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tv   Senate Banking Committee Examines Popular Cryptocurrency  CSPAN  December 17, 2021 2:46pm-4:33pm EST

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of virtual currency called staple coins. a panel of financial experts and academics answered a variety of questions, including on the risks these currencies may pose to financial markets. financial and federal regulations. this is about one hour and 45 minutes. >> the senate committee will come to order. i welcome our witnesses. today's hearing is in a hybrid format.
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members have the option to appear either in person or virtually for those running remotely if your reminders, members already know how to do this, after many times. please try to minimize background noise, click the mute button. you will have one box on your screen labeled clock that will show how much time of your five minutes is remaining. you will hear a bill ring when you have 30 seconds remember, if there is a technology problem, we will move onto the next witness or senator. the speaking order is at usual, determined by seniority. of the members who have checked in before the gavel leader in person or remote. then we go back and forth, republican, democrat. most people had never heard of cryptocurrency years ago. many people still didn't know what all these terms mean, from stable coins to non-fungible tokens. but they become a hot topic in washington, wall street come
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online, among millions of americans wonder stand up just don't trust big banks and are looking always for an opportunity to make money. over the last several years, the number of cryptocurrencies has exploded from the hundreds to the thousands. the supposed valley of these digital assets and circulation recently passed $3 trillion, which is about the size of j.p. morgan chase's balance sheet. our nation's largest bank. with that much money tied up, that's pretty much the definition of a systemic issue in our economy. those big numbers have come with big promises. we've been told the block chain, the technology these coins are built upon, will democratize money and build teamwork inclusive economy but none of these promises has materialized and likely never will. instead we have gotten while financial speculation. we've heard before this committee the wild price swings and high transaction fees from any cryptocurrencies make them useless for payments. the one thing they claim to be
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designed for. stable coins were supposed to solve this problem. unlike other cryptocurrencies, their value is not based on market enthusiasm, a stable coin is to be backed by real assets held by the company that issues the stable coin. stable coins or particular types of cargo currency whose value is managed by a single company. these include tether, circle, and abracadabra. a fast-growing scheme that makes magic internet money, that is their words, not mine, what could possibly go wrong with something that claims to make magic money? cryptocurrency advocates argue that crypto assets are superior to real dollars because they are decentralized and transparent. but stable coins are neither of those. most of them rely on a single centralist company to manage the reserve assets in their supply of coins, that sound a lot like what traditional financial into duchenne's do.
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it is not decentralized when one company controls when people can access their own money. it certainly is not transparent when cortical information aren't available to people who have their money tied up in those assets. last month, i wrote some of the biggest stable coin issuers to get more information on how they manage their funds that back there coins and to ask what rights their users have. the responses were not particularly enlightening. they should lead us to assume most customers do not have much in the way of rights at all. let's be clear about one thing, put your money in stable coins. there's no guarantee you're going to get it back. they call that a currency, implying it's the same as having dollars in the bank and you can withdraw the money at any time, but many of these companies had their terms and conditions, allowing them to trap customers' money. that is not a currency with a fixed value, it is gambling. with this much money tied up, it
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looks to me like a potential asset bubble, stable coins make it easier than ever to risk real dollars on cryptocurrencies that are at best volatile and fraudulent. we saw quickly these tokens can crash, with crypto market staffing by almost 30% one day. history tells us that we should be concerned when any investment becomes so untethered from reality. look at the 1929 stock market crash. security started out as a way for regular americans to invest in new companies that wanted to bring new products to market to expand their operations. by the end of the decade, companies were invented out of thin air to create more stocks to satisfy wild demands. banks allowed customers to borrow against one stock to buy another until the whole market collapsed. many of us are old enough to remember, most of us are, the 2008 crash. mortgages were supposed to create -- to give more families
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access to the american dream, while derivatives were created to help financial companies reduce their risk. and reality, predatory mortgages were used to strip homeowners of their equity, the equity they had in their homes, in order to create complex mortgage-backed securities and derivatives that ended up increasing risks that banks and financial companies. we know how that turned out for our country. we can't deny that betting on cryptocurrencies made a few people rich. that kind of action always does. just like some people became fabulously wealthy trading stocks in the 1920's were buying and selling derivatives 20 years ago. we heard the stories about mortgage brokers and house slippers becoming milliner's. more recently -- becoming millionaires more recently. the others that walk away unscathed are always a big eyes. what happens -- always are the big guys.
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what happens in the crypto market is the stable economies create a link between the real economy and this new fantasy economy. we saw this with doge coins, suddenly with billions when a tech billionaire tweeted about it. think about that. a lot of people were looking to alternative. wall street banks dominate this economy. they make record profits of matter what happens to workers and small businesses, in nevada, south dakota, ohio, rhode island. but a big tech scheme that makes it easy for hard-working americans to put their money at risk isn't the answer. stable coins, crypto markets are an alternative to our banking system. they are a mirror of the same broken system, with even less accountability and no rules at all. here are the same arguments today from this industry. the same argument we hear from the financial industry, lobbyists, so many times before, and harms innovation, the free
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market will solve all our problems. america needs to be globally competitive. of course we do. but what makes america strong as economy in the world is not while betting in the financial sector, it is our workers, the dignity of work, the talent, the ingenuity, the dedication, that is what our economy is built on. you can't fake that. but as we have seen so many times before, you can put it all at risk. the rest of the world trusts the u.s. dollar, when we have orderly markets. the real threat to global competitiveness is regulators who ignore clear warning signs. the biden administration is putting watchdogs in place, quite a change, strong watchdogs in place in the banking regulation, fighting to bring down costs for families, for
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seniors with perception drugs, for the middle class with the build back better plan, we can put that potential at risk. i will continue to work with the financial watchdogs to ensure that they have the tools they need to protect people's hard-earned money in our economic recovery from another bubble or another crash. >> stable coins are an essential component of the cryptocurrency ecosystem, which is itself at the vanguard of the tokenization of assets. stable coins can speed up payments, especially cross-border transfers. they can reduce costs, including remittances. and they can help combat money laundering and terrorist financing. stable coins can also be programmed and made interoperable with other currencies, creating efficiencies to improve access to financial services. unlike volatile cryptocurrencies, like bitcoin, stable coins do not fluctuate in their dollar price.
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in today's hearing, we will focus on stable coins, designed to maintain a one-to-one value relative to the u.s. dollar, meaning one stable coin is meant to always equal one dollar. over the past year, stable coin market has exploded. as one of our witnesses will explain, stable coins are beginning to be used for small business payments and international remittances. while traditional payment substance can be extensive and take several days to settle, transferring funds via stable coins is low cost, and narrowly instantaneous. given that stable coins disrupt the status quo, they have naturally drawn skepticism from incumbent industries and regulars. the president -- and regulators. the president's administration issued a report to establish a federal regulatory framework for stable coins. in their report, the treasury department and others expressed their worries about consumer protection and financial ability with stable coins -- financial stability with stable coins.
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i was encouraged that the report acknowledged there was possibly for clarifying to works that federal agencies have jurisdiction over stable coins. it is a question that rests with the congress. i'm open to working with the administration and my democratic colleagues on this front. whatever congress does, let's be sure that we don't stifle innovation in an evolving digital economy or undermine our own country's competitiveness. many of our views about how financial services are delivered and how investments work are quickly becoming outdated. i'm releasing a set of guiding principles this morning that i thing should influence our work on a stable coin legislative framework. these principles recognize the stable coins are very important innovations and introduce new capabilities into money that did not previously exist. in addition to the ease-of-use and reduced fees associated with their transfer, stable coins can improve the privacy and security of our transactions.
