House Subcommittees Consider Digital Asset Regulation

House Financial Services and House Agriculture subcommittees considered testimony on creating digital asset regulation and defining the SEC’s and the CFTC’s related jurisdiction.

At a joint hearing of the House Agriculture Subcommittee on Commodity Markets, Digital Assets, and Rural Development and the House Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion, Congressman French Hill (R-AR) warned that in absence of a regulatory framework for digital assets, legislators have been "forcing this activity to happen on offshore exchanges, rather than in a regulatory US environment – and this will hurt American investors more than anything." He said that both Democrats and Republicans have the goal of bringing the same consumer protections "seen in the current financial regulatory structure to digital asset-related activities and intermediaries."

The witnesses included:

• Mr. Andrew Durgee, Head of Republic Crypto, Republic. Mr. Durgee argued that the claim that digital assets can easily be registered under the SEC is "simply not accurate." He stated that Congress must authorize the SEC to expand on what registered broker-dealers and exchange are doing with digital assets in order to ensure investor protections in the crypto assets space. Mr. Durgee warned that without a regulatory framework for digital assets, the United States will experience a (i) reduction in economic growth, (ii) decline in technological advancements and (iii) losses in global competition.
• Mr. Matthew Kulkin, Partner and Chair, Futures and Derivatives Practice, Wilmer Cutler Pickering Hale and Dorr LLP. Mr. Kulkin stated that 71 percent of the digital asset market has been recognized as commodities by the SEC and the CFTC (e.g., Bitcoin, Ether, and Tether) but that currently, the CFTC does not have the authority to regulate these commodities. As a result, Mr. Kulkin emphasized that the CFTC is unable to regulate 71 percent of the digital asset spot market without authorization from Congress.
• Mr. Marco Santori, Chief Legal Officer, Kraken Digital Asset Exchange. Mr. Santori called on Congress to provide a mandate to regulators that (i) creates "clear jurisdictional lines," (ii) expands CFTC authority over spot digital assets, (iii) facilitates interagency coordination over digital assets and centralized exchanges, (iv) defines transitional arrangements to "minimize market disruption" and (v) provide investor protections. In addition, Mr. Santori encouraged a "coherent" international regulatory framework due to digital asset markets being "naturally global."
• Mr. Daniel Schoenberger, Chief Legal Officer, Web3 Foundation. Mr. Schoenberger identified regulatory barriers facing the digital asset industry, including (i) a lack of "comprehensive legislative framework" and (ii) attempts by regulators to apply laws that are not tailored to blockchain technology or digital assets. Mr. Schoenberger said that these barriers risk the United States losing its leadership position in the development of blockchain technology.
• Mr. Timothy Massad, Research Fellow, Harvard Kennedy School Mossavar-Rahmani Center for Business and Government. Mr. Massad recommended that Congress require each trading or lending platform to comply with a set of core principles for any tokens that it trades, regardless of whether the token is a security or commodity. Mr. Massad said that Congress would then mandate the SEC and CFTC to either (i) implement the principles through joint rulemakings or (ii) establish a self-regulatory organization to enforce the rules which would be overseen by both the SEC and the CFTC.
• Mr. Michael Blaugrund, Chief Operating Officer, New York Stock Exchange. Mr. Blaugrund recommended segregating key functions when implementing a digital asset regulatory framework that protects investors. He suggested looking to the "established" financial markets for guidance, and applying the existing public securities trading framework to oversight of digital assets.