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The U.S. Senate’s new digital assets subcommittee held its first-ever hearing on stablecoin and market structure legislation, while the CEO of the market-leading stablecoin believes his competitors are plotting a murder.
- Kill Tether (Vol. 1—Everybody wants a stablecoin)
- Kill Tether (Vol. 2—Tether finds another friend in Trump’s inner circle)
- Hearing witness praises subcommittee chair’s “overly simplistic” plan
- Stablecoin reserve rules “anti-competitive”
- Goldilocks enters the subcommittee
- Getting Tether ‘back’ to the U.S.
- Trump memecoin called ‘black eye for crypto’
- No libertarians in a foxhole
Wednesday saw the Senate Banking Committee’s new digital asset subcommittee hold its first hearing on Exploring Bipartisan Legislative Frameworks for Digital Assets. The Senate is currently contemplating several legislative proposals addressing digital assets, including a planned market structure bill similar to last year’s FIT21. But the immediate focus is squarely on stablecoins.
In the Senate, there’s the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act introduced by Sen. Bill Hagerty (R-TN). There are two stablecoin bills in the House, the GOP-led Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act, and the ‘bipartisan’ discussion draft introduced last week by Rep. Maxine Waters (D-CA) based on work she and now-retired Rep. Patrick McHenry (R-NC) did in the last Congress.
We’ll get to the hearing in a moment, but we first want to focus on some interesting chatter that emerged in the days before the Senate hearing. On February 24, Vance Spencer, co-founder of crypto-friendly venture capital group Framework Ventures, tweeted a claim that the “soon-to-be revealed stablecoin markup apparently has requirements to shut off access to the [U.S. Treasury bill] market to centralized international stablecoin issuers.”
Spencer called this alleged plan “a blatant attempt at regulatory capture by U.S. players done at the expense of U.S. national interest … The largest stablecoins today are built overseas, and the largest source of demand is overseas … The future of stablecoins can be U.S. dollar based only if we allow a broader competitive set of stablecoin issuers to flourish and deny gatekeeping/gaslighting by those interested in regulatory capture[.]”
It’s no secret that the stablecoin bills currently up for discussion appear intended to favor U.S.-based Circle—issuer of the USDC stablecoin via a partnership with the Coinbase (NASDAQ: COIN) digital asset exchange—at the expense of USDT, the highly controversial market-leading stablecoin issued by Tether.
The day before the hearing, Bloomberg quoted Circle CEO Jeremy Allaire saying stablecoin legislation “is the first priority” of President Donald Trump’s administration. But Allaire claimed that there” shouldn’t be a free pass” for stable issuers who “just ignore the U.S. law and go do whatever the hell you want wherever and sell into the United States.” Issuers looking to offer dollar-denominated stables in America “should need to register in the U.S. just like we have to go register everywhere else.”
Coinbase CEO Brian Armstrong recently stated a goal of making USDC the “number one dollar stablecoin” while suggesting that Coinbase would delist USDT should the U.S. approve regulations with which Tether is unable to comply. Coinbase and other exchanges have already delisted USDT in Europe to comply with the EU’s Markets in Crypto-Assets (MiCA) regulations.
Circle/Coinbase aren’t the only ones targeting Tether’s dominance. On February 25, Bloomberg quoted PayPal (NASDAQ: PYPL) execs saying they’re looking to expand merchant usage of PYUSD, the dollar-denominated stablecoin the company launched in August 2023.
PYUSD currently claims a market cap of just $700 million, down from $1 billion shortly after its launch, but the company hopes to reverse that slide in part by making PYUSD available through Hyperwallet, the platform that PayPal acquired in 2018. Hyperwallet focuses on payments for “marketplace sales, commissions, insurance settlements, charities, clinical study reimbursements, airlines, and employee benefits.” The plan is for Hyperwallet to begin offering a PYUSD option by mid-year.
It’s not just crypto operators horning in on Tether’s action, as Bank of America (BoA) CEO Brian Moynihan said this week that his firm might issue its own dollar-denominated tokens linked to dollar deposit accounts. According to Moynihan, “if they make that legal, we will go into that business,” although “what it’s useful for is going to be interesting.” (We’ll say.)
