In a joint committee hearing in the Unites States House of Representatives on Wednesday, members of the Financial Services Committee and the Agriculture Committee discussed what regulatory framework is needed to manage the risks and benefits of cryptocurrencies in the US.
President Joe Biden has often emphasized the need for greater cryptocurrency regulation, including in the recently published plan to reduce cryptocurrency risks. The joint committee hearing on Wednesday debated this sentiment, but several concrete problems and proposals were raised — suggesting general consensus for new regulation is growing.
The witnesses for this hearing included several cryptocurrency executives, such as Andrew Durgee, head of advisory firm Republic Crypto. Also in attendance was Marco Santori, crypto exchange Kraken’s legal chief, and Daniel Schoenberger, legal chief of the Web3 Foundation, which runs Polkadot.
Other perspectives were represented by Matthew Kulkin, partner at Wilmer Cutler Pickering Hale and Dorr LLP overseeing its futures and derivates practice. Timothy Massad, research fellow at the Harvard Kennedy School Mossavar-Rahmani Center for Business and Government and former CFTC chair, was also present. As was Michael Blaugrand, chief operating officer for the New York Stock Exchange.
Tailor-made cryptocurrency regulatory framework unlikely to pass
Attached to this hearing was the Resolution Expressing Support for Blockchain Technology and Digital Assets, a three and a half page document which said the Securities and Exchange Commission’s (SEC) methods used to determine if a digital asset “is offered and sold pursuant to an investment contract” was “not fit-for-purpose.” The resolution called upon Congress to enact a functional framework specifically tailored to the risks associated with digital assets.
This symbolic resolution seems unlikely to pass, especially as members of Congress used their time to insist that the current regulatory standards are sufficient for cryptocurrency. These included:
- Representative Lynch (D-MA) saying: “The current prevailing business models for crypto are not compatible with orderly markets or investor protection law. The problem is not regulatory ambiguity — it is mass non-compliance.”
- Representative Flood (R-NE) seemed to suggest the most pressing matter was classifying assets into a “CFTC lane” or an “SEC lane.”
- Representative Sherman (D-CA) again compared the fear of losing ground on cryptocurrency to losing ground on cocaine production, organ harvesting, and tax fraud.
The Californian congressman referenced SEC chairman Gary Gensler’s statements that nearly every cryptocurrency is a security; and then cheekily asked Massad if securities law violations would be found in other parts of the country’s capital markets, if exchanges weren’t registered and were offering unregistered securities.
With a smile that seemed to indicate he knew the rhetorical move that Sherman was attempting, Massad responded, “Yes, that would be a problem.”
However, support for new regulation is growing. Representative McHenry (R-NC) and Representative Waters (D-CA), chair and former chair of the Financial Services Committee respectively, both reiterated their goal of producing effective legislation that can make its way out of committee and eventually to the President’s desk.
Additionally, only one witness that attended the hearing — many of whom are cryptocurrency and finance firm executives — agreed that current standards were sufficient. During the session, the witness panel was asked to raise their hand if they thought regulatory changes were needed. Every witness affirmed, except Blaugrand. According to the stock exchange exec, “There’s a well established process to launch a registered exchange … However, we have not seen a digital asset trading platform follow this well-worn path.”
Lack of clarity and funding remain a concern
Representative Caraveo (D-CO) insisted that the focus should be on the consumer protection and ensuring adequate funding. “Ultimately providing regulatory clarity to the digital asset industry must also support a robust enforcement regime… I strongly believe any digital asset legislation passed by Congress must include a funding mechanism for the CFTC,” Caraveo stated.
This funding issue came up repeatedly:
- Representative Lynch (D-MA) pointed to the small scale of the CFTC when compared to the SEC.
- Massad highlighted how the CFTC had to reduce other activities when its oversight expanded to include swap markets.
- Representative Green (D-TX) asked Massad whether a GOP proposed cut to funding to the SEC and CFTC would present a problem, to which he responded affirmatively.
- Green then asked the entire witness panel if they thought additional funding would be needed — all except for Santori raised their hand.
Some insisted clarity was lacking, but spoke only in general terms. Representative Hill insisted, “We can’t trust offshore exchanges like we saw through the FTX collapse, we want to work on legislation here in the United States for US companies that follow the rules.” However, it’s unclear if a law that governs US companies that “follow the rules” would help deal with situations like crypto exchange FTX, which involved an offshore company decisively not following the rules.
Durgee discussed how they have tried to use the existing Regulation A+ exemption — but have been unable to get an offering approved that way.
Concrete proposals made for a cryptocurrency regulatory framework
Some in attendance were able to provide specific proposals for change. Representative Foster (D-IL) advocated for know-your-customer (KYC) safeguards for all cryptocurrency wallets, a proposal fundamentally at odds with many people’s conception of cryptocurrency. Representative Torres (D-NY) suggested that the BitLicense model used by the New York Department of Financial Services (NYDFS) could serve as an inspiration.
Others offered tangible suggestions about commodities spot markets. Kulkin proposed an expansion to the CFTC’s oversight into commodities spot markets, including rules that would keep customer funds segregated and remote from bankruptcy.
Massad highlighted the lack of a spot commodity regulator, and suggested a proposal involving the creation of a set of principles that any lender or exchange using bitcoin or ether would need to follow, including:
- protecting customer assets,
- preventing fraud and manipulation,
- risk management,
- trade transparency, and
- conflict of interest limitations.
These entities wouldn’t be able to trade or lend any asset that the SEC found to be a security, Massad said. The former CFTC chair further suggested the formation of a self regulatory organization (SRO) that would be funded by cryptocurrency participants to oversee the industry, and the CFTC and SEC would have joint oversight of this SRO. Massad repeatedly reiterated that an expansion of mandate for any of these agencies was going to need additional funding to be effective.
Meanwhile, Santori proposed the disclosures that cryptocurrency investors desire aren’t covered by traditional disclosures. Some of the things that cryptocurrency investors want to know, they said, are:
- the number of nodes,
- the number of developers,
- where developer funding comes from, and
- where nodes are located.
It seems consensus is starting to develop in Congress that there needs to be greater oversight of the cryptocurrency market, but the nature of that oversight is still debated. What’s more, existential problems like the debt ceiling make coordination on legislation like this challenging barring extraordinary circumstances.
Despite the serious concerns raised, this hearing enjoyed several moments of levity. Blaugrand used the term “rugged.” Schoenberger spent the majority of his time shilling his firm’s own token, DOT, by insisting it was no longer a security.
The Web3 Foundation legal chief said that web3 was currently at the same point the internet was in 1998. For context: AOL DOS launched in 1991, Yahoo in 1994, and Google in 1998.
“Even the chair I’m sitting in can be tokenized,” Schoenberger said at one point.