Witnesses Fault ‘Regulation by Enforcement’ of Digital Assets at Congressional Hearing

At a subcommittee hearing on the current state and future potential of digital assets, lawmakers and witnesses from the crypto and payments spheres — including PayPal — cautioned against a policy of what was repeatedly referred to as regulation by enforcement.

And, they said, for the right safeguards to be put in place, along with proper guardrails, regulatory clarity is needed.

The remarks, made before the U.S. House Financial Services Digital Assets, Financial Technology, and Artificial Intelligence Subcommittee on a Tuesday (Feb. 11) hearing, underscored the challenges of regulating the nascent space in a bid to realize, per the hearing’s title, “A Golden Age of Digital Assets: Charting a Path Forward.”

Some of the witnesses warned of regulatory overreach — as they argued the U.S. has fallen behind Europe and China in terms of technology and innovation — and others pointed to risks to the financial system tied the ever-more-mainstream embrace of cryptocurrencies and stablecoins.

In his opening statement, Subcommittee Chairman Rep. Bryan Steil, R-Wis., said: “Digital assets represent a clear opportunity for the advancement of financial services in the United States,” contending that digital assets can “modernize our financial infrastructure, enhance the dollar’s dominance in global markets, increase the efficiency of payments — both domestically and abroad, and provide American businesses and consumers with a faster, cheaper, more transparent way to transact in an increasingly digital economy.”

His statements decried the last presidential administration’s policy of “regulatory overreach.”

Coy Garrison, a partner at law firm Steptoe LLP, said that there exist regulatory gaps in federal oversight of dollar-denominated stablecoins. But, he said, the recently debuted discussion draft of the STABLE Act provides a framework for the issuance and operation of dollar-denominated stablecoins.

Jose Fernandez da Ponte, senior vice president of PayPal who serves as general manager of the firm’s Blockchain, Crypto, and Digital Currency business, said in his testimony that the company is “looking to take online payments onchain. We believe blockchain protocols will bring extraordinary efficiencies to the financial marketplace,” and its 2023 launch of the PayPal USD (PYUSD) stablecoin enables “efficient and cost-effective payments to transition from online to onchain … By using stablecoins, businesses can reduce financial costs, foreign exchange risk and counterparty risk” while making cross-border payments more efficient.

In reference to regulation, he added that New York State “has led the way on supervision,” as that state’s Department of Financial Services has set up a regulatory framework — and there should be a federal level framework, as well.

“We urge lawmakers to adopt a stablecoin issuer framework that continues to enable a state-based option. This framework must have uniform standards for certain reserve requirements, for example, but a state pathway is critical to the continued growth of the industry,” the PayPal executive said. Federal oversight — and digital asset charters — should focus on payments, while curbing non-banks from entering other banking activities, he told lawmakers.

In his own remarks, Ji Hun Kim, president and acting CEO of the Crypto Council for Innovation, also emphasized a national policy to foster innovation and create “a comprehensive legislative framework. Such action can ensure the U.S. regains its competitive footing alongside other leading jurisdictions” across the globe as the stablecoin market has grown to more than $200 billion. He said the Biden administration’s “regulation by enforcement” had been illustrated by 125 actions by the SEC focused on digital assets.

But Timothy Massad, research fellow and director of digital assets policy project, Kennedy School of Government, Harvard University, said that while stablecoins are the most useful application of blockchain and digital asset technology, their becoming a general means of payment will hinge on “a regulatory framework that puts the ‘stable’ into stablecoins.”

He warned that since there is no federal oversight of state-regulated stablecoin issuers, some of those firms could become large enough to become systemically important (and pose risks to financial stability).

“This all comes back to looking at this comprehensively and looking at the fact that we really don’t have a regulatory framework for a lot of these crypto firms, and we’ve seen a lot of fraud and manipulation as a result of that,” Massad said. A regulatory framework, with a building block approach, should start with stablecoins, he told the subcommittee, “and then turn to market-sector issues.”

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