And don’t expect BoA to be a banking-stable outlier for long. Earlier this month, Federal Reserve Governor Christopher Waller said, “a U.S. regulatory and supervisory framework … should allow both non-banks and banks to issue regulated stablecoins.”
Tether finds more friends in Trump’s inner circle
While Waters has been emphatic in her desire to keep Tether out of a U.S. regulated stablecoin market, all the bills currently circulating would impose conditions that Tether has steadfastly avoided complying with to date. These include submitting their reserve assets to an independent third-party audit and maintaining those reserves in cash or T-bills, rather than Tether’s mix of T-bills, gold bricks, BTC tokens, and questionable loans to parties unknown.
In response to Spencer’s tweet, Tether CEO Paolo Ardoino tweeted that his competitors’ “real intent is ‘Kill Tether’. Every single business or political meeting that they have culminates with this intent.” Ardoino claimed that “Tether won’t stand still and we won’t let these attacks succeed,” adding that “we have many friends in the process.”
Indeed. Last week, we learned that Tether representatives have been “working with U.S. lawmakers” on how stablecoins are regulated, with STABLE Act co-author Rep. Bryan Steil (R-WI) confirming that Tether has been “engaging on” the bill.
Tether also has a friend in U.S. Commerce Secretary Howard Lutnick, founder of Wall Street firm Cantor Fitzgerald (NASDAQ: ZCFITX). Lutnick claims Cantor custodies Tether’s over $100 billion in T-bills and recently confirmed that Cantor holds a “convertible bond” reportedly worth around ~5% of Tether. Last December, the Wall Street Journal (WSJ) reported on claims by Tether founder Giancarlo Devasini that Lutnick had promised to “defuse threats” to Tether from U.S. authorities.
Tether now appears to have befriended yet another influential government insider in the form of Richard Grenell, Trump’s new presidential envoy for special missions. Grenell is a longtime Trump ally, having served as U.S. Ambassador to Germany and acting Director of National Intelligence during Trump’s first term.
Responding to Spencer’s tweet, Grenell tweeted his view that there was “a disturbing trend in crypto where the same players who once backed far-left candidates & policies—the very people behind Operation Chokepoint 2.0—are now manipulating the system again to eliminate competition. This is not only the wrong path for the US but also completely at odds with [the Make America Great Again movement].”
Electric Capital co-founder Avichal Garg tried to defuse the brewing brouhaha by claiming that the goal of those drafting the stablecoin legislation was “not to shut out foreign buyers of treasuries. The goal is to prevent foreign issuers that have low standards for backing collateral from claiming to be safe/secure and rugging people.”
Apple polishing
The witness list for Wednesday’s subcommittee hearing featured Lewis Cohen, partner at the law firm of Cahill Gordon & Reindel; Jai Massari, chief legal officer at Lightspark (a Lightning Network-based payment platform); Jonathan Jachym, deputy general counsel for the Kraken digital asset exchange; and Timothy Massad, a director of the Digital Assets Policy Project at Harvard University’s Kennedy School of Government and a former chair of the Commodity Futures Trading Commission.
Both Jachym and Massad appeared at the House of Representatives digital asset subcommittee hearing earlier this month, so we’ll focus on the fresh(er) faces. Attorney Cohen’s written testimony sought to butter up subcommittee chair Cynthia Lummis (R-WY) by proposing a regulatory framework based on the Responsible Financial Innovation Act (RFIA) that Lummis co-authored with Sen. Kirsten Gillibrand (D-NY) a couple of years ago. Subtle, that.
Cohen proposed the same “technology-neutral way to reconcile” the difference between digital asset securities regulated by the Securities and Exchange Commission (SEC) and digital asset commodities regulated by the Commodity Futures Trading Commission (CFTC).
An “ancillary asset framework” would essentially classify all tokens as commodities “unless the asset provides the owner of the asset with equity, debt, liquidation, cash flow or another financial interest in a business entity, such as a corporation.” Even if an asset’s initial sale was deemed a securities transaction under the Howey test, so-called secondary sales—for example, on an exchange—would effectively transform said asset into a commodity.
