The Breakdown - The Case for U.S. Stablecoin Regulation

Episode Date: April 21, 2023

Last year, the first crypto legislation was supposed to be common-sense rules for stablecoins. The two political parties couldn’t come together, however, and the legislation was scrapped. Now, the House Republicans have reintroduced a draft, and on Wednesday held a hearing that featured witnesses including the Blockchain Association’s Jake Chervinsky and stablecoin expert (and recent “The Breakdown” guest) Austin Campbell.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh.  Join the discussion at discord.gg/VrKRrfKCz8.

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Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDess. What's going on, guys? It is Thursday, April 20th, and today we are on day two of congressional hearings, and this one may be a little bit more constructive. A quick note before we dive in, we are now down to our final few days on the CoinDesk Podcast Network feed. Yes, last week I announced the Breakdown Network, which includes news shows and for the Breakdown Main Show, a shift away from the Coin Desk Podcast Network, which has been our partner for the last few years. If you listen to The Breakdown on the Coin Desk Podcast Network, you need to switch over to the Breakdown-only feed, which you can find anywhere you listen to podcasts.

Sunday, April 23rd will be the last day you can hear this show on the Coin Desk Network. Thanks again to CoinDesk for the years of great partnership, and so looking forward to everything that comes ahead. All right, so like I said, we are in day two of crypto-related hearings. This hearing seemed to have the potential to be a little bit more productive, let's say, than yesterday's. As we discussed on yesterday's show, the congressional grilling of Gary Gensler was certainly satisfying, however, it wasn't necessarily a forward-directed type of thing.

This hearing had the potential to be something different. It was again the House Financial Services Committee, and specifically the newly formed subcommittee on digital assets, financial technology, and inclusion, holding a hearing on stablecoin policy. The witnesses were much better, and to get a sense of how people felt in the industry going into it, the night before the session, when the prepared testimony dropped, Nick Carter tweeted absolutely sensational testimony from Austin Campbell, who will be testifying in the House hearing on stable coins tomorrow. Probably the single best document I've read that makes the case for stablecoins as favorable to U.S. interests. At the same time, though, there has been a clear undercurrent

in Washington that has been gaining louder and louder. That's the idea that any legislation at all legitimizes the crypto industry and should therefore be opposed. This was apparently a quiet position of crypto opponents last year, and part of the reason stablecoin legislation was scuttled in the first place, but this year, emboldened by events like the failure of FTX, it's coming out into the open in a significant way. The context for the hearing was, of course, the recent draft. bill on Stable Coin Regulation that had been released just a few days before. The hearing showed up on the subcommittee schedule with very little warning or politicized fanfare, which makes it seem far more likely that it was a genuine effort to iron out wrinkles in the bill.

Stablecoin regulation had widely been seen last year as a topic that could be dealt with relatively quickly and in a common-sense bipartisan way before moving on to more contentious issues, but in the wake of FTX that seems to have changed. kicking off the hearing was subcommittee chairman French Hill, who opened the proceedings with a speech setting out the lay of the land. Today's hearing, he said, marks the official resumption of the House Financial Services Committee efforts to enact payment stablecoin legislation. Last Congress, Democrats and Republicans worked together on a proposal to bring payment stable coin issuers under a regulatory framework and allow stable coins to unlock their potential to contribute to a modern payment system. Hill set out the efforts made in the second half of last year, noting that feedback and compromise had been contributed across the office.

At the same time, he acknowledged that more work was needed, saying, that bill is an infant, it's a baby. It's not necessarily a beautiful baby. He'll made specific reference to the 2021 president's Working Group and Financial Oversight Board reports, which both laid out the risks and concerns, but ultimately recommended that Congress passed a legal framework for stable coins. The key risks to be dealt with were sufficiency of reserves, convertibility to other forms of fiat money, and preventing regulatory arbitrage. He'll drew attention to the fact that the digital asset industry is increasingly looking abroad to escape the incoherent regulatory atmosphere in the U.S., pushing his colleagues to recognize the urgency of the need to pass this legislation. He also added that the

turf war between the SEC and the CFTC is, quote, unhelpful and unsustainable, pointing out that the rival regulators were both claiming jurisdiction over one of the most utilized stable coins in the market. He'll concluded, 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's why it's time for Congress to act and pass a regulatory framework for payment stable coins. Flipping over to the other side of the aisle, Democrat ranking member Stephen Lynch to use his time to walk through the calamities that have impacted the industry across the last year. He used examples from the collapse of the Terra ecosystem through to the collapse of Silicon

