to pass payment 
stablecoin legislation. And we are hopeful that Members in this 
room on both sides of the aisle will build on the foundation of 
that work.
    Luckily, we have made significant headway with the proposal 
that we noticed for today's hearing. By requiring payment 
stablecoins to be backed one-for-one by high-quality liquid 
assets held in reserve, the proposal mitigates run risk. The 
legislation also requires stablecoin issuers to comply with 
redemption requirements monthly at the station, and disclosures 
and risk management standards. These are just a few ways that 
this legislation established strong, much-needed consumer 
protections in this area, just as Ms. Hand outlines in her 
testimony today.
    However, there is more work to be done. It is my goal that 
our payment stablecoin legislation will provide different ways 
for issuers to maintain and come into compliance. I believe 
innovation is fostered through choice and competition. And one 
way to do that is through multiple pathways to become a 
stablecoin issuer, with appropriate protections so that we 
prevent regulatory arbitrage or a race to the bottom. I am glad 
to have Superintendent Harris here from the New York State 
Department of Financial Services to explain the framework that 
is currently in place in New York and to discuss their 
requirements for payment stablecoin issuers.
    Finally, I want to reiterate the urgency for those of us in 
this room to work together and pass this needed legislation. 
Recent reports indicate that digital asset developers are 
leaving the United States to go to countries that have more-
established regulatory frameworks for digital assets. That is 
not good for innovation, jobs, or consumer investor protection 
here.
    The ongoing turf war between the SEC and the CFTC over 
digital assets is not only unhelpful, but it is also 
unsustainable. When you have two agencies contradicting each 
other about whether one of the most-utilized stablecoins in the 
market is either a security or a commodity, you end up with 
uncertainty.
    Federal regulators have made it abundantly clear that 
without an Act of Congress, they will continue to interpret 
their authorities broadly, even when in direct contradiction 
with each other. That is why it is time for Congress to act and 
pass legislation to establish a regulatory framework for 
payment stablecoins. We look forward to hearing from our 
witnesses, and I look forward to picking up where we left off 
last fall.
    I now recognize the ranking member of the subcommittee, Mr. 
Lynch, for 4 minutes for an opening statement.
    Mr. Lynch. Thank you, Mr. Chairman, for holding this 
hearing to further examine the role of stablecoins in our 
financial system. I would like to also thank the witnesses for 
their appearance here to help the committee with its work. 
Thank you.
    The last several months have marked the effective collapse 
of much of the crypto industry following the abrupt demise of 
Tether, FTX, and Silvergate Bank, and countless other 
cryptocurrency companies have also witnessed the massive 
failure of Silicon Valley Bank and Signature Bank, which is 
also a crypto-centric bank. In the wake of these destabilizing 
events and their devastating impact on the crypto sector, which 
lost two-thirds of its market cap and went from $3-trillion 
market capitalization to $1 trillion--$1.06 trillion as of this 
morning--stablecoins remain a relevant oversight topic, 
particularly considering that they fall within a subset of 
cryptocurrency, and are intended to be non-volatile digital 
assets by intent and design.
    As reported by the President's Working Group on Financial 
Markets in its report on stablecoins, well-designed and 
appropriately-regulated stablecoins could support faster, more-
efficient, and more-inclusive payment options. However, the 
panel also underscored that the stablecoins present a variety 
of risk factors that are not currently subject to robust 
regulatory standards and cohesive oversight.
    To this extent, then-Chairwoman Waters led our committee's 
bipartisan investigation last Congress to examine the risks to 
investors, market integrity, and financial stability associated 
with stablecoins. We reviewed the technology behind 
stablecoins, their current use cases, State regulatory 
structures, and Federal oversight gaps. And we also examined 
the role of stablecoins in potentially promoting financial 
inclusion.
    As we learned last year, stablecoins are a type of 
cryptocurrency that issuers assert is pegged to stable reserve 
assets such as the U.S. dollar. Issuers claimed that 
stablecoins serve the purpose of payments with the potential to 
improve payment infrastructure and increase access to financial 
services. In reality, however, we know that stablecoins are 
rarely used for payments, and are instead used to facilitate 
speculative cryptocurrency trading and investments.
    Stablecoins also contain structural fragilities that make 
them vulnerable to runs and pose risks to monetary policy, 
national security, financial stability, and fair competition. 
It is worth revisiting questions of whether stablecoins are 
even needed, if they are hardly used for the purposes intended. 
If our goal is to improve our payment system and financial 
inclusion, we should instead consider advancing public sector 
options such as the FedNow payment system and a publicly-issued 
digital dollar.
    Considering these insights, I have trouble understanding 
why this outdated legislation, which is not cognizant of the 
recent disasters in the crypto space that has structural flaws, 
is attached to this hearing. I share concerns about key parts 
of this with the 14 consumer advocacy groups that sent a letter 
yesterday expressing concerns about the numerous, grave risks 
that stablecoins pose to households and our financial system, 
and I will share a few.
    For starters, giving States the authority to regulate 
stablecoins allows issuers to easily avoid Federal oversight 
and seek out more permissive States. Additionally, the bill 
identifies the Federal Reserve as the primary regulator for 
oversight and provides issuers with the access to Federal 
Reserve programs such as the discount window, master accounts, 
and payment services. These programs are typically limited to 
banks which are heavily regulated, and that is for good reason.
    Most importantly, the bill does not address the biggest 
lessons we have learned in recent months. We have witnessed the 
risks that can occur when players commingle customer funds. 
This bill does not mention how conflicts of interest will be 
managed, particularly between issuers and exchanges. I also 
continue to have concerns about allowing non-bank entities with 
no regulation to issue bank-like products. If the recent bank 
runs have taught us anything, it is the danger of allowing 
shadow banking products, particularly stablecoins, to issue 
deposits-like products without FDIC insurance. So, I strongly 
believe we need to separate crypto assets from our banking 
system, and this bill does just the opposite.
    With that, I ask that we take the time that we need to get 
this right rather than try to get there first. I yield back.
    Chairman Hill. I thank the gentleman. The Chair now 
recognizes the Chair of the full Financial Services Committee, 
Chairman McHenry, for one minute.
    Chairman McHenry. Payment stablecoins are an important part 
of the digital asset ecosystem and have the potential to be a 
cornerstone of modern payment systems. I want to thank the 
Subcommittee Chair and the Subcommittee Ranking Member for 
their engagement on this. I also want to thank the Ranking 
Member of the Full Committee, the former Chair of the 
committee, for her engagement. The Ranking Member and I spent a 
significant amount of time along with our staffs, working 
together with Treasury, with the Fed, and with members of our 
committee last Congress, and I thought it was important to 
acknowledge that good work as the foundation of our discussions 
and the frame laid out that between these negotiations between 
Ranking Member Waters and I last Congress when she was the 
Chair.
    I think it is important that we lay that down for a public 
hearing and understanding of what we negotiated, and this is 
the continuation of that good work, but it is the first piece 
of committee work that we have done in a setting like this. A 
lot of things have happened since this draft, and we want 
members to engage in this, especially new members of this 
committee, and have ownership of the legislative product that 
we will be moving.
    But I want to thank Ranking Member Waters for her 
engagement on this. And I think she and I both will confess 
that this bill is imperfect to us in many, many ways, to each 
of us in different ways. But I thought it was important to 
ensure that a Democrat-led committee, now a Republican-led 
committee, that we acknowledge the intellectual framework 
around us having a modern financial regulatory regime at the 
Federal level, like consumer interest is not served by us not 
acting. We need to have a Federal regulatory regime for 
stablecoins. It is important for us internationally and 
domestically. And it is very important that we have the 
understanding, on a bipartisan basis, of the utility and the 
importance of this legislation. And with that, I yield back.
    Chairman Hill. I thank the chairman. The Chair now 
recognizes the ranking member of the Full Committee, Ms. 
Waters, for one minute.
    Ms. Waters. Thank you very much, Chairman Hill and Ranking 
Member Lynch, and I want to thank all of the witnesses for 
testifying today. Let me start by saying that last Congress, my 
staff and I worked extensively with then-Ranking Member McHenry 
on legislation to provide a regulatory framework for payment. 
He is absolutely correct about that. However, what did not 
happen was we did not complete the negotiation so that we can 
move forward, and, unfortunately, a lot of things have happened 
in between.
    And, of course, in addition to FTX and a lot of other 
things going on, this bill that we have posted in no way 
represents any final work, and because so much has happened in 
between, we needed to get back together in negotiations. But 
Mr. McHenry alarmed me somewhat when he said that the Members 
on his side of the aisle had come up with a whole new bill, and 
I said to him, ``Well, then, they come to any negotiations 
having made up their minds already.'' And I suggested that if 
he was going to have a Republican bill, that we would go back 
to work on a Democrat bill, and then we will get together and 
decide who is going to give, and what we are going to do to 
work out the differences, et cetera, et cetera. That has not 
happened.
    So let me just say, the posted bill in no way represents 
the final work on stablecoins by negotiations between the two 
of us. The bill has been posted. The Chair wanted to post the 
bill. It does not represent a final product of any kind, so I 
think we are starting from scratch to deal with stablecoins. We 
must deal with it. We must get a stablecoin bill. I think we 
can do that, but we must disregard the bill that has been 
posted altogether. I yield back.
    Chairman Hill. The gentlewoman yields back. My response to 
that would be that we welcome any legislative effort from the 
Minority in this regard, in a constructive way, and on behalf 
of Republicans. We have just been looking at the September 
draft led by Ms. Waters and Mr. McHenry and making our own 
changes, doing our own due diligence, and that is what this 
hearing is all about. So, we agree that in no way is the bill 
posted to this hearing the be-all or end-all. I made that clear 
in my opening statement. This really is an opportunity for both 
sides of the aisle to fully engage with this superb panel and 
think through the right way to revise the good work of Ms. 
Waters and Mr. McHenry last fall.
    Before I call on our panel, I want to wish my colleague, 
Jae Jang, a Happy Birthday today. Nothing says, ``Happy 
Birthday,'' like a stablecoins hearing.
    We will now turn to our witnesses. First, the Honorable 
Adrienne Harris. Ms. Harris is the Superintendent of the New 
York Department of Financial Services. Prior to her service 
there, she was in senior roles at the Treasury Department and 
the White House.
    Second, Professor Jesse Austin Campbell joins us. He is an 
adjunct professor at Columbia Business School, where he teaches 
a class on blockchain markets and infrastructure, as well as 
serving as a managing partner at Zero Knowledge Consulting.
    Third, Mr. Jake Chervinsky. Mr. Chervinsky is the chief 
policy officer of the Blockchain Association, a digital asset 
association based here in Washington, D.C.
    Fourth, Mr. Dante Disparte. Mr. Disparte is the chief 
strategy officer and head of global policy at Circle, the 
issuer of USDC, as well as a member of the World Economic 
Forum's Digital Currency Governance Consortium.
    And our final witness is Ms. Delicia Reynolds Hand. Ms. 
Hand is the director of financial fairness at Consumer Reports.
    We thank each of you for taking the time to be here today. 