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they also introduced the concept of money programmability or smart contracts, which allow omitted transactions based on a sequence of verifiable events. in recognition of the potential of these new capabilities, any regulation should be narrowly tailored and designed to do no harm. at the same time, sensible regulatory standards may help to combat against key risks, such as reduction or run risk. dispensable to a different approach in the root -- these take a different approach in the report. all stable coin issuers must be insured through its additions. there are three reasons i disagree with that wreck of addition. stable coin issuers have different business models than banks. they do not provide the sims services as banks and do not present the same risks -- same services as banks and do not present the same risks. stable coin providers do not engage in taking the deposits and making those in the -- making loans in the way that banks do.
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it is not appropriate tailored to the potential risks. requiring stable quest to become issuers which stifle innovation -- stable coins to become issuers which stifle innovation. it is unlikely much of this developer can happen within the banking system because of the onerous regulations which create a difficult environment renovation. allowing entrepreneurs to innovate with digital assets like stable coins will promote greater competition and deliver better results for consumers. the regulation of payments activities should create an issue playing field -- an equal playing field. venmo, apple pay, paypal are already subject to a state by regime and federal regulation. recognizing different business models, there should be at least three options available for stable coin providers, to operate under a conventional
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bank charter if they two, they couldn't comply with or acquire a special banking for stable kueng providers which would be in a compliance with legislation. they could have in assisting state regime at the federal level. this option i'll it would match each stable kueng provider with the regulatory framework closest to the model. you should meet certain minimum requirement. for example, they should disclose what assets back stable coin. and they should suggest a periodic audit. this requirement would in sure that they have a stable coin. it may also be appropriate to send minimum reserve requirements. legislations to stipulate that non-interest-bearing stable coins are not necessarily securities and there sure --
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therefore it should not be considered as such. this should protect the confidentiality of individuals using stable coins well allowing customers to up out of sharing personal information. finally, the anti-money laundering and other requirements including the bank secrecy act should really be modernized for all financial institutions, subject to them, given the emergence of stable coin and cryptocurrencies. including artificial intelligence. the emergence of stable coins represents, to me, the latest development in the ongoing development. i stand ready to work on this issue, and i do so any a matter that doesn't discourage innovation or competition, moving for print i look forward to hearing from our witnesses, and i yield my time. >> thank you. i will introduce the four witnesses from today. we will hear from alexis goldstein on financial policy and open markets. welcome. so i need is a partner at davis and wardwell. welcome.
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and the chief strategist officer at circle and a professor, hillary allen, i left out something. the chief strategy officer and the professor hillary allen who is joining us from her home and office. at the american university in washington college of law. you have five minutes please. thank you. ranking member to me and members of the committee, thank you for inviting me to testify today. as a director of financial policy of the open markets institute, my work focuses on financial regulation and consumer protections. my degrees in computer science, and i previously worked as a programmer for morgan stanley, building electronic trading systems. as a business analyst, we worked with ogre -- directive -- derivative trading. i am also an investor brit i invest in the equity markets, and i invest in the crypto asset
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markets. these crypto exchanges lend, borrow, and trade crypto. i have bridged from one block chained to the other. in doing so, i have seen how stable coins are used across the ecosystem, and i agree with the assessment that stable coins are here for speculation. stable coins are actively a way station. they deal with speculative trade and avoid losses. stable coins are also hailed it -- heralded for their potential. they are not used widely today for goods and services, but they could be. the reality is that today, tail investors across -- retail investors access stable coins by trading them, and not with the corner store. u.s. retail investors can either partners -- purchase nor redeem the top two stable coins directly from the issuer. instead, they are reliant on exchanges to trade stable coin
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for dollar. it is a second step that we are not used to seeing with other kinds of visual payments. you don't need to also set up a stock brokerage account in order to send someone money electronic. there are number of ways to earn rewards unstable coins. many crypto lending platforms pay far higher rates for coins on the platform then for locking in non-stable coins. it pays a future of a 1% reward for buying and holding the u.s. coins by default without any action from the user other than purchasing. it does not offer any rate of return for other stable coins. this is likely because the more the united states withholds for its customer accounts, the more they will make in a sharing agreement that they have. there are claims in the cryptocurrency industry and among some issuers that they are fighting wall street or disrupting wall street. they use the same force arbitration agreement and
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class-action bands that wall street does. they prevent users from suing in a court of law, should things go wrong. they also claim that government regulation and oversight are not needed because they are publicly available for anyone to read. the moment the platform is hacked, because an attacker has acted, they will find a bug and exploit a bug. they tend to call for law enforcement to help chase down the stolen funds. there also promises that stable coins could drive financial inclusion outcomes, and that we all agree is prickle. recent report from the economic form says that stable coins have no benefit for financial inclusion with higher barriers as pre-existing financial options, including the need for internet and smartphones. i have found this to be true when you stable coins. they begin to add up fast. especially, when you want to send a stable coin to your friend or to a different wallet
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off of the exchange. the plight of the cryptocurrency mike it -- market includes regulation. it is called decentralized finance. simply, it decentralized finance does not work without stable coins. help to facilitate trading and access collateral and lending and firing protocols -- borrowing particles. as of yesterday, eight out of nine of the top liquidity pools had at least one leg in the stable coin. with only a few exceptions, the platforms are not compliant with customer anti-monetary -- anti- laundering and terrorism. they are not conducting a simple check to ensure the cryptocurrency address calls to the protocols that are not on the sanctions was. today, the cryptocurrency market is not entangled. if the wall street and cryptocurrency industries have
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their way, it will be. i think the committee's right to pay attention to stable coins and crypto markets abroad. absent your attention, i think there is potential for a crisis, especially in a nonregulated ecosystem. thank you very much. i look forward to your questions. >> thank you miss goldstein. >> chairman brown. ranking members of the committee, thank you for inviting me here today to talk about this complex and interesting topic. i am a partner in the financial institution -- institutions group.