Valley Bank and signature bank to make the case for extreme caution and moving forward with legislative clarity for the crypto sector. In this, Lynch appeared to represent the firming Democrat opposition that all things crypto are extremely risky, and that investor protection rather than clarity and oversight should be the key aim for legislation, to the extent that legislation should even be considered. Lynch's entire introduction was extremely skeptical of the value of Stable Coins' viable digital infrastructure. He said that stablecoins are, quote, rarely used for payments, but are instead used to facilitate speculative cryptocurrency trading and investments. He also said that they contain, quote, structural fragilities that make them vulnerable to runs and pose risks to monetary

policy, national security, financial stability, and fair competition. Summing up what appears to be the new Democrat position on the industry after last year's disasters, Lynch said, it is worth revisiting questions of whether stable coins 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 Fed Now payment system and a publicly issued digital dollar. Lynch rejected the entire premise of the hearing, saying, 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. He conflated the issues with stable coins to the recent bank failures, which he said have taught us, quote, the danger of allowing shadow banks to issue bank deposit-like products without FTIC insurance. In closing, he stated, I strongly believe we need to separate crypto assets from our banking system and the bill does just the opposite. Now, don't even get me started on the straw man of connecting banking disasters, which had nothing to do with stable coins or stable coin issuance, and everything to do with issues we've discussed for the last few months, like duration mismatch, and interest rate risk in the context of the fastest tightening cycle in 40 years, which, by the way, happened under a Fed chosen by this administration, et cetera, et cetera, et cetera, whatever.

That's not the point, you get it, moving on. Next up in the introductions was chairman of the full committee, Patrick McHenry, who briefly walked through the work that was done last year between himself and his Democrat counterpart Maxine Waters to form the draft bill. He said, I thought it was important to acknowledge that good work, is the foundation for our discussions. He presented this hearing as an opportunity for members of the subcommittee to engage with the legislation, quote, that we will be moving. Further, he drilled down on the importance of getting some form of stablecoin legislation done. The consumer interest,

he said, is not served by us not acting. We need to have a federal regulatory regime for stable coins. It's important for us internationally and domestically. And it's very important that we have an understanding on a bipartisan basis the utility and importance of this legislation. Now, Democrat ranking member of the full committee, Maxine Waters, essentially used her time to disavow and walk away from the negotiations that had been held last year. She said, what did not happen was that we did not complete the negotiations so we can move forward, and unfortunately, a lot of things have happened in between. Waters advocated for a complete restart of the bill, saying this bill in no way represents any final work, and because so much has happened, we needed to get back together in negotiations.

She then claimed that the draft bill represented the Republican view only, and that Democrats would be forming their own bill before restarting negotiations. claiming to have been blindsided by McHenry. Chairman Hill apparently felt the need to address this outburst, clarifying that the Republican side of the subcommittee welcomed any legislative effort from Democrats and that all his party has done is revised the bill from where it stood in September. In no way, he said, is the bill posted to the hearing the be-all or end-all?

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 Waters and McHenry last fall. Now, again, what's not being spoken is why the Stable Coin legislation fell apart at the end of last year. Part of it was the simple reality of political schedules with everyone dealing with their own re-elections in the fall. But part of it was the fact that even throughout the negotiations, there was a loud part of the Democratic Party and specifically the Biden administration that, according to people in Washington, who were there at the time, believed that any legislation at all was a legitimizing force for crypto and so should be opposed. I hate how partisan this

industry is becoming. But when you have one party who has an entire wing that believes that an industry shouldn't even exist and that any legislation to give it rules of the road would be tantamount to saying it's allowed to exist, how are you going to get anything done? Now onto who was actually testifying, this was one of the absolute bright spots of this whole thing. We heard from Dante Desparte, the chief strategy officer for USC issuer circle, Austin Campbell, adjunct professor at Columbia Business School, former head of portfolio management at Paxos, and recent guest on this show, Jake Chervinsky, chief policy officer, the blockchain association, and Uber Twitter threader, and then the folks who were nominally supposed to be the not crypto crowd.

