The FinTech program led a timely conversation between former Securities and Exchange Commission (SEC) Acting Chair Michael Piwowar, executive vice president, Milken Institute Finance, and former Commodities Futures Trading Commission (CFTC) Chair Heath Tarbert, president, Circle, about the role stablecoins will play in the financial system as legislation and regulatory clarity for the asset class comes into effect. Piwowar and Tarbert worked together in the White House and on the Senate Banking Committee staff during the Global Financial Crisis. The interview was moderated by Josh Burek, senior director, strategic positioning, Circle, and Nicole Valentine, FinTech director, Milken Insitute Finance.
 

Q: We are here to talk about stablecoins and the moment that we are in, but let’s talk about you two first—your Washington experience and acumen. You both have held very senior regulatory roles. From your perspective, what does it take to balance innovation and commonsense consumer protections? And how can Washington keep pace with the high velocity of change inherent in tech today?

Mike Piwowar (MP): Washington is doing much better. Unfortunately, we've lost four years while technology has progressed tremendously. It was clear the last administration had no interest in engaging the market participants in digital assets broadly, crypto more narrowly, and stablecoins specifically. And what we've seen is a sea change over the last two and a half months at both the legislative and regulatory levels.

I'm very heartened to see the Senate Banking Committee mark up the GENIUS Act, its version of a stablecoin bill. I look forward to seeing the votes on the floor and then the House taking this up. Heath and I were both in the White House during the global financial crisis, and then we saw firsthand, while on the Senate staff, the challenges of legislating during a crisis. We know it's important to take a proactive and deliberative approach. I'm optimistic we're going to see a better product based on what Congress is showing us.

Heath Tarbert (HT): I agree. I've also been heartened by the sea change in approach. As a regulator, my approach was to recognize that we had to be humble as policymakers, to concede the fact that the technology was going to happen, regardless of whether we endorsed it, regulated it, or opposed it. I always felt as if the market was five years ahead, and my constant job was to create a set of clear rules of the road and principles that could guide technology without stifling it, to ensure there was a balance between consumer protection and innovation. As regulators, we couldn’t simply ignore the innovation.
 

Q: Why stablecoins? Why does this tech matter to consumers, institutions, and markets? What problems are policymakers trying to solve?

HT: First, it's important that people understand what a stablecoin is: a digital asset that holds a constant value in relation to the value of another asset, namely fiat money. Put in a nontechnical way, stablecoins are digital dollars.

In many ways, stablecoins are the most basic of all digital asset products. It is the base layer of money in the new internet financial system that is powered by blockchain technology. Simply taking the US dollar and putting it on blockchain enables other blockchain-powered projects. Stablecoins are so important because, though simple and straightforward, they lay the foundation for the rest of the technology to come.

MP: I completely agree. Stablecoins are the "killer app" for blockchain technology. If you go back to Satoshi’s original Bitcoin white paper, it was about efficient peer-to-peer payments, rather than a store of value or a purely speculative asset. 

Stablecoins solve two challenges with Bitcoin. First, Bitcoin’s cryptography enables transactions without going through financial institutions. But we live in a world where legislators and regulators need well-regulated financial institutions to balance innovation and consumer protections, adequate transparency in terms of holdings, and anti-money laundering and Know Your Customer. Well-regulated stablecoins address these priorities.

Second, while Bitcoin has become an investable asset, it's quite volatile. Stablecoins achieve their “stability” by being backed one-for-one with the US dollar. By addressing price volatility, stablecoins unlock new functionality for digital assets. That's why it's the number one priority, and it makes the most sense to move forward first.
 

Q. Walk us through the stablecoin regulatory outlook from a US and global perspective.

MP: At the Milken Institute, we have a global presence: our FinTech program tracks what's going on globally. At our summits every year in Singapore and UAE, we see regulators who are proactively bringing digital assets—and blockchain more broadly—into the regulatory framework. Some jurisdictions are ahead of the United States at this point. And people ask, “When are we going to catch up?” And “Is it too late?” And it looks like we're going to catch up, and it's not too late.

HT: Let’s level-set on why regulators are focused on stablecoins in particular. There are really three different ways to digitalize actual dollars. The first is a currency issued by a central bank, the so-called central bank digital currency. The second would be to tokenize bank deposits. And then the third is to create stablecoins backed dollar-for-dollar.

