US law And American justice concept

House Committee tackles draft bills to redefine regulation, enforcement of digital assets and stablecoins

A House Financial Services Committee met to discuss two Republican-drafted bills: one aimed at clarifying and reshaping regulatory enforcement in the digital asset space, and one introducing stablecoin-specific regulation. The Committee heard from expert witnesses, but the consensus seemed a way off, with opinions on the bills divided down party lines.

On June 13, the U.S. House Financial Services Committee held a hearing titled “The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem” to discuss two legislative proposals for the regulation of digital assets. One is related to stablecoin regulation, and the other is “market structure,” which focuses on more clearly defining the jurisdictions of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

The bills were jointly drafted by Republican lawmakers from the U.S. House Financial Services Committee and the House Agriculture Committee, and the contentious issue of whether an asset falls under the definition of commodities or security was once again top of the agenda—for the legislation and Tuesday’s hearing.

In its pre-meeting memorandum, the House Financial Services Committee stated:

“Determining whether a digital asset is offered as part of an investment contract (i.e., meeting the definition of a security) or falling under the definition of commodity in the CEA has proven difficult in the United States. Until there is a consistent, clear framework in place, market participants, consumers, and investors will continue to seek regulatory clarity.”

Of the two bills discussed at the hearing, the “Markets Structure” draft most directly addressed this issue and was naturally the most hotly debated.

Committee Chair Patrick McHenry (R-NC) described the latest version of this bill as: “A discussion draft that would close the gaps between our securities and commodities laws and provide much-needed clarity for digital assets.”

In coming up with the draft, the pro-crypto McHenry said he and his Republican colleagues had adhered to the “time-tested principle of ‘same risk same regulation,’ while modifying our regulatory framework to better match this innovative technology.”

The market structure’ discussion draft’

The Digital Asset Market Structure Discussion Draft, or simply the “discussion draft,” aims to clarify the respective jurisdictions of the SEC and CFTC, putting down in law the SEC’s authority over digital assets offered as part of an investment contract and the CFTC’s jurisdiction over the digital commodity spot market.

The legislation would require the SEC and CFTC to work together on rulemaking regarding certain terms and the oversight of dually registered exchanges.

In his introduction, McHenry said the draft bill would compel trading platforms to comply with strict requirements regarding the segregation of customer assets, as well as addressing how digital asset issuers raise capital for their projects—enhanced disclosure requirements would be a feature of this latter point, including the number of tokens in circulation and amount of assets held by affiliates.

But, according to McHenry, the central piece of the legislation was providing a workable timeframe for digital assets started as part of an investment contract to transition to digital commodities, “if the network is functional and decentralized.”

This could prove a sticking point, as it would involve the SEC and CFTC agreeing on a framework for when certain digital assets would become decentralized and defined as a commodity under the CFTC, thus no longer in the SEC’s jurisdiction.

Being decentralized is one of the common distinctions between a commodity and a security. Traditionally, commodities are interchangeable units/materials traded between peers and as such, can share a decentralized character with certain digital assets. Securities, including stocks, bonds, and mutual funds, are generally released by a centralized party and defined by how the original owner will see a profit or loss in return for an exchange between two people.

Certain digital assets can be considered securities because they are issued like stocks, by businesses and entities, which are often centralized. However, the decentralized nature—or claim—of certain assets and token-issuing decentralized autonomous organizations (DAOs) could place them more in the commodities category, where coins, including BTC and ETH, reside.

This is complicated enough without getting into the debate about whether there’s actually such a thing as truly ‘decentralized’ in the digital asset space.

The move to clear this up might seem to make sense, but it could also be seen as an attempted eroding of the SEC’s authority, by marking in law a point where something previously considered a security would pass into the CFTC’s jurisdiction.

The differing opinions among lawmakers on the Committee demonstrated the divisive nature of this discussion—a division that seemed to fall down partisan lines.

Partisan disagreement a potential roadblock

Republican members expressed support for the bills, noting that they would promote U.S. competitiveness, innovation, and consumer protection. Several Democrats, on the other hand, said that the bills might undermine existing laws or allow bad actors to thrive.

McHenry kicked off the hearing by praising the clarity that the Market Structure bill would bring to whether an asset is a security or commodity and the paths to registration with the SEC and CFTC that it proves. In the case of those registered with the SEC, he said this would bring “clarity for those assets offered as part of an investment contract, and therefore a security.”

However, Committee Ranking Member Maxine Waters (D-CA) noted that the provisional registration offered to digital asset firms in the Republicans’ draft market structure bill could “allow crypto firms that are currently being sued for violating our securities laws to continue doing business through provisional registration.”

