The Joint Financial Services-Agriculture Subcommittee first planned hearing on “The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital Asset Markets” took place in Washington, D.C. on Wednesday, where lawmakers across both sides of the aisle discussed the future of digital asset regulation in the U.S. and in particular what roles should be played by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
In kicking off the hearing, Rep. Dusty Johnson (R-SD), who serves as Chair of the Subcommittee, set the scene: digital asset technology holds ‘real promise’ in a range of areas, but that legislation in the United States had not adequately kept up.
“Current federal laws and regulations provide few rules of the road for those who want to engage with those emerging technologies,” he said. “I think we all agree that the current uncertainty doesn’t serve the market well.”
CFTC vs. SEC
One of the key items of uncertainty that have received plenty of airtime recently—and came up again and again in today’s hearing—was which regulator is best-placed to oversee the digital asset industry (and in what contexts) between the SEC and the CFTC, the former being concerned with securities and the latter concerned with commodity-based futures and derivatives markets. Even among the witnesses called to testify—which included former CFTC chair Timothy Massad—there was disagreement over whether something could be both a security and a commodity.
“Something can be a commodity under our laws—such as ETH—by virtue of the fact that there’s a futures contract traded on it,” Massad said.
“That doesn’t necessarily mean it is not a security. You can have something that’s both. And the question for a lot of these tokens is: is there still that enterprise behind it that is affecting its value?” he asked.
The CFTC has often been cast as the more industry-friendly regulator. At the same time, the regulator itself has called for more resources to both fulfill its current mandate over commodity-based futures and derivatives markets and take on additional responsibilities over digital assets.
Rep. Yadira Caraveo spoke to the CFTC ‘s recent request for additional resources so that it can fulfill its growing role as a regulator over digital assets.
“We must value those who do the work for the taxpayers. I strongly believe that any digital asset legislation passed by Congress must provide a funding mechanism for the CFTC,” she said in her opening remarks.
The fact that the CFTC is far less resourced than the SEC also caused Rep. Sean Casten (D-IL) to question the digital asset industry’s supposed preference for the CFTC.
“The CFTC is the smallest of all our regulators. But to state the obvious it is never easy to raise the resources its required,” Casten said, then asking the New York Stock Exchange’s COO Michael Blaugrund:
“If this industry is such a big deal, would you care to speculate why the industry would like to be regulated by the smallest, least well-resourced organization?”
Blaugrund wouldn’t speculate, but the question was clearly rhetorical.
However, not every member of the Committee appeared to agree with the primacy of the SEC vs. CFTC question.
“I worry we might be asking the wrong questions and risk feeding into an industry fuelled narrative of a turf war between the SEC and CFTC,” Rep. Stephen Lynch (D-MA) remarked. “The problem is not regulatory ambiguity: it is mass non-compliance with existing laws.”
US is falling behind the rest of the world
No matter the various opinions on this uncertainty, it is clear that it is a large part of what is animating lawmakers, not least of all because 2023 has seen other jurisdictions worldwide make significant progress toward designing and implementing their own proposed comprehensive legal frameworks. For that reason, the topic came up repeatedly throughout the hearing.
Johnson said the U.S. had fallen behind the G20 countries in this area and referenced an absence of U.S. leadership.
At one point, Marco Santori, who appeared at the hearing as a witness in his capacity as Chief Legal Officer of Kraken, was asked by Rep. Frank Lucas (R-OK) how the progress of jurisdictions like the European Union and the United Kingdom makes the jobs of U.S. lawmakers more difficult.
“It’s important we get it right and not necessarily first, but I can tell you firsthand that we have made plans to invest in Europe. We have planned to invest in the United Kingdom,” Santori replied.
“As for our plans to invest in the United States, well, we’re limited in that regard. We find it quite difficult to figure out how much we should deploy in terms of resources here without a comprehensive federal plan,” he added.
New laws: where to begin?
The Subcommittee discussed several potential approaches to regulating digital assets, from merely fitting digital assets within existing laws to modifying current frameworks to establishing an entirely new, dedicated regime for the industry.
For instance, former CFTC chair Timothy Massad expressed concerns over tinkering with current definitions and whether it would truly provide an answer to the current ambiguity.
“I think it is likely to generate its own questions of interpretation that will lead to litigation and confusion,” he noted.
“I think there’s another approach, which is that we would pass a law that requires that any trading platform or lending platform that uses or trades Bitcoin or Ethereum has to comply with a set of principles with everything it does, for every token and for every activity. That would be things like protecting customer assets, protecting against fraud and manipulation, requiring reporting, requiring trade transparency,” he said.
Congress would direct the CFTC and the SEC to develop those rules and standards together or create a Self Regulatory Organization that would do it for them.
When asked what this SRO might look like, he gave FinRA as an example.
One of the aspects of current laws that was suggested as a reason they are an ill fit for digital assets is the current laws around disclosure to investors and regulators. This is in part due to the fact that they don’t contemplate many factors unique to digital assets that would be critical for any investor to understand yet are not captured by current disclosure regimes.
Offered Kraken’s Santori: “Things like: number of nodes operating on the network, how many developers are actually developing on this network, whether they’re associated or whether they are operating independently, where those nodes operate from. These are highly technical and digital asset specific characteristics that I could frankly list for the rest of my time.”
Andrew Durgee, the head of Republic Crypto at Republic who testified as a witness, added:
“The disclosure requirements simply do not work within an industry trying to decentralize itself. For example, once a certain number of investors who are token holders is reached, the issuer is then required to register under s12(g) of the Exchange Act, inherently limited access and inclusion from other eager participants. It’s nearly impossible for a company to push for decentralization without triggering this requirement.”
Lynch proposes requiring that both sides of every transaction be associated with a digital identity
Perhaps the most drastic suggestion from the Subcommittee came from Congressman Bill Foster (D-IL).
“If we wish to prevent wash trades, insider trading, front running, money laundering, ransomware and everything else, is there any alternative to having both sides of every crypto transaction associated with a digital identity, and have that digital identity issued by a government with which we have extradition treaties and a common concept of financial fraud?” he asked.
Kraken’s Santori tried to resist this idea and, when asked for such an alternative, began describing how Kraken monitors their own exchange, but he was cut off by Foster, who pointed out that Kraken’s monitoring cannot possibly capture every transaction. He said it was harder to detect something like wash trading with some assets than it is with others.
“To my mind, the place we have to go…If you look at the automobile industry and how essential it has been to the development of the automobile industry to have license plates issued to a registered driver. It would be completely unacceptable to have unlicensed cars driving through your neighborhood or crossing into your borders,” he said.
Watch: U.S. Congressman Bill Foster on Bitcoin Association’s Blockchain Policy Matters
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