Communities. The Senate Committee on banking, housing and urban affairs will come to order. I welcome our witnesses. Todays hearing is a hybrid format. Members have the option to appear either in person or virtually for those joining remotely, a few reminders. Members already know how to do this after many times with our remote witness just please try to minimize background noise and click the mute button until its your turn to speak. Youll hear a bell ring when you have 30 seconds remaining. If theres a Technology Problem well move onto the next witness or senator. This speaking order as usual determined by seniority of the members who have checked in before the gavel either in person or remote. And then we go back and forth republican, democrat, republican, democrat. A few years ago most people had never heard of crip toy currency. Most people still didnt know what all these terms mean from stable continues to nonfungible tokens. For the last several years the number of crypto currencies has exploded from the hundreds to thousands. The supposed value of these Digital Assets in circulation recently passed 3 trillion, which is about the size of jp morgans balance sheet, our nations largest bank. With that much money tied up that pretty much the definition of a systemic issue in our economy. Those big numbers can with big promises. Weve been told the block chain the technology these coins are built upon will build a more inclusive economy but none of these have materialized and likely never will. Weve heard before in this committee the wild price swings and high transaction fees for any crypto currencies make them useless for payments, the one thing they claim to be prime for. A stable coins value is supposed to be back with real assets held by the company that issues the staple continue. In other words, staple coins are a particular type of crypto currency whose value is managed by a single company. These include as you know other circle and abbrucudab ru, a fast growing scheme that makes magic internet money. Thats their words, not mine. What could possibly go wrong with something that claims to make magic money . Crypto currency advocates argue crypto currency are superior to real dollar because theyre centralized and transparent. Staple coins are neither of those. That sounds a lot like what traditional Financial Institutions do. Its not decentralized when one Company Controls when people can access their own money. Its certainly not transparent when critical information about staple coins and the company that issues them. The responses were not particularly enlightening and should lead us to assume most ordinary customers dont have much in the way of rights at all. Lets be clear if you put your money in stable coins theres no guarantee youre going to get it back. They call it currency implying its the same as having money in the bank and you can draw your money at time. But Many Companies in the fine print allowing them to trap customers money. Thats not a currency with a fixed value. Its gambling. With this money tie up it sure looks to me like a potential asset bubble. Stable continues make it easier than ever to risk real dollars on crypto currencies that are at best volatile and at worst outright fraudulent. These tokens can crash with Crypto Market diving by almost 30 one day. History tells us we should be concerned when any investment becomes so untethered from reality. Look at the 1929 stock market crash. By the end of the decade companies were invented out of thin air to create more stocks to satisfy demand. Banks allow customers to pi another until the whole market collapsed. Of course many of us can remember the 2008 crash. Subprime mortgages were supposed to create, to give more families access to the american dream, while deritatives were created to help Financial Companies reduce their risk. In reality predatory were used to and create complex Mortgage Backed securities and derivatives. We know how that turned out for our country. We cant deny crypto currency has made a few people rich. That kind of action always does just like some people became fabulously wealthy trading stocks in the 1940s or buying and selling derivatives 20 years ago. For most people this kind of wild speculation ends in disaster. The only ones who tend to walk away unscathed are the big guys. Its always the big guys, the ones who call it innovation and then line their own pockets. So far what happens in the Crypto Markets has stayed in the Crypto Markets so far. We saw this with dogea coins that all of a sudden was worth billions when a tech billionaire tweeted about it. They make record profits no matter what happens to workers and Small Businesses in nevada and south dakota and ohio and rhode island. To a whole lot of people that seems like a fantasy economy, too, but a big tech scheme that makes it easier for americans to put their money at risk, theyre a mirror of the same broken system with even less accountability and no rules at all. Well hear the same arguments today from this industry against regulation, the same arguments we hear from the financial industry lobbyists so many times before. The free market will solve all our problems. America needs to be globally competitive. Of course we do. What makes america the strongest economy in the world isnt wild betting in the financial sector. Its our workers. Its the dignity of work. Its their talent, ingenuity, dedication. You cant fake that. As weve seen so many times before, you can put it at risk. The rest of the world trusts u. S. Dollars when we have orderly sane markets. The real threat to our Global Competitiveness is regulators who ignore clear warning signs. We have reason to be encouraged this time around. The Biden Administration is putting strong watchdogs in place, quite a change. Strong watchdogs in place as banking and market regulators were empowering workers wages and rising infrastructure and investment about to spur more job growth, were fighting to bring down costs for families, for seniors with prescription drugs, for the middle class with the build back better plan. We cant put that potential at risk. Ill continue to work with financial watchdogs to ensure they have the tools they need to protect peoples hard earned money in our economy recovery from another bubble and another crash. Thank you, mr. Chairman. Stable doins are an essential component of the crypto currency ecosystem. Stable coins can speed up payments especially across border transfers, can reduce costs including remittances and can help combat Money Laundering and terrorist financing through amenable and transparent transactions record. Stable coins can also be programmed creating efficiencies to improve access to Financial Services for americans. Unlike volatile crypto currencies like bitcoin, stable currencies dont fluctuate in their dollar price. Well focus on stable coins designed to maintain their 1 to 1 value. Over the past year the stable market has exploded. As one of our witnesses will explain stable coins will continue to be used for remittances. Transferring funds via stable coins is low cost and nearly instantaneous. Given that stable coins disrupt the status quo, theyve naturally drawn skepticism from incoming industries and regulators. A report was issued recommending that Congress Passed legislation to establish a federal Regulatory Framework for stable coins. In their report the Treasury Department and others expressed their worries about Financial Stability with stable coins. Although the report did little to highlight the potential benefits of stable coins i was encouraged the report acknowledged the responsibility for clarifying whether and to what extent federal agencies have jerks over stable coins. Its a question that rests with congress. Whatever congress does lets be sure we dont stifle innovation in an evolving Digital Economy or undermine our own countrys competitiveness. Lets have the humility to recognize many of our views about how Financial Services are delivered and how investments work are quickly becoming outdated. This morning im releasing a set of Guiding Principles i think should influence our work on a stable continue legislative framework. These principles recognize stable coins are a very important innovation, and they introduce new capabilities into money that did not previously exist. In addition to their ease of use and reduced fees associated with their transfer, stable coins can improve their privacy and the security of our transactions. They also introduce the concept of money programmability or smart contracts which allow automated transactions. In recognition of the potential of these new capabilities any regulation should be narrowly tailor and designed to do no harm. At the same time sensible regulatory standards may help to protect against key risks such as redemption or run risk. These principles take a different approach than the pwj report. It recommends all stable issuers must be insured depository institutions. There are three reasons i disagree with that recommendation. First, stable coin issuers have different Business Models than banks and do not present the same risks. As one of todays witnesses has observed stable coin providers do not engage in taking deposits and making loans in the manner banks do. Because of these and other important differences subjecting all stable coin providers to a suite of Bank Regulations and rules is not appropriately tailored to the potential risks. Second, requiring all stable continue issuers to become banks would stifle innovation. We know a tremendous amount of innovation occurs outside of the Banking System including by technology companies. Its unlikely much of this development could happen because of the onerous regulations which create a difficult environment for innovation. Allowing entrepreneurs will promote greater competition and deliver better results for consumers. Finally, the regulation of payments activities should create an equal Playing Field. Great innovators like paypal, venmo and apple pay are already subject to a state by state licensing regime as well as registration with a federal regulator. Recognizing the range of different Business Models there should be at least three options available for a stable coin provider. One would be to operate under a conventional bank charter if they chose. Two, they could comply with a special banking charter which would be designed in accordance to legislation, or they could register as a money transmitter under the existing state regime or Money Service business under the federal level. This optionality would match each with the Regulatory Framework most appropriate to the Business Model. Regardless of the charter or license they pursue, all stable coin provider should meet certain minimal requirements. For example, they should clearly disclose what assets back the stable continue as well as give clear redemption policies and subject themselves to periodic audits. These requirements would ensure consumers have sufficient information about which stable coins they use. In addition, legislation should stipulate that noninterest bearing stable coins are not necessarily