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| Examining the intersection of cryptocurrency and government By Nikhilesh De Managing Editor, Global Policy & Regulation February 8, 2022 If you were forwarded this newsletter and would like to receive it, sign up here. Supported by
Hey folks,
Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De.
Stablecoins seem to be the vector by which the U.S. will implement regulations on cryptocurrencies directly. A hearing in the House of Representatives today will bring this potentially one step closer to reality.
—Nik
Talking stablecoins The narrative The House Financial Services Committee, after holding a substantive discussion on crypto regulation broadly in December, is turning its attention to stablecoins specifically. The committee will discuss last year’s President’s Working Group report on stablecoins with one of the report’s authors, homing in on the recommendations and how they might be implemented. Why it matters Today’s hearing might bring us another step closer to legislation on digital assets. And as has been hinted more and more over the past year, this legislation might focus on stablecoins. Breaking it down The House Financial Services Committee will host a hearing on stablecoins at 10:00 a.m. Eastern time today, focusing on a report by the President’s Working Group for Financial Markets that recommends lawmakers pass a law to treat stablecoin issuers as regulated bank-like institutions.
As of press time, the sole witness will be Nellie Liang, under secretary for domestic finance at the Treasury Department, who worked on the report.
Liang told CoinDesk in November the current regulatory framework in place does not address the potential risks posed by stablecoins, hence the report’s recommendation that Congress pass a law specifically addressing stablecoin regulation.
She reiterated her views in prepared testimony published Monday night, outlining the risks and recommendations identified in the report.
The report, published Nov. 1, 2021, recommended Congress require that stablecoins and payment stablecoin arrangements be under the jurisdiction of a federal prudential framework, such as by treating stablecoin issuers like insured depository institutions.
It also recommended that unregulated entities be barred from issuing stablecoins
“We focused on prudential risks,” Liang said last year. “We mean the risk that investors could run on a stablecoin, if they were to lose confidence in the reserve assets that are backing the stablecoin … there could be risks to the payment system because of disruption in stablecoins in how they're stored or transferred.”
Indeed, a hearing memo published Thursday night references last year’s iron titanium token run. This past June, investors sold the TITAN token en masse after concerns that it had no real liquidity. The TITAN token was part of the collateral for the IRON stablecoin. The run on TITAN led to IRON losing its peg to the U.S. dollar, falling below 70 cents within hours.
IRON did not regain its peg until September, according to CoinMarketCap.
Possible legislation One member of the committee, Rep. Josh Gottheimer (D-N.J.), has begun circulating a draft discussion bill that would enact some of the recommendations from the report ahead of Tuesday’s hearing, according to Politico.
“The committee's going to be active this year on this,” he told the news outlet. “I'm hearing there's a lot of interest."
According to the draft bill, any nonbank stablecoin issuers would have to ensure their circulating stablecoins are fully backed by reserves, and some issuers may be required to maintain more than 100% of their supply in reserves if the Treasury secretary orders it.
These reserves can only be held in U.S. dollars or securities issued by the federal government, unless the secretary allows for another reserve asset.
Moreover, these assets would have to be kept in insured accounts at a depository institution.
In suggesting these requirements, the draft bill would appear to go beyond the report’s recommendations. While the report does recommend that any legislation create a framework for federal oversight of stablecoin issuers, limited issuance and “maintenance of reserve assets,” and ensure that any framework include provisions to oversee stablecoin transactions and end users as well as issuers, the report did not mention a specific reserve requirement.
The report did specify that a federal supervisor be appointed.
Spokespeople for Gottheimer did not return requests for comment.
Ron Hammond, the director of government relations at the Blockchain Association, an industry lobbying group, tweeted that Gottheimer is not alone in how he sees the report's recommendations.
However, at the moment the bill is not being introduced by the committee itself, and is not expected to be proposed during the hearing.
The committee memo published to frame the hearing outlined the different factors under consideration today: namely, the possible risks posed by stablecoins and the regulatory gaps into which they might fall.
PolyTrade is a DeFi stable coin lending protocol that helps small and medium size businesses in developing economies meet their working capital needs by tokenizing real-world invoices and bringing them on-chain into the DeFi space. Built on the Polygon ecosystem, PolyTrade is the first-ever bridge between DeFi and TradeFi, with an objective to accelerate the transition to a digital, modern and interconnected ecosystem. It leverages new models to achieve inclusivity while closing SMEs’ funding gaps and simplifying processes that inhibit the trade industry’s progression. “The trade industry is facing a $1.7+ trillion gap in trade finance availability exacerbated by the impact of the COVID-19 pandemic”, says Piyush Gupta, CEO PolyTrade. He further adds, “PolyTrade’s protocol would enable smart receivables financing connecting buyers, suppliers, insurance service providers and investors on a unique platform. While unleashing the locked-in liquidity within stagnant invoices, Polytrade is enabling SMEs to improve their working capital management.
The Biden Bunch Changing of the guard Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated) Fun fact: Fed Reserve Chair Jerome Powell’s first term expired, but he hasn’t yet been confirmed to his second term. As a result, he’s now Chair Pro Tempore, essentially acting chair until the Senate decides to vote on his renomination heading up the U.S. central bank.
Elsewhere Of Course It’s OK to Out the BAYC Founders: I think this is a solid take by my colleague Will Gottsegen on this weekend’s Bored Ape Yacht Club news. In brief: Buzzfeed News reporter Katie Notopoulos identified the pseudonymous founders behind Yuga Labs, the business entity that launched the BAYC NFTs. Will argues that Yuga is just like any other massive firm (it might have a $5 billion valuation) and so identifying its founders is fair play. Plus, all it took was a search of publicly available Delaware corporate records. Tesla Records $101M Impairment Loss on Bitcoin Holdings for 2021: FASB accounting standards strike again. Tesla recorded a fairly massive loss because the value of the bitcoin it hasn’t sold dropped in value after the electric automaker put the digital asset on its balance sheet. Tesla has not yet sold the bitcoin. Should the value of the bitcoin rise, Tesla cannot report the unrealized gain. I wrote about this like a year ago and whaddya know.
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Beyond CoinDesk (The Verge) “It’s pronounced ‘neft,’” says The Verge’s Corin Faife. (The New York Times) The Times took a look at the U.S.’ sanctions regime and how it might be used to cut Russia off from the global financial system should it invade Ukraine. It starts with the Society for Worldwide Interbank Financial Telecommunications – aka Swift – the infrastructure underpinning global financial firms. (The New York Times) The IRS will stop using a facial recognition platform to ID taxpayers, the Times reports. Last week, Business Insider reported the IRS was working with ID.me, a startup that would have had users upload photo IDs, selfies and Social Security numbers to identify themselves. It would then “infer citizenship.” This naturally worried people concerned with what ID.me would do with that information. At the moment, it looks like this partnership is off. Sen. Ron Wyden (D-Ore.), who championed changing the infrastructure bill’s crypto provision last year, called today’s news “big.” (ProFootballTalk) This doesn’t have anything to do with crypto, and it’s like the most minor of NFL scandals from last week, but as a long-time fan of the New England Patriots I want to just take a moment to say VINDICATION!! Deflategate was a sham and turns out the NFL knew it. I just hope the league has a harder time covering up its apparent lack of coaching diversity or the Washington Commanders’ alleged egregious harassment of its employees.
Today’s Tweet
If you’ve got thoughts or questions on what I should discuss next week, or any other feedback you’d like to share, feel free to email me or find me on Twitter.
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See y’all next week!
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