Each of you will be recognized for 5 minutes to give an oral 
presentation of your testimony. And without objection, each of 
your written statements will be made a part of the record.
    Ms. Harris, you are now recognized for 5 minutes to give 
your oral presentation.

STATEMENT OF THE HONORABLE ADRIENNE A. HARRIS, SUPERINTENDENT, 
        NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES

    Ms. Harris. Thank you, Mr. Chairman. Good morning, Chairman 
McHenry, Ranking Member Waters, Subcommittee Chair Hill, 
Subcommittee Ranking Member Lynch, and members of the 
Subcommittee on Digital Assets, Financial Technology, and 
Inclusion, and to the hardworking staff. I am Adrienne Harris, 
Superintendent of New York's Department of Financial Services 
(DFS). Thank you for inviting me today.
    Strengthening the nation's regulatory oversight of virtual 
currency is critical to protecting consumers and ensuring the 
safety and soundness of institutions. I look forward to sharing 
with you some key features of the DFS framework and to offering 
continued assistance as you work to develop a comprehensive 
national regulatory framework.
    DFS has been a prudential regulator of virtual currency 
since 2015. Our virtual currency regulatory framework is the 
most comprehensive in the country, built on the model of full-
scope banking supervision, but tailored for the unique 
considerations of the industry. It has served well to protect 
New York consumers, keep virtual currency entities safe and 
sound, and hold the bad actors to account.
    The Department has a wide range of tools to regulate the 
virtual currency industry, including licensing, supervision, 
examination, and enforcement. The core provisions of the DFS 
regulatory and supervisory framework are robust capital and 
financial standards, strong consumer protections, sophisticated 
cybersecurity requirements and strong anti-money laundering 
provisions. For example, virtual currency entities are subject 
to custody and capital requirements designed for industry-
specific risks. Entities must hold virtual currency in the same 
type and amount on a one-to-one basis that is owed or obligated 
to a customer that is distinct from the traditional banking 
fractional reserve system.
    Once an entity meets rigorous standards to be licensed or 
chartered, DFS creates a detailed supervisory agreement that is 
tailored to each company's risks. Companies must get approval 
from the Department for material changes in business, including 
for new product offerings, and stablecoin issuance. Entities 
also are subject to ongoing supervision and are regularly 
examined for compliance with regulations and those supervisory 
agreements. If, through our supervision, we find that a 
regulated entity is not in compliance with our rules, DFS' 
enforcement division can investigate and take appropriate 
actions to ensure that companies pay penalties for violations, 
remediate issues, and return lost funds to customers.
    Specific to stablecoins, DFS was the first agency to 
provide regulatory clarity for these products. In June 2022, 
DFS provided guidance related to the issuance of U.S. dollar-
backed stablecoins. The DFS stablecoin guidance requires one-
to-one reserving with cash or cash equivalents, redemption 
fulfillment within 2 business days, and independent public 
audits to confirm reserves.
    As members of this committee contemplate Federal 
legislation for stablecoins, I believe the best path forward is 
to build on the well-established dual-banking regulatory 
system. Any legislation that preempts the State's ability to 
regulate innovative financial services would be harmful to 
valuable regimes that already exist, and hamper State 
regulators' ability to respond nimbly to a changing financial 
ecosystem.
    I am proud of the work DFS has done to develop a 
comprehensive supervisory framework and to foster a well-
regulated virtual currency industry in the State. We welcome 
further collaboration with you to take advantage of our lessons 
learned and develop a comprehensive national regulatory 
framework to protect markets, entities, and consumers. Thank 
you.
    [The prepared statement of Ms. Harris can be found on page 
80 of the appendix.]
    Chairman Hill. Thank you.
    Mr. Campbell, you are now recognized for 5 minutes for your 
presentation.

    STATEMENT OF J. AUSTIN CAMPBELL, MANAGING PARTNER, ZERO 
KNOWLEDGE CONSULTING, AND ADJUNCT PROFESSOR, COLUMBIA BUSINESS 
                             SCHOOL

    Mr. Campbell. Thank you very much. I would like to start by 
thanking Chairman McHenry, Ranking Member Waters, Subcommittee 
Chair Hill, and Subcommittee Ranking Member Lynch, and all of 
the members of the subcommittee and the hardworking staff for 
the opportunity today.
    I want to start with something of an apology, which is to 
say the debate around stablecoins has been incredibly 
confusing. It has probably been harmful to consumers. It has 
probably been harmful to the nation. One of the problems is 
that with the lack of clarity from Congress, many things are 
called stablecoins which should not be. What we need is clarity 
to define stablecoins so that we understand that stablecoins 
built right are actually not new and are relatively mundane 
financial instruments.
    If you look at frameworks that have worked, like the 
framework from the NYDFS, these things look like conservative 
banks, maybe government money market funds. These are the sorts 
of things we know how to address as a financial system. We can 
regulate them, and I think there are also answers to some of 
the issues that already exist in our current system, such as 
State versus Federal. I suggest in my testimony for small to 
medium-sized stablecoins, they are fine at the State level. 
When they become very large and systemic, they should probably 
exist at the Federal level. We don't need a $2-million 
stablecoin being regulated by the OCC or the Federal Reserve. 
It is not an effective use of time, but nobody is suggesting 
that JPMorgan be only State-regulated.
    I think there is a way to make these things work. They 
serve the purpose of money on a blockchain, and that is what is 
ultimately the real innovation here is the blockchain itself 
and the opportunities for transactions that creates. In the 
current environment, we are failing at making this happen as a 
country. Our regulation is currently chaos for stablecoins. If 
I am an issuer and I want to create a stablecoin, I technically 
don't know if I am going to be answering to a State regulator, 
a Federal banking regulator, the SEC, or the CFTC.
    And it puts you in the same position as if you are out with 
friends and you are going to play some sports game, and 
somebody tells you, well, we may enforce the rules of baseball, 
or football, or basketball, and we are not going to tell you 
which in advance. And maybe some of them will all apply at the 
same time. It is unworkable.
    And what this means, and it pains me to say this as an 
American, is that things are moving offshore. I can say this 
with certainty because I advise my clients right now to do 
exactly that. There are other regimes with significantly more 
regulatory clarity than what we have provided here, where if 
you are a good actor who wants to comply with the law, who 
wants to do the right thing, you want to go there because you 
know you can do it with certainty.
    And this is bad for jobs. It is bad for the strength of the 
dollar. It is bad for our status as a reserve currency. And it 
is particularly bad for national security, as blockchains have 
a significant degree of transparency that is not present in 
markets like actual cash markets, right? When somebody 
transacts on a blockchain, it is public. We may not always know 
right now who transacted, but you know the amount, the time, 
the wallets they traded with, and what they sent back and 
forth. And with the richness of data, it is just a matter of 
time until you can identify the wallets. This is a huge data 
analysis tool to enforce our rules on the financial system that 
we are potentially giving away.
    Right now, over the past year, the biggest winner has been 
Tether. They are offshore. They don't work well with us. They 
facilitate some activity they probably shouldn't, but the chaos 
is leading that stablecoin to grow while others shrink. The 
other thing that is happening is other countries are moving 
into this space.
    Just this morning, before the hearing, I saw news that 
Russia is exploring legislation to formalize their ability to 
transact in crypto. If we don't take the field, others will do 
so before us, and they may not be doing it in ways that we 
like, so in the end, this matters. I would call upon the 
subcommittee to think deeply about passing some sort of bill 
about stablecoins. We can't let perfect be the enemy of good 
when one of our enemies here is time.
    Right now, doing this right will bring financial inclusion 
through the dollar to billions of people globally. This is not 
just a U.S. concern; it reinforces the strength of the dollar 
in the world. It will help us fund the deficit. Every dollar 
that goes into stablecoins ends up in traditional financial 
instruments that we can use to fund our government, like T-
Bills. It will bolster our reserve currency status, and it will 
ensure that if the blockchain continues to grow at the pace it 
has from 2012 to present, the standard of transaction on there 
for a currency is the dollar. Thank you very much.
    [The prepared statement of Mr. Campbell can be found on 
page 36 of the appendix.]
    Chairman Hill. Thank you, Mr. Campbell.
    Mr. Chervinsky, you are now recognized for 5 minutes for 
your oral presentation.

STATEMENT OF JAKE CHERVINSKY, CHIEF POLICY OFFICER, BLOCKCHAIN 
                          ASSOCIATION

    Mr. Chervinsky. Thank you, Subcommittee Chairman Hill, 
Subcommittee Ranking Member Lynch, Full Committee Chairman 
McHenry, Full Committee Ranking Member Waters, and members of 
the subcommittee for inviting me to testify today. My name is 
Jake Chervinsky, and I am chief policy officer for the 
Blockchain Association, a nonprofit trade association dedicated 
to advancing good policy so that all of the benefits of public 
blockchains can be realized here in the United States. The 
Blockchain Association includes over 100 leading U.S. companies 
who are committed to responsible innovation, to advancing and 
strengthening the United States strategic position in global 
finance and technology, and to making financial services more 
accessible to American consumers.
    My message for you today is simple: Congress must pass 
stablecoin legislation. Given the right policy, stablecoins can 
revolutionize the payment system and reinforce the dominance of 
the U.S. dollar at a time when our foreign adversaries, like 
China, are seeking to undermine its status as the global 
reserve currency.
    In my time this morning, I want to give you three reasons 
why stablecoin legislation is so necessary. First, our 
financial system has a problem. It is stuck in the analog era 
of the last century, constrained by intermediaries who act as 
gatekeepers and middlemen to outdated infrastructure that has 
failed to keep pace with the digital age.
    Today, the global economy is on all the time. It is always 
connected, and yet, our payment system is still slow, 
inefficient, unreliable, and inaccessible to many Americans. 
Public blockchains are the solution to that problem, a 
revolutionary upgrade on the technology that powers the global 
financial system. And U.S. dollar stablecoins are one of their 
best applications, allowing anyone with an internet connection 
to send any number of dollars to anywhere in the world, nearly 
instantly, and at nearly zero cost. Stablecoins outperform 
legacy payment rails across-the-board. They are safer, they are 
faster, they are cheaper, they are more reliable, and they are 
accessible to everyone. Now, new legislation is necessary to 
maximize the benefits of stablecoins and also to protect 
consumers and to ensure that the financial system is safe and 
sound.
    Second, the status of the U.S. dollar as the global reserve 
currency is under threat by foreign adversaries like China, 
which is pushing the digital yuan as a competitor to the 
dollar. The best way for us to maintain U.S. dollar-dominance 
worldwide is to spread stablecoins all over the world. 
Stablecoins are indeed best suited to perform that task.
    Third, if Congress fails to act, we will not only forfeit a 
huge competitive advantage to our adversaries, we will also 
lose entrepreneurs and innovators to other, more-welcoming 
jurisdictions like Europe, the United Kingdom, Singapore, 
Japan, Australia, and many others that are far ahead of the 
United States in regulating digital assets. Make no mistake, 
regulatory uncertainty is already driving innovation overseas. 