securities and therefore shouldnt automatically be regulated as such. This framework should protect the privacy, security and confidentiality of individuals using stable coins allowing customers to opt out of sharing personal information with third parties. Finally antiMoney Laundering and other requirements regarding financial surveillance under the Bank Secrecy Act should really be modernized for all Financial Institutions subject to them and other new technologies including artificial intelligence. The emergence of stable coins represents to me the latest development in the ongoing evolution of money. I stand ready to work on this issue. I look forward to hearing from our witnesses and i yield back my time. Thank you, senator toomey. Ill now introduce the four Witnesses Today. First well hear from alexis goldstein, director of financial policy at the market institute. Welcome. A partner, welcome. And chief Strategy Officer and head of Global Policy and professor Hillary Allen from american im sorry, dante disparte, and professor Hillary Allen joining us from her home or office from the University Washington college of law. Ms. Goldstein, you begin. Five minutes, please, thank you. Chairman brown, Ranking Member toomey and members of the committee, thank you for inviting me to testify today. Im the director of financial policy at the open markets institute where my work focuses on Financial Regulation and consumer and investor protection. My degree is in Computer Science and i previously worked as a programmer for margen stanley. And as a Business Analyst at Merrill Lynch and deutsche bank. Ive used large Crypto Exchanges and ive bridged from one block chain to another. In doing so ive seen how stable coins are used across the crypto ecosystem and i agree with the working groups assessment stable coins are used today for speculation. They essentially act as a weigh station in between speculative trades and as a way to avoid losses. Stable coins are often heralded for their potential. Maybe theyre not used widely today to pay for goods and services, but they could be in the future. But the reality is that today u. S. Retail investors across sorry. Retail investors access stable coins by trading them not by using them to buy groceries at the corner store. U. S. Retail investors can neither purchase nor redeem the top two stable coins directly from the issuer. Instead theyre reliant on exchanges to trade the stable coin for a dollar. Its an awkward scenario and sort of a second step were not used to seeing with other kinds of digital payments. You dont need to also setup a Stock Brokerage account in order to send someone money electronically. There are a number of ways to earn interests and rewards on stable coins. Many crypto currencies pay higher rates. And coin base pays its users a 1 reward for buying and holding the u. S. Dollar coin by default without any other action from the user. Coin base does not offer any rate of return for other stable coins likely because the more usdc stable coins holds the more revenue theyll make in a sharing agreement they have. There are claims in the crypto currency industry theyre fighting wall street. But they use the forced arbstration agreements and class action bans that wall street does, and there are also claims regulations and government oversight arent needed because the code is up there, publicly available for anybody to read. But the moment a platform is hacked because an attacker has read the smart contract, found a bug and exploited the bug, platforms tend to call for Law Enforcement to help chase down the stolen fund. A recent report from the World Economic forum found stable coins have no benefit for Financial Inclusion as theyre subject to the same or higher barriers as preexisting Financial Options including a need for internet and for smart phones. Ive also found this to be true as i have used stable coins. As fees began to add up fast. The slice of the crypto currency markets with the least compliance with regulations including checks for elicit finance is what is called decentralized finance. Put simply defy doesnt work without stable coins. Stable coins help to facilitate trading. The largest decentralized changes and as of yesterday 8 out of 9 out of the top liquidity pools had at least one leg in a stable coin. With only a few exceptions the platforms are not in compliance with know your consumer, antiMoney Laundering and countering the financing of terrorism. Nor does it seem any of them are conducting a simple check to ensure the crypto currency address, making calls to the protocol are not on the sanctions list. Today the crypto currency market is not that entangled with the mainstream Financial System. But if wall street and the crypto currency industry have their way, it will be. I think the committee is right to Pay Attention to stable coins and asset markets more broadly because absent your attention i think there is potential for crises especially in the least regulated pieces of the ecosystem. Thank you very much and i look forward to your questions. Thank you, ms. Goldstein. Chairman brown, Ranking Member toomey, and members of the committee thank you for inviting me here today to talk about this complex and interesting topic. Im jai massari, a partner in the Financial Institutions group at davis polk. For the past several years i have been advising Financial Institutions on the regulatory the financial regulatory considerations for stable coin activities. Today i am presenting my own views, not those of any client or my firm. My remarks focus on three key points. First, stablecoins are an innovation in our understanding of money. This is particularly the case for true or payment stablecoins. These are noninterest bearing Financial Instruments designed to maintain a stable value against a reference fiat currency, say 1. Today stablecoins are used primarily for payments in connection with Cryptocurrency Transactions and decentralized finance, that is defi applications. Stable coin payments though could have broader uses, complementing existing payments such as cash, checks, credit and debit cards and wire transfers, each of which has benefits and drawbacks. Second, as stablecoins begin to find use in retail payments, we must seek to understand the risks they present along with the benefits. Like the innovations in money that preceded them, stablecoins squarely present the core regulatory concerns of consumer protections, systemic stability, safety and soundness in combatting illicit finance. And as described in the president S Working Group report, stablecoins give rise to more specific kinds of risks such as those related to the operation of blockchain platforms and risks arising from regulatory gaps. Third, the regulation of stablecoins should address these risks while supporting their potential benefits. My written statement goes into these points in more detail, but for now i will summarize my view of what regulation of stablecoins should look like. Stable coin issuers should have restrictions on permissible types of reserve assets to ensure shortterm liquid backing of those reserves. They should have auditing and transparency transmitters so regulators and the public can evaluate reserve composition. There should be restrictions that preclude maturity and liquidity transformation to shield reserve assets. They should have obligations to address illicit finance and sanctions considerations. And there should be requirements the address operational risks from conducting transfers on blockchain networks. But requiring stablecoin issuers to be insured banks as suggested in the pwg report is not necessary, and unless certain adjustments are made is not workable. First, fdic insurance is not necessary to address run risk where a stablecoin issuer, properly regulated, holds reserves of shortterm liquid assets of at least 100 of the par value of outstanding stable coins. Second, banks are subject to leverage ratios and riskbased capital ratios that assume relatively illiquid and riskier assets than cash and genuine cash equivalents. Unless congress recalibrates these ratios the stable coin Business Model would be uneconomic. Congress should instead consider an optional federal charter for stable coin issuers. At this time u. S. Stable coin issuers and digital wallet providers are largely regulated by the states under money regulators and state trust authorities, but an expanded federal law may well be appropriate and useful. I would like to close by thanking the committee for its focus on these important issues. While i do not believe that stable coin issuers should be required to be insured banks, i strongly support common sense regulation for stablecoins in a way that takes into account their risks and benefits. Im optimistic that there is much Common Ground that can pave the way for a regulatory approach that safeguards consumers, the Banking System and the broader economy while continuing to promote innovation. Ill be happy to answer any questions. Thank you, ms. Massari. Mr. Disparte, welcome. Chairman brown, Ranking Member toomey, members of the Senate Finance committee on banking, housing and urban affairs, thank you for the opportunity to share my testimony with you today. My name is daunte disparte and im the chief Strategy Officer and head of Global Policy for circle, a leading digital Financial Services firm and sole issuer of usd coin or usdc, a dollar Digital Currency supporting the sensibility of the u. S. Dollar in a competitive, alwayson global economy. Having recently completed my threeyear term on the federal Emergency Management Agencies National advisory coin sill and being no stranger to disaster displacement and hardship, i want to acknowledge the communities affected by last weeks devastating storms. Indeed, as this disaster and others have shown, with the movement of Financial Aid and disaster relief, when speed matters most friction stands in the way. As a country, we have faced a great depression, a great deleveraging and in 2020 with the onset of the covid19 pandemic we faced nothing short of a great correction. In this correction, the centrality of technology for any semblance of political, business, economic and household continuity was laid bare. What was also clear is that access to the internet and other digital public goods was unequal. How we engage with money and payments in digital form was clearly an area of prepandemic vulnerability in the u. S. And around the world. The advent of stablecoins or what we like to refer to as dollar Digital Currency like usdc are an important innovation enabling greater control over how we send, spend, save and secure our money. To define a stable coin, noting that like money itself not all of these innovations are created equal, is tantamount to the moment we converted our compact disks into mp3s. The cd and music is still yours, but now enjoys the powers of programability, user control and a digital native form factor that works anywhere on any device across the planet. Stable coins in effect are designed to import the Economic Properties of an underlying asset. By circulation, the most successful of which all reference the dollar, with the economic gain of combatting the buyers and spenders remorse that plagued early cryptocurrencies. Usdc is now a threeyear old Digital Currency standing at 40 billion in circulation and supporting 1. 