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this particularly the case for truer stable coins. they are non-interest bearing instruments, designed to maintain a stable value. that is against a reference of a currency. one dollar. today's coins are used primarily for payments in connection with cryptocurrency transactions and decentralized finance that is an application. stable coin payments could have broader uses. they would complement existing payments such as cash check, credit and debit cards. also wire transfers. each of which has benefited -- benefits and drawbacks. second, a stable coin begins to find use in a retail payment. we must seek to understand the
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risks they present. along with the benefits. like the innovations money that preceded them, stable coins are squarely presented in the core regulatory concerns of consumers with actions, systemic stability, safety and soundness. also combating illicit finance. it is been described in the reports to more specific kinds of risk. such as related to the operation of block chain platforms and risks arriving from regulatory gaps. third, the regulation of stable coins should address these risks while supporting the potential benefits. a written statement goes into these points in more detail. for now, i will summarize my view of what regulation of stable coin should look like. stable coin issuers should have
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restrictions on permissible types of reserve assets to ensure short-term liquid backing of those reserves. they should have auditing and transparency standards to regulate the public so they can evaluate reserve compositions. there should be restrictions that preclude maturity and liquidity transformations. it would shield reserve assets. we should have obligations to address illicit finance and considerations, and there should be requirements to address operational risks from conducting transfers on blotchy networks. but, requiring stable coin issuers to be issuing a positive institution, that ensures banks, that suggests in that report that it is not necessary. unless adjustments are made, it will not be workable. for fdic insurance, it is not necessary to address risk where
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a stable coin issuer is properly regulated. reserves art short-term liquid assets, and they have at least 100% of the power value of the stable coin. second, things are subject to leverage ratios and risk-based cap ratios. but they assume, relatively easily, a liquid risk to your assets then cash or cash equivalents. unless congress recalibrate these ratios, the stable coin business model would be uneconomic. congress should consider an optional header -- federal charter for stable issuers. at this time, stable coin issuers and digital wallet providers are largely regulated by the states. that is under money transmission regulations to state trust company authorities. there is an expanded federal law. it is appropriate and useful. i would close by thinking the committee first focus on these
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important issues. while i do not believe that stable coin issuers should be required to be insured banks, i strongly support the commonsense regulation for stable coins in a way that takes into account the risks and benefits. i am optimistic that there is much common ground that can pay the four-way best pave the way to safeguard consumers and the banking system and the broader economy. that is what continuing -- i will be happy to answer any questions. >> welcome. >> members of the committee. thank you for the opportunity to share my testimony with you today. my name is dante and i am the head of global policy. i am a leading digital financial service firm worker in the usdc. a dollar digital currency
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extends the u.s. dollar in a competitive global county. having completed my term on the national visor counsel, i will be no stranger to disaster displacement and hardship. is this disaster and others have shown, with the movement of financial aid and disaster relief, friction stands in the way. there is a great depression, great deleveraging, and the onset of the covid-19 pandemic. it is notion short of a great depression. it is nothing short of political, business, and continuity was laid bare. there is access to the internet and other public goods that was unequal. how we engage with money and payment in the digital form was
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clearly an area of pre-pandemic vulnerability in the united states and around the world. the advent of stable coins is what we refer to as dollar digital currency, such as usdc. it is an important innovation and how we send, spend, and save our money. to define the coin, money itself is not created equal. it is tantamount to the moment we converted our compact discs into mp3. the music is still yours, but now you enjoy the programmability and control of a form factor. it works they were the planet. it is designed to reference the equitably's own underlying asset. circulation, the most successful of which all reference the dollar. with the economic gain of buyers and spenders rewards that plagued early cryptocurrencies. usdc is now a dollar digital
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currency standing at more than 40 billion in circulation and community leak -- communicatively supporting transactions print it enhances financial inclusion, responsible innovation, and parity. critically, the dollar is backing the usdc, which strictly caps the duration of treasury of 90 days or less. it is all held in the care custody and control of the u.s. regulated financial institutions. indeed, as this internet native financial infrastructure continues to grow, we aim to do our part with payments and moneys that are more inclusive in the past. our recently announced initiative has four core components, each of which are close to home for me, having grown up in poverty and being the first generation in high school graduate. these include allocating dollar reserves to minority depository institutions and community banks
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across the country. we hope this will include billions of dollars over time, strengthening the balance sheets of banks and thereby strengthen their committees. embarking on digital financial literacy initiatives with historically black universities, and other partners supporting the development of essential learning and hands approaches to entrepreneur. it is one of the leading nation equity crowdfunding businesses, targeting campaigns for women and minority auditors across the country. finally, assisting umana terry d interventions -- humanitarian interventions. it list corruption resistant statement lease. nothing is worth doing alone. our hope is to catalyze the common coalitions on these initiatives which are deeply connective -- connected to global prosperity with the restrictions of financial value. while some argued that the united states may use -- lose
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that rates if they failed to issue a central bank digital currency, i argue that we are winning this race because the sum of premarket activity taking place within the perimeter. digital currencies are in financial services. some of these activities are advancing broad economic competitiveness, and national security interests. thank you sharon brown and ranking member to me to allow me to speak. i hate look for to addressing your questions. sen. brown: thank you very much. we will now hear from professor hilary j allen from washington. she is joining us from a remote location. professor, welcome. >> thank you, chairman brown. ranking member to me and members of the committee. thank you for inviting me. i am a professor at the american university of washington college of law and the author of the book the impact of financials debility.
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financial stability regulation is the focus my remarks today relating to crypto, particularly stable coins and financial currencies. i would like to point out that while the focus of my testimony, there is a threat to monetary policy as well, and i would had be happy to take questions on that point as well. crypto creates jobs and promote special inclusion, but the financial crisis destroyed jobs and it is disproportionately affecting the most honorable in the community. we should be aware of the fragility of the effect on the financial system. there are number of new fragility's, including the ability with any programming ability to create financial assets out of thin air and bigger bubbles with bigger bus. the distribute to -- distribute if ledgers have a governance mechanism with makes problems go by extreme challengingly. fragility it also arrives in computer programs that operate
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with ledgers on a smart contract. they execute automatically. even when the parties agree with interest. other fragility includes the possibility of stable coins and losing confidence in the ability to attain stable coins as a currency at the expense of race. it is an important point to load -- note about this. although it is hard to maintain concrete data, it is almost exclusively being used in apps rather than for every day. these decentralized finance apps are not particularly decentralized grid centralize governance and complicated ownerships proliferate in a deep centralized finance ecosystem. it relies upon technology, which i've already discussed and want to use it for. our established financial system has more functions with channeling capital and our economy can grow. that is why we have taken the
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financial industry with industry -- insurance -- we ensure that it can continue floating credit to the economy. it becomes problematic in financial services when they are being bailed off by the real economy to make it profit for industry leaders. this is already an issue for the established financial system. decentralized finance has the potential to take it to the extreme. centralize finance has been described as a casino, and that is why it is critical that they not rake into things that the government feels compelled to bail out. a recent report from the bank of settlements concluded that given the self-contained nature, with potential for d5 driven disruptions in the financial system and the real economy seems limited for now. allowing the information of d fight in traditional systems could change that. congress already regulates and prohibits depository institutions and their ability to participate in d5.
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ensuring the issuers of stable coin to d5 would also encourage growth in a systemic way. i disagree with the president's recommendation that congress adopt legislation regulating a stable coin and that dispositive or a -- depository sedition. a stable coin can be dealt with in other ways. it will benefit stable coins and the lack of regulation with authorization of stable coins if they can demonstrate a purpose outside of the decent place by its ecosystem, and if they do not prove any threat to financial institution or monetary policy. it would create some barriers to innovation, to be sure, but not all financial innovation was created equal. a recent economic forum concluded that stable coin is deployed with benefits for financial inclusion beyond those offered by pre-existing options. simple payment innovation could make a better and less risky way to promote financial inclusion
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than a system built on radical stable coins that it already funds with a ledger of structure that entails environmental cost to operate. an alternative approach would be to use it as they are use current leap -- currently. a stable coin prohibits deposit taking institutions from excepting any deposits from stable coin issuers. or from issuing their own stable coins. second, there will be stock monitoring the stable coin changes in the economy. third, use the designation to designate a stable coin as important, and use antitrust regulation as well as the stock designation power to prevent terms like meta and facebook from watching a stable going. i look forward to hearing your question for it >> thank you. i will get -- begin with this
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goal -- goldstein. meaning no disrespect to the four of you, but we will be moving in and out and keeping things going with asking questions. miss goldstein, please be brief on these because i have a lot of material to cover. stable coins are mostly used for speculative bedding. some crypto advocates argue they have the potential to make the system faster and more for student -- more efficient. are they a way to settle payments with the traditional finance system? ms. goldstein: thank you for the question. i think for that to be true you need four things. you need low fees, predictability, we need to be able to exchange them for goods and services. needs to be fast. i don't think stable coins meet all of those needed objectives. as someone plays rome sending them, both personally and in my work, it also makes western union look cheap when you wrap up all of the things you need in order to send different ones to one person or another. especially with a theory, and
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block chain. it could be high, and as you know, people with low incomes cannot afford the practices, and transferring at that's -- assets can be full of lots of surprises and high fees. sen. brown: thank you. you agree with her? that stable coins do not show promise as a payment system? >> i think that is true. i also think about the distributive ledger. it is not something you can go to. if there is a problem on a decentralized ledger with a lot of notes and governance, debts. sen. brown: do they hold promise for faster and more inclusive payments, do you think it would make sense to bring them into a traditional finance? ms. allen: i think there are concerns about the traditional finance. primarily because of their relationship with decentralized finance. there's also the issue of their
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own risks. if they were brought to be used as payments and procured into the proper financial system, we would have to be very careful about systemic rates that plant -- play an important role. sen. brown: thank you. last week's hearing in the house -- your ceo agreed that stable coins are mostly used for trading in speculation, but your company is seeking a bank charter based on what you call usdc. just to be clear, you have an interesting name to be sure. united states dollar coin. being a payment product. if it becomes a payment, would you limited to internet payments and platforms, or would you allow usdc to be used to facilitate cryptocurrency speculation? >> thank you for the question. the advent of a capital market
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and always under economy, built around innovations on the block chain, it is important. it is also critical that the dollar fundamentally when with what it reasons. circle counterparts to accompany our other institutions and companies. we don't face the retail market as a retail payment system. a lot of what that is is ultimately payments, crypto capital market training, and other activities. we are also seeing, and this is critical, like to highlight this in the hearing, we see an increasingly becoming a mechanism of payment and settlement, including among traditional firms. credit cards and others are using usdc as a settlement option for the networks. and makes the medium of exchange quite strong. sen. brown: if you are inside, it becomes a bank. it would still be used for cryptocurrency speculation.
