Davis Polk partners Joe Hall and Zach Zweihorn will offer testimony before two House committees regarding digital asset regulations.[1]
House Financial Services Chairman Patrick McHenry recently stated his intent to pass stablecoin and crypto market structure legislation during this Congress, working closely with the Agriculture Committee in closing jurisdictional gaps while discussing whether cryptocurrencies should be classified as securities or commodities.
The Future of Digital Assets
Digital assets pose considerable threats to consumers, investors and businesses; their rapid proliferation can have significant ramifications on data privacy and security; financial stability and systemic risk; human rights enforcement and energy demand and climate change mitigation. We must take decisive action to reduce risks posed by digital assets and ensure this technology is used in an ethical fashion that doesn't promote criminal activities or support dictatorial regimes.
Last week, the House Financial Services Committee and Agriculture Commodity Markets, Digital Assets, and Rural Development Subcommittee held joint hearings to examine this topic. With both panels having strong Democratic representation, their hearings proved lively and informative.
Daniel Davis from Katten Muchin Rosenman testified before the Financial Services Committee and suggested that Congress will need to do extensive work to comprehend and regulate digital assets properly. Current regulation is inconsistent and unclear, with regulators needing to examine "how these products are used in real world". Davis noted that much of the spot market for digital assets falls outside the purview of either SEC or CFTC regulation, therefore many such transactions currently go unregulated in these markets.
Rep. Maxine Waters testified before the Agriculture Commodity Markets, Digital Assets and Rural Development Subcommittee and strongly advised Congress to set clear rules for crypto markets. She warned that without these clear regulations in place in America, other nations may take up regulation independently, which may make it hard for U.S. companies to compete globally.
She asserted that the United States must set standards for digital assets to remain an innovator in fields like blockchain and artificial intelligence, as well as in consumer protection for these digital assets. She suggested regulators formulate comprehensive policy to strike an equilibrium between protecting consumers while encouraging innovation, while at the same time creating a workable approach to oversight and enforcement that collaborates with law enforcement and industry for public education efforts.
Subcommittee Chairs
Leadership within congressional committees often determines their priorities and agendas. A chair of a committee holds significant power over assigning members to subcommittees, allocating staff resources among subcommittees, and allocating office suites when parties change control of the House. For instance, when Republicans chairing Appropriations committee may choose to bring some Democrats from other committees onto their panel so as to gain support for budget proposal they're working on with his team.
Rep. John McHenry will take over as chair of the Financial Services Committee this Congress and plans to focus on strengthening oversight of banks and Wall Street firms while pushing legislation that improves access to financial data for consumers while making it simpler for investors to raise capital. McHenry has also stated his intent to investigate cryptocurrencies following price crashes and allegations against exchanges like FTX.
On Thursday, Rep. French Hill will lead a new Financial Services subcommittee on digital assets, financial technology and inclusion; including new members from Congress like Reps Wiley Nickel and Ritchie Torres who may be more sympathetic towards an active congressional role for crypto.
Subcommittees of this panel will be overseen by Republicans Frank Lucas from Oklahoma and Zoe Lofgren from California; along with Democrats Roger Williams of Texas and Nydia Velazquez - its ranking member. Republican representatives will lead panels overseeing other federal agencies, such as the Science, Space and Technology Committee led by Oklahoma Rep. Frank Lucas or the Small Business Committee led by Texas Representative Roger Williams who has experience in auto retailing. Missouri Rep. Sam Graves will lead the Agriculture Committee, which oversees the Commodities Futures Trading Commission and has jurisdiction over cryptocurrency trading, under his watchful eye. New members joining will include Republican freshman Rick Larsen of Washington state and Democratic Yvette Clark from New York respectively.
Testimony
Congressional hearings are an essential element of the legislative process. Held to collect testimonies on measures or policies proposed to become laws, hearings also offer experts and citizens affected by them an opportunity to provide their input and opinions about proposed legislation. Hearings are usually open, so anyone may submit testimony which will become part of the official record.
House Financial Services and Agriculture Subcommittees held joint hearings this week to examine digital asset regulation. Both committees recognized the need for regulatory oversight in this space.
At this hearing, several witnesses expressed their perspectives on the current state of industry. Former CFTC Chairman Timothy Massad criticized the SEC's indecision as to which assets constitute securities versus commodities and penalizing companies instead of offering clear guidelines to follow.
Mike Crapo was called as another witness by the Senate Banking Committee. He spoke in favor of stablecoins, noting their use in providing stability and liquidity to markets as well as being part of innovation. However, he cautioned that they should be regulated to safeguard both users and financial systems.
Other witnesses also spoke on the need for clearer regulation in the crypto sector. Republican committee member Byron Donalds asked Gorfine if the CFTC could serve as market regulators for digital assets; she replied that she has extensive knowledge in commodities, markets, and underlying assets and would require additional resources in order to oversee spot markets for digital assets.
Purvi Maniar of FalconX also highlighted the need for clearer regulations. She stated that SEC's proposal on custodial disclosures might make it impossible for companies such as hers to comply as it requires more than simply listing who holds assets. A lawmaker raised concerns regarding FalconX KYC practices being inadequate but Allen responded it was actually part of their business model and should be seen as such.
Questions
The House is exploring the potential of digital assets and blockchain technology to enhance financial innovation and consumer protection. Last week, both Agriculture and Financial Services Committees conducted separate hearings with industry leaders in order to explore regulatory oversight strategies moving forward. Davis Polk partners Joe Hall and Zach Zweihorn were invited to give testimony before both committees; their prepared testimony can be found here and here respectively.
Hearings were held for lawmakers to gain an in-depth knowledge of the complex issues surrounding digital asset markets and gain an appreciation of their complex issues. Many key questions were addressed during these sessions, from education in this space to maintaining access for unbanked people.
One of the primary questions raised at the hearing concerned whether cryptocurrencies should be classified as securities or commodities, with significant ramifications on regulation based on which agencies oversee markets and what disclosure requirements must be fulfilled for those markets. Unfortunately, no definitive answers were forthcoming during this hearing regarding this question.
Patrick McHenry, the incoming Financial Services Chair for this Congress, plans on creating a subcommittee dedicated to cryptocurrency. McHenry and his Republican colleagues on the panel plan on prioritizing workable solutions that provide much-needed regulatory clarity while adhering to time-tested principles in order to safeguard market participants.
One of the key issues at play here is whether the CFTC can adequately regulate digital assets like Bitcoin and Ether in their spot markets. Speaking on behalf of the CFTC, Gorfine described an active and robust marketplace where products regulated by both bodies -- exchanges regulated by one body such as the CFTC as well as securities regulated by another -- compete for customer attention; though experts like Gorfine can effectively oversee those that fall within its purview while any product not under this regulation falls under either jurisdiction -- creating unnecessary confusion in the market place.
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.