Stablecoins Gain Spotlight at Senate's Initial Digital Assets Committee Meeting

Discussions on stablecoins and Congress's part in shaping future legislation for digital assets took the spotlight during one of the Senate Banking Committee's initial hearings on creating a regulatory framework for cryptocurrencies.

The hearing held on Wednesday, which aimed to initiate further Congressional action on digital asset regulations, was the first led by the banking committee's new digital assets subcommittee. Wyoming Republican Cynthia Lummis, a long-term crypto advocate, chaired the session.

"We're on the brink of finally establishing a bipartisan legislative structure for both stablecoins and market organization," Lummis stated in her opening remarks, referring to the draft legislation she introduced alongside New York Democrat Kirsten Gillibrand as a complement to the House's Financial Innovation and Technology for the 21st Century Act.

According to Lummis, stablecoins will be the committee's initial focus, consistent with statements made by White House Crypto and AI Czar David Sacks and South Carolina Republican Tim Scott, who leads the overall Senate Banking Committee.

Former CFTC Chair Timothy Massad, one of the hearing's four witnesses, advised lawmakers to prioritize stablecoin legislation and postpone any market structure efforts "for several years."

"For four years, the crypto industry has urged the SEC and CFTC to develop rules and guidance and to halt regulating through enforcement; that is now occurring," he said. "The SEC has dropped enforcement cases and established a crypto task force to address these issues. We should allow these regulatory initiatives to make progress before rushing to revise securities law."

Massad warned that current proposals to modify market structure regulations to account for crypto could "generate more confusion than clarity," particularly around defining how a digital asset might be a security, commodity, or something else.

These proposals could potentially undermine existing securities laws, especially if they address decentralized finance, he added.

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"That term is used to describe a lot of things that aren't decentralized," Massad continued. "There are almost always some vectors of control. Even if a process is decentralized or automated, that does not mean it should be exempt from regulation."

Virginia Democrat Mark Warner asked the panelists to discuss the possibility of stablecoin users undergoing know-your-customer processes, noting that while an issuer may conduct KYC, a stablecoin may be transferred between wallets without intermediate transfers going through a KYC process.

"I want to arrive at a regulatory framework that works, but I have seen — echoing what others have said from the classified side — oh my gosh, a lot of terrible things," Warner said. "So help me figure out, and I recognize [for] some people, the anonymity and the disintermediation role the blockchain plays, but how do we establish some minimum protections from issuer all the way back to conversion to fiat?"

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

While mixers and other tools can obscure transactions, custodial wallets still conduct KYC at the end of a chain of transfers, she noted.

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

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