Cohen acknowledged that this approach may be “overly simplistic,” but hey, handing nearly all responsibility for crypto oversight to the CFTC is probably a good move, given that the SEC’s new management has broadly hinted that it really doesn’t want the job.
Lightning in a battle
The written remarks from Lightspark’s Massari warned of the “potential anti-competitive effects for stablecoin reserve requirements that are overly conservative.” MiCA’s requirements for ‘significant’ stablecoin issuers to keep 60% of their reserve assets in cash in European banks has repeatedly drawn the ire of Tether’s Ardoino, who warns of the risk from banks’ fractional reserve policies.
Massari suggested a proper stablecoin bill “should also allow for issuers of different types with different kinds of business models.” (It’s worth noting that Tether’s USDT recently made its debut on Lightning, as well as on the main BTC network to which Lightning clings, so Massari definitely has a dog in this fight.)
Layer 2 applications like Lightning have been flagged by European authorities as presenting “additional problems for law enforcement investigations” into suspicious transactions. Massari celebrated Lightning’s capacity to “inherently protect the privacy of individual payment transactions” while claiming that “messaging protocols … enable regulated institutions to obtain and exchange the information they need to meet their legal and compliance obligations.”
Massari believes stablecoin legislation “should direct regulators to set out clearly the illicit finance and sanctions compliance expectations” of stablecoin issuers, but these issuers should be given “the flexibility to address those requirements in new and better ways.”
Hear ye! Hear ye!
Congressional hearings on digital assets follow a depressingly predictable pattern. For the most part, Republican committee members lob softball questions at the pro-crypto witnesses while studiously ignoring the crypto critics. Conversely, most (but not all) Democrats put their focus on the critics, while challenging the pro-crypto camp about crypto’s abysmal consumer protection standards.
Ranking member Ruben Gallego (D-AZ) asked Kraken’s Jachym what elements from international digital asset rulebooks should be incorporated into U.S. rules. Jachym, who was singularly focused on getting Congress to prioritize market structure legislation, said regulation of centralized intermediaries (like Kraken) should be paramount. Jachym even urged Congress to kick the decentralized finance (DeFi) can down the road to whenever, just pass the rules for exchanges already.
But after Jachym praised the “simplicity” of other jurisdictions addressing all tokens as “crypto assets” rather than as securities or commodities, Massad pushed back. Massad noted that Europe’s MiCA framework makes clear that the term’ crypto assets’ doesn’t include ‘financial instruments’ (Europe’s equivalent of securities).
Massad also praised MiCA’s “much stronger prudential and customer protection framework,” including stress testing operators. Massad noted that MiCA prohibits stablecoins from paying interest, because doing so would make them investment vehicles (aka securities), something stablecoin issuers claim their products are not.
Sen. Hagerty, who introduced the GENIUS Act, showed up to make a five-minute speech without asking a single question. Helpful.
Sen. Tina Smith (D-MN) quizzed Massad as to whether GENIUS should require stablecoin issuers to be vetted much in the same way bank regulators consider an applicant’s character and fitness to operate. Massad agreed, adding that the Waters/McHenry bill requires such vetting, while GENIUS doesn’t.
Massad suggested issuers should be required to “aggressively monitor” token transactions so they can freeze tokens when suspicious activity is observed. Massad further suggested that smart contract code should be designed so that a transaction doesn’t go through unless a user has been cleared by an appropriate authority.
Sen. Thom Tillis (R-NC) said he wanted a “Goldilocks just right” rulebook and asked the panel what rules from other markets might be suitable for the U.S. Massari hammered home her belief that reserve requirements shouldn’t be so restrictive as to make it difficult for new entrants to come into the market.
Help Mark ‘get to yes’
Gallego took another turn at bat, asking Cohen if Congress should apply banking standards of responsibility on issuers. Cohen agreed that both civil and criminal penalties may be warranted in certain situations but warned against creating “new penalties that are specific to the technological means by which those transactions occur.”
Massad added that “a very clear enforcement mechanism” was as or more important than stipulating what penalties await transgressors, as it “sends a strong signal that we won’t tolerate violations.”