The simplest, safest, most conservative, and best approach to a digitalized dollar is to issue stablecoins that are backed by real dollars, one-for-one. Accordingly, a number of countries around the world have either enacted stablecoin legislation or are considering it—the United States, the European Union through its Markets in Crypto-Assets Regulation, Japan, and UAE, for example. So that’s the current state of play. Stablecoins are the choice to put the dollar and other currencies on the web, and countries around the world are busy enacting legislation to make that happen.
 

Q. What does responsible policymaking look like? Can you share lessons learned from Dodd-Frank about what it means to have a principles-based approach to financial innovation? 

HT: The first lesson is that it's really important that financial regulation via congressional legislation be done in a sensible and, if possible, broad, bipartisan manner. Dodd-Frank was not that. I would hate to see that happen with stablecoin legislation, and I was heartened to see the broad bipartisan support in the Senate Banking Committee for the GENIUS Act. It’s very important that this legislation not be viewed as a political football but as a responsibility of the Congress to come together and come up with common-sense rules.

A second big lesson from Dodd-Frank is not to leave too much to regulators; Dodd-Frank required them to come up with detailed rules on hundreds of different subjects. As a result, to this day, I think the Dodd-Frank Act still has not been implemented in its entirety—15 years after it was passed. When I took office at the CFTC, there were massive parts of Title VII that had failed to be appropriately implemented into law, and my job a decade later was to do that. So, Congress should be very wary of kicking too much of the details in the particulars to regulators and actually come up with sensible, clear rules at the outset that people can start applying nearly immediately.

MP: When I first became a regulator, I was on the pro-principles-based side. And as soon as you do principles-based rulemaking, the first thing the industry says is, “We need clear rules of the road.” Regulators must recognize the balance between a principles-based and a prescriptive approach.

I was on the Banking Committee when Dodd-Frank passed. The act directed regulators to go forth and promulgate about 400 new rules, many of which were joint rulemakings and are still not done. A lesson learned is to give clear jurisdiction to one single regulator or as few regulators as possible because multiple agencies writing the rules are multiplicative in terms of complexity.
 

Q. Let's talk about the future of stablecoins. What does mainstream adoption look like for the economy, financial system, and global payments? Please feel free to draw upon any analogies in your toolkit.

HT: Many Americans think when they send money, they're sending it like an email, but what they're really doing is sending a message by email, and the actual money is moving like they put the envelope in the post office box. The actual money movement occurs, in some cases, days later. The revolution of blockchain technology is the ability to send money almost instantaneously. Sending value over the internet is a massive upgrade to our country's financial plumbing. So anywhere you see the use of money, you can see the use of stablecoins in the future.

Beyond faster and more efficient business and retail payments, we’ll start to see stablecoins used as collateral and cash held by the world's largest companies in their treasuries. We’ll see them used in derivatives exchanges, stock exchanges, and so on. It’s not just about speed and efficiency; it’s also about lowering risk across the financial system because instant settlement removes intra-day credit risk.

MP: When I was at the SEC, the securities settlement time took three days, or T+3. For example, if I buy or sell stock today, I get today's price, but the actual exchange of the cash and securities doesn’t occur until three days later. And to Heath's point, it adds an incredible amount of inefficiency and risk to the system: market, operational, and liquidity risk. Clearinghouses take on this risk, and that creates inefficiencies because their members have to post collateral. This is money that's taken out of the markets that would otherwise be used for productive purposes. If you add up all the money that has to be used as collateral at clearinghouses throughout the world for securities or derivatives, it's trillions and trillions of dollars.

In 2017, when I was acting SEC chairman, I moved the trade settlement cycle from T+3 to T+2 and directed the staff to come back with a study in five years. And people said, “Why didn't you go shorter?” And at the time, the technology wasn't there. Fast-forward to 2021, we had a meme stock-trading situation that underscored clearinghouse risk, and the SEC moved from T+2 to T+1. With well-regulated stablecoins, to Heath's point, we could have T+0 or T+midnight, reducing risk and inefficiencies while unlocking unproductive capital.
 

Q. Let’s turn to the geoeconomic aspects of stablecoins. There are arguments that stablecoins strengthen the dollar by enabling global access to US dollars. What should US policymakers consider as the US becomes a leader in digital assets globally? 

MP: The more uses we find for the dollar, the more it cements us as the reserve currency of the world, from which we get a lot of tangible benefits, including liquidity, interest rates, and soft power. In the last administration, the Treasury Department and Federal Reserve first thought that stablecoins were a threat to the dollar, and then they came around to discover the exact opposite. Stablecoin issuers are the natural buyers of Treasury securities, and making stablecoins more efficient for payments is going to preserve the US dollar’s reserve currency status.