Adopting stablecoin legislation now will send an important 
message to the job creators and the taxpayers in the U.S. 
blockchain industry that they are still welcome here at home.
    Members of the subcommittee, stablecoin legislation has 
already received bipartisan, bicameral support, and the 
Financial Services Committee has already made great strides 
toward a balanced and effective bill. I urge you to continue 
that work on a bipartisan basis, and I, along with the 
Blockchain Association and all of our member companies, stand 
ready and willing to help. I appreciate the chance to testify 
today, and I look forward to your questions. Thank you.
    [The prepared statement of Mr. Chervinsky can be found on 
page 51 of the appendix.]
    Chairman Hill. Thank you very much.
    Mr. Disparte, you are now recognized for 5 minutes for your 
oral statement.

 STATEMENT OF DANTE ALIGHIERI DISPARTE, CHIEF STRATEGY OFFICER 
               AND HEAD OF GLOBAL POLICY, CIRCLE

    Mr. Disparte. Full Committee Chairman McHenry, Full 
Committee Ranking Member Waters, Subcommittee Chairman Hill, 
Subcommittee Ranking Member Lynch, and members of the 
Subcommittee on Digital Assets, Financial Technology, and 
Inclusion, it is my honor to submit my testimony to you today. 
My name is Dante Disparte, and I am the chief strategy officer 
and head of global policy for Circle, a leading global 
financial technology firm, and the issuer of the USD coin, or 
USDC.
    USDC is a dollar digital currency supporting the 
extensibility of the U.S. dollar in a competitive, always-on, 
internet-based global economy. Indeed, as fears grow of de-
dollarization, or the rise of alternative payment systems that 
are non-conversant with U.S. values or broader norms in the 
rules-based financial system, Circle, USDC, and dollar-
denominated payment stablecoins can help to ensure the dollar 
remains the global currency of preference, including natively 
on the internet.
    Over the course of our 10 years of activity in the U.S. and 
around the world, we have always aspired to a regulation-first 
approach based on trust, transparency, accountability, and 
financial integrity. It has been 5 years since the first USDC 
was issued, which, for the purposes of this hearing and 
proposed legislation, can be considered a dollar-denominated 
payment stablecoin.
    Today, USDC has supported more than $10 trillion in 
cumulative transactions on the public internet. A USDC-enabled, 
wallet-supported global payment network is in more than 190 
countries, which is akin to a mobile money network like M-PESA, 
but at world scale. More than 75 percent of all USDCs in 
circulation are held in digital wallets and smart contracts 
rather than on digital asset exchanges, suggesting a strong 
correlation as a dollar-denominated store of value. Indeed, 
there is a, ``Cambrian explosion,'' of use cases and 
responsible innovation, courtesy of the programmable, 
composable, trusted, and open nature of USDC. Rather than 
disrupting traditional financial systems or markets, we are 
seeing growing acceptance of USDC as a dollar settlement option 
among major financial services firms including Visa, MoneyGram, 
and Worldpay, among many others.
    By every measure, courtesy of this early adoption of 
dollars as the currency of reference in digital assets markets, 
more than $132 billion of stablecoins in circulation reference 
the dollar, albeit to varying degrees of prudential regulatory 
standards. While some of these dollar-referenced stablecoins 
are starting to embrace sunlight and transparency, USDC was 
born in it. From the first issuance through to today, we have 
adopted macroprudential risk standards and transparency that is 
a hallmark of trust, even when compared to traditional 
financial services firms. As a result, a proliferation of 
enterprise use cases and adoption has followed.
    Enterprise use cases for USDC run the gamut from Treasury 
management to easing the exacting cost and slow speeds of 
cross-border payments, which remain stubbornly high, and 
inconveniently slow, with little meaningful competition. 
Indeed, one of the partnerships we are the proudest of shows 
the art of the possible with USDC and the advantages of open 
interoperable payment systems. Last year, Circle, together with 
the Stellar Development Foundation and MoneyGram, partnered 
with the United Nations High Commissioner for Refugees (UNHCR), 
to enable USDC as a form of digital dollar cash assistance 
supporting war-displaced Ukrainian refugees.
    As the sole issuer of USDC, Circle has always operated 
under the highest-prevailing regulatory standards for 
electronic-stored value and money transmission in the United 
States. While other countries regulate payments and electronic 
money activity at a national level, the U.S. framework empowers 
State banking and money transmission supervisors to foster, 
develop, and regulate the payments industry at the State level.
    Although this sum-of-the-parts approach may be subject to 
potential operating and regulatory gaps, it has nonetheless 
produced an economic development model that has enabled 
companies to start up and scale across the United States. Our 
States are not only the laboratories of U.S. democracy, and 
crucibles for economic development, they are also the 
laboratories of payment services innovation. Rather than 
framing financial innovation and regulation as competing 
forces, Circle's operating experience over the last decade has 
prioritized public-private regulatory partnership and 
personhood.
    In short, financial innovation, inclusion, and protecting 
the integrity of the financial system are not competing 
objectives. Today, we are comprehensively licensed as a State-
supervised money transmission and electronic stored-value 
company across 48 States. We were the first company to receive 
a BitLicense from the New York State Department of Financial 
Services in 2015. We have been and remain a registered money 
services business conforming with the Financial Crimes 
Enforcement Network's (FinCEN's) guidance on combating illicit 
financial activity. The net result is a company that went from 
a mere idea 10 years ago, to a business that has approximately 
1,000 employees in 35 States and 12 countries, with both strong 
prospects and the desire to become a U.S.-listed company.
    Thank you for the opportunity to testify today. I look 
forward to addressing the committee's questions.
    [The prepared statement of Mr. Disparte can be found on 
page 63 of the appendix.]
    Chairman Hill. Thank you, sir. Ms. Hand, you are now 
recognized for 5 minutes for your oral presentation.

    STATEMENT OF DELICIA REYNOLDS HAND, DIRECTOR, FINANCIAL 
                   FAIRNESS, CONSUMER REPORTS

    Ms. Hand. Thank you. Good morning, Full Committee Chairman 
McHenry, Full Committee Ranking Member Waters, Subcommittee 
Chairman Hill, Subcommittee Ranking Member Lynch, and members 
of the subcommittee. I am honored to participate in this 
important conversation about stablecoins and the need for 
legislation today. My name is Delicia Reynolds Hand, and I am 
the director of financial fairness at Consumer Reports, where I 
lead the organization's work to evaluate and rate digital 
financial products and services.
    Today, these products and services promise all kinds of 
things--financial security, well-being, and even the ability to 
leverage new forms of asset classes--without financial 
intermediaries, with a simple swipe or click. Whether these 
products and services live up to these promises is still an 
open question, but it's one that we aim to answer through our 
product testing and consumer research.
    Cryptocurrencies can be appealing to everyday consumers, 
whom traditional finance has never appropriately served. Our 
own 2022 Consumer Reports survey showed that African Americans 
once owned cryptocurrencies at a higher rate than other ethnic 
groups. These consumers have never been a priority of the 
traditional finance and banking system. They continue to live, 
however, in credit and intergenerational wealth deserts, so 
there is a certain appeal to something outside the very 
financial system which has largely ignored them. They are the 
targets of Super Bowl ads, influencers, and cryptocurrency 
kiosks.
    But consumers are caught in a vicious cycle of boom and 
bust of crypto experimentation. It is a public policy disaster 
that there yet no uniform and meaningful regulatory frameworks 
in the United States. These risks are significant and include 
an unlimited supply of tokens and coins serving as collateral 
for loans, rigid self-executing smart contracts, non-existent 
reserve requirements, lack of interoperability requirements, 
lack of meaningful disclosures, and the creation of debtor-
creditor relationships.
    We need to see common-sense, consumer-first, comprehensive 
regulation, and the bill as posted, while it has some positive 
things, does create some concern. First, the bill creates the 
potential for regulatory arbitrage. An important check on our 
banking system is that even State-chartered institutions have 
to obtain Federal approval. But this bill has no equivalent 
requirements for Federal regulatory review, as the Federal 
Reserve Board or other regulators would have no authority to 
reject State licensing.
    Second, while the bill does outline an important role for 
Federal oversight, and require parent companies of bank 
subsidiaries authorized as stablecoin issuers to be insured 
depository institutions, it doesn't provide the same 
requirement for non-bank issuers, and allowing this will create 
confusion and less protection for consumers who choose to 
purchase stablecoins that do not offer such insurance. While 
the bill sets up a regime to approve issuers of payment 
stablecoins, it doesn't outline how payment activities 
conducted or facilitated by the issuers or their coins will 
have adequate consumer protections. Consumers need to be able 
to prevent, cancel, replace, or override a transaction. And 
this is a critical, critical function necessary to ensure that 
payment system operators are able to conduct chargebacks or 
facilitate disputes over payments.
    Consumers have come to rely on interoperability, and they 
should have the same benefits in stablecoin payments. But this 
bill does not require interoperable technology protocol, 
although the bill calls for the development of standards. This 
may still impede consumer access and leave consumers walled off 
into each institution's specific system.
    We would also like to see additional language associated 
with custodial wallets. While custodial wallets may help 
consumers keep track of their keys, this has created a legal 
gray area that should be clarified. The law should prevent a 
debtor-creditor relationship from being formed, and this should 
be clearly required in the disclosures.
    There are additional consumer investor protections that we 
would like to see included or improved in the bill such as 
moving from outdated notice and disclosures, prohibiting the 
commingling of funds, requiring a 24-hour calendar day 
redemption requirement, and ensuring that a consumer's use of 
stablecoins does not create the debtor-creditor relationship. 
Notably, we want to see all Federal regulators have a clear and 
meaningful role in this space. I encourage committee members to 
continue to work together on a bipartisan basis, and I 
appreciate the ability to be here with you today. Thank you.
    [The prepared statement of Ms. Hand can be found on page 73 
of the appendix.]
    Chairman Hill. Thank you very much for your testimony. We 
will now turn to Member questions, and the Chair recognizes 
himself for 5 minutes for questions.
    Currently, the SEC and the CFTC are taking contradictory 
positions in court about whether one of the most-utilized 
stablecoins in the market is a security or a commodity. This 
creates an impossible situation for the private sector, for 
other regulators, and for stablecoin issuers, who can't 
possibly comply with both securities and commodities laws at 
the same time. One of the main goals of our legislation is to 
resolve this regulatory uncertainty once and for all.
    Let me start with you, Mr. Disparte. Can you discuss the 
impact of that conflict?
    Mr. Disparte. Thank you, Chairman Hill. Indeed, this is 
what I like to classify as sort of a regulatory Game of Thrones 
at the Federal level, and it isn't helpful. I think we saw that 
yesterday in the committee. Looking at securities issues alone, 
it isn't particularly helpful. There is a proliferation of 
digital assets in circulation. However, virtually every country 
of substance in the world treats payment stablecoins under an 
equivalent national regime that would conform with electronic 
money rules and as a payments and banking innovation, not as a 
securities or commodities innovation. They might be used in 
digital asset trading, but their core function, particularly 
when treated as a payment stablecoin, is to solve the buyers 
and spenders remorse that were one of the original sins, if you 
will, of the digital assets industry.
