(Bloomberg) — Technology companies that aren’t licensed as banks shouldn’t offer crypto stablecoins, according to U.S. Treasury Undersecretary for Domestic Finance Nellie Liang.
Liang told lawmakers on the House Financial Services Committee that firms issuing the tokens to let people pay for goods and services should face the heightened scrutiny that lenders receive under U.S. rules. Her comments come after Meta Platforms Inc.’s Facebook last month abandoned plans for a stablecoin project that drew fierce opposition from Washington.
Concerns that stablecoins are insufficiently regulated have proliferated since 2019 when U.S. regulators expressed unease over Facebook’s plans to establish one that could have been used by billions of the company’s social-media users. On Tuesday, Liang said there was an “urgent” need for Congress to pass legislation focused on the fast-growing corner of crypto.
“This is an urgent issue given the rapid growth of this market,” Liang said in an interview before the hearing. In testimony she said the market value for the assets has exploded to about $175 billion from roughly $5 billion at the start of 2020.
Stablecoins are a form of digital currency typically pegged to the U.S. dollar or other fiat currency.
The call for congressional action by Liang follows a report last year from a group of top U.S. regulators known as the President’s Working Group on Financial Markets that called for stablecoins to be regulated more like banks.
Treasury has been in touch with congressional offices and a number are working on proposals, according to Liang. Senator Pat Toomey of Pennsylvania, the top Republican on the Senate Banking Committee, has released a blueprint for future legislation. Still, it’s unclear if Republicans, like Toomey, and Democrats will be able to find enough common ground to advance a bill anytime soon.
Maxine Waters, who chairs the committee, said her panel will continue to study stablecoins and the potential risks they pose to the U.S. financial system and investors. “Regulators and policymakers must work to ensure that any innovation in this space is responsible–that it provides robust consumer and investor protection, that it mitigates environmental impact, and that financial inclusion is front and center,” said Waters.
Meanwhile, Patrick McHenry, the top Republican on the committee, said policy makers should focus on the possible benefits of stablecoins, not just the risks. He also pushed back against the notion that issuers should be banks. That would be a “major obstacle” to fostering innovation in this emerging space, he said.
During the Tuesday hearing, Liang said it’s unlikely that U.S. regulators would preempt congressional action by designating stablecoin issuers as systemically important financial institutions, a tag that would saddle them with a range of onerous new requirements. Such a designation by the Financial Stability Oversight Council, which includes Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and Securities and Exchange Commission Chair Gary Gensler, would mark the firms as posing a serious risk to the economy.
“In the current environment, I don’t see that FSOC would take such actions,” she said.
Prior to the hearing, Liang told Bloomberg that legislation and regulatory clarity is needed for the industry to flourish and for investors to be adequately protected.
“We hurt both innovation and we increase risks if legislation is not passed,” Liang said. The regulators’ report last year said that despite the concerns, stablecoins have the potential to make payments cheaper and faster.
Regulators currently don’t have the authority to address all of the risks, so Congress needs to step in to close the “regulatory gaps,” she said.
Liang said she anticipates the White House will offer more details on an administration-wide strategy for digital assets in a few weeks. Bloomberg previously reported that the Biden administration is preparing to take a more central role in overseeing cryptocurrencies, aiming to release an executive order as soon as this month.
That broader effort will expand beyond financial stability — a main focus of the stablecoin report — to examine issues such as the use of tokens in illicit finance, financial inclusion, and the importance of U.S. leadership in the global financial system, Liang said.
(Updates with Liang comments on the possibility of FSOC designation in 10th and 11th paragraphs.)
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