HT: There are hundreds of millions, if not billions, of people around the world who want to get their hands on dollars in the traditional legacy financial system but cannot. Stablecoins make that access possible. If you have a phone and an electronic wallet, now, all of a sudden, you can have dollars. The dollar is arguably one of our greatest export products as a nation, and now we can export it to a level never before seen. This could really strengthen the dollar, provided the issuers of those dollars are reputable and subject to sound, sensible regulation.

The more stablecoins that are out there, the better it is for the dollar. But those stablecoins need to be stable. They need to be reputable. So that's where regulation and our economic competitiveness come hand in hand; if done the right way, the two will be mutually reinforcing.
 

Q: What are your expectations for regulatory harmonization with other key players, like the EU and UAE?

MP: The first thing we need is to get robust legislation passed in the US. At that point, other jurisdictions are going to harmonize toward us, because we are the reserve currency of the world and have the largest capital markets. Our regulators are members of multilateral organizations that look at regulatory harmonization. When Heath was assistant secretary at the Treasury, he worked with organizations including G20, the Financial Stability Board, and the International Organization of Securities Commissions.

The US will set the global regulatory agenda. At the SEC, we would tell the other jurisdictions, “Don't copy and paste exactly what we do, but make sure it's harmonizing with what we do.” But they would just copy and paste. By passing robust legislation, we're going to see the rest of the world come in our direction.

HT: The rest of the world is yearning for US regulation. In discussions with European policymakers and others around the world, they're saying, “When are you guys going to get your regulation done? Because we're eager to see it, and we want to be able to grant reciprocity.” The good news, at least with stablecoins, is that it's pretty straightforward. You need to have an issuer that's reputable, that's subject to some degree of prudential regulation. You need to have safe, high-quality, liquid reserves backing everything, dollar-for-dollar, and you need to have transparency in the reserves. There's probably not going to be a ton of variation between jurisdictions, at least on stablecoins, so hopefully this should be an easier lift.

MP: That's exactly right. Stablecoins have been prioritized, because it's the simplest thing you can do. Once you start getting into the other digital assets, that raises other jurisdictional questions. The harmonization for stablecoins is going to be easy, while other digital assets are going to be more difficult.

HT: It’s really important that you do stablecoins first. Don't try to couple it and overcomplicate it by taking stablecoins and trying to combine them with market structure legislation.

MP: That's exactly right. The single best way to kill something, moving forward in the legislation, is to do a comprehensive bill, because it just falls under its own weight. You're into multiple committees, and multiple jurisdictions. And a lot of legislation gets messed up, not just along partisan lines but along jurisdictional lines. Outside of stablecoins, jurisdiction on digital assets more broadly is going to be carved up between the SEC and the CFTC. You've got the Banking Committee, the Agricultural Committee, and House Financial Services.

On the broader market structure bill last Congress, the FIT21 bill, almost all Republicans voted for it, and they got a substantial amount of Democratic votes. If you look at who voted for it versus against it, it didn't necessarily fall along the lines of far left or moderate; it fell along age lines. The stablecoin legislation that came out of the banking committee had five Democrats vote for it and six votes against it. The average age of the Senate banking Democrats who voted for it was 55 and the average age who voted against it was 67. We're seeing younger members of Congress embrace the new technology, while the older members are caught in the traditional banking world. It gives me optimism that as Congress gets younger over time with new members, you're going to get more pro-stablecoin, pro-crypto policymakers.

HT: That's a great point.

MP: We're not only seeing Congress being pro-crypto, but we also have the most pro-crypto administration ever. You're seeing the regulators move that way, too. Among the prudential regulators, Acting Comptroller of the Currency Rodney Hood issued new guidance on crypto in banking. The previous guidance basically said, “Keep crypto out of the banks.” And the new guidance is re-evaluating that position.

The SEC and CFTC are starting task forces, actively reaching out to market participants, asking questions, and holding public roundtables. There's this sense that technology is always ahead of the regulators, and how do regulators keep up? The first step is just to engage and get your head out of the sand. I’m seeing regulators ask in-depth, pointed questions that show they're getting to the nuts and bolts. I couldn't be happier—not only with the energy that we're seeing in Congress, but with the regulators as well.
 

Q. Could you describe how major financial institutions are watching these policy developments? What's their perspective on it? How might they get involved? 

HT: Given that it's a major upgrade to the financial plumbing, I think the banks are smart to not want to be left behind. We welcome new entrants because we think, overall, it will help transform and make the United States adopt the internet financial system sooner. So, we want buy-in from major institutions. This will also really help the banking system itself, as we discussed earlier.