    Chairman Hill. Thank you.
    Mr. Campbell, in your view, should non-interest-bearing 
payment stablecoins be considered securities?
    Mr. Campbell. No, I would echo Mr. Disparte's comments. 
These fundamentally work like money. They operate like banking 
products. Unless you believe that something like JPMorgan's 
bank deposits or physical U.S. dollars should be securities, 
then they should not be either. They should note that well.
    Chairman Hill. Okay. That is helpful. Let me switch gears. 
The current regulatory framework for stablecoins is mostly 
handled by State regulators and FinCEN. The State frameworks, 
New York being the most recognizable, provide critical consumer 
protections and regulatory oversight. As we seek to set up a 
Federal framework, it is critical that we also retain multiple 
pathways for payment stablecoin issuers. This is an aspect of 
the proposal that I particularly want to make sure we get 
right. We had a version of that in the draft.
    So, Superintendent Harris, what role do you think State 
regulators currently play, and should play in regulating 
payment stablecoin issuers?
    Ms. Harris. Thank you so much, Mr. Chairman. I think the 
State regulators can play an incredibly important role. As you 
have seen in New York, we work very closely with FinCEN, among 
other Federal regulators, but we have been able to nimbly 
respond to all of the changes in the marketplace, laying out a 
flexible licensing and charter regime both through our 
BitLicense and limited purpose trust, and engaging in 
supervisory agreements with each of our licensed entities, so 
that we can tailor our oversight to each of the risks that 
those entities present, examining on a regular basis, and 
bringing enforcement actions when necessary.
    And as I noted in my testimony, everything that we do is 
based on the banking supervision model, and I think it would be 
very helpful to see the dual regulatory framework that we use 
in banking duplicated for cryptocurrency and stablecoins as 
well.
    Chairman Hill. Good. Thank you. And consumer protection is 
at the forefront of what you do and investors, right?
    Ms. Harris. Absolutely, we require--
    Chairman Hill. I thought Ms. Hand made a good point about 
making sure that is at the forefront of what we are doing, and 
you would echo that as a State regulator?
    Ms. Harris. Absolutely. We require robust disclosures about 
fees and risks. We require one-to-one reserving and 
attestations, we don't allow lending of consumer assets, and we 
require segregation, all of which are very important consumer 
protections.
    Chairman Hill. Thank you. Representative Himes is visiting 
our subcommittee today. We are glad to have you, Mr. Himes. He 
and I have a bill called the 21st Century Dollar Act. The 
mission is to ask the Treasury to inform Congress about how to 
keep the preeminence of the dollar-based trading system in the 
world, which is integral to the economic success of the U.S., 
and has been a boon for countries all over the world in the 
past 8 decades. It is a positive thing, not a negative thing, 
and only people who think it is negative are people who are 
sanctioning. So, you have to think about that for a little bit. 
We are not here to emulate whatever the surveillance State 
policies are of Iran or China.
    In my view, one of the benefits of creating regulatory 
certainty in America is preserving this innovation in our 
country and preserving the U.S. dollar's status as the global 
reserve currency.
    Mr. Disparte, could you reflect on the role stablecoins can 
play in supporting U.S. dollar dominance?
    Mr. Disparte. Thank you, Mr. Chairman. As I mentioned in my 
testimony, cumulatively, in 5 years alone, Circle's USDC has 
processed $10 trillion of internet-native payments. This is an 
activity that is not possible by any other means and any other 
transactions. Most of the world's payment systems labor under 
what is known as the, ``walled garden,'' problem. That would be 
the equivalent of a Gmail account not being able to send an 
email to a Hotmail account because the two systems are not 
conversing.
    Chairman Hill. Thank you very much. If there are any 
further thoughts from witnesses on the panel, please respond in 
writing.
    I'd now like to turn to my friend, Mr. Lynch, the ranking 
member of the subcommittee, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman. Ms. Hand, the landscape 
of stablecoins has changed considerably in recent months. In 
particular, it has shrunk due to failure of some stablecoin 
issuers following the collapse of FTX, the crypto exchange. 
About a million customers lost all of their money, totaling 
about $8.9 billion. All of this has revealed some complex risks 
associated with stablecoins, including their lack of stable 
values. Obviously, stablecoins are not stable. I know that 
there have been warnings to the banking system about the 
custody of stablecoins and dealing with other cryptocurrencies 
and also the vulnerability to runs that we have seen recently. 
Can you talk about some of the other risks that have been 
exposed in recent months? And could you also discuss the ways 
in which the current legislation that is tied to this hearing 
does not reflect those vulnerabilities and does not offer ways 
to address those new risks?
    Ms. Hand. Certainly. Thank you for the question. I think 
one of the primary risks has actually been brought up in 
testimony here today with reference to the growing acceptance 
of USDC by financial institutions. So, despite the recent 
instability and volatility that has impacted the fiat currency 
banking system, we continue to see the traditional financial 
industry invest, and this is at the risk of consumers. We need 
to see in a bill clear activity limitations that reflects some 
of the issues that came up in recent months.
    We need to see limitations on commingling. That was an 
issue with FTX. We also need to see restrictions on self-
dealing, and undisclosed conflicts of interest. And very 
explicitly for the consumers in Celsius, who were not able to 
recover, we need to prevent a debtor-creditor relationship so 
that my coins are my coins, and not those of the company. Those 
are some of the key risks that we see are not addressed, among 
other things.
    Mr. Lynch. I do want to make one correction in what I said 
before. I think I talked about Tether's collapse, but it was 
actually Terra, not Tether, that collapsed. Tether just dropped 
in value. One of the things I worry about in this current 
legislation being proposed is that it would allow stablecoin 
issuers access to the Federal Reserve services, the discount 
window.
    One of the saving graces of the FTX collapse, and other 
subsequent collapses, is that it wasn't tied to the traditional 
banking system. We had ring-fenced the crypto industry so well 
that most of those losses were occurring in the crypto industry 
itself, and did not infect the traditional banking system, 
which is the envy of the world, and provides so much power to 
the U.S. dollar, and provides us a safe haven for much global 
investment. Can you discuss the risks that can come with 
allowing stablecoin issuers to act like banks without the 
regulatory framework that provides protection to depositors and 
provides integrity to our entire system?
    Ms. Hand. Certainly. I will start with an historical point, 
which is the reason why we have the National Bank Acts. They 
stemmed from a series of bank failures, and systemic runs, and 
a complete lack of Federal oversight. So in the equivalent 
here, we need that clarity. We cannot treat non-bank entities 
like banks without the equivalent restrictions to their access 
to consumers and not having substantive consumer protections in 
place.
    Mr. Lynch. My time has expired, and I yield back.
    Chairman Hill. The Chair now recognizes Mr. Lucas of 
Oklahoma for 5 minutes.
    Mr. Lucas. Thank you, Mr. Chairman. I appreciate that. I 
think it is helpful as we work through this process to do just 
a little bit of housekeeping on some of the definitions. 
``Stablecoin'' attempts to provide a relatively stable value in 
pegging its value to real-world assets.
    Mr. Campbell, could you elaborate on the different 
categories of underlying assets that can back a stablecoin, and 
then specifically on the payment stablecoins in the legislation 
we are discussing today?
    Mr. Campbell. Yes, thank you very much. If we look out in 
the wild, there are really three kinds of stablecoins that have 
existed. The first is what I would call fiat-backed 
stablecoins. They kind of work the way you have in your mind, 
which is there is a pile of some sort of financial instruments 
behind them. The second is crypto-backed. This is people 
attempting to over-collateralize with things like Bitcoin or 
Ethereum. And then, the last version is algorithmic, which are 
backed by some sort of mathematical relationship.
    I can tell you that the first category has been largely 
successful. The second two are highly-experimental financial 
products that probably should not be called, ``stable.'' And I 
would say specifically within this bill, defining stablecoins 
as the first category with good reserve guidelines and then 
consumer protections around what you are allowed to call a 
stablecoin would be greatly helpful. Thank you.
    Mr. Lucas. Ms. Harris, you discussed the general approval 
process for a BitLicense through the New York State Department 
of Financial Services (DFS) and how DFS enters into supervisory 
agreements with companies based on their individual risks and 
business models. Could you elaborate a bit more on examples of 
specific risks presented by a firm that could be addressed in a 
supervisory agreement?
    Ms. Harris. Absolutely. Thank you, sir. First, I want to 
note that we have one licensing and one chartering regime in 
New York, so it gives companies the flexibility to choose a 
regime that matches their business model without sacrificing 
any regulatory rigor. Then, once a firm has a license or a 
charter, as you noted, we engage in the negotiation of a 
supervisory agreement that allows us to tailor our oversight to 
risks.
    So, imagine a company that wants to offer a coin on two 
different protocols. We can require separate disclosures, 
enhance cybersecurity controls, and enhance Bank Secrecy Act/
Anti-Money Laundering (BSA/AML) controls, based on the risk 
that those protocols might present. We also have preapproval 
for every new product or material change in business a licensee 
seeks to offer.
    Mr. Lucas. Mr. Disparte, Circle's USD Coin fell below its 
$1 peg during the banking turmoil that stemmed from Silicon 
Valley Bank (SVB). SVB was, of course, one of the banks that 
Circle used to manage cash reserves. And as we all know, the 
regulators stepped in to fully insure those deposits. Mr. 
Disparte, could you discuss the lessons learned from the 
collapse of SVB and what the potential impact of the SVB 
collapse was to USDC?
    Mr. Disparte. Thank you for the question, Congressman. We 
learned a lot of lessons, the first of which is that while many 
of the policy conversations have been about what risks could 
crypto and digital assets introduce to the traditional banking 
system in the traditional sector, we learned with the failure 
of not one bank, but three successive bank failures 
consecutively over the course of several weeks, that we had to 
protect our business from risks in banking. And one of those 
risks obviously could have been an existential-level event for 
America's commercial banks, but for the Federal intervention. 
And over the course of the weekend, Circle, like any other 
U.S.-regulated money transmitter, had a fiduciary obligation to 
redeem all USDC demands at par. We were able to make that 
promise on the Saturday after the bank failures began, closing 
the temporary DPAC of USDC from $0.88 to $0.98.
    And today, as we advocate for this legislation, one of the 
points that we could separate is payments activity from banking 
because Circle, like any other company that relies on banks for 
payments, had an exposure, and that exposure was what happens 
with uninsured deposits inside the banking system.
    Mr. Lucas. Absolutely. I thank the witnesses for their 
observations, and with that, Mr. Chairman, I yield back.
    Chairman Hill. I thank the gentleman from Oklahoma. And I 
recognize the distinguished gentlewoman from California, the 
ranking member of the Full Committee, Ms. Waters, for 5 
minutes.
    Ms. Waters. Thank you very much. First of all, I am a 
little bit surprised that Superintendent Harris is here today. 
I didn't know that you have a regulatory framework for 
stablecoins. Do you?
    Ms. Harris. Yes, ma'am, we do, quite a robust one that 
exists both in regulation in our supervisory agreements and in 
our recent guidance that we issued.