4 trillion in onchain transactions in a manner that enhances inclusion and integrity. Critically, the dollar backing usdc which are strictly cash and short duration treasuries of 90 days or less are all held in the care, custody and control of u. S. Regulated Financial Institutions. Indeed, as this internet native financial infrastructure continues to grow, we aim to do our part ensuring the future of payments in money is more inclusive than the past. Our recently announced Circle Impact Initiative has four core components, each of which are close to home for me having grown up in poverty and being the first Generation High School and college graduate. These include, allocating a share of usdc dollar reserves to minority depository institutions and Community Banks across the country. We hope this will accrue to billions of dollars over time, strengthening the Balance Sheets of these banks and thereby strengthening their communities. Embarking on Digital Financial literacy initiatives together with historically black colleges and universities and other partners supporting the development of essential learning and handson approaches to entrepreneurialism. Leveraging our seed invest platform, which is one of the nations leading equity crowd funding businesses to catalyze campaigns for women and minorities across the country. Finally, assisting humanitarian interventions and incorporating Public Private partnership to deliver corruptionresistance realtime aid and relief. Because nothing worth doing is worth doing alone, our hope is to catalyze on these initiatives which are deeply connected to raising Global Economic prosperity. While some argue that the u. S. May lose the Digital Currency space rates if it fails to issue a essential bank Digital Currency, i argue we are winning the race because the sum of free market activity taking place inside the u. S. Regulatory perimeters with Digital Currencies and digital services, the sum of the activities are advancing broad u. S. Economic competitiveness and National Security interest. Thank you, chairman brown and Ranking Member toomey, for the opportunity to speak to you today. I look forward to addressing the committees questions. Thank you very much, mr. Disparte. We will now hear from professor hilary j. Allen from american university, Washington College of law, joining us from a remote location. Professor allen, welcome. Thank you, chairman brown, Ranking Member toomey and the members of the committee. Thank you for inviting me to testify at todays hearing. My name is hilary allen and i am a professor of law at the american university, Washington College of law, and the author of the book driverless finance, fintechs impact on Financial Stability. My area of expertise is on Financial Stability so i will focus remarks on crypto, particularly stable koinls and financial crises. I would like to point out while not the primary focus of my testimony, stablecoins pose a threat to monetary policies as well and i would be happy to take questions on that point. Proponents of crypto often claim it creates job and improves Financial Inclusion, but financial crises destroy jobs and disproportionately affect the most vulnerable of our communities and so we should be aware of the fragility crypto could create for our Financial Systems. It introduces fragility for anyone to create Financial Assets out of thin air, meaning bigger bubbles and bigger busts. It runs on complicated governance which makes fixing problems challenging. Fragility arise because computer programs that operate on distributed contracts execute automatically. Other fragilities include the possibility of runs on stablecoins if holders lose confidence in hair ability to exchange stable coin for fiat currency at the expected rate. An Important Note about stable coin is although it is hard to obtain concrete data on Crypto Markets, my understanding is these are almost exclusively used in defi apps rather than everyday day payments. Defi is not particularly decentralized. It pro live rates in the ecosystem. Instead, what distinguishes defi from the established Financial System is the technology it relies upon which i have already discussed and what it is used for. Our established Financial System performs the important functions of channelling capital to people and businesses so that our economy can grow. That is why we have safety nets for the financial industry like deposit insurance and finance, Federal Reserve emergency loans that ensure credit can keep flowing to the real economy. It becomes problematic though when the Financial Services being bailed out do not serve the real economy but exist primarily to make profits for industry leaders. This is already an issue in the established Financial System and defi has the potential to take it to the extreme. Defi has been described as a casino and thats why it is critical defi not grow into something that the government does feel compelled to bail out. A recent report from the bank for International Settlements concluded that given its selfcontained nature and potential for defi driven disruptions in the broader Financial Systems and the real economy seems limited for now, but allowing the integration of defi with the traditional Banking System could change that. Congress or banking regulators should therefore prohibit insured depository institutions and affiliates from participating in defi. Insuring the insurers of stablecoins that fuel defi would encourage its growth in systemic importance so i disagree with the president S Working Group recommendation that congress adopt regulation regulating stable coin issuers as depository institutions. The run risks associated with stable coins can be dealt with in other ways. One possibility is to ban stablecoins or to introduce a licensing regime that would only authorize the issuance of stablecoins if they demonstrate a purpose outside of the defi ecosystem and that they do not pose any obvious threats to financial stabltd or Monetary Policy. A ban on this regime would create some barriers to innovation to be sure, but not all financial innovation is created equal. A recent World Economic Forum White Paper concluded stable coins as currently deployed would not provide compelling new benefits for Financial Inclusion beyond those offered by preexisting options. Simpler mobile Payments Innovation may be a better and less riskie way to promote Financial Inclusion than a system build on runable stablecoins that operate on a ledger with a convoluted structure that entails significant environmental costs to operate. An alternative approach would be for stable coin to remain regulated as they are currently with the fcc and fcc monitoring them. The systemic risks associated with them could be addressed by first prohibiting insured deposit taking institutions from accepting deposits from stable coin issuers or from issuing their own stablecoins. Second, the fsoc and ofr monitoring the stable coin for changes in usage. Third, if necessary, using designation powers to designate it as. Fourth, using the fsoc designation power to prevent a large tech firm like meta or facebook from launching a stable coin. Thank you and i look forward to your questions. Thank you, professor allen. I will begin with ms. Goldstein. First, there are three votes beginning around 11 00, we think, and so meaning no disrespect to the four of you but we will be moving in and out but keeping the hearing going and asking questions. Ms. Goldstein, even though and please be brief on this because it is a lot of material to cover, of course. Stable coins are mostly used for speculative betting. Some crypto advocates argue they have the potential to make the Payment System faster and more efficient. Are they a better way to settle payments nationally or internationally than the traditional finance system . Thank you for the question. I think for that to be true you need four things. You need low fees, you need predictability, you need to be able to exchange them for goods and services and it needs to be consistently fast, and i dont think stable coins meet all of those needed objectives. As someone who played around with sending them, personally and sort of in my work, it often makes Western Union look cheap when you rack up all of the fees you need in order to send it from one person to another, especially when the Ethereum Blockchain gets congested. It can be very unpredictable, fees can be very high. I think as you know, senator, people with low incomes cant afford surprises and unfortunately transferring assets, especially on the dominant Ethereum Blockchain, can be full of a lot of surprises and high fees. Thank you, ms. Goldstein. Professor allen, do you agree that stable coins dont show much promise as a Payment System . Yes, i think thats right. I think it is also important to think about the structure of the distributed ledger. If there are problems, theres not someone you can go to if theres a problem, if it is run on ooh decentralized ledger with a lot of nodes managing its governance. And if stable coins did, in fact, hold promise to provide faster, more inclusive payments, do you think it would make sense, professor allen, to bring them in the traditional finance system . I think there are real concerns about bringing them into the traditional finance system, primarily because of their relationship with defi. Theres also the issue of their run risk, of course. So if they were to be brought if they were to be used as payments and to be brought within the proper Financial System, we would have to be very careful about monitoring their systemic risk. I think thats a place where the fsoc and ofr can play an important role. Thank you. Speaking of mr. Disparte bringing them into the Financial System, last week in the house your ceo agreed theyre mostly used for trading and speculation, but your company is seeking a bank charter based on what you call usdc. Just to be clear, an interesting name to be sure, u. S. Dollar coin is what it stands for, being a payment product. If circle does become a bank, would you limit usdc, mr. Disparte, to internet payments platforms or still allow usdc to be used to facilitate cryptocurrency speculation . Thank you for the question, senator. The advent of a whole host of internet native Capital Markets, payments and an alsoon economy that is built around these innovations and public blockchains is important. It is also important that the dollar fundamentally and dollar reference stablecoins ultimately win what that innovation represents. So circles counterparties as a company are other institutions and companies. We dont face the Retail Market as a retail Payment System, and a lot of what that is supporting ultimately are payments, crypto Capital Market trading, and other activities. We are also seeing and i think this is a critical point we would like to highlight in this hearing. We are seeing this increasingly becoming