first do no harm. Be careful about the economic impacts and potential disintermediation of the banking industry here. You know, in some ways you could think of every dollar. U. S. Dollar that becomes a payment stablecoin is in some ways a dollar that's not in a deposit account at a bank. And that has real implications.
From the American Bankers Association, this is the ABA Banking Journal podcast. I'm Evan Sparks. Today's episode is presented by nCino. And I'm here with two of my ABA colleagues, Brooke Ybarra, who is the head of our Office of Innovation, and Kirsten Sutton, who is the Executive Vice President for Congressional Relations in our Government Affairs team. Two incredibly, talented colleagues who know a lot more than I do about the subject that we're going to discuss today, which is stablecoins.
and the stablecoin policy environment in Washington, D. C. right now. So, I love it. Brooke, again, you know way more about this than I do. For the purpose and benefit of our listeners, can you just bring us up to speed? What is a stablecoin? And why are, people in the financial sector interested in this? particular kind of, of a digital asset.
Yeah, absolutely. Well, Evan, I'm so glad to be doing this with you and Kirsten. So a payment stablecoin is a type of cryptocurrency or digital asset that as its name implies is intended to maintain a stable value. So oftentimes it uses reserves that are held in collateral, to maintain the value of that. stablecoin at what it's attended intended. And so most often stablecoin is pegged to the US dollar. Many of our listeners will probably have heard of circle or tether.
These are stablecoins out there that are in the market pegged to a dollar.
people can buy and sell and trade them, and there's been a real push to develop a regulatory framework that will apply to payment stablecoin issuers, you know, something that will govern the type of reserves that are eligible to be held to back that payment stablecoin, or what types of anti money laundering rules might apply, you know, a whole host of things you could think of, that should be part of a framework when we're talking about an instrument set that looks a lot like a dollar.
So it's like, I mean, so it's the, the opposite use case of a Bitcoin or Ethereum or whatever, where the value fluctuates substantially. And so people are treating it more as a investable asset versus, versus, something that you could use to actually transact on a regular.
Yeah. It really is. That's exactly right. So, you know, the price of Bitcoin, the price of truly thousands and tens of thousands of other crypto tokens out there that are not asset backed, you know, who there's a market for them just based on what someone is willing to buy or sell that token at, the price will fluctuate accordingly.
Stablecoin is precisely the opposite of that in many ways, where it's intended to be what it It's said that it's, worth it kind of at all times and therefore may have, applicability as a means of payment.
So when we think about a stablecoin, is it just a new kind of payment rail or is it, is it something else in terms of how it's structured and why and what the advantage is for the, for people who are using it to transact?
So it's a great question. And the answer is kind of a combo, I think of it depends and we'll see, right? So I think most people even, you know crypto and stablecoin enthusiasts would agree The primary use case for a stablecoin today is basically to buy in to the crypto ecosystem. It's much easier to trade in other cryptocurrencies kind of once you're in the system.
And you get in the system, not usually with your US dollars to make that next trade, but with a crypto token worth a US dollar, like a circle or a tether. so that's, that really is the predominant use case today. But, you know, there are visions, I think, and, and maybe real opportunity for stablecoin to develop as a, a payment rail. I think there's, that vision holds more water, in my view, when we think of potentially cross border payments.
You know, where there's a real desire by, people and entities outside of the United States to hold a dollar denominated, And for them, a stablecoin really could have a lot of value if they don't have kind of direct assets, or excuse me, direct access to US dollars.
Yeah. And so I mean, so I really want to get to the policy landscape around this in just a minute here, but I'm just curious a little bit more as we, drill down on this concept. You talked about AML issues. What are some of the challenges that within our existing regulatory landscape that affect the issuance and use of stablecoins?
Well, I think so. One, the technology is different. I'll say it's it's not fair, I think, to call it new anymore. Distributed ledger and blockchain have been around for some time, but it's different. It's different than kind of rails and systems that value transact on today. there are also there's features of the blockchain and distributed ledger that make it in some ways more transparent and easier to track value through transactions.
but that's not that transparency isn't, I wouldn't say obvious to everyday people. It's, it requires, experts in many cases to identify wallet addresses. And there's a lot of technology that can, that can obfuscate, in many ways, you know, how, where transactions are going and, and that can make the application of, BSA or anti money laundering rules much harder.
So that's a, that is an area, That that is requiring some focus, I think, and has been, you know, a particular interest as we look at different policy proposals.
I know I want to take actually a quick moment here, and thank our sponsor for this episode, nCino. Today's financial institutions strive to achieve efficiency, boost customer satisfaction, and adapt to changing markets. nCino provides the tools to digitize processes, consolidate systems, and drive innovation with more than eight, with more than 1,800 institutions already benefiting from our, from their platform, and nCino is powering a new era in financial services.