    Ms. Waters. I agree with most of our panel that we should 
move very quickly to establish the stablecoin bill and get that 
legislation going. But since I have you here, Ms. Harris, I 
cannot help but ask you a few questions about the stablecoins 
that we are concerned about, which certainly are very 
important. But you just had a big bank failure in New York, and 
I want to take a moment or so to understand that. What happened 
with one of the biggest bank failures in the country as it 
relates to cryptocurrency, if I may?
    Ms. Harris. Absolutely, ma'am. It is a misnomer that the 
failure of Signature Bank was related to crypto. What we saw 
with Signature Bank is that it had a new-fashioned bank run and 
the outflow of deposits were from a broad depositor base, 
including wholesale food vendors, fiduciaries' trust accounts, 
and law firms. And in fact, the outflow of crypto deposits was 
in exact proportion to the representation in the depositor base 
overall, and, in fact, some of those deposit outflows were 
actually pre-planned. It is, of course, unfortunate that there 
was a run on the bank at Signature prompted by what we saw with 
SVB, but it is not the case that the failure of Signature was 
related to crypto.
    Ms. Waters. Again, why is it understood or believed that it 
was related to cryptocurrency? How do you absolutely excuse 
cryptocurrency from being a part of the problem at Signature, 
that caused it to be in the situation where it had to be closed 
down?
    Ms. Harris. Yes, ma'am. I think it is part of what has 
transpired with social media and other things. It is true that 
Signature banked a healthy proportion of crypto customers; 
about 20 percent of its depositor base was crypto companies. 
They were known and had announced previously that they were de-
risking from the crypto space. But again, with the run we saw 
on the bank that Friday evening, about 20 percent of the 
deposits left the bank, but 20 percent of that 20 percent was 
crypto. The rest were normal commercial customers with 
uninsured deposits that were leaving the bank.
    And so, we did not see the collapse as a result of crypto 
deposits and their instability. There was a broad base of 
depositors that left the bank. The crypto depositors that left 
the bank were in exact proportion to their depositor base, so 
it really was just a new-fashioned bank run prompted by what 
happened with SVB.
    Ms. Waters. As you know, there will be continued 
discussions and hearings and investigations on the issue. But 
since you do have a regulatory regime for the stablecoin, much 
of the concern that we have learned about has to do with assets 
and whether or not they are credible, and what can be called an 
asset, and how can we be sure that we are going to protect the 
investors with assets that may not be real. What have you 
learned about that?
    Ms. Harris. We have learned a great deal, and let me start 
by saying in New York, we did not license FTX. They could not 
do business in New York. The same is true of Voyager, and the 
same is true of Celsius. They did not meet our standards, so 
they could not operate in New York, even though they could 
operate in the rest of the country. We require our stablecoin 
issuers to back their stablecoins one-to-one with cash and cash 
equivalents. They have to provide redemption to their customers 
within 2 business days. They have to provide public and 
independent attestations of their reserve mix on their 
websites. And we have robust capital requirements based on a 
very sophisticated formula that we require our companies to 
have, which is why no New York-licensed entity has gone 
bankrupt.
    Ms. Waters. What advice would you give us, since we are 
still at the point of putting together legislation and 
hopefully working in a bipartisan way to do that? What advice 
can you give us about determining what is and what is not a 
real asset?
    Ms. Harris. I think, ma'am, the framework that we have put 
together in New York is a very good model that has served well 
to protect New Yorkers. And I would urge the committee to do 
what it can to duplicate that and to allow for a State pathway 
so that nimble regulators can continue to police the space 
appropriately.
    Ms. Waters. Thank you very much.
    Ms. Hand, given the implications of our national payment 
system, should we allow States to regulate payment stablecoins 
on their own? Does a Federal agency, like the Fed, need a role 
to approve payment stablecoins before they are issued in 
addition to regulating their digital wallet providers?
    Chairman Hill. Could you submit that answer in writing?
    Ms. Hand. Yes, I am happy to do so.
    Chairman Hill. The gentlewoman's time has expired.
    Ms. Waters. Thank you.
    Chairman Hill. The Chair now recognizes Mr. Davidson, who 
is also the Vice Chair of this subcommittee, and the Chair of 
our Housing and Insurance Subcommittee, for 5 minutes.
    Mr. Davidson. Thank you, Mr. Chairman. And thanks to our 
witnesses for being here today. I also thank the staff on both 
sides of the aisle for all of the work that has gone into 
getting to this point on the stablecoin bill. The market has 
been pleading for this for a long time, except in New York.
    The New York regulators have been way ahead of the curve. I 
am glad that more of my colleagues are learning that not only 
is there a regulatory framework in place, but that it is 
essentially impossible for a stablecoin to go to zero. And the 
reason is that it is backed by Level 1 high-quality liquid 
assets or, in at least one case, physical custody of a 
commodity, not a derivatives contract like a net asset value 
fund, but actual audited, physically-present custody of a 
commodity.
    Superintendent Harris, you regulate those things, so what 
would you say are the key elements of the guidance that gives 
people confidence that a stablecoin really is stable and backed 
by the full value, whether that is $1, or in the case of a 
commodity, the value of the commodity?
    Ms. Harris. Thank you so much for your questions, and they 
are precisely the elements that you mentioned. And I will also 
note that in New York, we have not approved any 
algorithmically-backed stablecoins for issuance or listing in 
New York, but it is that one-to-one backing. It is our 
prohibition on commingling rehypothecation lending. It is our 
T+2 redemption, and it is our audit and reporting requirements, 
I think, that gives consumers quite a bit of confidence in a 
New York-regulated entity.
    Mr. Davidson. Just as a follow-up, when you look at the 
implications of that--I am from Ohio, and we don't have an Ohio 
regulator that is doing what you are doing. But a Federal 
framework for payments stablecoins would say, we can trust that 
the New York financial services regulators have this. At some 
level, we would have some Federal supervision that would 
interact like we do in other financial services, and that would 
be highly compatible with your existing State-based regulatory 
framework?
    Ms. Harris. Absolutely, sir.
    Mr. Davidson. Thank you very much for that clarification.
    Mr. Campbell, Tether is the largest stablecoin in the 
ecosystem, and it is headquartered in Hong Kong. What does it 
mean for the stablecoin ecosystem that Tether is located 
offshore, and how has Tether become such a large player in the 
space?
    Mr. Campbell. Thank you for the question. I would say, one, 
Tether has become a large player because they had a first-mover 
advantage. They started in 2014 before other stablecoins, and 
that just speaks to the problem of inaction. When people can't 
move elsewhere, you end up with entrenched incumbents.
    Two, Tether has not faced the same kind of regulatory 
uncertainty. They don't have the concerns that others do about 
having to conform with something relatively strict and 
relatively demanding like the NYDFS guidance, which, by the 
way, I greatly support, having worked in that space as well, 
that keeps consumers safe. They are not transparent. It is 
unclear if they have always had all the reserves, and it puts 
people at risk, but when they are the default option because 
others are being hamstrung, it is what people use, because 
there is demand for dollars on a blockchain. So, I think it is 
there just because it has been available.
    Mr. Davidson. Yes. I think that is a big part of it, and 
thanks for your clarification. Because they don't have the 
transparency and disclosure requirements, I have at times 
referred to it as a, ``time bomb,'' because we have clarity in 
New York, but we don't have clarity into Hong Kong's market. 
And frankly, the move to Hong Kong is a step in the right 
direction, because for a while it wasn't even clear that they 
were accountable even in Hong Kong, so hopefully, Tether is as 
stable as it is purported to be. But I think the real 
opportunity for us is for this body to create legal clarity.
    And look, we hit SEC Chairman Gensler pretty hard yesterday 
on his failure at the SEC to provide clarity, but ultimately, 
we should be clear: The job to provide legal clarity at the 
Federal level is right here in this body. And I just want to 
thank Chairman McHenry, and, when she was Chair, Maxine Waters, 
for paying attention to this space. The market really needs 
this legal clarity, and I think that is something that both of 
you have highlighted.
    Let me close with Mr. Chervinsky. If stablecoins are to 
eventually be used as an actual medium of exchange to move that 
store of value that is stable, do you believe it is necessary 
that they retain the attributes of cash, which is 
permissionless, peer-to-peer transactions versus an 
intermediary third-party that facilitates the transactions?
    Mr. Chervinsky. Thank you for your question, Congressman. I 
think that is absolutely critical. I think that we are 
currently moving toward a cashless society, and we can go in 
one of two directions. We can either follow China and have a 
currency that is totally controlled and surveilled by 
governments and also by corporations to sort of a business 
model of surveillance capitalism where we can reproduce the 
benefits of cash. I think we all agree that cash is a very 
important tool for people to use and we can do that in the 
digital space using stablecoins.
    Chairman Hill. The gentleman's time has expired.
    Mr. Davidson. To be trusted, it has to have those 
characteristics. My time has expired, and I yield back.
    Chairman Hill. Thank you. And I now recognize my friend 
from Illinois, the distinguished ranking member of our 
Subcommittee on Financial Institutions and Monetary Policy, Dr. 
Foster, for 5 minutes.
    Mr. Foster. I guess I will start with a question that I 
asked a little more than a year ago when we had SBF and all of 
the crypto luminaries in front of our committee, and what I 
regard as the foundational question on identity, which is, if 
we wish to prevent crypto assets from being used for ransomware 
and a long list of illicit activities, is there any alternative 
to having every crypto transaction traceable to the secure 
digital identity issued by a country with which we have 
extradition treaties, or is there any technological solution to 
that of which anyone is aware, or do we have to just say, we 
cannot have self-custody? We can't have any of these? We can't 
have anonymous transactions? Is there anyone who believes there 
is a solution that prevents ransomware, and doesn't violate 
that?
    Mr. Chervinsky. I will take that, Congressman. I think that 
there will be those solutions, and I can tell you--
    Mr. Foster. No, that is not acceptable. I am talking about 
doing something right now. Right now, is there a technology 
that stops ransomware, if we allow self-custody on anonymous 
transactions?
    Mr. Chervinsky. There are many companies working on very 
important--
    Mr. Foster. That do not have solutions that work. I 
understand there are many companies that are anonymous Monaro-
type collaborations that are trying to make the exact opposite 
happen. I think everyone watching this debate should understand 
that either you support continuation of ransomware and all of 
that illicit stuff or you don't, and it is a pretty much a 
binary choice that we have to face. Another example of this is, 
let's say that someone puts a gun to your head, drags you into 
an alley, and says, get out your phone and transfer all of your 
digital assets to me, are you screwed or not? In your ideal 
world, are you in your utopia? What is your reaction to that?
    Mr. Campbell. I will say that if you look at the models of 
existing stablecoins, including the Paxos stablecoins that I 
previously ran, we do have a solution to this problem, and I 
advocate for it in my testimony. Stablecoins that exist on 
public blockchain should have freeze and cease capabilities. If 
there is illicit action, we need the ability to take those 
coins back and prevent them from being spent. We also need 
blockchain surveillance tools, which Superintendent Harris 
talked about, and they exist: Chainalysis; Elliptic; Inca 
Digital.