embedded as a mechanism of payment and settlement including amongst traditional firms. Credit card companies, banks and others are using usdc as a settlement option on networks which makes the Medium Exchange and payment argument kawhi strong. So if you are regulated, if you are inside, if you become a bank, it would still be used for cryptocurrency speculation . Is that a yes or ooh no . Well, again, usdc and the end users of usdc have no expectation of a profit. It is ultimately a medium as exchanged. A dollar goes in and comes out and we maintain price parity with the dollars with cash inside the care and control of the u. S. Banking system. Let me ask a different way. If circle were a traditional finance company, it would be you understand it would be illegal for you to sell metal coins that said u. S. Dollar coin on them, right . Senator, i think the question ultimately is as circle has it is a simple question. If you were a traditional finance company, could you sell metal you think you could sell metal coins that say u. S. Dollar coin on them . No, senator. Thats the answer. I mean thats the law. Do you think of the name of your stable coin, u. S. Dollar coin, do you think it could mislead users to believe it is backed by the u. S. Government . I know you said throughout the hearing usdc, you may have once at the beginning, im not sure you did, said u. S. Dollar coin. Im sure you may market it that way to some who may be less sophisticated than we pretend to be up there. But do you think thats misleading in any way to call it u. S. Dollar coin . No, senator. The stable coin innovation that we support is regulated consistently across the country according to electronic money and electronic Money Transfer and statutes as a Payments Innovation. We are on a level Playing Field with Companies Like paypal and other major Payment Companies inside the u. S. Fair enough. Let me ask a last question. So if the fed moves forward with the central bank Digital Currency, are you going to let them call theirs the u. S. Dollar coin or u. S. Dollar . Thats meant with some irony into. I appreciate the irony. I dont know if you have a copyright or patent on u. S. Dollar coin, but i assume if we do a central bank Digital Currency that they may have rights regardless of the Supreme Court or any financial regulators to u. S. Dollar coin. But just putting that out there. Last comment. Quickly, senator, thank you for that. Indeed, sovereign issued currencies have three currency prefixes, so im certain one day if a central bank Digital Currency is issued by the fed they would enjoy total autonomy over the name choice. I think they would enjoy the stablecoins already in circulation for what may one day be an opportunity to upgrade the infrastructure to support a federal issued as well. You are a good representative for usdc. Thank you, senator. Thank you, mr. Chairman. Mr. Disparte, some of our Witnesses Today seem to think stablecoins are unlikely to serve a purpose other than facilitating crypto speculation. Theyve cited the cost of transactions and various things, although it seems to me this technology is moving very rapidly in the direction of facilitating and lower the cost and increasing the volume and the throughput. Could you tell us what else is actually happening already with stable coins outside of the facilitation of Crypto Trading and what you think is imminent . Thank you, senator. The blend of these types of innovations within the traditional payments and Banking System i think is exactly where we are right now. That while we can, of course, acknowledge the original use case was to support crypto Capital Markets and a host of activities in the trading domain, what were seeing emerging however is integration of stable coin base settlements and payments across Third Generation block chains that are increasingly better, cheaper, faster than the analog alternatives for how we move money. They benefit from the immutable financial ledgering of Financial Transactions which have enormous gains in terms of counting and financial integrity. Im sorry to cut you off, but in limited time, would it be fair to say there are large, sophisticated, traditional Financial Institutions that are increasingly pursuing the use of these platforms as an alternative mechanism for settling payments, for instance . Indeed. Just to name a few of what would be traditional household name payments and settlement networks, the visa network has enabled usdc as a native option across a network of 70 million merchants. Those in traditional domains like moneygram announced a partnership with enabling usdc with remit answers and solving for cash in and cash out across the world. Visa probably knows something about settling payments. It seemed to be suggested that one possible alternative we might consider would be to ban stable coins. If congress banned stable coins, do you think that maybe people in other countries would develop stable coins, and then if anybody who has access to a computer and the internet, wouldnt they be able to access those coins. In other words wouldnt that be very unlikely to actually work if prohibiting the use of stable coins . No question. I think it borrows then perhaps from Early Experiences with the advent of the internet in which people creating websites was once upon a time considered a precluded activity or an activity that might warrant authorization. I think the same holds true here today with how the socalled internet of value is beginning to emerge. I think it is profoundly in the American National interests and in our public interests we have options for how people can move money in an alwayson Financial System. Let me move to ms. Massari. I think you made it clear you think there should be a Regulatory Regime regarding stable coins, but you point out that requiring them to be insured depository institutions doesnt make a lot of sense because their fundamental purpose is different from that of insured depository institutions. Could you just briefly elaborate on that a little bit . Then i have one last question. Sure. Happy to. Thank you for the question, senator toomey. So i think the fundamental idea is that the Business Models and the risks raised by what i think of as wellregulated stable coins is quite different from that of Traditional Banks. Traditional banks take in deposits and they make longterm loans and investments with those deposit proceeds. That activity, the maturity transformation and the liquidity transformation that gives rise to run risks and is sort of the core of what Traditional Bank regulation is designed to address. This includes, for example, leverage ratios designed to address those core banking activities. And so in my view, imposing regulation for insured depository institutions on stablecoins, which hold 100 shortterm liquid reserves and are designed for payments, not lending, is the wrong approach. Mr. Disparte, as Part Congress hopefully wrestles with the question of what should an appropriate Regulatory Regime look like, what are some of the principles you think we should keep in mind . First, i would argue do no harm and allow the innovations to continue thriving inside the u. S. Regulatory perimeter. As a company, the state money transmission regulations have been the appropriate starting point. Again, if Companies Like paypal and many of the other major american Payments Companies can exist and safely transmit trillions of dollars, transactions on their platforms understate money transmission statutes, i think it is a powerful starting point. The concept of then having banklike risks managing banklike divisions is similarly point but it should be risk adjusted and based on the type of activity, it should be what drives our policy. Thank you. And let me just say, ms. Goldstein, im going to submit to you a written question because were out of time here, but i do think that the examples that you provide in the case for Western Union, provides a lower cost transfer, is an unusually expensive transaction and that people who were interested in such a transaction and were concerned about lowering the cost could easily construct the transaction in alternative ways that would be much lower cost, but i will submit a question for the record to clarify that. With that, mr. Chairman, i yield back. Thank you, senator toomey. Senator reed is recognized, from rhode island. Thank you very much, mr. Chairman. Professor allen, you i believe invited us to ask you about the Monetary Policy aspects of the stable coin. We all understand that a critical part of our economy is the ability as the Federal Reserve to control money supply. So could you comment in whatever detail is appropriate about the impact of these stable coins on Monetary Policy . Thank you for the question, senator. If you are dealing with a situation where theres high inflation or if you are dealing with a situation with deflation, the central sorry, the central bank needs the ability to match the amount of money in the system to the needs in the economy. Thats how mon tear policy is carried out. If, however, the central bank loses control over some of the monetary supply, they lose their ability to put their hands on those levers. So this is something that Central Banks are extremely concerned about and, in fact, that is the impetus for a lot of interest in central bank Digital Currency. Interestingly, the big Central Banks worried about these issues are also worried about the Financial Stability issues that come with the introduction of a central bank Digital Currency, not to mention the privacy issues. So it is an interesting question that they feel the need to compete with stable coins, perhaps more interventionist policy is justified. Thank you very much. One other aspect is that this is a novel, at least a fairly recent phenomenon, and it requires a great deal of thought, analysis and projected as to what we should do. After the crisis in 20082009 we created the office of Financial Research. Professor allen, do you see a role for the office of Financial Research here in terms of analyzing, structuring and making a recommendation to congress with respect to these stable coins . Thank you, senator. I very much do see a role for the office of Financial Research here. The office of Financial Research, as you know, was created to respond to the data gaps that we saw following the financial crisis of 2008. As finances become more technologically informed, as finance im sorry faces risks from Climate Change and things like that, we are now needing an interdisciplinary approach to Financial Regulation that includes data scientists, climate sign tyes. I think the ofr is underutilized and could be built up with that expertise to give regulators a more informed foundation to engage on issues of stable coins amongst other things. Thank you. I concur. Ms. Goldstein, there are data gaps in the cryptocurrency markets. Could you highlight what you think are the most significant data gaps that we need to have . Sure. Thank you for the question, senator reed. Unlike the stock market where we can rely on things like the consolidated audit trailer we know all of the quotes that go