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is that a yes or no? mr. disparte: the usdc has expectation of a profit. a dollar goes in and a dollar come separate we have maintained price parity to the dollar. with cash and duration tragedy -- treasury. at least within the banking system. sen. brown: let me ask a different way. if it was a traditional finance company, it would be illegal for you to sell metal coins. the u.s. dollar coin on them. correct? mr. disparte: i think the question ultimately --. sen. brown: it's a simple question. if you are simple finance company, you believe you could sell metal going since the u.s. dollar coin? mr. disparte: no. sen. brown: that's the answer. that's the law. do think the name of your stable coin could mislead users to be believed as backed by the u.s. government?
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throughout the usdc, you may have wanted that at the beginning, and i'm sure you marketed it that way to some who are less sophisticated than we pretend to be appear. do you think that is misleading in any way to call it u.s. dollar coin? mr. disparte: no. the stable coin innovation that we support is regulated consistently across the country. it is according to electronic money and electronic money transfers, and statutes of payments. we are on a level playing field with companies like paypal and other venture payment companies such as the niceties. -- on the united states. sen. brown: let me ask another question. the fed moves forward. are you going to let them call it a u.s. dollar coin or u.s. dollar? there's some irony. i don't know if you have a copyright or a patent on u.s. dollar coin, but i assume that if there is, we do is central
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bank digital currency, they may have rights regardless of the supreme court or any financial regulation of the night states dollar coin. just putting that out there. mr. disparte: indeed, sovereign issued currencies have three currency prefixes, so i am certain that if a central-bank digital cardi was issued by the fed, they would enjoy total autonomy over the name choice. i think they would enjoy this experience of stable coins that all reference the dollar is important prototypes for what may be an opportunity which we could upgrade the infrastructure to support digital currency as well. sen. brown: you are a good representative for usdc. mr. disparte: thank you. >> thank you. the sum of our witnesses today seem to think that stable coin is unlikely to ever start -- serve any purpose other than serving crypto speculation. the cost of transactions in various things seems to be that technology is moving very
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rapidly in a direction of facilitating and moving the cost of throughput. could you tell us what else is actually happening already with stable coins outside of the facilitation of crypto trading, and what do you think is imminent? mr. disparte: thank you. the lens of these types of innovations within the traditional payment and baking system, i think it is exactly where we are right now. we can acknowledge the original case, with the support of crypto and capital markets and a host of activities in the training to me. we are seeing, however, integration of stable coin based on payments across third-generation block chains that are increasingly better, cheaper, faster than the analog alternatives for how we move money. they increasingly also benefit from the immutable permanent lecturing of financial transactions which have enormous
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gains in caching and financial integrity. sen. toomey: we have limited time. are you saying it is fair to say that there are sophisticated financial institutions that are increasingly pursuing the use of these platforms for an alternative mechanism for settling payments? mr. disparte: indeed. to name a few, just to name a few, the visa network has enabled usdc as a native settlement option across its network of 70 million merchants. traditional companies in the remittance domain, such as money grab, they have announced a partnership with enabling usdc on a stellar block chain for remittances and for cash in and cash out across the world. sen. toomey: visa probably knows something about settling payments. it seems to be suggested that one alternative would be to ban stable coins. if congress banned stable coins,
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do you think that maybe people in other countries would develop stable coins and then if anyone had access to the computer, and the unit, would they be able to access those coins? would that be very unlikely to actually work and prohibiting the use of stable coins? mr. disparte: no question. it borrows from early experiences with the advent of the internet in which people creating websites once upon a time considered a precluded activity or neck to be that might warrant authorization as value began to emerge. it is profoundly in the interest and public interest that we have options for how we move in the economy. our financial needs do not take bank holidays, and our money should not. >> let me move on. you've made it clear that you think there should be a regulatory regime starting
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stable coins, but you point out that requiring them to be insured depository institutions doesn't make a lot of sense because the fundamental purpose is different from that of insured depository institutions. could you elaborate on that a little bit. i have one last question. ms. massari: i'm happy for the question. it is a fundamental idea. it is a business model in the risks raised by what i think is a well regulated stable coin. it is quite different from the traditional bank. traditional banks taken deposits and they make long-term loans and investments with deposit proceeds. that activity -- the maturity transfer and the equity transformation gives rise to run risks. that is the core of traditional bank regulation and what it is designed to address. this includes leverage ratios designed to address core banking activities. so, in my view, composing
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regulations for a depository institution like stable coin, it will 100% short-term with earnings and payments. they are not lending. that is the wrong approach. sen. toomey: as congress hopefully wrestles with what an appropriate regulatory regime should look like, what are some of the approaches we should keep in mind. mr. disparte: we should allow this thrive in the u.s. regulatory promoter. -- perimeter. it is the appropriate starting point. if companies like paypal and many of the other major payment companies can exist and safely transmit millions of dollars on the platform, it is is a powerful storing point. the concept of them having bank risks and managing structures and supervision's are important. the risk adjustment will be based on the type of activity.
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it is the type of activity in the policy. sen. brown: let me say, i am going to submit to you a written question because of the time, but i think the examples that you provide in the case for western union in the lower-cost transfer is unusually expensive in a transaction, and people who were interested in such a transaction and were concerned about lowering the cost could easily construct a transaction in alternative ways that would be much lower cost. i will submit a question for the record to clarify that with them. i yelled back. sen. brown: senator reid is recognized. >> thank you. esther allen, you have invited us to ask you about the mullah terry -- monetary policy of stable coin. it is a critical part of our economy.
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the ability and the federal reserve to controls my supplies. -- control money supplies. can you comment on the appropriate nature of monetary policy? >> think you for the question. if you are dealing with a situation where there is high inflation or dealing with a situation of inflation, the central bank needs the ability to match the amount of money in the system to the needs of the economy. that is how monetary policy is carried out. however, the central bank loses control of some of the monetary supply and they lose the ability to put their hands on those levers. this is something that central banks are truly concerned about. in fact, that is the impetus for central bank currency. the central bank is right about the financial stability issues. that comes with the introduction of a central bank digital currency, not to mention the privacy issue.