    Mr. Foster. But these are being defeated by more anonymous 
coins all the time.
    Mr. Campbell. Only when using crypto assets that are not 
the regulated stablecoins.
    Mr. Foster. Okay. So, part of your vision is that there be 
mandatory transparency so that ultimately, regulators can see 
the true identities behind the participants in transactions?
    Mr. Campbell. That is one option. I would say the other is 
right now, given the lack of clarity and the inability of many 
of the most-regulated financial institutions to operate in this 
space, you have many bad actors. If you create a Federal 
pathway where they use specifically-regulated stablecoins that 
have these properties--
    Mr. Foster. Yes, ultimately, what we need is the equivalent 
of a license plate on every digital wallet because if you think 
about how essential the development of license plates and 
driver's licenses were to the healthy development of the 
automobile industry, you know that this was crucial. It would 
be completely unacceptable to have unlicensed cars and 
unlicensed drivers driving through your neighborhood or across 
your international borders.
    And it can be anonymous, like a license plate is anonymous, 
under most circumstances, but you have to have that guarantee 
that if someone drives through your neighborhood and runs over 
your dog, you can jot down the license plate, take it to a 
trusted court system, de-anonymize the owner of that car or 
that wallet, and haul them into court.
    Mr. Campbell. I would say, in fact, in the freeze-and-seize 
regimes for stablecoins, you don't even need anything other 
than their license plate. I don't need to know who owns a 
wallet address to take the assets out of it. If somebody was 
hacked, and all we know is the wallet address, you can take 
those assets back.
    Mr. Foster. You have to know the private key associated 
with it.
    Mr. Campbell. No. No. With the freeze of stablecoins--
    Mr. Foster. If you have or if you are willing to--
    Mr. Campbell. --if the token is standard, we can take it 
back.
    Mr. Foster. With some kind of governance superseding and 
overpowering the blockchain, in which case the blockchain 
doesn't rule, you have a trusted third party that can reverse 
transactions.
    Mr. Campbell. That is essentially correct in how the 
centralized fiat stablecoin issuers--
    Mr. Foster. Okay. For my last 30 seconds here, there is a 
whole bundle of things associated with rapid run risk, 
fraudulent minting implications on monetary policy, that all 
seemed like they would be perfectly addressed with a simple 
rule that any stablecoin that is issued has to be associated 
with an account at the Federal Reserve, and that no issuance is 
valid until it is accompanied by an attestation from the Fed 
that the total amount that has been issued is less than what is 
on reserve at the Fed. And a simple API that the Fed would 
provide, as well as the license, seems like an answer to that 
whole bundle of things.
    Is there anyone, if you can answer for the record, who sees 
any problems with that simple rule? Among other things, it 
provides a business model for issuers, because they get to 
collect the interest from the Fed.
    Chairman Hill. I would invite the panel to respond to that 
good question in writing.
    Thank you, Mr. Foster. The Chair now recognizes the 
gentleman from South Carolina, Mr. Timmons, for 5 minutes
    Mr. Timmons. Thank you, Mr. Chairman. Mr. Disparte, in the 
last few weeks, $6 billion has been transferred from USDC to 
foreign stablecoins. That $6 billion left the U.S. economy. 
That $6 billion is no longer subject to the same U.S. AML/KYC 
standards. Could you opine on this? What do you believe are the 
reasons for this mass exodus of U.S. funds, and do you believe 
it is due to the lack of regulatory clarity? And what 
implications does that have for our national security?
    Mr. Disparte. Thank you for the question, Congressman. I do 
think for a lot of users of these alternatives in the world, be 
it alternative payment systems, or in this case, Tether, 
opacity is the future they are looking for the most, and that 
should be neither conflated nor confused with the presumption 
of privacy in financial services, whether digital or analog. 
But I do think there is a race to the bottom taking place in 
corners of this market segment, and candidly, the void of 
regulatory clarity in the United States is partly filling that 
vacuum.
    And there is also a geopolitical digital currency space 
race taking place around the world that I think, more 
importantly and perhaps more kinetically in the short run, also 
manifests itself as a digital assets 5G war. So, just as there 
are certain companies you wouldn't want building hardware and 
software in your telecommunications infrastructure, I think 
there are certain firms in this industry that you wouldn't want 
building the financial plumbing of the future. And many of 
those firms are operating with impunity outside of the 
perimeter of major jurisdictions including the United States.
    Mr. Timmons. Thank you for that. It seems direct 
contradictions from regulators are just one of the many signs 
that show Congress needs to act. Many stablecoin projects are 
fleeing the United States for countries that have established 
clear frameworks for payment stablecoin issuance. The longer 
the U.S. goes without a clear regulatory framework for 
stablecoins, the more this will accelerate.
    Mr. Chervinsky, would you describe what the impact will be 
if legislation is not enacted?
    Mr. Chervinsky. Thank you for your question. I think if 
Congress doesn't act, then stablecoins will be issued in other 
countries. There is a clear desire for this type of technology 
and for its application to national currencies, and there are 
many other jurisdictions that are adopting workable frameworks. 
And I think what that means is that the United States will not 
be able to ensure that stablecoin issuers are observing 
American principles. It also may mean that stablecoins will not 
be based on the U.S. dollar to begin with. We will see euro 
stablecoins in Europe, and yen stablecoins in Japan, and that 
will be a hit to U.S. dollar dominance, and is something that 
we should avoid.
    Mr. Timmons. Thank you. The draft legislation attached to 
this hearing would require stablecoin issuers to produce 
information such as financial inclusion reports annually.
    Mr. Campbell, in your view, what is helpful to know about a 
stablecoin issuer? Would you consider financial inclusion 
reporting as materially-important enough to be statutorily-
required?
    Mr. Campbell. Thank you for the question. I would start by 
saying I primarily think of these as banking products, which 
means the first thing I think about is safety and soundness 
when I think about stablecoins. Number one on the list when you 
think about transparency is transparency of reserve assets, 
composition of reserve assets, and giving everybody from a 
financial inclusion perspective, the faith that they can use 
this instrument, and it is backed by things like cash at U.S. 
banks that is insured, it is backed by T-Bills, it is backed by 
the correct forms of assets. Then, where you end up with from 
an inclusion standpoint is regardless of reporting at very low 
cost with very low friction, every American and others can use 
this product.
    Mr. Timmons. Thank you for that. Mr. Chairman, I yield 
back.
    Chairman Hill. The gentleman from South Carolina yields 
back. The gentleman from New York, Mr. Torres, is now 
recognized for 5 minutes.
    Mr. Torres. Thank you. Superintendent Harris, I said to you 
privately and will reiterate publicly that I will not support 
any stablecoin legislation that preempts the New York State 
Department of Financial Services or otherwise encroaches on the 
sovereignty of New York State. As a New Yorker, that is a red 
line for me.
    When it comes to finance, there is a long tradition of dual 
regulation. Just like banking has both a Federal option and a 
State option, stablecoin issuance should have both a Federal 
option and a State option, and a State option should exist not 
only on paper but in practice. The Federal Government should 
certainly have a floor that prevents regulatory arbitrage to be 
sure, but there is no need for a ceiling that preempts either 
in theory or in practice does the proposed legislation before 
us create a genuine system of dual regulation.
    Ms. Harris. Thank you so much, Congressman. It has been 
such a pleasure to get to know you and work with you since 
taking on this role, so I appreciate your partnership. I think 
there are certainly improvements that could be made to the 
present legislation, although it has language which states that 
nothing in the legislation will preempt States in practice. I 
think there are a number of provisions that give Federal 
regulators veto authority over State regulators and their 
judgments and oversights that would be counterproductive and 
provide a disincentive for companies to take a State path.
    Mr. Torres. So, we are not quite there yet.
    Ms. Harris. Not quite yet.
    Mr. Torres. Do you agree that stablecoin issuers should be 
fully reserved and that those reserves should consist of 100 
percent cash or cash equivalents?
    Ms. Harris. Absolutely, and that is what we do in New York.
    Mr. Torres. And do you agree that those stablecoin reserves 
should be verified not only by self-attestation, but also by a 
third-party audit?
    Ms. Harris. Yes, and that is what we do in New York.
    Mr. Torres. Common sense dictates that you cannot have an 
honor system in which a charlatan like Sam Bankman-Fried claims 
to be fully reserved and then the regulators take his word for 
it.
    Ms. Harris. Exactly.
    Mr. Torres. The President's Working Group (PWG) report 
proposes banking regulation for stablecoin issuers, but since a 
stablecoin issuer has no fractionalization of reserves and no 
lending function like a bank, it would seem to me that a 
stablecoin issuer operates differently from a bank and 
therefore should be regulated differently.
    Mr. Chervinsky, do you agree with that analysis?
    Mr. Chervinsky. I completely agree, and I think that we can 
design reasonably-tailored regulations for non-bank entities to 
issue stablecoins in a way that is just as safe and sound as a 
bank doing the same.
    Mr. Torres. SEC Chair Gary Gensler asserts that an 
alternate regulatory framework for crypto would undermine 90 
years of securities law. Since American federalism has 50 
laboratories of democracy, we can actually test that thesis, 
that hypothesis against the regulatory experience of one of 
those laboratories, New York State. New York State crypto 
regulation is segregated from securities regulation. The New 
York State Department of Financial Services regulates crypto, 
whereas the New York State Attorney General regulates 
securities. So, has the Gensler hypothesis been proven right or 
wrong in New York? Has a separate regulatory framework for 
crypto undercut securities regulation?
    Ms. Harris. What I would say is our authorities do not 
depend on definitions about what is a security, what is a 
commodity, or what is a currency. At DFS, we have blanket 
authority over virtual assets, and we exercise it accordingly. 
Some of our companies are also subject to registration 
requirements with the Attorney General, and I think what we 
have done in New York has proven to be quite successful for 
some of the reasons we have discussed today.
    Mr. Torres. So, has a separate licensing regime for crypto 
come at the expense of regulatory rigor?
    Ms. Harris. No, not at all, to the contrary.
    Mr. Torres. In fact, New York State DFS is the most 
rigorous regulator of crypto in the country.
    Ms. Harris. And I would say in the world.
    Mr. Torres. In fact, who was the first to raise red flags 
about the insufficient reserves of Tether? It was not the SEC. 
It was not the CFTC. It was the State of New York.
    Ms. Harris. Correct.
    Mr. Torres. So, the notion that a separate regulatory 
framework for crypto would undermine 90 years of securities law 
has been definitively disproven in New York State. The legacy 
financial system has high fees and long delays that prey upon 
the lowest-income Americans. Poor people of color have to pay 
predatory fees in order to transfer their own money to loved 
ones abroad. Stablecoin has the ability to function as a 
currency, and blockchain has the ability to move money from 
peer to peer in real time.
    Mr. Campbell, is it fair to say that the combination of 
those two technologies has the potential to create a better, 
cheaper, and faster payment system? Actually, that question is 
for both Mr. Campbell and Mr. Disparte.