through every exchange will be reported back to a regulator at the end of the day, we are sort of at the mercy of what the cryptocurrency industry wants to selfreport. So we may get information about particular prices throughout the day or trades, but we may not get quota information. You also will see sort of arbitrage opportunities crop up, right, the price of bitcoin on one exchange may be different than it is on another exchange, and i dont know that regulators currently have all of the data to truly understand why that might be. So theres a real sort of, i think, potential for congress to look at is there a way to make sure that we do have standardized data reporting in a way that we make sure all of the different exchanges are giving regulators all of the information they need. And, ms. Goldstein, i presume that you would have some questions about the existing transparency, ordering and Disclosure Requirements that are imposed on these entities, is that correct . Yes, senator, thats correct. Thank you very much. Senator brown, chairman brown asked me to recognize senator rounds at the conclusion of my questions. Senator rounds, you are recognized. Thank you, mr. Chairman. First of all, thank you to all of you for appearing before us today. As a consumer i look at these and i say, okay, theres got to be an opportunity here or theres a reason we have millions of people currently participating in these transactions, using the products and services that you provide. At the same time it seems to me that we have a regulatory responsibility to make sure that the illicit uses of these types of services are limited. Were challenged because in the United States as we regulate, certain organizations may very well simply move outside of the United States, move elsewhere. If im a consumer, why would i want and i will direct this first of all to mr. Disparte. If i am a consumer, why would i want to use your service as opposed to that of a visa using dollars as the currency . Thank you, senator, for the question. So part of what circles innovations are providing, bearing in mind our direct customer are typically businesses and we dont work with retail consumers. But nonetheless, part of the infrastructure that were supporting today is enjoyed by more than 20 Million People in the United States and 200 Million People worldwide, for whom the price of access or the cost of access to things Like International remittances, payments, Money Transfers, both domestic and foreign, and candidly access to the Capital Markets have been prohibitive, right. On the one hand if to be banked hinges on brick and mortar structures there will be hundreds of millions or billions left on the margins. Let me cut to the chase. You are suggesting theres an economic benefit to someone because the cost of actually executing the transaction are less, im going to say on average, for yours than what it would be for someone through the traditional brickandmortar processes . Is that the marketing thats being done . Thats part of what the ultimate opportunity is. For example, in the remittance use cases of which we can describe a number, theres Companies Like a womanfounded startup that is partnered with visa for remittances. The proposition that sending Digital Currency is no different than sending data, of course, subject to Financial Crime compliance and subject to the appropriate guardrails around protecting the Financial System. But nonetheless, the Value Proposition is a fundamentally lower cost transfer of value on the internet. Thank you. Ms. Goldstein, im curious. You indicated that the cost, the actual cost per transaction was probably greater in this particular case. It seems to be a discrepancy here between your opinion on it and mr. Disparte. Can you share with us why you think it is more expensive in this particular case . Sure, senator rounds. I think it has to do with whether or not you are going to use the usdc coin to purchase other crypto. Are you going to keep it in this closed crypto ecosystem and just use it to buy Something Else . My point is if you are using it for remittances, if you are sending it to another country, chances are you cant go to your local Grocery Store and use usdc to buy some milk. You are going to need to convert it to your local currency. Theres almost a fee say i want to send something overseas, i need to send it to somebody elses wallet. To do that the usdc coin runs on lots of blockchains but the predominant is ethereum. Theres an erc20 token standard they use to do that. The ethereum fees are incredibly high. It can cost 10, 20, i have seen it as high as 40 to send it from my wallet to somebody elses wallet. Once it gets to their wallet, if theyre not using usdc to buy milk from the local Grocery Store, they have to convert it to their local currency. They need to trade it to local currency and get it into their bank to pay for the milk in the Grocery Store and that may include a fee. It has to do can you bring it back to fiat or can you keep it in the closed crypto system. I think thats where you see the disparity. I will give you a chance to respond, mr. Disparte. What is your version . Thank you for the opportunity. The quick version is early block chains are a little bit akin to dialup internet and the argument to ban the stable coin innovation because the current experience on certain blockchains may be slower or cost prohibitive, ignores the fact that the innovation is not standing still. There are late generation block chains, Third Generation that are approaching akin to Credit Networks akin to dollars on the transfer. Thank you. My time has expired. Thank you, senator rounds. On behalf of the chairman, let me recognize senator daines. Thank you. Stable coin policy is not where it should be and hopefully there been bipartisan agreement as well as compromise. Stable coins are distinct from cryptocurrency in that theres a central entity that issues and is responsible for any individual token. Personally, i believe that we should pursue a lighter touch approach to regulating the innovation taking place with cryptocurrencies and with stable coins, but i do believe a bipartisan legislative framework, that i hope this committee would agree on, is both possible for stable coins and, frankly, necessary. I would urge my colleagues to avoid hyperpartisan solutions and instead seek consensus on something thats truly bipartisan, that will provide certainty needed for the private industry to grow as well as to prosper. This i believe will help provide the best pathway forward for this technology to grow in a way that will benefit montanans, the American People as well as the global Financial System. Mr. Disparte, can you describe the current Regulatory Environment facing stable coin users such as circle . Thank you for the question, senator daines. We agree with the spirit of appealing to a nonpartisan approach to how to regulate these innovations inside the United States. Arguably, when i look at the experience of a company like circle, we are licensed from sea to shining sea understate money transmission regulations and answerable through the examination process to the Bank Supervisors and the state money transmission supervisors across the country. We also as a company have helped contribute to creating a model law to try to make a more uniform operating environment. We are also a registered money Transmission Company with fincen and have worked over the years with Law Enforcement and other actors on protecting the integrity of the Financial System which is an important pillar. When you think about this innovation outside of the United States, however, and what it means to compete on a global environment, this is where i think the u. S. Faces a gap. At the International Settlements at the Financial Task force, the Financial Stability board, state regulators are not represented. It is the federal and national that are. Thats where the u. S. Faces a competitive gap at the moment. Broadly speaking i think our current regimes for money transmission provide for a degree of sufficiency around the use of an electronic form of payments in a medium of exchange like a stable coin. Thank you. You touched on the issue certainly on the Global Situation and that really leads me to question now for ms. Massari. Can you describe how a usdpegged stable coin could advance the role of the u. S. Dollar from an International Viewpoint . How that might help preserve the dollar status as the worlds foremost reserve currency . Thank you for the question, senator. To me this is a very interesting line of thinking about how stablecoins could affect Monetary Policy. To me it is not entirely clear that they would be harmful to Monetary Policy where regulated in the manner that i described in my testimony, backed at least 100 by Bank Deposits, u. S. Treasuries. As some of my fellow witnesses have spoke about, you know, these stable coins can be available for remittance transfers, for use outside the United States just as other dollartype instruments and to my mind just as those instruments help to bolster the standing of the u. S. Dollar, the worlds reserve currency, the argument should be the same for stable coins. So what do you think the future of stable coin regulation would be if congress doesnt act in a bipartisan fashion to foster safe and stable growth . It is a great question, senator. Thank you. My own view is that it would be useful for congress to think about a federal charter, an optional federal charter for stable coin issuers. I think this is a really important aspect of insuring appropriate regulation at the federal level, to achieve all of the policy goals that i think we care about in a nonpartisan and bipartisan way. To my mind the state Regulatory Regime that exists today has gone a long way to serve the interests of consumers in different states. I think a federal framework would provide additional clarity if it is available. Speaking of benefits perhaps, back to mr. Disparte, what are some of the ways in which stable coins lower cost within and increase access to Financial Systems . Indeed, thank you for the question, senator. On the one front i get back to the question if to be banked hinges on Traditional Bank and mortar infrastructure then many people will be unbanked or underbanked. We saw it happening with the covid19 pandemic and the inability to move money across the internet at scale was a vul vulnerability for the world. It allows for a host of Financial Services to blossom where the senate is protected and preserved. Senator reed. The senator from montana is recognized. Thank you, mr. Chairman. I want to thank you, the Ranking Member, for having this hearing. I want to thank everybody for testifying. So ive heard i have heard from a lot of folks in the cryptocurrency space. Their descriptions of their product reminds me of something, and it is not necessarily a good thing. It reminds me of the synthetic products that we saw leading up to the financial crisis of 08, because not in all cases, but in some there isnt anything real behind them. Now, i know stable coin is backed by real assets, but that doesnt mean they cant be manipulated