US House subcommittee hears arguments for ‘crypto’ legislation

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Legislators in the United States continue to advance stablecoin and ‘crypto’ market structure legislation, even as some observers caution them that it’s more important to get it right than to get it written.

• A stacked deck of witnesses
• Did somebody say corruption?
• Opening remarks
• Banking on it
• Decentralization theater
• State vs federal oversight
• SEC vs CFTC
• CFPB and the ‘harmer-in-chief’
• See ya next time

February 11 saw the House of Representatives’ Financial Services Committee’s Subcommittee on Digital Assets, Financial Technology, and Artificial Intelligence hold a hearing with the not-at-all-grandiose title of A Golden Age of Digital Assets: Charting a Path Forward.

The witness list consisted of Jonathan Jachym, Global Head of Policy & Government Relations at the Kraken exchange; Ji Hun Kim, president/CEO of the Crypto Council for Innovation (CCI); Coy Garrison, a partner at Steptoe LLP; Jose Fernandez da Ponte, crypto point person at the PayPal (NASDAQ: PYPL) payment processor/stablecoin issuer; and Timothy Massad, a former chair of the Commodity Futures Trading Commission (CFTC) and a director of the Digital Assets Policy Project at Harvard University’s Kennedy School of Government.

The prepared remarks by Kraken’s Jachym focused on giving the ‘light touch’ CFTC oversight over exchanges while seemingly demanding no oversight whatsoever for decentralized exchanges (DEX). Kraken also seeks that ever-elusive ‘regulatory clarity’ for staking-as-a-service products.

In 2023, Kraken was fined $30 million by the Securities and Exchange Commission (SEC) for failing to register its staking services. Kraken agreed to suspend staking for U.S. customers as part of that settlement. However, Kraken recently relaunched staking for 17 different proof-of-stake (PoS) tokens for customers in 37 U.S. states after the SEC’s new management effectively told crypto operators not to fear future enforcement actions.

In his prepared statement, the CCI’s Ji largely focused on stablecoin regulation, warning that other jurisdictions were ahead of the U.S. on this front, singling out Europe’s Markets in Crypto Assets (MiCA) as a model to emulate. Failure to catch up to these other jurisdictions will (allegedly) compel crypto operators to ditch the U.S. for greener—green, as in profits—pastures. But like Kraken’s Jachym, Ji also suggested the CFTC take the lead in crypto oversight and leave decentralized finance (DeFi) projects to police themselves.

Da Ponte’s opening remarks predictably focused on digital asset-based payments, including those using PayPal’s in-house PYUSD stable (which attracted the unwanted attention of the SEC shortly after its 2023 launch). Da Ponte wants the federal government to mimic the actions of certain states and “enable non-banks to participate in crypto payment systems” and to exclude “the purchase, sale, and transfer of stablecoins” from rules regarding token trading.

Attorney Garrison believes the SEC needs to “articulate a sound legal interpretation for when digital asset transactions are subject to the securities laws,” starting with “an acknowledgment that the digital asset itself is not a security.” The SEC should also scrap all existing litigation involving violations of the exchange, broker-dealer and clearing agency rules, as well as make it easier to launch token offerings, tokenize securities and custody digital assets. Oh, and a pony. He’d really like a pony.

Massad plays the Tether card

We previously offered a few snippets from ex-CFTC chair Timothy Massad’s testimony, but here are a few more nuggets. Massad says he’s a digital asset believer, but he’s not one of those who claim to want ‘regulatory clarity’ while actually seeking ‘regulatory capitulation.’ According to Massad: “Yes, we need clarity of rules. But we need the right rules.”

Massad finds plenty of holes in the STABLE Act, the ‘payment stablecoin’ bill introduced by Reps French Hill (R-AR) and Bryan Steil (R-WI). Since Steil chairs the digital asset subcommittee, STABLE was front and center on the list of bills up for discussion on Tuesday.

Among Massad’s chief quibbles with STABLE are its insufficient standards for and supervision of state-chartered issuers, the severe limits on federal oversight, zero specifics addressing the fallout should a stable issuer go bankrupt, the risks of financial crime and evasion of sanctions by crypto intermediaries not subject to compliance obligations, and more.

That ‘more’ includes a shot across the bow of Tether (USDT), the largest stablecoin by market cap, and the widespread “concerns about its practices, including the nature of its investments, its lack of transparency, and the use of Tether for money laundering and evasion of sanctions.”

