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(Kitco News) -
Jeremy Allaire, CEO of stablecoin issuer Circle, published the opening remarks he prepared ahead of Tuesday’s House Financial Services Committee hearing on stablecoin regulation. He used the opportunity to link the fate of stablecoins like Circle’s USDC with the global dominance of the U.S. dollar itself, and to recommend the banning and criminalization of his offshore rivals.
“All eyes are on the US dollar, and the steps that the US government takes in the coming years will have a significant impact on dollar competitiveness in the decades that follow,” Allaire said. “Failing to take the appropriate steps could have devastating consequences for our country.”
Committee Chairman Patrick McHenry published an updated draft of the proposed stablecoin legislation bill on June 8. The latest draft is significantly shorter than the previous version, and it taps the “Board of Governors of the Federal Reserve System” to be the primary regulator and author of the requirements for qualified stablecoin issuers. In addition, the bill gives the Fed new powers to intervene against state-regulated issuers in emergency situations.
The new draft also removes the section in the earlier version that called for research into a possible central bank digital currency (CBDC) or ‘digital dollar’, which has been receiving considerable pushback from legislators and industry. The draft leaves stablecoin reserve requirements and consumer protection rules essentially unchanged, and also maintains the two-year moratorium on so-called ‘algorithmic’ stablecoins.
“The demand for safe and secure dollars on the internet is real and growing,” Allaire wrote in his remarks. “With the right regulatory framework, stablecoins and blockchain networks could scale to support billions of users and tens of trillions of dollars in payment activity. Indeed, advancements in blockchains are accelerating, and Web3 technology is widely viewed as strategic infrastructure for the future of the internet.”
Allaire said that what’s at stake in the digital currency competition is the U.S. dollar’s preeminence among the world’s currencies. “Rapidly evolving geo-economic and geo-political blocs are putting enormous pressure on the post-WWII dollar-based global financial system,” he said. “The dollar’s share in global foreign reserves has been declining by about one percentage point every year on average for the past 8 years.”
He highlighted China as a major threat to the USD, saying that it already has “its own state-controlled digital yuan, complete with embedded surveillance,” and that China intends “to compete with and erode the dominance of the dollar” in the coming years.
“We need to ensure that the dollar is the most competitive currency on the internet, and that there can be universal access to the safest and most secure digital dollars possible,” he said. “Digital dollars should freely and widely circulate on the internet for all lawful uses.”
Allaire said that in order for this to happen, these digital dollars must be backed by the safest possible assets. “Full reserve money, backed by the highest quality liquid assets, and without embedded investment and lending risk, can provide the world with the safety and assurance needed to transact and exchange value without fears of bank runs or credit defaults,” he said.
Allaire called the stablecoin bill “a crucial piece of legislation that should be the first step in creating a regulatory framework that builds the conditions for a vibrant and safe digital assets market,” but added that it will also have “significant ramifications that go far beyond the digital assets market to the global role of the US dollar.”
He listed some of the key strengths of the latest draft including “robust bank-grade supervision and risk management of stablecoin issuers, strict requirements on the assets that can be held to back digital dollars, redemption and custody requirements that protect consumers, and strong transparency, audit and reporting requirements.”
He also lauded the bill for including “measures to bar the circulation of counterfeit digital dollars by issuers that operate offshore and that do not play by US rules” and for enshrining roles for “both state and federal regulators in supervising issuers.”
Allaire went on to list four unresolved issues which he wanted to address. “The first is the respective roles state and federal banking regulators should play,” he said. “We need nationally-established standards that set a high bar for both state and federally-licensed issuers. Those standards should be enforced by federal regulators where appropriate.”
The second issue is reserves. Allaire said that he agrees with the requirement that “stablecoins be backed 1:1 by liquid, dollar-denominated assets,” but said the bill still “deprives payment stablecoin issuers of the ability to hold even a small portion of their cash assets at the Federal Reserve” which exposes them to the risks inherent in fractional-reserve banking.
“The appropriate solution is to afford payment stablecoin issuers tailored and limited rights for accessing basic Federal Reserve account services,” he said. “This would facilitate more timely satisfaction of redemption requirements, enhance financial stability, and protect consumers without providing access to the discount window or other financing programs afforded only to banks.”
The third issue related to how financial institutions should be required to hold stablecoins. “Both the history and precedence for cash custody under US banking law, as well as the harsh lessons learned in 2022 from the waves of digital asset exchange and brokerage failures teach us that we need stronger consumer protections around the custody of digital dollars and other digital assets,” he said.
Allaire suggested including a requirement “that any company acting as a financial intermediary for payment stablecoins be required to hold those stablecoins with either a state or federally chartered qualified custodian, including trust banks.”
His final recommendation was that offshore issuers like Tether, the company behind the market-dominant USDT stablecoin and Circle’s biggest competitor, be banned and even criminalized.
“Today, the internet is plagued with dollar stablecoins that purport to be dollars, but where the operators are opaque, the risk management and financial integrity uncertain, and in some cases where the stablecoins are specifically designed to be resistant to US national interests and law,” he said. “At best, these so-called stablecoins are counterfeiting the dollar, at worst, they are actively undermining US national interests and security.
Allaire said that in the same way that the stablecoin bill mandates criminal penalties for U.S. stablecoin issuers who violate its provisions, “the bill should impose criminal penalties on stablecoin firms that knowingly issue false digital dollars into the US, to US persons, or around the world.” He added civil penalties alone “are woefully insufficient to dissuade those who will have tremendous economic incentives to flout US law and undermine the dollar’s credibility at home and abroad.”
“Delivering a bill to President Biden’s desk should be a national priority,” he said. “The time has come for the United States to lead the development of global rules that will determine how our own currency moves around the world.”
In addition to the Circle CEO, the committee will get input from Ava Labs founder and CEO Emin Gün Sirer and Thomas Sexton III, President and CEO of the National Futures Association, as well as Steptoe & Johnson LLP partner Coy Garrison, formerly counsel to SEC Commissioner Hester Peirce, who has been a vocal critic of the enforcement actions of her own agency and has often come out forcefully and publicly against the positions of SEC chair Gary Gensler.
