Congress divided in partisan hearing on DeFi

United States lawmakers of the House Financial Services Committee’s digital assets-focused subcommittee clashed over how to regulate decentralized finance (DeFi) during a congressional hearing on Tuesday, with some advocating for a freer financial system, while others blamed DeFi for crime, scams, and tax evasion.

The September 10 hearing, titled “Decoding DeFi: Breaking Down the Future of Decentralized Finance,” explored emerging topics like tokenization and how blockchains can be used in finance.

Taking place a few hours before the two presidential candidates—former President Donald Trump and Vice President Kamala Harris—took to the stage for their first televised debate, the DeFi hearing was perhaps unsurprisingly defined by partisan politics, with the Republican-Democratic disunity on full display over how best to regulate the technology.

Subcommittee Chair French Hill (R-AR) opened the hearing by vocalizing the Republican “pro-crypto”—or what could more generously be described as pro-innovation and pro-economy—approach to financial regulation.

“As we consider how blockchains can be used in finance, we must continue expanding our knowledge of the possible costs and benefits as it relates to DeFi,” said Hill. “Substituting intermediaries for autonomous, self-executing code, decentralized finance can shift the way the financial markets and transactions are currently structured and governed.”

This was in stark contrast to Democrats such as Rep. Brad Sherman (D-CA), who claimed that DeFi was primarily used for crime, sanctions evasion, and tax evasion.

“What we have here is an effort to liberate billionaires from income taxation,” said Sherman.

DeFi has been conspicuously absent from recent U.S. regulatory efforts. The only major attempt at dealing with DeFi has come from the Financial Innovation and Technology for the 21st Century Act, also known as FIT21, which passed a full vote of the House of Representatives earlier this year and would direct the U.S. Treasury Department, Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to study DeFi.

The Republican-led bill would also significantly boost the oversight role of the CFTC while reducing that of the SEC; the latter regulator has been widely criticized, chiefly by Republican lawmakers, for its purported heavy-handed approach to oversight of the digital asset space.

For its part, the SEC proposed a rule in 2022, which has since been revisited, that would broaden the definition of an exchange to encompass decentralized exchanges. This rule would require decentralized projects to register with the agency as alternative trading systems, so naturally, it received pushback from the more regulation-shy end of the digital asset industry.

Not least because the SEC has not been an idol when it comes to cracking down on DeFi, a recent example was Uniswap Labs, developer of the decentralized exchange Uniswap, which received a Wells Notice—a letter that the SEC sends to people or firms after an investigation that states it is planning to bring an enforcement action against them—in May.

Such actions were the kind of things the Director of Research at Coin Center and hearing witness Peter Van Valkenburgh argued were avoidable and unjust during his testimony on Tuesday. He suggested that regulators have not given the digital asset industry enough guidance on how to comply and avoid situations such as tax evasion.

“I do not, however, think that tax evasion and its existence warrants a 100% surveilled and controlled financial system,” said Van Valkenburgh.

The House Committee heard from five witnesses on both sides of the DeFi debate, another in favor being Amanda Tuminelli, chief legal officer at DeFi Education Fund, who said in her opening statement that traditional finance “relies on intermediaries that often serve as gatekeepers to finance.”

“Big banks can and do deny access to the system for discriminatory reasons or no reasons. But DeFi is open access, anyone with an internet connection has access to a DeFi protocol and that is the epitome of financial inclusion,” argued Tuminelli.

On the more skeptical side was a senior policy analyst at Americans for Financial Reform, Mark Hays, who described the digital asset and DeFi sector as “highly volatile, scam-laden, and extremely predatory, which exposes investors to substantial financial losses.”

He went on to advocate for applying current securities laws to DeFi, an approach favored by Committee Ranking Democrat Maxine Waters (D-CA), who has previously argued that “we don’t need to invent new regulatory structures simply because crypto companies refuse to follow the rules of the road.”

Fellow Democrat Rep. Stephen Lynch (D-MA) largely supported this view, criticizing the digital asset industry as a whole for its “episodes of implosion.”

“This committee should have explored digital asset topics such as DeFi and tokenization long before legislation was introduced,” added Lynch. “The FIT act, which I strongly opposed, excluded DeFi services. I urge this committee to refrain from moving forward with similar legislation that would invite the same consumer and investor protection risks by legitimizing this industry.”

However, he highlighted that there currently is no “consensus definition” for DeFi among regulators or the industry itself and urged legislation to redress this.

More shots fired at Trump

Waters also took the timely opportunity of a Committee hearing on Presidential debate day to criticize the Trump-backed digital asset project, World Liberty Financial, spearheaded by the former President’s sons, Donald Trump Jr. and Eric Trump.

The project has faced some recent and very public challenges. Last week, the X accounts of Lara and Tiffany Trump (Donald Trump’s daughters) appeared to have been hacked so that posts promoting a token purporting to be associated with World Liberty Financial could be shared.

“While decentralized finance, or DeFi, aims to create greater efficiencies and transparency, it can also pose heightened risks of hacks, scams, unequal information and conflicts of interest that can harm consumers and investors,” said Waters. “We’ve seen this play out in the new DeFi venture that Eric Trump and Donald Trump Jr. plan to launch, called World Liberty Financial.”

Waters added that “lawmakers have a responsibility here” while questioning the ability of regulators such as the SEC and the CFTC to deal with DeFi platforms and “mass noncompliance by entities that claim they are decentralized to avoid regulatory compliance.”

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