Adrian Harris, the superintendent for the New York State Department of Financial Services, which oversees the Bit License State Regulatory Scheme, and the late edition of Delicia Reynolds Hand, who's the director at Financial Fairness, which is a consumer advocacy group. Let's talk first about Austin Campbell, who was recently on this show and whose testimony Nick had called out. In it, Austin explains the status of the U.S. regulatory landscape on a granular level, and makes the case for clear stablecoin regulations as a tool to continue the dominance of the U.S. dollar well into this century. Campbell opened by explaining the difference between the various instruments called stable coins and advocated for more clarity in the language.

Many things he said are called stable coins which should not be. What we need is clarity to define stable coins so that we understand that stable coins built right are not new and a relatively mundane financial instruments. The main thrust of Campbell's testimony was a warning that the current regulatory framework for stable coins is his word chaos. Issuers have to be used. no idea which regulator will come knocking, and this lack of certainty is pushing firms offshore. He said, I can say this with certainty because I advise my clients right now to do exactly that. Campbell argued that this status quo is not only bad for jobs and the status of the US dollar, but it's, quote, particularly bad for national security, as blockchains have a significant

degree of transparency. Next up, Jake Trevinsky gave a simple message to the subcommittee on behalf of the more than 100 companies represented by the blockchain association. Congress, he said, must pass stablecoin legislation. Jake argued that this moment is pivotal, while enemies of the U.S. are actively undermining the global dominance of the dollar. Trivinsky presented three main points. First, that the U.S. payment system had failed to keep up with digital technology and the always open economy that goes along with it.

Second, that the dollar is under threat from competitors like the digital yuan, and the best way to bolster its global use quickly is to spread U.S. dollar stablecoins around the world. Third, that the entrepreneurs that are interested in building this industry are already leaving for more friendly jurisdictions. Adopting stablecoin legislation now, he said, will say. an important message to the job creators and the taxpayers in the blockchain industry that they are still welcome here at home. Congressional mainstay Dante DeSparte gave a rundown of the technology and capabilities of Circle's USDC. He explained that Circle had always taken a, quote, regulatory

first approach based on trust, transparency, accountability, and financial integrity. USDC, he said, had facilitated more than $10 trillion in transactions across more than 90 countries. He joined the other panelists in warning that the U.S. is falling behind due to a lack of a clear regulatory framework. financial innovation, inclusion, and protecting the integrity of the financial system, he said, are not competing objectives. Finally, there were the two witnesses who were nominally supposed to be not pro-crypt, or at least not clearly so. There was that late addition, Delicia Reynolds' hand, who presented a wide range of consumer concerns, from the lack of payments reversals in the crypto system to the commingling of funds in some crypto firms. Her critiques definitely were less

about stablecoins specifically and more about the crypto industry as a whole. For example, she discussed the targeting of African-American populations in crypto advertising and the need for protection of minority investors. Now, one interesting note about that is that by any statistical measure, basically, non-white Americans are much faster adopters. This makes sense if you understand the patterns of historical discrimination and how much harder it is for minority communities to get good banking access in America. Whether that means they need more consumer protection is a reasonable and open question. But the distinction I'm trying to draw is that African-American communities aren't being targeted more by crypto advertising because they're more susceptible. They're being targeted as a desirable

consumer because they're already opting into the system. Finally was Adriane Harris. She discussed the structure of the existing New York State regulatory scheme that she oversees. Her agency, the NYDFS, oversees the major U.S. Stablecoin issuers, including Circle and Paxos, and has the longest running and most comprehensive crypto policy in the U.S. having been launched in 2015. The state regulatory regime is modeled on banking supervision but modified to suit the crypto industry. Regarding stablecoin issuers, the New York regulation, which was clarified in June 2020, require stablecoins to be fully reserved with cash equivalence, redeemability within two business days, and public independent reserve audits. Now, frankly, for someone who has previously been seen as something of an opponent

to crypto, if only because of the strictness of the New York regulatory regime, Harris frankly appeared in this hearing at least to be constructive on the need for sensible, permissive federal regulation. She also presented as a strong advocate for state's ability to operate independent regulatory frameworks. Harris said, 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. Now again, it's worth noting here that throughout this hearing,

Harris was, I think, supposed to be the anti-crypto person, but was generally pretty positive on the industry. She clearly represents the position that Democrats used to have by and large, which is that it has a lot of potential, but that it needs really clear rules of the road. I think it's reasonable to take the position that the Bit License scheme goes too far and is overly burdensome, but at least it exists and they're not getting caught up in this silly game of if we regulate it, it's allowed. So going into the testimony, what were some of the key themes? while one was definitely stablecoins as securities. SEC Chair Gensler has obviously made it clear that he thinks stablecoins are,

but for his opening question, Chairman Hill asked the panel, straight up, should stablecoins be treated as securities, commodities, or more like currencies? Disparte said, quote, virtually every currency in the world treats stable coins under an equivalent national regime that would conform with electronic money rules and as a payments and banking innovation, not a securities or commodities innovation. Campbell agreed, saying these fundamentally work like money. They operate like banking products.