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it is an interesting question that they feel the need to compete with the stable coin, perhaps morris policies justified. >> think you very much. one other aspect is that this is a novel, or at least a recent phenomenon. it requires a great deal of analysis and projecting as to what we should do. after the crisis in 2008 in 2009, we created an office of financial research. do you see a role for the financial research in terms of analyzing structuring and making a recommendation to congress with respect to these points. >> thank you. i see a role in the researcher. the office of financial research is created to respond to the
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taps we see following the financial crisis of 2008. finances become more technologically informed as finance faces risks from the changes of things like that. we are now needing interdisciplinary approaches to financial regulation that includes computer scientist, data scientist, climate scientist. it is underutilized, and could really be built-up with interdisciplinary expertise which could give a more informed foundation to engage on issues of stable coins, among other things. sen. reid: i concur. ms. goldstein, there are data gaps in the cryptocurrency market. could you highlight what you think on the most significant -- are the most significant data gaps? ms. goldstein: thank you for the question. unlike the stock market where we can rely on things that are consolidated. we know the all the quotes that go through ever change are
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reported back to a regulator every day. we are sort of at the mercy of what a cryptocurrency industry wants to self-report. we may get information about a trade, but we may not get quote information. you also see arbitrage opportunities with bitcoin. it may be different on one exchange to another. i don't know if regulators have all the data to truly understand why that might be. it is a real story of potential for congress to look at a way to make sure we have standardized data reporting in a way that we make sure that all the different exchanges are giving regulars all the information they need. -- regulators all the information i need. sen. reid: i presume you would have some portion of transparency and disclosure that is imposed, correct? ms. goldstein: yes.
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sen. reid: i recognized senator brown as the conclusion of my collections. you are recondite. -- you will recognize. >> thank you for being recognized today. i look at this and i say there has to be an opportunity here. there is a reason why millions of people are currently participating in these transactions. they are using a product and service that you provide. at the same time, it seems to me that we have a regulatory responsibility to make sure that the illicit use of these types of services are limited. we are challenged because in the eye states, as we regulate, certain organizations may very well move elsewhere. if i was a consumer, why would i
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want, and i would direct us to you, why would i want to use your service as opposed to a visa using dollars as the currency? mr. disparte: thank you. part of what circles innovations are providing, wearing a mind that our direct customer is typically a business, and they work with retail consumers. nonetheless, part of the infrastructure that we are supporting today is enjoyed by more than 20 money people. that is 2 million people worldwide. that is for whom the price of access or the cost of access to things like international remittances, payments, money transfer, domestic and foreign, and candidly, access to the capital market, that has been credited. right on the one hand, it is a bank hinged on brick and mortar info structure. hundreds of millions of people, if not billions will consistently be left in the margins. sen. rounds: what you are
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suggesting is that there is an economic benefit to somebody because the cost of actually executing the transaction is less on average for yours than what it would be for someone going through traditional brick-and-mortar process. is that the marketing that is been done? mr. disparte: that is part of what the ultimate opportunity is. for example, in the remittance cases, of which we can describe a number, there are companies that are part of a startup to use usdc for remittances. the proposition is ultimately that sending digital currency payments is no different than sending data. of course, subject to financial crime compliance and the appropriate guardrails around protecting the financial system, but nonetheless, the value proposition is a fundamental lower cost with a transfer value on the unit. thank you. sen. rounds: i am curious.
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the circle scene, you indicated that the cost per transaction was probably greater in this particular case. it seems to be discrepancy between your opinion and mr. to partake. --departe. can you claim the difference. desk to explain the difference? ms. goldstein: it has to do with usdc coins and other crypto. are you going to keep in the system and buy something else? might point is that if you are using it for remittances and sending it to another country, you cannot go to your local grocery store and use usdc to buy some milk. you're going to need to convert it to your local currency. there is also a fee if i want to send something overseas. i need to send it to somebody else's wallet. just do that. -- to do that, the coin represents a block chain, but the predominant block chain is the theory him -- ethereum.
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the cost is incredibly high. it can cost 20 or $30 just to send it to someone else's wallet. once he gets to their wallet, if they are not using usdc to buy milk from the local grocery store, they need to convert it to the local currency. that involves putting it on an exchange. they need to exchange back to a currency and get into the bank so they can pay for the milk at the grocery store. that may also include a fee. has to do with you if you need to bring a feedback to see that. i think that is where you see the disparity. sen. rounds: i'm going to give you a chance to respond. what is your analysis? mr. disparte: the quick version of this is that early blood chains are candidate up internet. the argument is that staving -- banning the stable coin innovation is that early block chains may be a little cost primitive. it ignores the fact that the
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innovation is is not -- is not standing still. you are approaching transaction akin to major credit card networks and approaching cost structure for pennies on the dollar for value transfer. sen. rounds: my time is expired. thank you. sen. brown: on behalf of chairman brown, let me recognize senator daines. >> we thank you. stable coin policy. it is where we it should be. it has broad bipartisan agreement and copper mice. stable coin is distinct from cryptocurrency. there is a central entity that issues and is responsible for any individual token. personally, i believe that we should pursue a lighter touch approach to regulation. innovation is taking place with cryptocurrency and stable coins. i do believe that a bipartisan framework will help with this
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committee to agree. it is both possible for stable coins and frankly, necessary. i urge my colleagues to avoid high -- hyper-partisan solutions. seek consensus on something that is truly bipartisan print it will provide certainty needed for the private industry to grow as well as to prosper. this will help provide the best pathway forward for this technology to grow in a way that would benefit montana and the people of the global financial system. can you describe the current regulatory environment facing stable coin usage such a circle? mr. disparte: thank you. we agree with the spirit of finding a nonpartisan approach for regulations inside the nicety spirit arguably, when you look at the experience of a
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company like circle, you are licensed from sea to shining sea. money transmission the regulations are answerable to the examination of the bank supervisors and the transmission supervisors across the country. we also create a model law to have a more operating environment. we are also working with a registered transmission company and 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 nine states up, however, and what it means to compete on a global stage, this is where they face a gap. national settlements of the financial accident customers in this ability board state that regulators and representatives are -- for the nine states, they face a competitiveness gap. probably speaking, our current regimes for transmission provide for a degree of sufficiency around the use of a product form
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of payment. an exchange like stable coin. sen. daines: you touched on the issues, certainly on the global situation, and that really leads me to a question now for business. can you describe how you would -- usd see has advanced the role of the united states dollar? how might it help preserve the dollar status with the world's foremost reserve currency? ms. massari: to me, this is a very interesting line of thinking about how stable coins could affect monetary policy. it is not entirely clear that they would be harmful to monetary -- policy. where they would be regulated in the managed -- manner that i described my test my. 100%. they face deposits in the u.s. treasury, as some of my fellow witnesses have spoken, these stable coins can be available
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for transfers. it is for the nine states. just as other dollar types and accounts and payment instruments , and to my mind, just as those instruments help to bolster standing of the nine states dollar, with reserve currencies, the argument should be the same for stable coin. sen. daines: what do you think the future of stable coin regulation b if congress does not -- would be, if congress would not react. >> that is a great question. thank you. my own view is that it would be useful to find a federal charter. it is a really important asset ensuring appropriate regulation any federal level. it achieves all of the policy goals that we care about.
