The public has experienced two damaging shocks this year from the digital asset industry that are a reminder of how a lack of regulatory clarity can harm U.S. consumers and U.S. economic competitiveness.
The first shock came in the summer, when a complex financial derivative calling itself a stablecoin, TerraUSD USTUSD, -0.63% — issued offshore — collapsed in a matter of days. This triggered a steep drop in the value of the entire digital asset market and led to the bankruptcies of multiple industry participants, with tens of billions of dollars in value lost.
Most recently, one of the most well-known offshore exchanges, FTX, sustained a liquidity crunch that is creating widespread fears about the viability of the entire crypto industry.
These incidents overshadow the fact that many developers, entrepreneurs and companies are using blockchain technology to catalyze major innovations in finance, among other areas. What’s more, neither incident caused contagion in the broader economy. But the next one might — if U.S. regulators do not act now.
A small but vocal group of critics is, paradoxically, urging a “head in the sand” approach to these market events — both of which were caused by irresponsible risk-taking and fraud rather than the failure of the underlying blockchain technology. These critics — many of whom benefit from entrenched positions in the current system — contend that legislation will legitimize an irredeemable industry. This line of reasoning is cynical and wrongheaded, and has pushed digital activity outside of U.S. borders and into a regulatory abyss.
Fortunately, policymakers and regulators globally recognize regulation is necessary. In the U.S., lawmakers in both the House and Senate have been working in a bipartisan manner on legislative solutions that would regulate digital asset exchanges and stablecoins. Congress has never been as close as it is now to providing much-needed rules to protect consumers and support responsible innovation.
As a co-founder of Circle Internet Financial, issuer of payment stablecoin USD Coin USDCUSD, , I’ve been helping to build this industry for 10 years and testified at the first-ever hearing on digital currency in the U.S. Senate in 2013. While today I’m surprised by the speed of these incidents, I stand by what I said almost a decade ago:
“As this technology moves from early adopters into mainstream acceptance, it is critical in my view that Federal and State governments establish policies surrounding digital currency that uphold consumer protections associated with fraud and privacy risks, ensure that criminals and bad actors find it increasingly difficult to utilize these platforms and provide clarity to consumers and businesses that conduct business using digital currency.”
Rules and regulations
President Joe Biden issued an urgent call to Congress more than a year ago to establish a national regulatory framework for payment stablecoins. Payment stablecoins are the medium of exchange in the digital asset economy and are increasingly used within the traditional financial system because of their propensity to make it faster, cheaper and more convenient to send, spend, save and store money.
Circle’s payment stablecoin, USD Coin (USDC), simply changes the form factor of a U.S. dollar DXY, -0.32% from one that is physical to one that is digital. It is pegged to the dollar and is always redeemable for $1. Period.
Since USDC was launched in 2018, even amid several global geopolitical and macroeconomic shocks, including COVID-19, Circle has supported trillions of transactions and processed more than $191 billion in customer redemptions as of November 18.
Transparency is one of Circle’s core values. Circle is regulated under state money transmission licenses across the U.S., the same standards that govern major U.S. payments companies including Venmo, Stripe, PayPal and others. Circle files audited financial statements with the Securities and Exchange Commission, is compliant with the Bank Secrecy Act, and the composition of Circle’s reserves — composed of U.S. Treasury bills and cash — are published on its website down to the CUSIP level.
In contrast, many offshore businesses operate from undisclosed locales and are not subject to U.S. regulatory oversight, subjecting U.S. consumers to unnecessary risk. Federal regulators should be armed with more tools to ensure the safety and soundness of any stablecoin issuer that does business with Americans.
Fortunately, the House Financial Services Committee and Senate Banking Committees are reportedly working on bills that would set clear standards — including a requirement that every stablecoin be backed 1:1 by U.S. dollars in segregated bank accounts. Passing these bills would lead to a financial system that is more resilient, less expensive, more efficient and more inclusive, and would firmly establish America’s global leadership on the next generation of payments and the internet.
Separately, a bipartisan coalition in the U.S. Senate has been working on legislation that could improve market conduct by requiring digital asset platforms — including exchanges, custodians, brokers, and dealers — to register with the Commodity Futures Trading Commission. Congress should continue working toward a solution that puts a tough cop on the beat and brings illicit activity out of the shadows and into the light.
This legislative activity comes at a time when some of the world’s largest economic zones are moving forward with comprehensive legislation designed to displace the U.S. dollar as the world’s reserve currency. China, for example, has launched its own government-run alternative payment system that would raise troubling privacy concerns in an open society like ours. The U.S. should allow its more dynamic private sector and open internet models to counter these competing powers and ensure the world does business in digital dollars rather than digital yuans.
The U.S. has a once-in-a-generation opportunity in front of it. Leaders in Congress and the Biden administration are rightly doing their part to craft sensible legislation. The details are important, and hard compromises are required. The consequences of inaction are severe, and the benefits of regulatory clarity are immense. The time to act is now.
Jeremy Allaire is the co-founder, chairman and chief executive officer of Circle Internet Financial.
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