HFSC Considers Impact of Increased Digital Asset Use on U.S. Financial System

At a hearing titled "America on 'FIRE': Will the Crypto Frenzy Lead to Financial Independence and Early Retirement or Financial Ruin?," the U.S. House Financial Services Committee (the "Committee") considered the increased exposure that institutional investors and individual persons have in the digital assets markets.

The Committee addressed regulatory and financial concerns, including, among others, reporting requirements, illicit activities, market manipulation, and the inability to deliver promised products and services. The Committee also discussed issues of regulatory jurisdiction over the diverse range of digital assets, including concerns raised by the SEC, FDIC, CFTC, FinCEN, FTC, OCC and other federal regulators.

The Committee heard testimony from the following individuals:

• Alexis Goldstein, Director of Financial Policy, Open Markets Institute. Ms. Goldstein requested that Congress determine what regulatory gaps require new legislation to safeguard consumer and investor protections in the cryptocurrency space. Ms. Goldstein recommended that regulators monitor the digital asset space, with respect to existing compliance standards and regulations, while new legislation is implemented to ensure that mechanisms are in place to evaluate systematic risks posed by digital assets.

• Sarah Hammer, Managing Director, Stevens Center for Innovation in Finance at the Wharton School of the University of Pennsylvania. Ms. Hammer emphasized the importance of balancing the benefits of blockchain technology and cryptocurrencies with their potential systematic risks in order to foster innovation, safety and financial stability. Ms. Hammer recommended that Congress utilize the authority of the Financial Stability Oversight Council to align federal interagency efforts, engage with state regulators and confer with international standard-setting bodies. She also emphasized that Congress should establish a "clear, sufficient, and appropriate" regulatory framework for cryptocurrencies.

• Christine Parker, Partner, Reed Smith LLP. Ms. Parker highlighted the lack of support in the digital asset market from Congress under the existing financial regulatory regimes. Ms. Parker emphasized the need for Congress to (i) pass "comprehensive and meaningful" legislation regarding cryptocurrency spot markets, and (ii) establish a "logical framework" for the regulatory characterization of digital assets. Ms. Parker also highlighted two "areas of growth" in the digital asset space: (i) the development of non-fungible tokens, with respect to gaming, and (ii) decentralized finance more broadly.

• Eva Su, Analyst in Financial Economics, Congressional Research Service. Ms. Su recapped current debates on digital assets, and restated the consensus of policymakers, that the underlying objective of regulatory oversight of the digital asset space should be ensuring market stability and investor protection while maintaining an innovative financial marketplace.

• Peter Van Valkenburgh, Director of Research, Coin Center. Mr. Valkenburgh argued that federal and state governments have robustly regulated cryptocurrencies. Mr. Valkenburgh stated that there is no need for new regulations, and that the CFPB, the FTC, the SEC, the CFTC and state attorneys general have sufficient existing authority to address the concerns presented by cryptocurrencies and digital assets.