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it is a nonpartisan and bipartisan way. to my mind, the state regulatory regime that exist today has gone a long way to serve the interest of consumers in different states. the framework would provide additional clarity if it is available. sen. daines: speaking of benefits, what are the ways in which stable coins could lower cost within and increase access to financial systems. mr. disparte: thank you for the question. on the one front, we get back to the question, if too many banks hinge on traditional brick-and-mortar infrastructure, many people will be under bank. we saw that happening with the covid-19 pandemic and the ability to move money across the net was a vulnerability for the world. stable coins added trusted that by referencing the dollar on the internet, and that allows for
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lower cost transactions and a host of other financial services to blossom where the fundamental trust of the dollar is protected and preserved. sen. reed: quickly, with the senior senator from montana, you are recognized. >> i want to thank you for having this meeting and hearing. i want to thank everyone for testifying. so, i have heard from a lot of people in the cryptocurrency space. their description of the product reminds me of something. it is not necessarily a good thing. it reminds me of the synthetic products we saw leading up to the financial product -- prices of 08 it --. for some, there is nothing behind them. i know that stable coins is backed by real assets, but that does not mean that katie not --
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that it cannot be manipulated, and that there is an opportunity for some foul play. was put it that way. so, for you, do you think that is a fair comparison? cryptocurrency and synthetic financial instrument? ms. allen: thank you for that analogy, senator. will meet come to the synthetic financial products in the lead up to the financial crisis of 2008, things like homeownership, you have to be wary of financial inclusion because sometimes they are overblown. in particular, you have to be wary of them in circumstances where ava means to providing a goal that is unnecessarily complex. you don't necessarily understand why things are the way they are. they are too complicated. the system can have a capacity for confusion and panic. we have a product like the
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stable coin that is being proposed to financial inclusion, we have to ask ourselves why it needs to be so complex. why does it need to be on an administrative ledger with a governance mechanism? why do we need environment of cost of that kind of process? are there not innovations that are simpler and could achieve the goal in a civil way? -- a simpler way? sen. tester: is there anything you like to add to that? ms. goldstein: i worked on wall street before, during, and after the financial crisis. there are important comparisons and what you raise. the stable coin participates in markets and it reminds me of over the counter derivatives. decentralize finance is very much a retail institution. sen. tester: i want to go back to you professor allen. you were the one that stated if you have problems, there is no one to go to. is that correct? ms. goldstein: that is correct.
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sen. tester: i have to ask you. if i had a problem and i was using these products. who would i go to? or am i just out in the cold? ms. goldstein: i think it depends. if, in fact, the stable coin has an issuer that manages the reserve and financial problems, you could go to that stable coin issuer, but then, it highlights that these things are not as decentralized as anticipated, where intermediaries come into the system, and those intermediaries a prophet limits like any established intermediary. the democratizing finance will fall apart. if we are talking about a stable coin that is being operated in a truly decentralized fashion, where it is operating on a ledger where multiple nodes agreed to any change to operate,
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then that is something that could create incredible problems. who would you go to. would you be able to reach out if you need a transaction, for example because of mistakes made. sen. tester: thank you. ms. goldstein, you talked about the four objectives. what were the other three? ms. goldstein: it needs to be predictable, and you need to be able to exchange for goods and services. you mentioned fees. i forget what the second --. i had a fourth. sen. tester: you said it doesn't include fees because fees are high. does that meet the other fee -- three? ms. goldstein: it doesn't need to meet the fee requirement. it doesn't need to meet the predictability requirement and i don't forget meets the goods and
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service requirement properly. sen. tester: very quickly, what kind of fees are we talking about compared to what we see in the industry today? ms. goldstein: it depends on the exchange and if you are moving to fiat. if you start fiat and you move to stable coin, and you buy one on exchange because the department says they don't service this retail customer, you have to go to a federal change pretty put on the exchange, and it can be as high as $80 front to back or as low as six dollars. western union is about four dollars or five dollars. sen. tester: that is a flat fee, regardless? ms. goldstein: it is an accumulation prettier to take several steps throughout. sen. tester: thank you all. sen. brown: senator warner is on from his office. >> thank you, mr. chairman. i appreciate you holding this hearing. i am very concerned.
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i agree with the ranking member that there is a lot of things going on and we should not get rid of that, but i do feel concerned about the intel standpoint. a lot of this is being used for illegal and illicit purposes. we just had a major break in to a state legislative system in virginia. everything is frozen. ransomware has been been issued. my fear is that will be paid off in some level of bitcoin and append chili -- and append chili -- and potentially currency. i'll start with ms. goldstein, but i will probably talk to everybody. i understand that some legislature, and wi-fi, and the notion of creating different currency. gold has no impairment -- apparent value. if we make bitcoin or some other
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entity to have a value, it has some logic to me. but the idea of a private sector stable coin, where you have a dollar for dollar or liquid fragility with no leverage at all, how do you make any money off of this? i get it if you are facebook and you have a whole network effect and you become the default crypto wallet and that means you are collecting a lot more information, but i will start with you ms. goldstein. if they're making all these fees, but it's right -- they are ultimately going to get down to a frictionless transaction. how do you make money off of the flow to have a stable coin become a viable financial investment? ms. goldstein: that's a good question. i think that's why you see circle and their funding say they want to move to a circle decentralized finance and offer
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financial services that allow customers to access platforms like calm down with investor presentations about building. i also think they have a revenue sharing agreement with coin base , and they are making profits from coin base. i would direct the question to my colleague, but if it is just treasury and cash, i think i understand why the investment trail once services like circle decent place finance in the future. sen. warner: again, help me out here. they have to be paying a lot of fees. if you have no leverage at all, you have a one-for-one exchange, you're going to bring down the transaction costs. and you don't have a network effect the way facebook how do you make any money? >> that's a great question.
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i can't speak about any of my clients or particular projects. i think your observation is right. if we appropriately regulate stable coin issuers, they should be holding liquid assets to their stable coin regulations. they can provide payment services and other services adjacent to the issuance of the stable coin. the same kinds of payment services we see today, whether it is remittances or peer-to-peer transfers or other kinds of services. and perhaps charge fees for those services. >> again, paypal i don't believe argues it literally has a dollar backing every dollar that goes to the paypal transaction system. how are you going to make any money with the system you are claiming to head towards?
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>> as a general matter, we are in the process of going public as a company, so there's quite a lot of customer and market facing disclosure around the business' revenue model. paypal holds an account held in the interest of customers to execute transactions. so we have a similar business model and similar u.s. licensing platform. our current reserve structure is cash and short-term treasuries of 90 days or less. there's a nominal degree of interest rate sensitivity on that reserve composition. there's also a revenue model implied in terms of the minimum transaction fees for using circle accounts and other services. >> let me get to ms. allen. my time is up. if you want to add any comments. >>. briefly, no one is going to offer a service where there
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isn't a way to make money. we wanted to be a win-win. there's no reason to be skeptical when the actual moneymaking nature of the innovation is in fully disclosed. >> thank you, mr. chairman. >> senator warren from massachusetts is recognized for five minutes. >> thank you. unlike other cryptocurrencies like bitcoin, stable coins like tether are supposedly pegged to the dollar. the reason is to reassure people that stable coins are as stable as using the dollars from having your wallet or in your checking account. a stable coin dollar in other words will supposedly be worth a real dollar. that would make it a lot easier and a lot safer to trade among different tokens to put up collaterals for risky bets or even to pay for a cup of coffee at your local bodega. but i want to examine whether or
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not the stable coin talk matches the stable coin reality. miss goldstein, let's say that i own $10 worth of tether or usdc. if i want to trade my $10 worth of these tokens, mi guaranteed to get $10 back -- mi guaranteed to get $10 back? >> no, it is dependent on the exchange where your trading it. i cannot go to circle and say please redo my usdc and tether, no u.s. customer can redeem tether, so i have to traded on an exchange and sometimes it is a little above a dollar and sometimes it is a little below. we also don't really know necessarily what is backing all of these stable coins. >> i want to get into that. i promise. because i want to underscore this point, that if tether's tokens were actually backed 1-1,
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it would be one of the 50 largest banks in the country. but we know that it is not. and that is because according to tether's own report, only about 10% of the assets backing stable coin a real dollars in the bank. 90% is something else. not real dollars. if that worries you, there's a little more news on this one, the report that 10% of tether's stable coins are backed by dollars is not actually verified by a comprehensive audited financial statement or verified by any government regulator. so professor allen, let me ask you, let's say i'm not the only one who wants to redeem my $10 worth of tether or usdc for dollars. maybe there's bad news in the market and people rushed to cash in their stable coins. what would a run on the stable coin market look like?