Learn how you can take the next step forward to to solving your institution's challenges with nCino at. nCino. com. That's ncino. com. And thanks again to nCino for sponsoring this episode. So coming back to the conversation with Brooke and Kirsten and Kirsten, I'd love to have you hop in here as well. You know, I know Congressman McHenry who, on the financial services committee was very interested in stablecoin legislation.
And now we have these two bills, the, the stable act and the house side and the genius act on the Senate side. And I, I'm assuming that is a, a meme name based on, you know, one, one of president Trump's, tweets from long ago, but the, the, we've got the stable act and the genius act and, the genius act just passed the Senate, banking committee with a, You know, with a significant bipartisan majority,
bipartisan vote. Yeah, that's right. It's picked up. It's a small committee picked up five Democrats, which is really interesting, over the objections of ranking member Warren, I'll add. But you're right, Evan, there's been, I think, building congressional interest in digital currency over the past few years. We've all seen that coming. I think the difference now is we have An administration that is very, very pro crypto, and we're seeing that manifest itself in lots of different ways.
But in addition to the work that began, I say began, I think it started in the House, with Mr. McHenry, but there, we saw Senate legislation last Congress as well. but the noteworthy shift here is, is just really quickly seeing the Senate Banking Committee move to mark up the Genius Act, lots of amendments, there was an agreement that limited the amount of time. Spent, debating each amendment, but it was still, you know, a three hour long markup, which for banking is a long time.
So lots of interest in Congress, but I think the difference is the administration expressing this is a priority and we want to get it done. We're seeing that really have an impact on the committee's agendas in Senate, Senate Banking and House Financial Services. So this issue is kind of moving up. To the forefront. and people are watching and watching very, very closely. so this, the Senate moved on Friday to mark that bill up and pushed out a committee.
It still needs to be considered on the floor. And, the house is just slightly behind the Senate. They've had some hearings, but I have not yet marked up their version of the legislation. We anticipate that happening this month. And, and I think floor consideration will be coming quickly for both of these measures.
Yeah, well, so what would these particular what would these particular bills do and how would they how would they change the existing? I mean, obviously we have stablecoins out there. You talked about tether, you know circle how would these change the existing stablecoin landscape and What are some of the dynamics for in terms of how these bills if they are enacted in the form that they are? Currently in could affect the broader financial services landscape
Yeah, Brooke. I mean, I'll, so I'll pass it to Brooke, who's our, obviously our, our expert, and I feel like I learn something new every time I hear Brooke talk about these issues. I know I'm not alone. I know a lot of bankers feel like I do, just being overwhelmed and trying to, like, learn about all of the dynamic swirling around the regulation of digital currency. But the, the goal here, the purpose, is to create a framework for, But a regulatory framework for stablecoin issuance.
but Brooke, maybe you can share kind of how these rules do that. And the differences between the approaches in the House and Senate.
Yeah, that's exactly right. So, I mean, at its core, each of these bills identifies, several paths that an entity can take to be approved as a payment stablecoin issuer. And so there's, you know, this process to, to become approved. And then as part of that, it also sets out a series of requirements or obligations that an approved issuer. will have to follow.
And that's things like, what reserves, like I mentioned at the onset, what reserves can back a payment stablecoin, what type of disclosures and how often, does an issuer have to share about its reserves and the composition. what are the rules that related to capital, liquidity, risk management, cyber security, that the, the prudential regulators actually are going to jointly develop if these, bills become law and that will be applied to, payment stablecoin issuers.
You know, what's the process for supervision? It really sets out to establish a regulatory framework that many aspects of which will look familiar if you're familiar with banking regulations. But of course it's, it is not as fulsome as banking regulation. it is, you know, narrow to the activities of payment stablecoin. So what
are some, I know ABA sent up a statement for the record on the Senate, for the Senate markup. What are some of the areas where we'd like to see improvement in the way that these issues are being discussed as these bills go through the legislative process?
Yeah. So, you know, we've really, one, we've been quite engaged with, the committees and staffers on kind of both, in both chambers, and, and I should note, you know, changes have been made to these bills along the way, many of which we've advocated for, and we're really appreciative that kind of the industry's voice is being heard as this important legislation is contemplated. and so we're really appreciative. We've, we've kind of taken our thinking around a couple of key principles.
And, I know many listeners will have heard us talk about level playing field and same activity, same risk, same regulation, you know, all of that very much applies, but we started to really frame our messaging around, you know, what some of the risks are and what is it important there for that a payment stablecoin regulatory framework contemplates. And so. You know, first is really like, do no harm.
Be careful about the economic impacts and potential disintermediation of the banking industry here. You know, in some ways you could think of every dollar. U. S. Dollar that becomes a payment stablecoin is in some ways a dollar that's not in a deposit account at a bank. And that has real implications. now there's maybe ways to mitigate that, but that's, we want to just make sure that the economic impact of this ecosystem.
