Stablecoins and the role of Congress in addressing future digital assets legislation took center stage

The Wednesday hearing, framed as the jumping-off point for further Congressional action on digital asset regulations, was the first hosted by the banking committee's new digital assets subcommittee and chaired by Wyoming Republican Cynthia Lummis, a longtime crypto proponent.

The role of stablecoins and Congress in addressing future digital assets legislation was at the forefront of discussion at one of the Senate Banking Committee's first hearings to focus on what a regulatory framework for crypto may look like.

The Wednesday morning hearing, billed as the jumping-off point for further Congressional action on digital asset regulations, was the first hosted by the banking committee's new digital assets subcommittee and saw the return of former CFTC Chair Timothy Massad, a frequent contributor to the panel's thoughts on digital assets. It was also the first time the subcommittee convened since launching its bipartisan effort to draft legislation from scratch.

The digital assets subcommittee is chaired by Wyoming Republican Cynthia Lummis, a longtime crypto proponent who has been working with New York Democrat Kirsten Gillibrand to draft a draft crypto legislation that would serve as a natural counterpart to the House's Financial Innovation and Technology for the 21st Century Act, which is being drafted by Utah Republican Steve Chaffetz and California Democrat Maxine Waters.

Stablecoins will be first on the committee's agenda, Lummis said in her opening remarks, and she is planning to introduce a bipartisan bill on the topic in the coming weeks. This statement follows remarks from both White House Crypto and AI Czar David Sacks and South Carolina Republican Tim Scott, who chairs the overall Senate Banking Committee, about the pressing need for Congress to act swiftly in establishing a clear regulatory framework for stablecoins.

However, Massad suggested that the panel should focus on completing legislation for stablecoins and then defer any efforts on market structure for several years to allow time for the existing regulatory initiatives to take effect.

"For four years, the crypto industry has called on the SEC and CFTC to develop rules and guidance and to stop regulating by enforcement; that is now happening," Massad said.

He noted that the SEC has dropped several enforcement cases and launched a crypto task force to specifically address these issues.

"We should let these regulatory issue initiatives make progress before rushing to rewrite the securities law, which will itself spark lengthy litigation and delay the day when there is effective regulation in place."

Existing proposals to update market structure regulations to address crypto have the potential to create more confusion than clarity, especially with terms like "digital asset" being used in a broad sense to encompass a vast category of instruments, which could ultimately diminish the impact of the legislation.

Another critical aspect is how the legislation will define which administrative agency will be responsible for registering and regulating various types of digital assets. This is a significant factor that could influence the scope and stringency of regulations.

Furthermore, these proposals could have the effect of undermining existing securities laws, especially if they include provisions for Decentralized Finance (DeFi), which are described by its proponents as a new paradigm for financial services that is decentralized, open, and accessible to all.

"That term is used to describe a lot of things that aren's decentralized; there are almost always some leaver of control," Massad said. "And even if a process is decentralized or automated, that does not mean it should be exempt from regulation."

Virginia Democrat Mark Warner raised the question of Know Your Customer (KYC) processes in the context of stablecoin users. He pointed out that while an issuer may carry out KYC, a stablecoin could be transferred between wallets without those intermediate transfers being subject to KYC.

"I want to get to a regulatory framework that works, but I have seen — and I can't say more because it is classified and I don't want to get in trouble with the intelligence community — but oh my gosh, a whole bunch of bad stuff is moving in new technologies and crypto," Warner said.

"So help me figure out, and I recognize for some people, the anonymity and and the disintermediation role the blockchain plays, but how do we put some minimum protections from issuer all the way back to conversion to fiat?" he asked the panel.

Lightspark co-founder and Chief Legal Officer Jai Massari responded that while self-custodied wallets don't conduct KYC, "there is an immutable on-chain record of those transactions that can be monitored, not only by the issuer, but third parties, including law enforcement."

She added that mixers and other tools can obfuscate transactions, but custodial wallets still conduct KYC at the end of a chain of transfers.

"I agree that we need to continue, as the industry has done, to develop new tools to address these issues," Massari said.