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could it endanger our financial system? >> thank you for that question. a number of the witnesses today have said that stable coins don't engage in maturity transformation and therefore do not suffer this infertility is as bank deposits. that is probably true to some degree. a run on they stable coin would look a lot like the run that we have seen on money market mutual funds. in 2008 and again in 2020. it could also share dynamics that we seen in the past. they could seek to redeem or exchange their stable coin en masse. if they have direct retention rates, that would force the issuer to liquidate its reserve of assets. i don't think that would have systemic consequences. if stable coin holders are using them to speculate, the roads will be less likely, but it is a
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run -- if a run it occur now, the impact would be felt in the d5 system -- de-fi system. that is why we don't provide this government support for the system. >> 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 nosedive, precisely when people most need stability. that run on the bank mentality could ultimately crash our whole economy. but there's another piece of risk here. you are headed in that direction, professor allen. de-gi is the most -- de-fi is the most dangerous part of the crypto world. it is where the scammers and the swindlers mix among part-time investors and first-time crypto
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traders. should in de-fi -- they cannot even tell if they are dealing with a terrorist. in de-fi, people need stable coins to trade between different coins to trade derivatives, lend and borrow money, all outside the regulated banking system. without stable coins, de-fi comes to a halt. does -- does de-fi threatened our financial stability and cannot grow without stable coins? >> i don't think it can grow without stable coins. it is content to the fact that it won't impact financial stability but if it grows there is a real threat there. particularly if it becomes intertwined with our traditional financial system. there is interest in pursuing this integration in both traditional finance in the crypto side. -- and the crypto side. >> i appreciate it.
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it is a risk to traders, risk to act is before it all blows up. stable coins have no regulators, no independent auditors, nothing. they are propping up one of the shady estate -- shadiest parts of the crypto world, 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. thanks, mr. chairman. >> thank you, senator warren. senator smith from minnesota is recognized. >> thank you to our panelists for being here today. i want to ask about this -- if businesses transition to cashless models, some businesses could adopt stable coin or even crypto as an alternative or as the only method for a payment. i am trying to figure out what impact this can have on people, especially people of color who
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are so often left out of the financial system. according to a report by the fdic, approximately 7.1 million households -- in 2019. as we move to a cashless economy, what happens to people who are low-income or homeless or undocumented? how do they pay for things that they would need in a stable coin world? do stable coins actually give them more freedom and access? or does it become another barrier? could you help me answer this question? advocates for stable coins argue they provide access for small businesses and unbent people. what do you think about that argument and how exactly does stable core work for someone who doesn't have a checking or savings account? >> again, because stable coins are not widely accepted for goods and services, you need a bank. that only do you need a bank, you need an account at a crypto currency exchange in order to
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buy stable coins in the first place, at least a top to -- top two ones. there are not many financial inclusion benefits the stable quinn because it is using the rails of the existing baking system. it is a big if -- if we see mass adoption of stable coins as a way to accept things at the grocery store, to buy your groceries, i don't really see that -- because you need a bank and to currency exchange. >> thank you. professor allen. >> i agree with her comments. i just want to add something further, which is financial literacy is already huge problem for a lot of people. we see a lot of consumers -- with the move to crypto related financial services, what you are asking them is to understand computer code because disclosures don't always mess the code so investors in these areas tend to the code
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themselves. -- to go to the code themselves. it is unreasonable to expect people to except risks in this product by looking at the code. >> it's difficult enough for anybody to understand. i agree with you. let me ask you another question about this. we have course need to make sure that workers can rely on their pensions, that they have earned. this is something that chair brown and i have worked on. as stable coins and cryptocurrencies become more prominent in the financial system, it seems like 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, for 401(k) plans. professor allen, for workers or teachers who were thinking about their attornment accounts for pensions, what do you think is the right role or is there a role for stable coins in those plans? >> i don't think that there is a
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role for them there. i appreciate people are going through a really hard time right now to search for yield. this environment is in real pressure. it is very dangerous for people to gravitate towards highly volatile assets in that search for yield. particularly when we are talking about long-term investment liquor attornment, that is a recipe for disaster. >> would you elect to comment on that? >> i agree with professor allen. i don't know that there is a retirement investor that wants the volatility and insolvency risk of bitcoin. it gives you very little yield if any at all. >> thank you. we know that the stable coin market is worth about $130 billion. a lot of this growth has happened really fast in the last couple of years. i don't think regulators have kept up with this transition. the president's working group on
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financial markets released a report recently on stable coins, suggestions for congress, as well as banking regulatory agencies recommendations for what we should think about as we regulate stable coins. 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 de-fi and make sure there is not a gap between the protections that you receive as an investor in the equity market and the protections that you may receive as an investor in the crypto acid market. whether it's best execution or that the trades are not being manipulative or spoofed. we need to make sure we are narrowing the gap as much as possible, so that we can all enjoy the protections that we are used to seeing in the equity markets. >> thank you so much. i know i am out of time. i will yield back. thank you, mr. chairman.
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>> senator sinema is recognized from her office. i believe she is still getting on. she may be on the foreboding. i would like to hold for a moment -- on the floor voting. i would like to hold for a moment. ms. goldstein, is it true that cryptocurrency speculation on decentralized finance platforms wouldn't work without stable coins? >> yes, senator, i think that is right. or at least it would be a lot smaller. >> so could a company like circle create a stable coin that can be used for electronic payments, but couldn't be used to gamble? and cryptocurrencies like gode
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coins -- doge coins? >> you could design the system however you like in the 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 de--- -- de-fi markets. >> if it is offered by a company like meta, facebook, you have the potential to scale up quickly and it can be used for other services and you potentially have the monetary policy and financial civility issues, in the sense that the tech company would become too big to fail and essentially part of the government safety net. unless one of those companies moves into the space, though, i don't see stable coins becoming used for everyday goods and service payments. some kind of government support
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in the form of deposit insurance or the equivalent. if that does happen, these could then be used potentially for payments but also they would be used to a large extent in the de-fi ecosystem. that is going to be shadow banking 2.0, in terms of the government essentially having to bail out the financial system that operates outside the boundaries of what we normally regulate. >> thank you, professor allen. mr. disparte, when testifying in front of the circle, it is a payment flat form that could enable cheap international payments -- platform that could enable cheap international payments. on the website, circle highlights the de-fi particles
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are designed to work with the u.s. dollar quinn, the most used scorn. -- u.s. dollar coin, the most used coin. how does that actually help small businesses are the economy? >> thank you for the question. there is of course a wide range of use cases for any payment infrastructure, any payment innovation. in de-fi, the use of stable coins is a fundamental innovation but the end-users only got a dollar off from the economic use of the stable coin for any of these activities. >> thank you. after senator toomey, we will call on senator sinema, then we will likely adjourn. >> thank you, mr. chairman.