and it doesnt mean when you combine all of the products together that there isnt opportunity for some foul play, lets put it that way. So for you, professor allen, do you think it is a fair comparison i just made between cryptocurrency and synthetic Financial Instruments . Yes, i do. Thank you for that analogy, senator. When we heard about the synthetic products in the leadup to the financial crisis of 2008, we heard things like these will promote homeownership. So you have to be wary i think of claims of Financial Inclusion because sometimes theyre overblown, and you have to particularly have to be wary of them in circumstances where the means of providing that goal is unnecessarily complex. Complexity is a problem for Financial Stability. We dont understand why things are the way they are, if theyre too complicated, that primes the system for confusion, opacity and then panic. So when we have a product like the stable coin thats being proposed to solve Financial Inclusion, we have to ask ourselves why does it need to be so complex. Why does it need to run on a distributed ledger with decentralized governance mechanisms, why do we need the environmental costs of that kind of process . Are there not innovations that are simpler, that could achieve the goal in a simpler way . Ms. Goldstein, do you have anything you would like to add to that . Senator, i would just add that i agree. I mean i worked on wall street before, during and after the financial crisis, and i do think there are some important comparisons to the products that you raise. I do think that the secondary market where stable coins pats pate, defi in particular, reminds me at the overthecounter derivative markets. Professor allen, i want to go back to you for a second. I believe you were the one that stated if you have problems theres no one to go to. Was that correct . That would have been in your opening statement. Yes, thats correct. So ive got to ask you, if i had a problem, if i was using these products, who would i go to . Or am i just out in the cold . Thank you, senator. I think it depends. If, in fact, the stable coin has an issuer behind it that manages the reserve and theres a problem, you could go to that stable coin issuer. But then that sort of highlights that these things are not as decentralized as anticipating. We are hitting new intermediaries coming into the system and those intermediaries have profit motives like any established financial intermediary. So i think the decentralizing democracy false apart. If we are talking about a stable coin operated in a truly decentralized fashion where it is operating on multiple nodes where you need them to agree to change and how it operates, then that is something that could create incredible problems. Who would you go to . Which of those people would you be able to reach out to if you needed a transaction undone, for example, because there was a mistake made . All right. Thank you. Ms. Goldstein, you talked about these there had to be four objectives. One was fees. What were the other three . It needs to be predictable. You need to be able to exchange it for goods and services. You mentioned fees. I forget my fourth. Thats all right. You said it doesnt meet fees because fees are high. Correct. Does it meet the other three . I think when you stay within the cryptocurrency ecosystem it does immediate the speed requirement. I dont think it needs the predictability requirement and i dont think it meets the exchanging it for goods and services requirement broadly. Very quickly because my time is slim, what kind of fees are we talking about compared to what we see in the industry today . It depends on the exchange. It depends if you are moving back to fiat, but lets say you start at fiat, you move into stable coins, you buy one by buying one on an exchange, because as mr. Disparte said they dont Service Retail customers, you have to go to an exchange. You send it to someone else, they put it on exchange and you bring it back to fiat. It can be as high as 80 or as low as 6. Western union is about 4 or 5. What kind of amount. Thats a flat fee regardless of how much money . It is an accumulation of fees because you have to take several steps throughout the whole gotcha. Thank you very much. Thank you all. Thank you, senator. Senator warner from virginia is on from his office. Thank you, mr. Chairman. I appreciate you holding this hearing. I am very concerned. I agree with the Ranking Member that theres a lot of innovation going on and we shouldnt get rid of that. I do am very concerned from the intel standpoint that a lot of this is being used for illegal and illicit purposes. We just had a major break into our state legislative system in virginia. Everything is frozen. A ransomware effort has been threat has been issued, and my fear is it will be paid off in some level of bitcoin, and potentially using a stable coin as the ability to transfer back to a fiat currency. But let me ask the question that and i will start with ms. Goldstein but probably take everybody. I think i understand some distributed ledger and defi and the notion of creating a different currency. Gold has no inherent value, so the idea if we as a society may pick bitcoin or some other entity to have a value has some logic to me. But the idea of a private sector stable coin where you have a literally dollarfordollar or total liquid security and no leverage at all, how do you make any money off this . I get it if you are facebook and you have got a whole Network Effect and you become the default crypto wallet. Then that means you are collecting a whole lot more information. But, ms. Goldstein, i will start with you. I get it if they are making all of these fees, but if mr. Disparte is right and theyre ultimately going to get down to a frictionless transaction, how do you make enough money to have this kind of stable coin become a viable Financial Investment . Senator, i think thats a good question. I think thats why you see for example on circle and some of their sec filings said they want to move potentially into circle defi and offer Additional Services that allow customers to access defi platforms with apis that circle talks in their Investor Presentation about building. I think they have a revenue sharing agreement with coinbase. Perhaps theyre making some profits from coinbase. I mean i would direct the question to mr. Disparte, but i imagine it is not if it is just treasury, then it is just cash, i think i understand why i see in the sec investment materials they want to provide other circles like circle defi in the future. Im going to get to mr. Disparte, but i would like to hear from ms. Massari first. Again, help me out here. Building firm, theyve got to be paying folks a lot of fees. If you literally have no leverage at all and you have a oneforone exchange and you are going to bring down the transaction cost and you dont have a Network Effect the way facebook would from libra or dm or whatever theyre calling it this week, how do you make any money . Thank you, senator. It is a great question. Of course, i cant speak about any of my clients or particular projects, but i think your observation is right. If we appropriately regulate stable coin issuers they should only be holding shortterm liquid assets to back their stable coin obligations. That likely isnt the main source of revenues for them. They can provide Payment Services and other services adjacent to the issuance of the stable coin. You know, the same kinds of Payment Services i think we see today, whether it is remittances or peertopeer transfers or other kind of services and perhaps charge fees for those services. But even again and, again, ill get to mr. Disparte, but these other paypal i dont believe argues it literally has a dollar backing every dollar that goes through the paypal transaction. Im going to let ms. Allen answer as well, but i want to ask mr. Disparte, how are you going to make money if we get to the frictionless ecosystem we are heading towards . Thank you. We are in the process of going public so theres a lot of customer facing disclosures around the Business Model. Akin to a paypal, paypal holds an omni bus account held in the interest of customers to execute transaction. We have a similar Business Model and a similar u. S. Licensing platform. Our current reserve structure is cash and shortterm treasuries of 90 days or less, so theres a nominal degree of Interest Rate sensitivity on the reserve com position. Thats part of the revenue level. Theres a level applied for using circle accounts and other services. We also operate my time is running out. Stable coin brags you have a dollarfordollar exchange. Again, before my time is up, if you want to add i will say no one is going to offer this Service Without a way to make money. If we try to promote Financial Inclusion we want it to be a win win, but theres reason to be skeptical when the actual money making nature isnt disclosed. Thank you, mr. Chairman. Thank you, senator warner. Senator warren from massachusetts is recognized for five minutes. Thank you, mr. Chairman. So unlike other cryptocurrencies like bitcoin, stable coins like tether and usdc are supposedly pegged to the dollar. The reason for this is to reassure people stablecoins are as stable as using the dollars you have in your wallet or in your checking account. A stable coin dollar in other words will supposedly be worth a real dollar. Now, that would make it a lot easier and a lot safer to trade among different tokens to put up collateral for risky bet or even to pay for a cup of coffee at your local bodega. But i want to examine whether or not the stable coin talk matches the stable coin reality. Ms. Goldstein, lets say that i own 10 worth of tether or usdc. If i want to trade my 10 worth of these tokens, am i guaranteed to get 10 back . No, senator. You are sort of dependent on the exchange where you are trading it, because as a u. S. Retail customer i cannot go to circle and say, please redeem my usdc, and tether specifically says no u. S. Customer can redeem tether. I have to trade it on an exchange. Sometimes it fluctuates, sometimes it is a little above the dollar, sometimes it is a little below, but if there were a run the peg could collapse. We also dont know necessarily what is backing all of these stablecoins, right. Hold on a second. I want to get into that, i promise. Because i want to just underscore this point, that if tethers tokens were actually backed onetoone it would be one of the 50 largest banks in the country, but we know that it is not. That is because according to tethers own report only about 10 of the assets backing stable coin are real dollars in the bank. 90 is Something Else, not real dollars. If that worries you, theres a little more news on this one. The report that 10 of tethers stablecoins are backed up by dollars is not actually verified by an audited Financial Statement or verified by any government regulator. So, professor allen, let me ask you. Lets say im not the only one who wants to redeem my 10 worth of tether or usdc for dollars and maybe theres bad news in the market and people rush to cash in their stable coins. What