Congressional Witnesses Debate Regulatory Framework for Digital Assets

Witnesses at a House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion debated how to regulate digital assets.

Testimony

Ms. Marta Belcher, President and Chair, Filecoin Foundation. Ms. Belcher emphasized that cryptocurrency (i) provides an alternative to big tech by allowing people to control their own data and (ii) enables instant and automatic global payments. She said that a user's ability to transact directly without the constraints, risks and costs associated with using an intermediary must be protected.

Mr. Daniel Gorfine, Founder & CEO, Gattaca Horizons LLC; Adjunct Professor of Law, Georgetown University Law Center. Mr. Gorfine underscored the importance of Congress empowering financial regulators to implement a framework to oversee the spot digital commodity markets. He said that without authorization, the CFTC, in particular, is unable to directly oversee and supervise these markets. He said that lack of definitional clarity with regard to when a digital asset is or is not a security "is highly problematic" when determining jurisdictional authority. Even if appropriate regulatory frameworks are created for digital assets, Mr. Gorfine argued that they will remain "incomplete" if it is unclear when such frameworks apply.

Mr. Joshua Rivera, General Counsel, Blockchain Capital. Mr. Rivera called on policymakers to "meet the challenge" of designing new regulations designed for blockchain technology rather than "[c]linging to rules that were designed around centralized actors in hopes that they will also regulate decentralized actors." He clarified that the perception of the digital asset industry not wanting to be regulated "is false." Mr. Rivera warned that regulators’ reliance on existing frameworks and "campaign of enforcement" against an emerging industry will dissuade law-abiding Americans from innovating in the United States.

Mr. Zachary Zweihorn, Partner, Davis Polk. Mr. Polk stated that it is common within the crypto community to blame the SEC for a lack of a regulatory regime compatible with digital assets. However, he said that an "entirely new regulatory regime" must come from Congress. He highlighted several ways in which the existing market structure laws do not align with digital asset securities due to (i) broker-dealers being unable to facilitate trading of digital assets due to issuer compliance requirements, (ii) broker-dealers’ inability to maintain possession of customer digital asset securities under the Customer Protection Rule, (iii) clearing agency requirement obstacles for anyone involved in facilitating settlements and (iv) end-user involvement in digital asset trading which is not allowed in national securities exchanges.

Ms. Hillary Allen, Professor of Law, American University Washington College of Law. Ms. Allen asserted that existing financial regulations are "already well-suited" to accounting for the harms posed by crypto business models. She argued that while the crypto industry claims that these regulations are "incompatible" with their technology, it is more likely that crypto business models are incompatible with existing regulations because their business models "tend to harm people." She recommended that legislators consider a ban on issuing and trading crypto assets reasoning that the benefit from a ban would go beyond investor protection and financial stability to include "limiting environmental damage and preventing ransomware attacks."