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Yahoo Finance Presents: Senator Pat Toomey

Senator Patrick Toomey, the Republican Senator from Pennsylvania and Senate Banking Committee Ranking Member, sat down with Yahoo Finance’s Jennifer Schonberger to discuss his work on a range of issues around cryptocurrency and other financial areas like regulating the practice of payment for order flow.

Video Transcript

[MUSIC PLAYING]

JENNIFER SCHONBERGER: This is Yahoo Finance's Presents. I'm Jennifer Schonberger. Joining me now in an exclusive interview is the senator from Pennsylvania and ranking member of the Senate Banking Committee, Pat Toomey. Senator, welcome to Yahoo Finance. It's great to have you.

PAT TOOMEY: Good morning, Jennifer. Thanks for having me.

JENNIFER SCHONBERGER: The president's working group on financial markets is recommending that Congress come up with a new framework to regulate stablecoins, specifically urging lawmakers to mandate that banks be the only entities that issue stablecoins. Senator, are you on board with these recommendations?

PAT TOOMEY: No, no, I wouldn't say that. So I agree with part of what you just said, which is that Congress should act here, right? This is a very, very new, very exciting, really important technology. And it doesn't fit well with the existing law because the law was written at a time when no one had conceived of any kind of digital currency, much less stablecoins.

So I do think Congress should act. It is not at all obvious to me that the optimal outcome is to treat all stablecoin issuers as though they're banks or force them to become banks. I can see an argument for that, but I can see arguments for treating stablecoin issuers very differently as well. And so that's exactly why Congress ought to have this debate. We ought to maximize public input. We ought to have a transparent process where we figure this out. But no, it's not at all obvious to me that the right solution is to force all stablecoin issuers to be depository institutions.

JENNIFER SCHONBERGER: And so if they're not all supposed to be depository institutions, how do you see regulating stablecoins?

PAT TOOMEY: Well, that's what we need to figure out, and I haven't come to a final conclusion. But, you know, I think you can make an argument that the stablecoin issuance itself doesn't really look as much like a bank as it looks like other things. And of course, it is unique. I think you could make a very strong argument that there ought to be transparency and disclosure about the assets that back a stablecoin, for instance. But beyond that I think we have to really think long and hard before we put some onerous regulatory regime on a new technology.

JENNIFER SCHONBERGER: To your point, given that if under these rules, banks would be the only entities allowed to issue stablecoins, would that give an unfair advantage to the large banks at the expense of startups? And what would that mean for innovation in terms of the development of the stablecoin industry?

PAT TOOMEY: Yeah, I think that's one of the dangers. That's one of the risks that is implicit in forcing stablecoin issuers to be banks. I think also it's a big mistake to suggest that in the absence of imminent congressional action, the FSOC should designate this activity. That takes us down the wrong road. When I read through the report, it does kind of have the feel of a report issued by bankers, right? People who have a very bank centric mindset. And I think we should not automatically go down that road.

JENNIFER SCHONBERGER: How do you see this playing out in Congress? Have you talked to your colleagues within your party? What are you hearing also perhaps across the aisle? And what could a potential timeline on this look like, given that there are a lot of pressing priorities right now that you guys are dealing with?

PAT TOOMEY: Well, there's no question. Very difficult to get comprehensive legislation that would create a new regulatory regime for stablecoins or something else in the crypto space. That's difficult. But I do think that's our responsibility. And so we are working on this. We have solicited-- my office, we've solicited input from the public, so people in this industry, people, academics, economists, people who have a view about how we should do this. We have solicited that. We've gotten tremendous feedback. And we intend to use that to kind of inform our judgment in a discussion with colleagues to see if there is a path forward.

JENNIFER SCHONBERGER: And senator, I'm curious what you think these recommendations could mean for Facebook, which is looking to issue its own stablecoin called Diem. It started actually testing its digital wallet recently. Under these rules, it appears that the commercial entities could not be intertwined with stablecoin issuers. So what would that mean for Facebook? Would it be frozen out, essentially banned from issuing a stablecoin? Or on the flip side, could it be regulated as a bank?

PAT TOOMEY: Well, so that's an important question that this report raises. It does seem to imply that they want to preclude the possibility of a commercial entity affiliating with an issuer. And again, it's not obvious to me that we're ready to come to that conclusion. I can think of arguments, both for and against, a large non-banking entity issuing a stablecoin. That's the kind of thing that should be debated publicly in Congress. And we ought to make a decision. You know, the people who are responsible to the American people are Congress, right, because we get elected, and we can get fired.

Regulators play an important role, but they're not accountable to the American people. So they shouldn't be making these big important sweeping value judgments. That should be made by people who are accountable to the American public.