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i've had a little back-and-forth with the sec chairman. he has at times indicated that stable coins, at least some, may actually be securities. even if they lack an inherent expectation of profits. but he hasn't explained to me exactly what the criteria he is using, what legal tests, what makes a stable coin that has no expectation of profit a security. it seems to me that some expectation of a gain on the part of an investor is a fundamental -- is fundamentally at the heart of what we consider to be securities. i want to ask you, if there's a non-interest-bearing stable coin, most are not, intrinsically, and there's no specific petition of profits and really the value proposition is the utility, the reason people
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are interested in the stable coin, and such an example, do you think -- in such an example, do you think it meets our definition of what is a security and should be regulated as a security? >> thank you for the question. as you might imagine, every practitioner in this area is extremely well-versed in the tests. i won't bore you with the technical details. in short, in my view, a non-interest-bearing stable coin fully reserved and regulated, as many stable coin issuers are today, as many transmitters, those should not be viewed as securities. under existing law. >> thank you. mr. disparte, you made an interesting and important observation about how rapidly the space is evolving, how the capabilities are expanding, how speed and throughput are accelerating, and you made the
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analogy, back when the internet relied on dial-up modems, it is a little bit faster today, and i suspect the capabilities of these platforms to handle large motives of transactions is also going to group. 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 an example of a smart contract that would have a use case for an ordinary small business or consumer? >> absolutely. thank you for the question. i would argue the public infrastructure in this open source technology wave that is happening, many are likening it to a web 3, read write own, and has a lot of imprecation broadly for financial resilience and competitiveness. an example of a smart contract
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innovation could be something really important and close to home for me, coming from the insurance world -- one of the most elusive aspects of the insurance world is this concept of a parametric claim. a homeowners policy that can liquidate a claim based on a geo-referenced, where the disaster took place, and there's no equivocation that it was a total loss would be a game changer. the absence of being able to do that at scale and quickly and in real-time is partly solved for by a trusted dollar digital currency like usdc, but also partly solved for what the cabability is of a smart contract. you start to see some block chain based innovations taking place in that domain and the insurance domain, but an open internet dollar functionality becomes one of the only missing links to enable that at scale. other examples are opportunities around a zero default loan, effectively programmable money enables you to execute even micro-payments. whereby today's standards, it often costs more than the sum of the money sent.
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the ability to execute micro-payments, i use an example in my written testimony that a journalist be able to accrue a penny by every lie, it is not possible to execute that penny to the generalist, so the freelancer is effectively a starving artist or a starving journalist, starving artist. use cases are enabled by this, cross-border payments, being able to have sanctions compliance, money movement for example, corruption and bribery and fraud internationally and in a humanitarian context, money is the honey pot, especially physical money because of the opacity. block chain payments because of the chance parents he, their speed and -- because of their chance paren see, their speed -- because of their transparency, there speed. i think we are in the opening innings. when people say we have failed the financial inclusion test, the presumption is the stable coin has agencies such as the
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dollar and both are patently wrong. >> thank you, senator. senator sinema his recognized from her office. >> i want to thank our witnesses for being here today. i cochaired the senate financial innovation caucus, alongside my friend, the senator from wyoming. stable coins are cryptocurrencies that are pegged to other internal reference assets, like a fiat currency, another virtual currency commodity, or accommodation of these assets. it is important for companies to consider the regulatory up locations of this trend and the innovations happening in this ecosystem. it is great to meet you to discuss this topic. how can he or she know for sure that it's truly backed by the assets that the issuer claims?
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>> thank you for the question. today in the u.s., stable coin issuers are regulated by the states in which they offer their services and are located. this is regulation under state licensing regimes. which exist in every state but one. in addition, they are regulated for financial crimes purposes, by fincen, as money services businesses. it is primarily the state regulators that are responsible for oversight and supervision of many transmitters, including stable coin issuers, so we would look to the state regulators to ensure that the stable coin issuers, like other payment service providers, are living up to their promises. >> thank you.
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currently, stable coin issuers are generally subject to state-level money trans better laws. do these state laws require particular disclosing of how the stable coin is backed? >> that's a great question. these laws generally require stable coin issuers, like other payment providers, to maintain what are called eligible assets to back their obligations to customers. they are also required to provide financial reports to the regulators and any disclosures that they make about how they hold assets. >> i see. in the event stable coin is not truly backed, is there a risk that the issuer may not be able to provide the cash? what bigger problems could that because in the long term? >> it is a great question. i think the short answer is yes. that can certainly be a problem.
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that is one reason why i support common sense strong regulation of stable coin issuers. the states are currently largely respond for that regulation. in my view, a federal option could also be explored, to achieve the same goals. >> thank you. with $10,000 and a run on the issuer, how much of the $10,000 would be lost if the backing of the coin is not credible? >> i think these are really important questions to think about as we think about how to regulate stable coins. i'm going to give you a lawyerly answer, which is, it depends on the assets that are available, in bankruptcy, to redeem out the stable coin holders, if the issuer goes into bankruptcy. in general, how much money is left with the stable coin holder that is available for the stable coin holders to get in that kind of situation. >> thank you.
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this is an important issue for which consumers and investors deserve a clear answer. at the same time, we should not assume that overlaying every law is a correct thing here. i would love to hear from the others on my last question. can you highlight the key differences, good and bad, that policymakers should continue in thinking about regulation of stable coin issuers? >> think you for the question. -- >> -- >> thank you for the question. it is important to protect consumers and to protect the financial system. but at its core, the most important thing is to make sure that the regulations for the activity. stable coin issuance is different from traditional banking and therefore in my view does not make sense to overly the same regulations that we have with the traditional banks
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on top of stable quinn issuers. -- stable coin issuers. >> i will add quickly that i think that stable coin issuers in particular, when they go to raise funds were issued new tokens, we have this uneven playing field. . there are loser standards -- there are looser standards for fundraising. versus a former suitable company raising money. that is like having a triathlon and asking 10 of -- asking 10% of the participants to skip the win. i don't think we should be advantaging one industry over another when it comes to fundraising from the public markets. >> thank you for the hearing. i really appreciate the time today. i think our witnesses for appearing. >> thank you, senator. senator cramer is not on. this has been an important and eye-opening discussion.
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we have failed to pay attention to these issues in the past until it is too late. they devastated workers and families into many cases -- and to many cases have been devastating in this country. we will continue to keep a close eye on stable coins and cryptocurrencies to ensure the economic recovery that we have worked so hard to rebuild is not destroyed by other crisis. for senators who wish to submit questions for the record, the questions are due one week to today -- one week from today. witnesses will have 30 to 45 days to respond to any questions. thank you to the four of you. the committee is adjourned. [captions copyright national cable satellite corp. 2020] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org]
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announcer: the reagan national defense forum hosted a discussion on u.s. military alliances, global security, and defense spending. watch tonight at 8 p.m. eastern on c-span come online at c-span.org, or watch full coverage on c-span now, our new video app. ♪ announcer: c-span is your unfiltered view of government. funded by these television companies and more, including cox. >> cox is committed to providing eligible families access to affordable internet. bridging the digital divide one connected and engaged student at a time. cox, bringing us closer. announcer: cox supports c-span as a public service, along with these other television providers, giving you a front row seat to democracy. ♪
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announcer: president biden gave the commencement address at south carolina state university in orangeburg. he is introduced by the house, jim clyburn, who is a 19 621 graduate of the university. this is about half an hour. >> i am told that the proper way to introduce the president of the united states is by simply saying, ladies and gentlemen, the president of the united states. [cheering and applause] [laughter]

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