Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission (CFTC), has warned that "stablecoins could have national security implications," advocating for stronger regulations in this area. Massad's statement was part of a research paper published by the Brookings Institution on April 17.
"As Congress struggles to resolve big issues like funding for Ukraine and Israel, the debate over legislation to regulate stablecoins seems like small potatoes," said Massad. "But there is a connection, which is that stablecoins could have national security implications: Unless we strengthen their regulation, they could undermine our ability to use sanctions to advance our national interests."
According to the paper, Massad suggested that without proper regulations, stablecoins could potentially be exploited as a means to bypass U.S.-imposed sanctions. Stablecoins are a type of cryptocurrency whose value is pegged to another asset, such as the U.S. dollar. They "can be used to move value across borders without going through banks, and it is the banking system—and in particular the role of U.S. banks—that is key to the implementation and efficacy of sanctions," said Massad. He drew parallels between stablecoins and Eurodollars, "a financial innovation that helped to create the financial plumbing used to implement sanctions." While current stablecoin usage remains relatively small, mirroring the early days of the Eurodollar market, he warned that just as Eurodollar use "grew quickly and unexpectedly," a similar trend could occur with stablecoins. This possibility is further heightened by other jurisdictions like Europe, Japan, and Singapore advancing their own stablecoin regulations.
In relation to Russia's invasion of Ukraine in February 2022, Massad stated that despite U.S. and allied sanctions against Russia at that time, Deputy National Security Advisor Daleep Singh had said: "crypto’s not really a workaround for our sanctions." At this point, according to Massad, the crypto market was not large enough to facilitate large-scale evasion of sanctions. However, he also cautioned that as the crypto market expands and those seeking to evade sanctions become more sophisticated, this situation could change.
Massad advocated for bringing stablecoins within regulatory frameworks in order to mitigate risks they pose while also leveraging their potential benefits for payment efficiency. However, he acknowledged the division within Congress on how to approach these regulations. According to Massad, some policymakers are enthusiastic about the innovative potential of stablecoins and favor regulations that encourage their development and provide clarity for market participants. Conversely, other policymakers, influenced largely by the crash in crypto prices and failures of big firms like FTX in 2022, are reluctant to regulate stablecoins out of concern that doing so would further legitimize them. Despite this divide, Massad argued that "the recent recovery in prices, coupled with events like the launch of Bitcoin exchange-traded funds, prove that crypto is not going away."
On April 17, U.S. Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced the bipartisan Lummis-Gillibrand Payment Stablecoin Act which aims to establish a regulatory framework for stablecoins. "Passing a regulatory framework for stablecoins is absolutely critical to maintaining the U.S. dollar’s dominance, promoting responsible innovation, protecting consumers and cracking down on money laundering and illicit finance," said Gillibrand.
Massad's previous roles include serving as Assistant Secretary for Financial Stability of the U.S. Department of the Treasury and chairman of the CFTC. He is currently a research fellow at Harvard University's Kennedy School of Government and an adjunct professor at Georgetown Law School. Before entering public service, Massad worked as an attorney at law firm Cravath, Swaine & Moore, LLP.