While STABLE makes it unlawful for unapproved issuers to issue tokens for use by U.S. residents, “there are no specific enforcement provisions or penalties attached to that language.” Massad wants STABLE to give the U.S. Attorney General explicit enforcement power with “extraterritorial application” and bar U.S.-based platforms—centralized and decentralized exchanges—from listing unapproved stables “so that there is no doubt as to legislative intent.”

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Opening remarks

Tuesday’s hearing was much like last week’s Senate/House hearings, in which the Republican majority rages against former SEC chair Gary Gensler’s anti-crypto reign of terror. The Democrat minority tried to stop the GOP from going overboard and granting crypto operators prima nocta rights while occasionally taking shots at President Donald Trump’s memecoin and “co-president Elon Musk.”

The opening remarks by Steil and ranking member Stephen Lynch (D-MA) didn’t deviate from this script that much, with Steil vowing a “course correct” from the Gensler years and Lynch suggesting that a regulatory revamp was justified “but not one that reflects a crypto wish list.”

Rep. Maxine Waters (D-CA) is not technically a member of the subcommittee, but she is a ranking member on the Financial Services Committee, so she showed up to chastise Steil and Hill’s STABLE bill while promoting the bill she herself introduced the day before.

When the witnesses were allowed to speak, the four overtly pro-crypto ones laid out their regulatory hopes and dreams, including passing both market structure and stablecoin legislation, with STABLE getting lots of love.

It was up to Massad to call out STABLE as “substantially weaker” than the Waters bill, mainly due to STABLE treating federal oversight as an afterthought. Massad also found fault with the FIT21 market structure bill from the last Congress, calling it overly “complex” and claiming it will “create more confusion” than any clarity it brings.

Massad stressed that he wasn’t anti-crypto, noting that it was under his chairmanship that the CFTC first suggested BTC was a commodity back in 2014. Clarity can be good, but “bad rules can have clarity.” The proposed bills getting most of the love from crypto operators are “a prescription for a mess” and will likely “evolve in ways we can’t predict.”

The other witnesses begged for clear distinctions between which tokens are securities and which are commodities, also arguing that regulators needed to formally acknowledge that tokens themselves aren’t securities. Massad countered, “If I have a token that represents GM stock, it’s a security, regardless of how it’s transferred.”

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Banking on it

Ranking member Lynch referred to the rash of crypto-friendly bank failures in early 2023 and asked Massad what additional risks legislators/regulators should consider to protect the broader economy if banks are allowed to cannonball into the shallow crypto pool.

Massad suggested banks should be allowed to custody digital assets and engage in crypto-based payroll services, but you don’t want banks putting crypto on the asset side of their balance sheets. Noting Silicon Valley Bank’s largest customer was USDC stablecoin issuer Circle—which had to be bailed out to the tune of $3.3 billion when SVB collapsed—Massad suggested banks be limited in terms of crypto customer concentration, a safeguard the STABLE bill doesn’t contain.

Massad also suggested Congress focus on getting stablecoin legislation done first before tackling a market structure bill. Congress would “learn a lot” in the process.

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Decentralization theater

Massad won few fans among his fellow witnesses when he pushed for Congress to “extend the perimeter” of what constitutes stablecoin oversight. Massad suggested Waters’ bill was on to something good by addressing self-hosted wallets and how stablecoins are transferred, not just who issues them and whether their reserves are real.

Rep. Bill Foster (D-IL) asked Kraken’s Jachym how the exchange knew tokens sent to the exchange from self-hosted wallets weren’t illicitly obtained. Jachym noted his exchange had a “zero-tolerance policy” when it came to ‘know your customer’/anti-money laundering practices. Foster said he wasn’t so much interested in Kraken’s customers but rather the other wallets and/or mixers that feed tokens into customers’ wallets.

Jachym claimed that 85-90% of market activity goes through centralized intermediaries, and that’s what they should be talking about today. Foster countered by saying he’s more concerned about the 15% that could be funding North Korean missiles.

Massad jumped in to say he found it interesting to hear Jachym’s centralized rationalization while at the same time actively promoting DeFi. “Are you willing to somehow restrict DeFi and have everything go through centralized intermediaries so we can have [Bank Secrecy Act] checks?” Sadly, he was cut off by chairman Steil’s banging gavel.

