By Pam Martens and Russ Martens: December 15, 2021 ~

The Senate Banking Committee held a hearing yesterday titled “Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?”

Senator Sherrod Brown (D-OH), the Chair of the Committee, set the tone for the hearing by including the following poignant remarks in his opening statement:

“Last month, I wrote to some of the biggest stablecoin issuers to get more information on how they manage their funds that back their coins, and to ask what rights their users have. Their responses were not particularly enlightening – and should lead us to assume most ordinary customers don’t have much in the way of rights at all.

“So let’s be clear about one thing: if you put your money in stablecoins, there’s no guarantee you’re going to get it back. They call it a currency, implying it’s the same as having dollars in the bank, and you can withdraw the money at any time. But many of these companies hide their terms and conditions in the fine print, allowing them to trap customers’ money. And if there’s no guarantee you’ll get your money back, that’s not a currency with a fixed value – it’s gambling.

“And with this much money tied up, it sure looks to me like a potential asset bubble.

“Stablecoins make it easier than ever to risk real dollars on cryptocurrencies that are at best volatile, and at worst outright fraudulent.

“Just a few weeks ago, we saw how quickly these tokens can crash, with crypto markets diving by almost thirty percent in one day. History tells us we should be concerned when any investment becomes so untethered from reality.

“Look at the 1929 stock market crash. Securities started out as a way for regular Americans to invest in new companies that wanted to bring new products to market to expand their operations. By the end of the decade, companies were invented out of thin air, to create more stocks to satisfy wild demand. Banks allowed customers to borrow against one stock to buy another, until the whole market collapsed.

“And, of course, many of us are old enough to remember, most of us are, the 2008 crash. Subprime mortgages were supposedly created to give more families access to the American dream, while derivatives were created to help financial companies reduce their risks. In reality, predatory mortgages were used to strip homeowners of the equity they had in their homes in order to create complex mortgage-backed securities and derivatives that ended up increasing risks at banks and financial companies. We all know how that turned out for our country.”

That last paragraph above contains one word that will define this financial era when the history books are written – the word “complex.” Imagine attempting to explain to your children or grandchildren why millions of Americans were willing to invest their hard-earned savings in dubious crypto offerings built on a “complex” blockchain that was solving “complex” mathematical problems with no purpose (while using as much energy as entire nations, thus adding to worsening climate change) which then traded on “complex” platforms with all the transparency of mud. 

Witnesses at the hearing included two experts, Alexis Goldstein, Director of Financial Policy at the nonprofit Open Markets Institute, and Law Professor Hilary J. Allen of the American University Washington College of Law. There were also two witnesses (likely called by the right-wing factor on the Senate Banking Committee) who were deeply conflicted: Jai Massari, a Partner at Big Law firm, Davis Polk & Wardwell, LLP, which has been a paid legal advisor on many of the crypto deals that have been brought to market; and Dante Disparte, Chief Strategy Officer and Head of Global Policy at Circle, a crypto company which was described in unfavorable terms by Alexis Goldstein in her written testimony for the hearing.

Goldstein provided the following information on Circle to the Committee:

“U.S Dollar Coin (‘USDC’) is an asset-backed stablecoin issued by Circle. Circle has made its tokens available on several blockchains: Ethereum, Tron, Algorand, Solana and Hedera. According to the whitepaper for Centre (a stablecoin consortium co-founded by Circle and Coinbase) Circle’s strategic investors include ‘IDG Capital, one of the largest venture capital firms in China,’ Breyer Capital, founded by Jim Breyer, the ‘first investor in Facebook,’ and others including ‘Goldman Sachs, CICC Alpha, Baidu, WanXiang, CreditEase and EverBright Bank.’

Goldstein further challenged the idea that stablecoins are fully backed by $1 for every $1 invested, writing:

“For many months during 2021, Coinbase stated that for every dollar offered to investors in U.S. Dollar Coin, there was one dollar ‘in a bank account’ backing it. But a July disclosure from Circle showed their assets ‘actually include commercial paper, corporate bonds and other assets that could experience losses and are less liquid if customers ever tried to redeem the stablecoin en masse,’ as Bloomberg’s Joe Light reported. Following the press scrutiny, the Centre consortium said it would shift its reserves into cash and short-term U.S. Treasuries.

“Circle’s October attestation, conducted by the auditing firm Grant Thornton LLP, claims that Circle is backed by ‘cash and cash equivalents’ which they define to ‘include US dollar deposits at banks and short-term, highly liquid investments that are readily convertible to known amounts of cash and have a maturity of less than or equal to 90 days from purchase.’ It is unclear what percentage (if any) of these are U.S. Treasuries, and if so, what their maturities are.”

Goldstein also addressed the climate change issue connected to stablecoins, writing as follows:

“Most major asset-backed stablecoins have a version of their token that runs on the Ethereum blockchain. Ethereum still uses ‘Proof of Work’ to validate transactions, a type of cryptocurrency mining that creates a number of extensive climate harms, which include annual energy consumption akin to that of entire nations, 30,700 tons of electronic waste (computer hardware is notoriously difficult to recycle) annually, higher electricity bills for residents of states with crypto mining, and quality of life issues. More than 70 climate, economic, racial justice, business and local organizations recently wrote to Congress, asking them to mitigate the considerable contribution portions of the cryptocurrency markets are making to climate change.

“In addition, Proof of Work cryptocurrency mining has been exacerbating the shortages of semiconductors. Senators Maggie Hassan and Joni Ernst recently introduced a bill calling on the Treasury Department to compile a report on how cryptocurrency mining operations are impacting semiconductor supply chains. It is unclear how stablecoin issuers plan to mitigate the increasing carbon footprint that follows the ongoing growth of their tokens.”

You can read Goldstein’s full, detailed testimony on the risks of stablecoins here.

Professor Allen correctly challenged the recent recommendation by the President’s Working Group on Financial Markets that read: “To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level.”

Federally-insured depository banks, backed by the U.S. taxpayer, are already risky enough as a result of being tethered to Wall Street’s trading casinos via the repeal of the Glass-Steagall Act in 1999. Why would anyone of a sound mind want to add dubious stablecoins to that explosive cocktail.

Professor Allen wrote in her testimony that “Regulating stablecoins like bank deposits will lend them implicit government backing – and with it, confidence and legitimacy far beyond what stablecoin issuers could generate on their own. Inspiring this type of confidence in the stability of stablecoins may counterproductively make runs more likely…If a stablecoin were to gain significant traction, then fire sales of its reserve assets would obviously be of significant concern, but if stablecoins remain modestly sized, then any fire sales will have limited impact on broader asset markets.”

You can read Professor Allen’s full remarks here.