    Mr. Campbell. I thank you for the question, and I would say 
yes, unequivocally. The beauty of a blockchain is it treats 
everybody the same. If you have low fees, high transparency, 
and a high ability to transact, everybody can use it regardless 
of the amount of money they have, and I think that is one of 
the best features of this new technological innovation.
    Mr. Disparte. Unequivocally.
    Mr. Torres. Short and sweet. I yield back.
    Chairman Hill. The gentleman from New York yields back. The 
gentlewoman from Indiana, Mrs. Houchin, is recognized for 5 
minutes.
    Mrs. Houchin. Thank you, Chairman Hill and Ranking Member 
Lynch. And thank you to the witnesses for your testimony and 
for speaking with us today.
    As I highlighted yesterday in our hearing with SEC Chair 
Gensler, I am concerned about the lack of regulatory clarity 
from agencies and the restrictive, overly-burdensome approach 
that many of our Federal regulators are taking with the digital 
assets ecosystem. The constant threat of regulation by 
enforcement has done nothing to help businesses and innovators 
here in the United States. Instead, an unclear approach by the 
Federal agencies has only served to push innovators elsewhere.
    Mr. Disparte, Circle just announced it is opening its 
European headquarters in Paris. What does the regulatory 
environment for stablecoins look like in the European Union?
    Mr. Disparte. Thank you for the question, Congresswoman. 
The European Union, since 2019, has embarked on a whole-of-
region, whole-of-economy framework for digital assets known as 
the Markets in Crypto-Assets Regulation framework. Originally, 
this was in response to fears of Big Tech and, at some level, 
fears of China tech or geopolitical competition in technology. 
But today, that framework has evolved into perhaps the world's 
most comprehensive framework for digital assets that including 
the topic of stablecoins would acknowledge them as electronic 
money, tokens, and would passport those licenses across the 
European Union.
    Circle has just announced the submission of two licenses in 
Europe and Paris, and France is the venue of choice. One is an 
electronic money license and the second is a digital assets 
service provider license. And the two of them would allow for 
all of the activity that we support here to be effectively 
exported to Europe. I should add, we have also filed for a 
similar license in Singapore as a major payments institution.
    Mrs. Houchin. How does it compare to the draft proposal 
from the 117th Congress that is attached to this hearing?
    Mr. Disparte. On the one hand, it is a much broader 
framework. The European framework, Markets in Crypto-Assets 
(MiCA) framework, contemplates broader activities and payments 
stablecoins. It contemplates digital asset trading, which types 
of assets would be systemic, definitional issues around market 
conduct, and so on, but it does have many aspects that would be 
comparable. For example, the requirement of prudential 
treatment of stablecoin reserves, segregation of funds, a lot 
of the disclosure points that we have highlighted so far in 
this hearing.
    Mrs. Houchin. And to be clear, the EU is not the only 
foreign political entity that is moving on this issue. Mr. 
Campbell, Mr. Disparte, could you shed some light on what other 
countries' regulatory frameworks for stablecoins look like, and 
what the frameworks require of issuers? I am looking at what 
are the implications of the United States not being the first 
mover in this space, and how has that impacted the current 
dynamics of the overall ecosystem?
    Mr. Campbell. Thank you for that question. I would say, if 
you look around the world, you are starting to see legislation 
that deals specifically with fiat-backed stablecoins, so nobody 
is really embracing crypto-backed. Nobody is really embracing 
algorithmic. But places like Singapore, Dubai, Abu Dhabi, and 
the U.K., which is now working on a framework like the European 
Union, all have frameworks that I would say are substantially 
similar to what has been proposed in the 117th Congress bill. I 
think we can do better in America. Our financial regulation and 
systems are more robust than some of those places, but, in 
general, if we don't act, those are the best options, and 
people will take advantage of them. Thank you.
    Mr. Disparte. And for my part, I don't subscribe to the 
view that it is a zero-sum proposition. I do think the stakes 
are increasingly higher and there are more choices in terms of 
jurisdictions and venues, but it should be made clear that 
Circle, or a company like Circle, probably wouldn't have been 
started successfully in any other country around the world. But 
the fact that we are now a net exporter of our operating model 
and business model does require, I think, that the U.S. pay 
attention to these alternative jurisdictions.
    There are other places as well. Later in June, Japan will 
issue broad, comprehensive stablecoin guidance. Hong Kong has 
come back online in a broad way. But the innovation ultimately 
will conform, I think, with all of the rules that we could set 
forth in this committee. And I do think it is really critical 
that the path for digital assets is increasingly shaped by city 
states as opposed to nation states. And we see that, of course, 
with New York, Singapore, Hong Kong, and many other 
jurisdictions around the world.
    Mrs. Houchin. Thank you. Without proper action, I certainly 
fear the U.S. could lose its leading role in digital assets. 
Many stablecoin projects are fleeing the United States for 
countries that have established clear frameworks for payment 
stablecoin issuance. Without guidance, I think this problem 
will only worsen. As a member of the subcommittee, I am 
certainly excited to tackle these important issues to make sure 
that we get it right here in the United States. I yield back, 
Mr. Chairman.
    Chairman Hill. The gentlewoman yields back. And I now 
recognize the gentleman from California, Mr. Sherman, who is 
also the ranking member of our Capital Markets Subcommittee, 
for 5 minutes.
    Mr. Sherman. There is a lot of money in the crypto and the 
crypto-adjacent space. The crypto world makes money by 
literally making money. They had it up to $3 trillion. It has 
dropped down to $1.2 trillion, but $1.2 trillion out of thin 
air pays for a lot of lobbyists, and a lot of propaganda. In my 
City, Los Angeles, the Lakers play in a crypto arena. They do 
not play at a, ``Know Your Customer,'' arena. They do not play 
at an, ``Enforce Our Tax Laws,'' arena. They do not play at a, 
``Prevent Drug Dealers from Being Able to get Their Financial 
Transactions Handled,'' arena.
    We have a very good payment system. We have an excellent 
currency. The entire world tends to like the dollar. It is a 
good store of value, a good measure of value, and a good means 
of transaction. If you use Apple Pay, it comes right out of 
your checking account. It is not as good as what the crypto 
world promises they will deliver in some future decade, but it 
is way better than what the crypto world delivers now, and I am 
sure that payment systems using the dollar will get better.
    So, what is the problem? The problem is that it is so hard 
to cheat on your taxes, and it is hard to run a drug sales 
operation with the U.S. dollar because we have Know Your 
Customer (KYC) and we have Anti-Money Laundering (AML), and we 
need a payment system that meets the needs of the millions of 
Americans, or at least the hundreds of thousands of Americans 
who want to engage in major illegal activity.
    Other countries are moving forward with this, and we have 
to catch up with them. Peru is ahead of us in cocaine 
manufacture and cocaine cultivation. China is ahead of us in 
organ harvesting, and it is time for America to catch up.
    Ms. Hand, if we allow every State to have its own rules, 
and say, a State like Wyoming, which doesn't have that many 
people and cows don't always sell for as much as they would 
like, if they could make a billion dollars by just having a 
regulatory system that was perfect for tax evaders, what would 
stop them?
    Ms. Hand. Thank you. Currently, nothing would stop them 
because there is no overarching equivalent Federal regulatory 
framework, and we would continue to see a race to the bottom, 
which is not good--
    Mr. Sherman. Yes. What the payment system needs is 
regulation so that you can be sure that while you are hiding 
your money from the IRS, and that is the big market for this. 
Drugs are important, sanctions evasion is important, but the 
IRS has testified that there is nearly a trillion dollars of 
unpaid taxes every year, almost exclusively from the very 
wealthy. And in order to not pay a trillion in taxes, you need 
to hide a trillion of income, which means over a decade, you 
have to hide $30 trillion of assets. That is a huge market, and 
I think it could be more important to Wyoming than cows. And of 
course, it all goes away if your payment system has Know Your 
Customer and Anti-Money Laundering provisions.
    And a stablecoin, talk about an oxymoron. The problem for 
those who want to use the system is that it is so completely 
unregulated that they might find that their money in the 
Bahamas isn't there anymore. So, they need regulation to 
protect those who put their money in while at the same time, 
who don't have Know Your Customer and Anti-Money Laundering. 
And that is something that I think the State of Wyoming or 
anyone else trying to provide this service will make sure that 
there is actually reserves behind the coin. But at the same 
time, the IRS can't find out who owns the coins. So, every day, 
drug dealers get cheated because they try to buy a kilo and the 
scale is deliberately cheated against them. They need 
regulation too, and a fair system to have a concealed currency 
is what cryptocurrency is all about. I yield back.
    Chairman Hill. The gentleman yields back. Mr. Flood is now 
recognized for 5 minutes.
    Mr. Flood. Thank you, Mr. Chairman. I appreciate all of the 
witnesses' time and testimony today. As someone who passed the 
Nebraska Financial Innovation Act to allow State-chartered 
banks to custody digital assets in my home State, I am really 
interested in the pathway for States, and I appreciate, 
Superintendent Harris, you being here today and your testimony. 
As we think about legislation, can you describe why maintaining 
a robust role for State regulators is important?
    Ms. Harris. Absolutely, sir, and thank you for your 
question. I think we see the success of the dual regulatory 
framework on the banking side, and it is something that we 
should seek to duplicate when it comes to stablecoins. I think 
the main virtue is the nimbleness with which State regulators 
can act and you see that evidence in New York with our one-to-
one reserving requirements. All of the things we have talked 
about here today are already in place in New York because we 
can move more quickly and stay abreast of developments in the 
space.
    Mr. Flood. In your position, can you tell me other States 
that you think are at the forefront of stablecoins and 
understanding the space and State regulators that have maybe 
taken some steps to be more innovative?
    Ms. Harris. Illinois has recently announced that they are 
going to take the New York framework and duplicate it, and I 
understand that a number of other States that are exploring 
that as well.
    Mr. Flood. Okay. Thank you. It is important that the 
pathway to becoming a stablecoin issuer remains open for new 
entrants.
    Mr. Disparte, do you view the current path for non-banks in 
the current draft legislation attached to this hearing as 
achieving this goal?
    Mr. Disparte. Thank you for the question, Congressman. I do 
think it is really critical. The United States of America is an 
outlier among the advanced economies in the world and not 
having a Federal payment system charter. The best alternative 
we have is companies like PayPal, and Stripe, and Apple Pay, 
and all of these other services. And I do think it is really 
critical that a Circle enjoys competition in the future, where 
a comparably regulated and structured stablecoin might exist 
also, referencing the dollar. The next real breakthrough is 
fungibility and interoperability of those payment systems as 
well. So, preserving a bank and non-bank pathway for digital 
currency issuance in the country is going to be really 
critical.
    Mr. Flood. One of the issues that I have dealt with in 
Nebraska is, I think consumers don't appreciate that the word, 
``bank,'' comes with a level of security that you can't get in 
a lot of countries around the world. Allowing non-bank entities 
access to the Federal payment system is a big step for 
Congress. It is a big step for this process. It comes with FDIC 
oversight, and the Federal Reserve. Can you respond to the 
concerns that someone might have about allowing an entrant into 
the Federal payments system? And how do we weigh whether or not 
we do it with a non-bank entity, which I really think is an 
open question. I am concerned about it. I would like to know 
your thoughts.