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State’s rights alright?

The ‘state v federal’ issue came up several times, with several of the pro-crypto witnesses praising the comprehensive approach taken by New York’s Department of Financial Services. This led Rep. Warren Davidson (R-OH) to ask Massad why he wanted to “nuke” what’s clearly working in certain states.

Massad noted that even the jurisdictions that all the pro-crypto panelists warned are vastly out in front of the U.S. are similarly struggling to define many of these issues, noting the European Union’s distinctions between ‘crypto assets’ and ‘financial instruments.’

Rep. Sam Liccardo (D-CA) asked PayPal’s da Ponte whether he shared Massad’s concerns regarding federal oversight. Da Ponte said his firm was focused on payments, and payments are regulated at the state level. ‘Payment stablecoins’ are, therefore, in the business of payments, not banking. Da Ponte added that a state path can co-exist with a federal path, but there should be a general set of standards rather than a duplicity of regulations.

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SEC v CFTC

Rep. Marlin Stutzman (R-IN) referenced the SEC’s new crypto task force and its chair Hester Peirce’s new game plan for regulating digital assets, including distinguishing between securities and commodities. Kraken’s Jachym noted that the SEC plan also referenced “clarity around staking,” which he called “a very important part of the ecosystem.”

Massad called Peirce’s plan “very thoughtful” and again suggested Congress might want to let the SEC and CFTC “work on this for a while” before tackling the market structure bill “because [Congress] could easily screw things up … more than help.”

Rep. Byron Donalds (R-FL) threw a bit of a curveball by asking what role self-regulation would play in the market structure bill. Attorney Garrison called self-regulation “an important layer in the overall sector” and noted that the traditional financial sector has self-regulated agencies such as the Financial Industry Regulatory Authority (broker-dealers) and the National Futures Association (derivatives), so there’s “absolutely no reason why porting that concept over into the digital asset space would not make sense.”

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See ya, wouldn’t want to CFPB ya

More than one Democrat noted that both the GOP reps and the pro-crypto witnesses kept talking about the need for regulation to ensure consumers are protected. They contrasted this with the utter glee with which many of these same GOP reps and crypto bros are welcoming the Trump administration’s gutting of the Consumer Financial Protection Bureau (CFPB).

Many crypto luminaries—including a16z co-founder Marc Andreessen, Coinbase (NASDAQ: COIN) CEO Brian Armstrong, Gemini’s Tyler Winklevoss and others—have all cheered the CFPB’s imminent demise. One observer who pointed out the falsity of Armstrong’s claim that the CFTB “is unconstitutional” suggested that these same individuals have “a lot to gain from a less informed, less protected consumer.”

Indeed, the CFPB has logged thousands of complaints regarding Coinbase’s dealings with its customers and last month proposed a new rule that would have (among other things) required crypto service providers to compensate users for funds stolen by bad actors, including through hacks. Clearly, the CFPB failed to see how much money Coinbase spent buying the new ‘pro-crypto’ Congress.

Rep. Ayanna Pressley (D-MA) wondered why the CFPB’s proposal was important, but was rebuked by chairman Steil for claiming Musk was killing CFPB with the blessing of “our scammer and harmer-in-chief.” Steil gently warned the panel against “engaging in personalities towards the president.”

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Hey, kids… let’s put on a show!

There were plenty of other issues raised and points debated, including whether dollar-denominated stable growth will boost T-bill purchases, whether ‘Murica will reclaim all the tech stars that allegedly fled to jurisdictions offering greater clarity, and whether a market structure bill needs to target everything at once rather than focus on a few basic foundational rules.

The hearing was formulaic, with a stacked panel of pro-crypto kids eager to tell Santa what they wanted/expected/demanded for Christmas and one Grinch urging caution. The GOP directed nearly all their questions to the crypto believers, while the Dems directed most of their queries to the guy who didn’t believe God would hurl meteors at Earth should crypto bros not be given the keys to the kingdom. 

There will almost certainly be a lot more of these performative hearings, despite the fact that the GOP—with the assistance of a sufficient number of pro-crypto Dems—already has the votes to pass the stablecoin/market structure bills the industry wants. But it wouldn’t be much of a movie if they killed the villain in the first act, now would it?

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Watch: Reggie Middleton on DeFi, booms/busts & crypto regulation