Sen. Mark Warner (D-VA) stated that he “wants to get to yes” on approving digital asset rules but stressed the need to get it right. Warner added that it “would be great to bring entities like Tether back” from, well, exactly where Tether is wasn’t specified. (Warner returned later to say that if the U.S. gets its regulation right, “everyone offshore is going to rush to America.”)
Sen. Bernie Moreno (R-OH) said he wanted to help Warner ‘get to yes,’ then launched into a long soliloquy about other technological innovations over the past century that could have been strangled in the womb had big bad government got its wish. Moreno claimed automobiles have caused “millions of deaths,” and yet we found a way to live with them rather than ban these homicidal devices. Moreno asked why Congress shouldn’t create “the most-light touch Petrie dish” for digital assets.
Cohen suggested a little context was required, noting that early automobiles had a 20mph speed limit because the roads in those days were made for horses. As the roads improved, the speed limit changed. So, you change the rules to adapt to changing situations. Cohen suggested Congress should seek the “right touch” rather than light or heavy.
When Massad tried to speak, Moreno claimed his time was up, but Lummis allowed Massad to suggest that “light touch is what weak countries do that are trying to pull business away from strong countries.” Massad offered an analogy with the U.S. swaps market and how smaller jurisdictions “tried to undercut” the U.S. via weaker rules. This forced the U.S. to harmonize its rules, and now the swap market works pretty well.
Trump memecoins: a black eye for crypto, or no big deal?
Sen. Dave McCormick (R-PA) asked Massari whether stablecoins could be “a force for good” by supporting the dollar’s role as the world’s reserve currency. Massari said one of the chief benefits of stablecoins is that they provide dollar access to people outside America who otherwise wouldn’t be able to transact with dollars.
Sen. Chris Van Hollen (D-MD) asked Massad for a “deeper dive” regarding how GENIUS vets issuers and what happens if an issuer goes bankrupt. Massad noted that GENIUS says stablecoin users have a priority claim on a bankrupt issuer’s assets, but there’s no timeline for returning these assets to users. As written, a court would issue a stay that froze all the assets, and nobody would get paid until all the details are worked out (which, as we’ve seen in the case of FTX, can take years).
Massad suggested Congress could insist on a dedicated process for resolution that was fast enough not only to reimburse users but also prevent “collateral damage,” aka the possibility of downstream entities facing consequential defaults. Massad believes that this process could be “much simpler” than that imposed on banks given that stablecoin issuers’ business model is “fairly simple.”
Van Hollen then quizzed the panel re President Trump’s recent memecoin launch. Predictably, Massad called it “a black eye for crypto” but Massari concurred, saying it “hurts those of us trying to build something that has real value and that has real utility.” Massari held out hope that proper market structure/stablecoin legislation would help counter “the worst of the bad behavior” associated with memecoins.
Kraken’s Jachym took a different view, saying memecoins are “not a new phenomenon,” noting that Dogecoin is over a decade old. Jachym claimed that “regulatory uncertainty” was responsible for the rise of memecoins as, absent clear rules, there’s not much incentive “to create much of anything else.” Attorney Cohen agreed, saying the technology is open and people “will do with it what they will.”
No libertarians in a foxhole
Sen. Warner returned to emphasize his belief that one of America’s “most essential assets is the stability of the dollar, our financial markets.” Warner related an anecdote regarding the 2023 collapse of Silicon Valley Bank—where Circle held $3.4 billion of its cash reserves—and how it sparked a Damascene conversion among his “most libertarian friends.”
Warner said these libertarians constantly told him, “we don’t want the government touching anything,” but then “the shit hit the, excuse me… the stuff hit the fan.” (Yes, Warner swore on the Congressional record.) Warner mocked these Ayn Rand diehards for doing an ideological 180°, saying “some of the biggest funders in this industry were calling around and saying ‘we need the [Federal Reserve] to bail us out.'”
Warner used this anecdote to warn that ‘light touch’ regulation would be okay if stablecoins were “completely divorced” from the broader financial system, “but if we’re ultimately going to intertwine this with the financial system … nudging our entities a little further along the line, that’s the risk/balance I’m trying to get to.”
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