    Mr. Disparte. Again, here, too, if you want to really 
understand the competitiveness gap the United States faces, the 
inability for the central bank of the United States, the 
Federal Reserve Board, to provision Federal services to non-
bank actors is an enormous gap. Again, we are an outlier 
compared to the United Kingdom, Europe, Singapore, and many 
other countries around the world and indeed, the digital 
currency space race analogy is precisely that. There are 114 
central banks around the world representing 95 percent of 
global GDP, developing solutions around this digital currency 
question, and that could include the provision of central bank 
custody for cash reserves. We have just run the cusp of 
launching FedNow in the United States. If FedNow is going to 
work, FedNow has to be provisioned to non-bank actors.
    The banks, I hate to say, have no incentive in competing 
past fee interest incomes--to be banked is expensive in this 
country. To use basic payment services is expensive in this 
country, and we exact the highest fees from the people who can 
least afford it, for very basic services. Those services, I 
might add, also enjoy a public backstop. The last time we 
socialized losses to trillions of dollars was in bailing out 
the very banking system; we just saw three banks bailed out 
recently. So, payments competition is critical. Legitimizing it 
at the Federal level would merely level the playing field 
between the United States and other countries.
    Mr. Flood. Do you think that non-bank entities would also 
welcome all of the steps that we require like, Federal FDIC 
insurance, and the exams? One of my concerns, and I think it is 
an honest concern, is if we let non-bank entities enjoy the 
benefits of banks, that could make it difficult. We can't have 
a collapse. We can't have a calamity. We can't miss for the 
American consumer. Thank you. I yield back.
    Chairman Hill. I thank the gentleman from Nebraska, and I 
now recognize the gentleman from Illinois, Mr. Casten, for 5 
minutes.
    Mr. Casten. Thank you, Chairman Hill. And thanks to all of 
our witnesses. Mr. Disparte, I want to start with you. When Mr. 
Lucas asked you what lessons you learned from this period in 
March, when that essentially broke the buck, if you will, on 
stablecoin, and you had mentioned that--I think you said you 
were exposed to some risks in the banking sector. I want to 
challenge you a bit on that because there were no money market 
funds that broke the buck and they were just as exposed to the 
banking sector. First question, do I have it right that you had 
about $40 billion in cash deposits on March 9th, of which $3.3 
billion was at SVB? Is that right?
    Mr. Disparte. That is correct.
    Mr. Casten. Okay. Have you since that point made any 
efforts to increase your dollar holdings, diversify your 
dollar? What have you done to protect against the fact that you 
did have exposure to a part of the banking sector, but not to 
the majority of your dollar holdings?
    Mr. Disparte. Yes. Thank you for the question, Congressman. 
Circle, prior to the failure of Silicon Valley Bank, continues 
to operate what we think of as the safest dollar settlement 
infrastructure on the internet. USDC's entire composition--
    Mr. Casten. I don't want to be rude, but I don't want to 
get into a whole pitch for Circle. I am just trying to 
understand, did you take measures to increase the diversity or 
the liquidity of your dollar holdings?
    Mr. Disparte. Sure. Today, the cash component of USDC is 
held at a large cash custodian, New York bank, and the 
remainder, typically 80 percent of USDC, is short-dated U.S. 
Treasuries.
    Mr. Casten. Okay.
    Mr. Disparte. Of 90 days or less.
    Mr. Casten. Okay. And was there significant volume of loss 
on the trading during that period before you got back to the 
dollar peg?
    Mr. Disparte. Well, yes, USDC lost about $10 billion of 
circulation. But we think of it as fulfilling the right that 
the coin holder has of redemption at par for a U.S. dollar, 
even in a situation of extreme stress in the banking system. 
The three banks that failed had connectivity to the digital 
assets industry, although their failure wasn't caused by the 
industry.
    Mr. Casten. I understand. So, I asked that question. Now, I 
just want to put a question to all of you, and I was going to 
ask you all to be New Yorkers in 1975, but then I realized some 
of you may be conflicted out from that question. So, let me ask 
instead that you all be Michiganders in 2013. The largest city 
in your State is about to go bankrupt. You were the treasurer 
of Michigan. Would you support legislation that would allow 
States to print paper money issued by the State of Michigan 
with a peg to the U.S. dollar without any approval from the Fed 
that would allow you to print your way out of the bankruptcy of 
Detroit? Would any of you support that legislation, or would 
that feel like a moral hazard to you?
    Mr. Campbell. I will answer that one and say, one, no, you 
shouldn't be having unbacked instruments, but two, their--
    Mr. Casten. No, no, they are backed. They are backed by the 
Fed. We are going to mandate that the Fed has to fully back 
that Michigan dollar.
    Mr. Campbell. I would say I think the model you should 
think about in this context is things like prepaid cards or 
money market funds, which are different--
    Mr. Casten. I am just asking, should you be able to print, 
as we did before the Civil War--just have States print 
currency, but then say that the Federal Government is going to 
backstop that currency? It feels like a big moral hazard to me. 
The reason I ask that is because Section 103 of the draft 
legislation says that a stablecoin issuer could ask for 
approval from a State, that State could then choose to accept 
that, and the Federal Reserve would have to approve that within 
60 days, and the Fed would have no backstop.
    Look, it is currency, right? You could have a situation 
under Section 103 of this rule, where if I am a State, if I am 
New York in 1975, and Michigan, if I am the next State that is 
facing a fiscal crisis, I can just say, can somebody please 
issue a stablecoin so that I can back my way through this and 
dump all the risk on the American taxpayer?
    Mr. Campbell. Yes, I would say that is the value of the 
reserve guidelines that are also within this bill, is that to 
create a stablecoin--
    Mr. Casten. No, no, I am asking, should the Fed not have 
the right, if we are going to give the Fed the obligation to 
backstop that risk. And the reason I framed this by starting 
about the Circle question is, the money market funds did not 
blow up because for better or for worse, there is a Fed 
backstop.
    Ms. Hand, with the time I have remaining, do you have any 
thoughts on how we might improve this legislation to remove the 
moral hazard?
    Ms. Hand. Absolutely. We need that clear backstop and the 
Federal Reserve to minimally have the ability to reject 
applications that don't come up to par.
    Mr. Casten. Okay. I would hope that at a minimum, we can 
improve this legislation by making sure that if we are going to 
put that obligation on our Federal Government, the Federal 
Government should have some authority to say whether or not 
they are willing to accept it. Thank you. I yield back.
    Chairman Hill. I thank the gentleman.
    Mr. Nickel is now recognized for 5 minutes.
    Mr. Nickel. Thank you. And thank you all for being here 
today. I share the same concerns as Ranking Members Waters and 
Lynch and agree that we need to ensure robust consumer 
protections when it comes to digital assets. I also want to 
thank Chairman Hill for holding today's hearing and I look 
forward to working on bipartisan stablecoin legislation.
    After our committee's hearing with SEC Chair Gensler 
yesterday, it is still evident that there is a lack of clarity 
in regulation impacting the digital assets industry. Without 
clear rules of the road, this innovative technology could head 
overseas where we can't protect investors. I am committed to 
working in a bipartisan way to make progress wherever we can on 
this issue.
    Mr. Chervinsky, how would effective stablecoin legislation 
bring more clarity to the way digital assets are regulated?
    Mr. Chervinsky. Thank you for the question, Congressman. I 
think stablecoin legislation would bring clarity in two ways. 
One, specifically, it would provide clear rules of the road for 
stablecoin issuers as to how they can set up their businesses 
and put these products into the market here in the United 
States subject to American principles and so that, as 
Congressman Foster asked earlier, they would be required to 
freeze assets, if it were required in order to keep illicit 
actors and other bad actors out of the crypto ecosystem. I 
think that is very important.
    But secondly, it would also send a message that the United 
States is open for business to this technology. That is not the 
message that the industry has been receiving from many other 
regulators so far, who have been substituting their own 
judgments about the value of digital assets for Congress' 
judgment. But indeed, it is Congress' role to answer the major 
question of how digital assets should be regulated, and I think 
that Congress should begin with stablecoin legislation.
    Mr. Nickel. Thank you.
    Mr. Disparte, I understand that the U.S. has an opportunity 
with stablecoins to reinforce the dominance of the U.S. dollar 
as the global reserve currency. This comes at a time when the 
status of the dollar is under threat by foreign adversaries 
like China and Russia. Mr. Disparte, can you provide some 
examples of how stablecoins have improved cross-border 
transactions and empowered those living in economically-
disadvantaged countries? And can you please explain how 
stablecoins may enable individuals and businesses across the 
globe to transact in U.S. dollars?
    Mr. Disparte. Thank you for the question, Congressman. One 
of the most powerful examples is a very recent one, which is 
our partnership with the United Nations High Commissioner for 
Refugees (UNHCR). Circle, together with Stellar and MoneyGram, 
as I shared in my written testimony, helped design a sort of 
digital cash assistance program for Ukrainian refugees. This 
program worked in a manner that no other alternative payment 
system could have supported, which is that if you think of the 
way we as a country move foreign aid today or disaster 
assistance, it is pallets of physical cash, which are literal 
honey pots for corruption, bribery, and fraud. The idea that 
you have device-centric money that is corruption-resistant, 
near-instant, and auditable is a very powerful feature, and the 
stablecoin, a dollar-denominated stablecoin, in this case USDC, 
is the payload that supports that innovation.
    Mr. Nickel. Thank you. Public blockchains offer a 
revolutionary solution to our current financial system. Public 
blockchains can be accessed by anyone in the world who has an 
internet connection and are faster, less expensive, more 
reliable, and more transparent than legacy payment rails. But 
as we have seen, the value of various cryptocurrencies is 
volatile when compared to many currencies, especially the U.S. 
dollar.
    Mr. Chervinsky, how do stablecoins differ?
    Mr. Chervinsky. Stablecoins combine the best of both worlds 
of the traditional financial system and public blockchains. 
They take the benefits of the public blockchain--efficiency, 
security, reliability, and accessibility--and combine that with 
stable value. Now, many other types of digital assets like 
cryptocurrencies are volatile against the U.S. dollar. And that 
is not to say there aren't great reasons why people should use 
those assets for any number of purposes in a decentralized 
environment. But for the purpose of payments, it is best to 
have an asset that is stable against a national currency so 
that it can be used to exchange for goods and services without 
worrying that tomorrow, the price of what you bought yesterday 
is going to be way higher or way lower. So with stablecoins, we 
get all the benefits of the technology without that issue of 
volatility.
    Mr. Nickel. Thank you so much. I yield back.
    Chairman Hill. The gentleman yields back. I want to thank 
our witnesses for being an excellent panel today. I thought the 
conversation was very helpful in clarifying the direction to 
take on stablecoin legislation. I certainly have heard 
unanimity from the panel that a regulatory framework designed 
by Congress is something that would benefit the U.S. economy 
and U.S. investors and consumers.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 11:49 a.m., the hearing was adjourned.]

                            A P P E N D I X


                             April 19, 2023


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