Senate Examines Stablecoins as Replacement for Bitcoins

WASHINGTON — A Senate panel discussed strategies Tuesday for the U.S. government to participate in the growth of cryptocurrencies but to avoid economic calamities.

Financial advisors told the Senate Banking, Housing and Urban Affairs Committee they face a daunting task.

Cryptocurrencies are collections of digital data that assign a value to each unit of the currency, such as bitcoins and ethereum ethers. Their price fluctuates by the amount of demand from purchasers.

Most currencies have the equity of a national economy to back them up, similar to the equity a homeowner amasses through mortgage payments. Cryptocurrencies have no equity, meaning their prices can fluctuate wildly.

Despite concerns about their volatility, cryptocurrencies have produced millionaires who invested only small amounts of money. They have also created frustrated speculators who fell victim to wide swings of the market.

Lawmakers who handle financial issues are exploring possibilities for a middle ground investment called stablecoins. Unlike bitcoins, they would be backed up by the value of U.S. dollars.

Senators at the Banking Committee hearing said they hoped U.S. government-backed stablecoins could provide a predictable, solid investment, perhaps offering financial security for retirees or bedrock assets for families.

“A few years ago, most people had never heard of cryptocurrency,” said Sen. Sherrod Brown, D-Ohio, who chairs the Senate Banking Committee.

The first bitcoins were issued in 2009 by private financial institutions amid predictions by some economists they were a fad that would fail quickly. This year, the worldwide cryptocurrency market hit a value of $3 trillion, according to CoinGecko, a financial services firm that tracks the value of digital currency.

“Those big numbers have come with big promises,” Brown said.

They also come with big risks for investors who might not get their money back and national economies that could tumble into recession if they allow cryptocurrencies to control too much of their financial markets, he said.

“That’s gambling,” Brown said.

The Senate hearing continues an investigation of cryptocurrencies for an industry that has largely operated outside of government scrutiny.

Cryptocurrencies are sometimes used to hide criminal activity because of difficulty tracing it back to its owners.

An example was the May 7-12, 2021, Colonial Pipeline ransomware attack in which the cybercriminals shut down gasoline and jet fuel deliveries along a pipeline to the southeastern United States. They released their software grip on the pipeline only after corporate directors transferred 75 bitcoins, or $4.4 million, to an account they designated.

The U.S. Securities and Exchange Commission is considering heavier regulation of cryptocurrency systems. 

The agency’s latest round of analysis was propelled partly by a demand in July from Sen. Elizabeth Warren, D-Mass., to report on ways to protect consumers from pitfalls of the digital currency market.

Stablecoins have arisen from the analyses as perhaps a better option. Their equity, backed by U.S. currency, means their price fluctuations would be more modest than other cryptocurrencies.

“Stablecoins are a very important innovation,” said Sen. Patrick Toomey, R-Pa.

Their status as a private sector currency means they could reduce transaction costs and spur new approaches to financing, he said.

Otherwise, the United States could get shut out of the market as other countries consider offering stablecoins.

Economists who testified at the Senate hearing advised against a hasty rush into the market.

Jai Massari, a lawyer representing the law firm of Davis Polk & Wardwell, suggested a rigorous set of regulatory standards before the U.S. government launches its own stablecoins.

“They should have auditing and transparency standards,” she said.

Hilary J. Allen, a professor at American University Washington College of Law, said that because corporations could offer stablecoins, their internal problems could become financial disasters for their investors.

She mentioned the example of Facebook, also known as Meta Platforms Inc., which has considered selling a stablecoin called Diem. If it succeeds, “The tech company could become too big to fail,” Allen said.

She suggested using antitrust laws to rein in any companies that could influence the U.S. economy through their cryptocurrency.

Tom can be reached at [email protected]