Financial Services Subcommittee Considers Digital Assets Legislation

At a hearing before the House Financial Services Subcommittee on Digital Assets, witnesses recommended legislative changes to the current digital asset regulatory framework.

The Subcommittee considered the following bills on digital-assets.

• H.R. ___, the "Blockchain Regulatory Certainty Act," would exempt blockchain developers and blockchain service providers from specific financial reporting and licensing requirements if they do not control consumer funds;

• H.R. ___, the "Financial Technology Protection Act," would create the “Independent Financial Technology Working Group to Combat Terrorism and Illicit Financing” which would be required to (i) research the use of new financial technologies for terrorist or illicit activities and (ii) submit an annual report on its findings;

• H.Res. ___, a Resolution Expressing Support for Blockchain Technology and Digital Assets, enumerates potential benefits of blockchain technology and digital assets;

• H.R. ___, the "Keep Innovation in America Act," would (i) amend the digital asset reporting provisions under the Infrastructure Investment and Jobs Act by updating the definition of “broker” and “digital asset” and (ii) mandate a report and study on the treatment of digital assets as cash for purposes of reporting requirements; and

• H.R. ___, the "Keep Your Coins Act," would prohibit federal agencies from applying a rule used to “impair” a person involved in the transaction of digital assets from acting as a self-custodian.

Testimony

Duke University Financial Economics Center Policy Director Lee Reiners. Ms. Reiners disparaged digital assets as an asset class, saying that it is (i) “wholly unconnected to the productive purpose that defines finance” and (ii) without a fundamental valuation methodology on which digital assets are traded. Further, she denied the crypto industry’s claim that clearer regulations would reduce what Ms. Reiner called digital assets’ “fragility.” While Ms. Reiner applauded enforcement of regulations by agencies, in particular, the SEC, she called on Congress to bridge the regulatory gap between digital assets that are securities and those that are commodities. One solution Ms. Reiner recommended was granting the SEC exclusive authority to regulate the crypto industry, stating that the SEC has “more expertise, more resources, and more appetite” for enforcement than the CFTC with regard to crypto.

Coinbase Chief Legal Officer Paul Grewal. Mr. Grewal claimed that a majority of Americans feel that the financial system is both unfair and in need of a “serious upgrade.” He argued that crypto and blockchain technology was the solution. He warned that the United States was in danger of falling behind as a leader on crypto noting that foreign jurisdictions have already implemented “high standard” regulatory frameworks.

Jones Day Partner Jonathan V. Gould. Mr. Gould asserted that regulatory guidance in response to recent developments to digital assets has created a “chilling effect” on banks’ practical ability, as well as willingness, to engage in digital asset services. Mr. Gould added that because the supervisory relationship between bank and regulator is private, there is no way of examining the causal effect of agencies’ regulatory guidance on banks. To address these issues, Mr. Gould asked Congress to consider (i) whether the response of agencies is disproportionate to risks posed by digital assets, (ii) how regulations prevent banks from exploring new technologies and (iii) asserting congressional authority to determine the U.S. banking system’s risk tolerance by intervening in instances where it disagrees with an agency’s assessment of risk.

Penn State Dickinson Law Professor Tonya M. Evans. Dr. Evans advocated for improvements to the crypto asset industry that (i) establish clear regulations, (ii) strengthen access to and inclusion for all Americans while also protecting against financial and predatory harm and (iii) empower the CFTC to regulate spot crypto asset markets. Dr. Evans advised Congress to “reign in” the recent “First-Ever Comprehensive Framework for Responsibility Development of Digital Assets” Executive Action after it failed to deliver a workable framework that regulated parties could rely upon. Dr. Evans called on Congress to hold an oversight committee hearing with the SEC to examine how its “aggressive piecemeal” regulatory approach to crypto assets aligns with its legislative mandate to protect investors.

CEO and Co-Founder of BitGo Mike Belshe. Mr. Belshe questioned how the United States can expect to remain competitive in crypto technology if regulatory agencies lag in providing crypto asset firms a basic regulatory framework. He questioned how the issue of custody of digital assets under the Advisers Act went unanswered by the OCC and then the SEC for several years (until just recently when the SEC proposed amendments to the Custody Rule). Mr. Belshe argued that regulatory agencies cannot claim that digital assets are different while also claiming that the rules should already be well understood.