You know, legitimizing scaling, you know, could becoming much bigger than it is today. What impact that might have on the banking industry? the second key principle, control for the known risks. sounds very obvious, but ensure we have robust, consistently applied regulations, supervision and enforcement.
You know, this really comes out in ensuring there's a consistent federal, framework, a federal floor for which all payment stablecoin issuers, regardless of, you know, I mentioned several different paths they can take to be approved, regardless of which path you take, you still are going to have to follow the same basic rules. This is important to ensure consistency, trust in the system, consumer protection, all sorts of things.
and then the third principle is going to prepare for the unknown risks. And of course, we can't probably identify all of those now. this market is relatively new. It's, you know, it's not very big today, but it's growing and there's visions for it to be much, much bigger. So it's important in our view that regulators have the, authority to respond as the market develops, as we identify emerging risks that result from this ecosystem.
Brooke, do you, do you expect that there's, that banks might be interested in getting into this, into this, this sector in terms of, as, as stablecoin issuers and how would this legislative framework affect, banks ability to participate in this ecosystem?
Yeah, absolutely. So, I do. I do. And there's a couple different ways. one, I think the legislation has actually taken great care to provide for a bank path to be a payment stablecoin issuer, you know, in the way we think of Circle. so that is an option. but it also, importantly, the definitions are carving out what sometimes called a tokenized deposit.
So the idea of a bank representing on a blockchain or on a distributed ledger, an actual deposit, that's not really a payment stablecoin because it's not fully reserved with assets kind of held in custody somewhere else. It's a deposit and that's the liability. so it, the legislation would allow for that.
There's also a role for bank to banks to be custodians of the assets or, you know, again, as this ecosystem develops and there's different payment opportunities, I think there could be quite a bit of opportunity, you know, provided the regulatory framework is established, you know, and bank regulators are comfortable with banks participating in the process.
And Evan, if I could add a couple things coming back to like the congressional view on everything that Brooke just said, we're dealing with members of Congress that have really different views here. We have some that like, don't even want banks providing custody to the crypto community because they're so concerned about it. And then we have others who want to make sure that banks are able to participate.
One noteworthy thing from the House hearing recently, I do think members are also thinking about this disintermediation question, and I think particularly the potential impact on banks of different sizes, you know, for a community bank dealing.
With this if it if it does scale like that is different than a larger bank dealing with stablecoins potentially really taking off and so folks in congress are looking at this sometimes through different lenses I think there's agreement that there's a need for and a desire for a framework. It's just what does that framework look like? And we of course want banks to be able to participate as well, as Brooke mentioned. but our bankers listening in don't need me to remind them.
We're dealing with unlevel competition like all over the place, right? Is it credit unions? Is it farm credit? just non banks engaging in the offering of financial services and products. And so in some ways, these conversations aren't new. They're just being applied to cryptocurrencies now. And so, Brooke touched on this, but that level of federal regulation, what does that look like? Is this going to be a race to the bottom with the states where the state that has the least rigorous process?
Everybody's kind of moving to be issuing out of that state. Like, what does that mean? And one other point, that has really gotten a lot of attention is BS, BSA, AML requirements and restrictions and so lots of bipartisan interest in trying to make sure that there is accountability and sort of safety around these issues. So I think the momentum is absolutely there. Some of the detail, the details are still being hammered out, though.
I think even with this bill moving out of Senate banking and we're seeing conversations happening. In the House among the House members and then between the House and Senate and also with the administration, our job is to make sure that ABA has a voice in those conversations, even though, you know, there are things about this legislation that we really like, and there are a lot of ways in which that Brooke's perspective.
Our lobbying team has been able to take that policy feedback to these congressional offices and ask for changes and improvements. And we've seen a number of those improvements. We want to make sure that we continue to have a voice and that we're part of the conversations all the way through to this thing being signed into law. So a lot of our strategic engagement, Some of it may be a little bit more behind the scenes.
It's not always going to be through pushing for amendments or taking public positions a lot of this is happening Behind the scenes and we've been part of those conversations and we want to make sure that we continue to be part of them Yeah
Well, well, I I think it's fair to say we're probably going to be talking about this at our aba washington summit in a couple Weeks here almost certainly in april. So If you're interested in this conversation, you can learn more at, by coming to our Washington Summit, in April. learn more at aba. com slash summit.
I know Brooke and Kirsten and I would love to, to meet up with you there and, talk about any number of things that we're dealing with and in Washington on behalf of the banking industry. But, Brooke and Kirsten, thank you both so much for being on the show today.
Thanks, Evan. Thanks, Evan.
For thanks. Thanks again to you, to you for listening and thanks to nCino for sponsoring today's episode. We will be back with you again very soon.