would a run on the stable coin market look like . Could it endanger our Financial System . Thank you for that question, senator. So a number of the Witnesses Today have said that stable coin dont engage in maturity transformation and therefore dont suffer the same fragility as Bank Deposits and runs and thats probably true to some degree. But a run on the stable coin would look like the runs we saw on mutual funds in 2008 and again in 2020. So if holders of the stable coin suddenly lose confidence in either the ability of the issuer of the stable coin or the reserve of assets backing it to maintain a stable value, they could seek to redeem or exchange their stable coin en masse and if they have direct redemption rights it would force the issuers to liquidate. The stable coin holders are only using them to speculate. They dont expect stability and so runs would be less likely. But if a run occurred right now i think the impact would probably be felt in the defi ecosystem and thats why it is critical that we not provide this Government Support to the defi ecosystem. Okay. So let me go there. Sorry to interrupt, but let me go there. We know that stable coins are not always stable. In fact, it is worse than that. In troubled Economic Times people are most likely to cash out of risky Financial Products and move into real dollars. Stable coins will take a nose dive precisely when people most need stability, and that run on the bank mentality could ultimately crash our whole economy. Theres another piece of the risk here, and you have headed in that direction, professor allen. Defi is the most dangerous part of the crypto world. This is where the regulation is effectively absent, and, no surprise, it is where the scammers and the cheats and the swindlers mix among parttime investors and firsttime crypto traders. Shoot, in defi someone cant even tell if theyre dealing with a terrorist. Stable coins provide the life blood of the defi ecosystem. In defi people need stablecoins to trade between different coins, to trade derivatives, to lend and borrow money outside the regulated Banking System. Without stablecoins defi comes to a halt. Professor allen, does defi threaten our Financial Stability and can defi continue to grow without stablecoins . I dont think defi can grow without stable coins. Right now i think it is contained to the point it wont impact Financial Stability, but if it grows i think theres a real threat there, particularly if it becomes intertwined with our traditional Financial System and theres interest in pursuing this integration on the traditional finance and the crypto side. So i think it is critical that stable coins not be allowed to fuel that growth. I appreciate it. This is risk to traders. Risk to our economy. The time to act is before it all blows up. Stable coins have no regulators, no intended auditors, no guarantors, nothing, and theyre propping up one of the shadiest parts of the crypto world, the place where consumers are least protected from getting scammed. Our regulators need to get serious about clamping down on these risks before it is too late. Thank you, mr. Chairman. Thank you, senator warren. Senator smith from minnesota is recognized. Thank you, chair brown. Thank you to our panelists for being here today. I want to ask about this. So as businesses transition to cashless models, some businesses could adopt stable coin or even crypto as an alternative or its only method for a payment. Im trying to figure out what impact that this could have on people, especially people of color who are so often left out of the Financial System. According to a report by the fdic, approximately 7. 1 million households are unbanked. That was in 2019. As we move to a cashless economy, what happens to people who are low income or homeless or undocumented and how do they pay for things that they would need in a stable coin world . Does stable coin actually give them more freedom and access or does it become another barrier . Ms. Goldstein and professor allen, could you help me answer this question . Advocates for stable coin argue that they provide access for Small Businesses and unbanked people. What do you think about that argument and how exactly does stable coin work for someone who doesnt have a checking or a savings account . If i may briefly and then give professor allen a chance to respond. Again, because stable coins arent widely accepted for goods and services you need a bank. Not only do you need a bank, you need an account at a Cryptocurrency Exchange in order to buy stable coins in first place, at least the top two ones. I think this is why we saw the World Economic forum find there are not many Financial Inclusion benefits to stable coin because it is essentially using the rails of the existing Banking System. Until and if, you know, i think it is a big if, we see mass adoption of stable coin as a way to accept things at the Grocery Store to buy your groceries, i dont really see how this helps the unbanked because you need a bank and a Cryptocurrency Exchange. Yeah. Thank you. Professor allen. So i agree with ms. Goldsteins comments. I just want to add something further, which is Financial Literacy is already a huge problem for a lot of people. We expect a lot of consumers in terms of their ability to read complex financial documents and understand them. With the move to cryptorelated Financial Services we are asking them as well often to understand computer code because disclosures dont always match in these areas, tend to go to the code themselves. So i think that it is just entirely unreasonable to expect people to be able to sense the risk in these types of products on their own by looking at the code. Yep. I mean it is difficult enough for i mean it is extremely difficult for anybody to understand, so i really agree with you. Let me ask you another question about this. We, of course, need to make sure that workers can rely on their pensions, the pensions that they have earned. This is something that chair brown and i have worked on, focused on since i first came to the senate. So as stable coins and cryptocurrencies become more prominent in the Financial Systems, it seems it is worth looking at what this could mean for Retirement Plan assets and figuring out whether it is a good idea for them to be offered as Investment Options for Pension Plans or 401 k plans. Professor allen, let me stay with you. For workers or teachers thinking about retirement accounts or pensions, what do you think is the right role or is there a role for stable coins in those plans . I dont think there is a role for them there. I appreciate that people are going through a really hard time right now. The search for yield in this environment, you know, is a very real pressure, but i feel it is very dangerous for people to gravitate towards highly volatile assets in that search for yield, particularly when we are talking about longterm investments like requirement. I think thats risky and asking for disaster. Ms. Goldstein, would you like to comment on that . Yes. I would add i agree with professor allen. I dont know theres a Retirement Investor that wants the volatility and the risk of bitcoin but gives you, you know, very little yield, if any at all. Thank you. So we know that the stable coin market is worth about 130 billion and a lot of the growth has happened really fast, in the last couple of years. I personally dont think that regulators have kept up with this transition. The president S Working Group on Financial Markets recently released a report on stable coins with suggestions for congress as well as banking regulatory agencies on recommendations for what we should think about as we regulate stable coin. I just have a couple of seconds left, but what, ms. Goldstein, i will stay with you. What do you think we should be considering as policymakers as we think about a Regulatory Framework for stable coins . I think we need to think about the secondary market and how stable coins drive defi and make sure there isnt a gap between the protections you receive as an investor in the equity market and the protections you may receive as an investor in the Crypto Markets, whether it is best execution or making sure that the trades are not manipulated or spoofed, you name it. I think we need to make sure we are narrowing the gap as much as possible so we can all enjoy the protections we are used to seeing in the equity markets. Thank you so much. I know im out of time so i will yield back. Thank you, mr. Chair. Thank you, senator smith. Senator sinema from arizona is recognized from her office. I believe she is still getting on. She may be on the floor voting, but i would like to hold for a moment. I will ask one question, if senator toomey wants to ask one, too. Ms. Goldstein, is it true that cryptocurrency speculation on decentralized finance platforms wouldnt work without stable coins . Yes, senator, i think thats right. Or at least they would be a lot smaller. So could a company like circle create a stable coin that could be used for Electronic Payments but couldnt be used to gamble and cryptocurrencies like dogecoin. Yes, chairman, i think you could. You could design the system as you would like and, yes, they absolutely could do that. Professor allen, what are the risks of allowing stable coins to be used both as a Payment System and as a tool to allow gambling in defi markets . In terms of allowing them to be used as a Payment System, i think the biggest Financial Stability risk is if that is offered by a tech company like meta, facebook or amazon because then you have the ant to scale up very quickly could be used for everyday goods and services and then we do potentially have both Monetary Policy and Financial Stability issues in the sense the tech company would become too big to fail and essentially part of the government safety net. Unless one of those Tech Companies moves into this space though, i dont see stable coins becoming used for everyday goods and Service Payments absent some kind of Government Support in the form of deposit insurance or the equivalent. So if that does happen, these could then be used potentially for payments, but also they would be used to a large extent in the defi ecosystem, and that is essentially in my view going to be shadow banking 2. 