On dollar dominance and geopolitical issues, Hill asked Disparthe to speak to the role that stablecoins can play in promoting dollar dominance. Disparte explained that the global payment network currently labors under a walled garden problem, where national payment systems fail to interact with one another. An internet-native cross-border standard that's based on the U.S. dollar could be extremely beneficial. Capital flight was also an issue. Tether came up and it makes sense why. Stablecoins in general are down 23% from their peak, and among that, BUSD has been regulated out of existence,

losing $11 billion, Tether has lost around $1 billion in market cap, and Circles USDC has lost $20 billion in market cap. Why? Well, in my opinion, the USDC flight is an indictment of the U.S. After BUSD was shut down, and after USC reserve assets were stuck in Silicon Valley Bank, I think traders looked at USC and said, it is in fact the U.S. regulatory regime that gives it risk. Representative William Timmons made the interesting point that the outflows of other stablecoins into Tether represents capital flight out of the U.S. to offshore domiciled companies. Asking DeS. whether this exodus represented a flight away from U.S. regulatory certainty, Disparte responded that there is a race to the bottom taking place in corners of this

market segment. The lack of regulatory clarity is partly fueling that vacuum. Now, giving breath to the fear that companies are going to move abroad, Representative Aaron Hochin questioned Disparte about why Circle is taking steps to establish a European headquarters. Disparte responded that the EU markets in crypto assets regulatory framework, or Mika, which is slated to be signed today, had made it easy for Circle to essentially export all of their current products into the jurisdiction. Now, on the Democratic side, candidly, there was a little bit less substantive than you'd like to see. Ranking Member Lynch again continued to be hyper-focused on last year's crypto collapse. Maxine Waters appeared confused by the presence of Harris,

unaware that the NYDFS regulated stable coins in the state. But if one is looking for some bipartisan optimism, I would again point to Democrat Congressman Richie Torres. He had a much more substantive line of questioning. He discussed with Harris the idea that stablecoins should be fully reserved and audited. He suggested that stablecoin issuers do not perform the function of banks and therefore should not be regulated by banks, to which Jake Trevinsky agreed, adding that he thinks, quote, we can design reasonable tailored regulation for non-bank entities to issue stable coins that is just as safe as a bank doing the same.

Testing the assertion from Gary Gensler that a regulatory framer for crypto would, quote, undermine 90 years of securities law, Torres asked Harris if she had seen any evidence of security's laws being undermined by the crypto framework in New York, to which she responded, no, not at all. To the contrary. Finally, touching on the financial inclusion promise of stable coins and crypto, Torres asked the panel whether the tech can actually deliver a cheaper and better financial system for the underprivileged.

Austin Campbell responded, yes, unequivocally. The beauty of a blockchain is that it treats everybody the same. If you have low fees, high transparency, high ability to transact, everybody can use it regardless of how much money they have, and I think that is one of the best features of this new technological innovation. So where did this hearing leave us? Like yesterday, I think it did reinforce the growing partisanship around this issue. But also like yesterday, it showed that there were still clear bright spots in the Democratic ranks and people who were being thoughtful about the technology and might be allies for sensible regulations. I didn't go deep into it, but Bill Foster on the

Democrat side was another one who, while asking a set of rather contentious questions, still seem to be doing so in good faith, a point that was reinforced by panelists after on Twitter. Editorializing for a moment, I think that for those of us who want to see a sensible regulatory regime in Washington, we have to effectively ignore the portion of the Democratic Party that has decided to disengage and that any regulations and rules would be legitimizing,

and focus on the people who are more open. If we're going to get anything done, we need more than just Republican votes. And so honing in on the concerns that this set of folks who don't a priori hate the industry have might be a good place to start. Anyways, all in all, I think it was still a more positive hearing than the day before. And frankly, between both these days, I'm just glad to see the conversation actually happening in the halls of Washington.

Until tomorrow, guys, be safe and take care of each other. Peace.