She mentioned the SEC’s recent actions against Binance as an example of the agency attempting to prevent another FTX, and how such firms could use a provisional registration to wriggle out of ongoing actions.

Waters also had concerns about the bill rewriting the country’s securities and commodities laws and said that Democrats would be looking at it carefully, suggesting that existing securities laws already work and should not be undermined.

Fellow Democrat Digital Asset Subcommittee Ranking Member Stephen Lynch (D-Mass.) also expressed concerns. “Both these bills under consideration will serve to fundamentally undermine our broader financial system,” said Lynch. “By creating a whole new regulatory carveout dedicated to digital assets, these bills create a loophole that allow any non-bank security issuer to digitize or tokenize its product so it will be able to avoid compliance with the existing investor protection and financial stability regulations.”

When it came to the expert witnesses, the majority seemed to favor the Republican position.

Coy Garrison, a partner at Steptoe & Johnson LLP and former counsel to SEC Commissioner Hester M. Peirce, urged Congress “to bring sensible regulation to the digital asset industry.” He praised the draft under discussion as “a thoughtful and measured approach” that would “create a workable regulatory framework for the industry.” Something he suggested was absent in the U.S. currently, where regulators are more reactive than preventative.

“The status quo fails to protect people who trade or hold digital assets on centralized exchanges,” argued Garrison. “Enforcement actions are tools to hold wrongdoers accountable, but they cannot replace sensible market regulation that can help deter, identify, and mitigate wrongdoing.”

This was clearly a jab at the SEC’s much-maligned regulation-by-enforcement approach to digital assets, which has ramped up in recent months.

Another witness, Thomas Sexton III, president and CEO of the National Futures Association, was a big supporter of the CFTC’s approach, often seen as less intrusive. He emphasized the importance of segregation of consumer assets and called for Congress to provide the CFTC regulatory authority, to complement its existing anti-fraud authority, over spot digital commodities.

Emin Gün Sirer, founder and CEO of controversial blockchain developer Ava Labs, told the hearing of his concern for the U.S. falling behind international peers and competitors if its regulation stifles innovation in the blockchain space. He was primarily concerned that under the current system, “tokens and smart contracts created with blockchains are lumped into homogenous and incompatible categories,” and as such, was in favor of the bill’s move towards “clearer” definitions.

The only voice amongst the witnesses that seemed to dissent from the praise of the discussion draft was Aaron Kaplan, founder and co-CEO at Prometheum. He saw existing SEC regulations as sufficient and explained that new legislation is not in the best interest of the investing public or the blockchain industry:

“The SEC is the most capable financial markets regulatory agency in the world. The SEC relies on FINRA…, whose mission is market integrity and investor protection, to regulate the securities markets. Together, the SEC and FINRA employ approximately 8,000 employees to oversee these vital securities functions. Put simply, the Federal Securities Laws (FSLs) and oversight from the SEC and FINRA have proven to be the most effective system to protect investors, operate fair and orderly markets, and protect customers’ funds and assets.”

A strong argument but one that swam against the tide of opinion at the committee hearing.

Despite the different views in the room, McHenry said he wanted a bipartisan process but did insist that there was a time limit on alterations to the proposed legislation.

“This is a draft bill,” said McHenry, “there’s plenty of time for us members to find common ground on how we legislate here, but be advised I intend for this committee to markup some form of this legislation when we return from the July 4 recess.”

The other, perhaps less divisive, piece of legislation under discussion is related to stablecoins.

Stablecoin legislation

The draft stablecoin bill provides a definitive definition for stablecoins, one that clarifies that “payment stablecoins are not securities” and introduces limitations and requirements for stablecoin issuers.

The bill proposes the U.S. Federal Reserve as the key regulator overseeing requirements for stablecoin issuers, but the legislation offers state regulators powers to oversee companies issuing the tokens.

The draft legislation also discusses rules regarding who can issue stablecoins and the requirements of a payment stablecoin issuer, which include maintaining reserves backing the issuer’s stablecoins on at least a one-to-one basis; publicly disclosing the redemption policy; establishing procedures for timely redemption of outstanding stablecoins; and publishing the monthly composition of the issuer’s reserves on its website.

“The dollar is at a crossroads,” said Jeremy Allaire, co-founder, chairman, and CEO of Circle. Of the two bills up for discussion, Allaire was the only witness to focus on the stablecoin legislation, telling the Committee of his experience overseeing USDC and urging the U.S. to take action to support the competitiveness of the dollar on the internet.

Allaire praised the stablecoin bill as a “significant step towards increasing dollar competitiveness.”

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