Autor Cointelegraph By Turner Wright

The Senate Committee on Banking, Housing and Urban Affairs heard from several expert witnesses with knowledge of stablecoins who urged lawmakers to establish a clear regulatory framework but could not seem to agree on where lines would be drawn.In a Tuesday hearing on “Stablecoins: How do They Work, How Are They Used, and What Are Their Risks?” Hilary Allen, a professor at the American University Washington College of Law, Alexis Goldstein, director of financial policy at Open Markets, Jai Massari, partner at Davis Polk & Wardwell, and Dante Disparte, chief strategy officer and head of global policy at Circle, addressed U.S. senators regarding some of the risks stablecoins may pose to the U.S. financial system and how lawmakers could handle regulating the space. Goldstein’s written testimony included her views that decentralized finance, or DeFi, projects were “largely out of compliance” with checks on Know Your Customer, Anti-Money Laundering, Countering the Financing of Terrorism, and current U.S. sanctions. She said that because there were “virtually no KYC/AML checks in DeFi applications,” stablecoins like the Pax Dollar (USDP) could be used to convert ransomware payments from one cryptocurrency to another.Alexis Goldstein addressing the Senate Banking Committee on TuesdayMassari added that U.S. lawmakers could consider having stablecoin issuers operate under a federal charter rather than potentially requiring them to be insured depository institutions, like banks. According to Massari, having a stablecoin issuer regulated similarly to an FDIC-insured bank is “unworkable” and “unnecessary.” She said the firms are already capable of limiting the risk of their stablecoin reserves to be “short-term, liquid assets, and requiring the market value of those reserves to be no less than the par value of stablecoins outstanding.” “A new and well-designed federal charter could accommodate a business model premised on the issuance of stablecoins fully backed by short-term, liquid assets and the provision of related payments services,” said Massari. “This charter could impose requirements for reserve asset composition while tailoring leverage ratios or risk-based capital requirements and other requirements to the nature of the business model. And it could restrict the stablecoin issuer from engaging in riskier activities, to minimize other claims on reserve assets.”In contrast, Disparte — the only witness directly appearing with a direct connection to a stablecoin issuer — used part of his written testimony to highlight use cases around digital assets, including empowering women and minority entrepreneurs and delivering aid. While he did hint that a change in approach to regulation might be necessary for stablecoins, the priority for lawmakers should be to “do no harm” and encourage innovation.“I argue that we are winning [the digital currency] race because of the sum of free-market activity taking place inside the U.S. regulatory perimeter with digital currencies and blockchain-based financial services,” said Disparte. “The sum of these activities are advancing broad U.S. economic competitiveness and national security interests.”Related: ‘DeFi is the most dangerous part of the crypto world,’ says Senator Elizabeth WarrenNot every witness who appeared in front of the committee seemed to be so optimistic. Allen said stablecoins could pose a “real threat to financial stability” in the United States. In her opinion, the asset class could eventually grow to the point at which it could displace enough U.S. dollars to limit the Federal Reserve’s ability to respond to inflation.“Private sector institutions — who have no mandate to serve the public interest — will have usurped control over the money supply, undermining central banks’ ability to rein in inflation or address deflation,” said Allen. “This is yet another reason to avoid policies that encourage the growth of stablecoins.”