JENNIFER SCHONBERGER: Senator, have you given any thought to how other areas of the cryptocurrency universe should be regulated? Are you planning to put forth any proposals anytime soon?

PAT TOOMEY: So, yeah, I've given a lot of thought to this, and there are, you know, a lot of different aspects to this. You know, Bitcoin is, in many ways, in a category unto itself, and it's certainly very different from a stablecoin. The question of whether or not and how potentially to do a digital dollar is a related question, but it's also a very distinct category. So it's an awful lot to try to kind of wrap our arms around, but we are pursuing this.

I do think it's really important that Congress take responsibility here. These are really important decisions that are going to have a personal impact on every American. If we change the role of money, if we change the design of money, it gets very personal very quickly. So I do hope to play a constructive role in influencing this discussion.

JENNIFER SCHONBERGER: Switching gears a bit, last week, you introduced a bill that would prevent banning payment for order flow, just as SEC chair Gary Gensler has said he's considering doing just that. Why is it important to protect payment for order flow, especially given the potential conflict of interest there? And what's your sense of the support that you could garner on this bill?

PAT TOOMEY: So, first of all, it's not clear to me that there's any greater conflict of interest with payment for order flow than there is in any other arrangement between a broker and a customer. And when I think about payment for order flow, I think it has been a significant contributing factor to a fantastic revolution for retail investment.

You know, I'm old enough to remember when I got out of college and I finally had scraped together enough money to buy a stock, the commission I paid for a really small purchase of stock was hundreds of dollars. It put me so deep in the hole in terms of what I would need for a return to cover my cost that it was a real disincentive to invest.

Today, look at the difference. Investing has zero transaction costs. You have the best execution ever. Tens of millions of Americans are investors who never were before. And they are now therefore participating in the returns of the greatest capital market on the planet. This is terrific. And payment for order flow has contributed-- not the whole reason, but it's a contributing factor. And by the way, in order for the payment for order flow mechanism to take place, the customer has to get at least as good and usually gets a better execution price than anything that's available on an exchange.

So my question to the SEC is, exactly what is the harm that's being done here? Who's being harmed? The investor who gets a better execution and pays no commission for it? They haven't made this case. They have not explained why there is a problem, why there's something wrong. And so in the absence of a cogent explanation of who's being harmed, I'm not in favor of eliminating a practice.

And by the way, any retail investor who doesn't want their execution to go to one of the big wholesalers, there are now brokerage firms that offer an alternative. Say, fine. You don't have to do a payment for order flow. We'll just charge you a commission and execute on the exchange. So customers aren't even required to use the payment for order flow mechanism. The SEC has not made the case for why there's something broken here. And in the absence of that case, they shouldn't ban this.

JENNIFER SCHONBERGER: And senator, you have worked with other members within the Senate, as well as the Biden administration, to come up with a narrower definition of what constitutes a cryptocurrency broker. That definition did not make it into the hard infrastructure bill, which is currently being considered by the House, which could get a vote today or tomorrow. If that does pass, does the broad definition stand, or are you prepared to offer legislation with that more narrow definition to supplant what's in the bill?

PAT TOOMEY: No, I absolutely want to fix this. The language is badly flawed. It would impose-- it could impose reporting requirements on participants that have no ability to even comply with the reporting requirements because they don't have the information that the requirements would impose. So, completely unreasonable.

Now my hope and the one good thing I can report is, you know, we did reach a consensus on what the solution was. It was a procedural problem that prevented us from getting our fix adopted. So that means we still have the opportunity to fix it. We'll have to do it in subsequent legislation if they pass the infrastructure bill in its current form. But I certainly hope they'll have the opportunity to do that.

JENNIFER SCHONBERGER: And I understand that you met with the Biden administration's nominee for the CFTC. What are you hearing from him? Do you support him? How do you think he could potentially regulate crypto?

PAT TOOMEY: Well, we had a very good meeting, a very good discussion. Mr. Behnam is very knowledgeable. He was at the CFTC. And I'll say one of the things that I think we should keep in mind is, he was there at the CFTC at the time that they made the decision to approve the futures contract on Bitcoin.

That is really the only federal regulator that has blessed and currently regulates, and I would say very effectively, the most important financial instrument in the crypto space right now, arguably, right? The futures contract on Bitcoin, it's huge volume. It works very, very well. It's a really, really important and valuable tool for price discovery. And the CFTC did that. And it was very prudent of them to have done so. So they've demonstrated a competence in this area that I think we should bear in mind.

JENNIFER SCHONBERGER: Senator Toomey, thanks so much for your insight. Hope to speak with you again soon.

PAT TOOMEY: All right, thanks for having me.