On May 10, the US House of Representatives Financial Services Committee and the Committee on Agriculture held their first joint hearing on digital asset regulation. The event seemed like a logical continuation of another recent hearing where representatives blasted Securities Commission Chairman Gary Gensler for perceived regulatory overreach.
The main narrative, laid out by the initiators at the hearing, was for Congress to step in with its own regulatory project to provide certainty, stop “regulation through enforcement” and address competition between regulatory agencies. But maybe it shouldn’t. In fact, many lawyers believed it, too.
Hill and Lynch
Despite the nature of the inter-committee hearing, dubbed “The Future of Digital Assets: Measuring Regulatory Gaps in Digital Asset Markets,” members of the Financial Services Committee set the tone for the event.
In his opening remarks, Rep. French Hill, an Arkansas Republican, summed up the current struggle over digital assets: While some lawmakers (primarily Republicans) believe there is no practical framework for cryptocurrency in the country, others (primarily Democrats) are certain that Current regulations are sufficient to ensure compliance. Hill rushed to expose the partisan nature of the conflict, saying:
“Nobody here is claiming that cryptocurrency should be exempt from the rules or that we should create an entirely new regime for it. Instead, we are trying to apply the same risk, same regulation principle to amend existing law.”
In an unsurprising move, Rep. Stephen Lynch, a Massachusetts Democrat, outlined the exact opposite position after Hill’s speech. He urged Lynch not to fall into the “industry-fueled false narrative” about the turf war between the CFTC and the Securities and Exchange Commission.
In his view, industry advocates continue to make claims that current legislation is not suitable for the innovative economy because they know crypto business models are not compatible with regulated markets or investor protection law. Hence, creating a new truncation of digital assets seems superfluous and redundant. Bear Lynch, lawmakers should step back and scrutinize brokers, which he claimed generally fail to comply, and seek to combine multiple financial functions despite existing bans.
If one were to distinguish current positions among members of Congress as “pro-reform” or “anti-reform,” the majority of the hearing’s witnesses belonged to the former.
Echoing some of the representatives, Andrew Dorje, head of investment platform Web3 Republic Crypto, highlighted the perceived incompatibility between current regulations and the decentralized, non-intermediary trading technology of blockchain networks.
He claimed that digital assets registered as securities cannot be traded on existing crypto exchanges, none of which are registered as national stock exchanges. Durgee called for the change, proposing that a number of legal definitions be included in any future amendments, such as standalone smart contract, smart contract publishers, liquidity providers, and front-end website operators.
Matthew Culkin, former director of the CFTC’s division of swaps and broker-dealers, told the committee that most of the largest digital assets in terms of market size and trading volume are commodities and, as such, should be subject to regulation by the CFTC. This can be achieved if Congress recognizes the inherent differences between digital assets that are securities and those that are commodities.
Kraken Chief Legal Officer Marco Santori described how Congress can close current gaps in regulation, noting that the House should create a functional framework, define the jurisdiction of the SEC, and expand the CFTC’s authority to regulate digital asset markets and exchanges. His counterpart from the Web3 Foundation, Daniel Schoenberger, largely agreed, warning against attempts to apply laws and regulations not expressly designed for blockchain technology to the digital asset space.
Timothy Massad, a research fellow from the Harvard Kennedy School, offers an alternative to the proposed approach of taming the SEC and potentially expanding the CFTC’s powers.
In Massad’s opinion, many of the principles of investor protection are the same regardless of whether the token is a security or a commodity. From that point on, any trading or lending platform that “trades in Bitcoin or Ethereum” must comply with a set of core principles for all tokens traded or used on that platform, even if it is not registered with the SEC or CFTC as a securities or derivatives broker.
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However, the decision does not carry any power in and of itself, and was sponsored solely by Republican Representative Mike Johnson. “This was really a rebuke to a congressman from the SEC,” Richard Hung, a former SEC attorney who is now a partner at Morrison Cohen, told Cointelegraph. Given SEC Chairman Gensler’s support within the Democratic Party, he won’t have to worry about the decision.
What we are witnessing is a political deadlock, and it will not collapse soon, according to Fisher. Efforts to explicitly strip the SEC of regulatory and enforcement power, whether aimed at giving that power to the CFTC or a new self-regulatory organization, are unlikely to succeed. And Fisher notes that the financial climate of the cryptocurrency industry will not help these efforts:
Many will see this as a back-road to give digital asset companies freedom from regulation. While it might have been politically possible early last year, the cryptocurrency cycle crashing since then makes that unlikely.”
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