0 in terms of the government essentially having to bail out this entirely selfreverential system that operates outside the boundaries that we normally operate. Thank you. Mr. Disparte, since your company name was evoked in this discussion, when testifying in front of congress, in the working group, circle emphasized it is a payment platform that can help Small Businesses or enable cheap international payments. It concerned also which senator warner was concerned, as you heard. On the website circle highlights the defi protocols it is designed to work with and your ceo recently bragged on twitter your u. S. Dollar coin is the most used stable coin for making bets in the unregulated market. So, mr. Disparte, is circle is a safe banking property to facilitate payment to Small Businesses, why is your company promoting its use to gamble on cryptocurrencies . How does that help Small Businesses or the economy . Senator, thank you for the question. There is, of course, a wide range of use cases for any payment infrastructure, any payment innovation. In the software intermediated Capital Markets, also known as defi, the use of stable coins is an important innovation but its fundamental function is exactly the same, and the expectation of the end user is they only get a dollar out from the economic use of the stable coin for any of these activities. Thank you. Senator toomey, and then we will after senator toomey we will call on senator sinema, if she is on. Otherwise i think we will likely adjourn. Go ahead. Thank you, mr. Chairman. Ms. Massari, i have had a little back. I have had a little back and forth with mr. Chancellor. Times indicated stable coins, at least some stable coins may actually be securities, even if they like him inherit profits. He hasnt explained to me the criteria that he is using, what legal tests and what makes a stable coin that has no expectation of profit a security. It seems to me that the gain on the apart movie investor is fundamental we at the heart of what we consider to be concerned he. I want to ask you, if there is a non interest bearing stable coin. Most of them are not intrinsically bearing interest. There is no explicit expectation or profit. And really, the Value Proposition is that there is a utility that is the reason that people are interested in the stable coin. But in such an example, do you think that it meets our definition of what is the security and it should be regulated as a security . Senator toomey, thank you for the question. As you might imagine, every practitioner in this area is extremely well versed in the Technical Details but in my view, and short, annan and just bearing stable coin fully reserved and regulated as many are regulated today as many transmitters those should not be viewed as securities, they are not security under existing law. Thank you and i was wondering if you could give us you made a really interesting and i think important observation about how rapidly this space is evolving and how the capabilities are expanding. How the output is expanding any made the analogy to back on the internet relied on dial up modems, it is a little bit faster today. I suspect that the capabilities of these platforms to handle transaction is also going to grow. And as it does, it seems to me that there is very interesting potential for smart contracts. Could you give us an idea of how we should think about smart contracts . And maybe even example of a smart contract that would have a case for an ordinary Small Business or consumer . Absolutely thank, you for the question senator. Indeed, i would argue that the Public Infrastructure in this open Source Technology way that is happening and many are liken into a web three. We have one was read websters read write an own and it is an important innovation and has a lot of implications for Financial Resilience and competitiveness. An example of a smart contract innovation could be something really important close to home from a, coming from the insurance world for example. One of the most elusive worlds of this is a concept of a parametric claim. And homeowners policy that could liquidate a claim based on the geo reference, weather disaster took place. There is no equivocation that in fact was a total loss. It would be a gamechanger. The absence of being able to do that at scale and quickly and in realtime is partly solved for by a trusted dollar Digital Currency like the u. S. D. C. But it is also partly solved for the capability of a smart contract. So, you start to see some block innovations taking place in that domain in the insurance domain. But an open internet dollar functionally becomes one of the only missing links to enable that at scale. Other examples are opportunities around zero default loans. Effectively, the programmable money that enables you to execute even micro payments. Whereby todays standards, saying even small amounts of money it cost more than the sum of money sent. And so, the ability to execute micro payments i use an example of my written testimony about journalists being able to accrue a penny for every like. But todays payment standard, it is not possible to execute that plan into the turn a list. So, the freelancer is effectively a starving artist or a starving writer or journalist. When theres a whole host of other use cases that are enabled by this. The cross border payments, being able to have sanctions, Money Movement for example. Corruption, bribery and fraud internationally and the humanitarian context money is the honeypot. Especially physical money, because of its opacity. Stable coin base payments because of the transparency, their speed in their ordered ability. It can enable a whole host of applications. Usbc was use for example to support doctors in venezuela, as one use case of moving humanitarian funds using these innovations. So, i think were in the opening innings and when people say they have failed Financial Inclusion test the presumption is a stable coin has agency just as the dollar. Both are patently wrong. Thank you mister chairman. Thank you it is recognized in the office. Thank you mister chairman, thank you to senator toomey in particular for extending the question so is able to join today. I also want to thank the witness for being here today. I coached a financial innovation caucus, alongside my friend senator llamas of wyoming. So, im glad that we are holding this hearing on stable coin today. As you know, stable coin is cryptocurrency that is to external reference assets. If yet currency, another virtual or a combination of these assets. As more americans invest holden transacted Digital Assets. It is important to policy makers to consider the regulatory implications of this trend and the innovations happening in this ecosystem. Miss mitt sorry, it is great to meet with you and discuss this important topic. If in arizona as looking at holding a stable coin how can he or she know that it is truly backed by the asset and then they can usher claims . Thank you for the question today in the United States it is regulated by where they are located in the offices. This is under transmissions license and it existed in every state but one. In addition, the regulated for crimes purposes, a bureau of the year apartment as Money Services businesses. Primarily, it is a state regulators that are responsible for oversight and supervision of money transmitters. Including stable coin issuers. So we, would look to the state regulators to ensure that stable coin issuers like other Payment Service providers and by providers are living up to their promises. Thank you. As i understand, stable coin issuers are money transmitter laws. Do these state laws require particular ways of disclosing how the stable coins backed . It is a great question senator. These laws are generally another payment providers, they maintain eligible assets to back their customers. They also are required to provide Financial Reports for the regulators. And of course, any disclosures that they make about how they hold assets must be accurate. I see. And the events of stable coin isnt really backed, is there a risk that the arizona can try and redeem their token for cash . The issue or may not be able to provide it . Thats a problem for the arizonian in the near term. But what bigger problems could that cause in the long term . That is a great question senator. I think the short answer is, yes. That could certainly be a problem, it is one reason why i support common sense strong regulation of stable coin issuers. As i mentioned, the states are currently largely responsible for that regulation. And my view, a federal option could also be to explore and achieve the same goals. Thank you. Now, the arizonian holds 10,000 dollars in a particular stable coin. And then there is a run on the issue or. How much of the 10,000 dollars would they booze, the backing on the coroner be credible . That is a great question. Again, i think these are really important questions to think about as we think about how theyre regulate stable coins. Unfortunately, im going to give you a lawyer ali answer. It depends. It depends on the assets that are available and bankruptcy to redeem of the stable coin holders. Its a stable coin issue or goes into bankruptcy. I mean in general, how much money is left with a stable coin holder that is available for the stable coins holders to get and that kind of situation. Thank you. This is an important issue for consumers and investors. At the same time that, we should not assume that simply overlying every long regulation we have four other issuers and it might not be the correct issue here in the short time that we have left i would love to hear from isthmus sorry on my last question. Relative to banks or other issues of Digital Currency, can you highlight what is good and bad when thinking about stable coin issuers. So first, miss miss sorry . Again, thank you for the question. To my mind when thinking about stable coin regulation, this regulation is really important. It is really important to protect consumers, protect our Financial System. But at its core, the most important thing is to make sure that the regulation fits the activity. Right . The stable coin issue is different from the Traditional Banking. And therefore, and my view, it doesnt make sense to overlay the same regulation that we have for the Traditional Banks. And thats on top of the stable coin issuers. And senator, i would just add very quickly that i think and they will issue new tokens and have an uneven Playing Field. Theyre looser standards for fundraising and crypto notes. Including for a Pharmaceutical Company going to the Public Markets and raising money. That is sort of like having a triathlon where you are asking 10 of the participants to skip the swim. And, so i dont think that we should be i would like to do that, personally. Yeah, i think it be a good trick, right . I dont think we should be advantageing one industry over the other when it comes to fundraising from the Public Markets. Thank you. Thank you mister chairman and Ranking Member for the hearing. I really appreciate the time today. I think our witnesses for appearing. Thank you senator. This has been [laughs] [inaudible] thank you, this is been a important an eyeopening discussion. This financial regulator has failed to Pay Attention to these issues in the past, until it is too late. They have devastated workers and families and too many cases have been devastated in this country. The Ranking Member state, my state all over the country will keep a close eye on stable coins, cryptocurrencies. We will ensure that this economic recovery that we have worked so hard to build is not destroyed by another crisis. Thank you to the four Witnesses Today four senators who wish to submit questions for the record this question is do one week of today december 21st. Witnesses will have 40 to five days to respond to the question. Thank you to the floor of. Yet the committee is adjourned. Military officials and defense experts to bargain a discussion on u. S. Security and