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House Ag Hearing on Digital Assets

House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit

The Future of Digital Asset Regulation

Thursday, June 23, 2022

Topline

  • The CFTC witness, McGonagle, asserted that digital asset regulation is similar enough to what the CFTC is already doing and that the CFTC has the intellectual expertise to regulate digital asset markets but could use more resources to do so. Dr. Brummer said the CFTC has a comparative advantage over the SEC in regulating digital asset spot markets, and Hoskinson emphasized the transparency of the cryptocurrency industry.
  • Questions focused on whether the CFTC or SEC should regulate digital assets and how to categorize digital assets.

Witnesses

Opening Statements
Chairman Sean Patrick Maloney (D-N.Y.)

In his opening statement, Maloney spoke to the need to protect retail investors in the digital asset markets and the limits of Commodity Futures Trading Commission (CFTC) authority in digital asset markets, especially the regulatory gap in spot markets. He also discussed the need for regulatory certainty and investor education.

Ranking Member Michelle Fischbach (R-Minn.)

In her opening statement, Fischbach discussed the need to balance investor protection with innovation and the proliferation of cryptocurrency ownership. She praised the CFTC and Securities and Exchange Commission (SEC) for trying to fold digital assets into their existing framework but highlighted issues in spot markets.

Ranking Member Glenn Thompson (R-Pa.)

In his opening statement, emphasized the volatility of digital assets market and the need for guardrails in the industry, namely through his bill, the Digital Commodity Exchange Act (DCA).

Testimony

Mr. Vincent McGonagle, Director of the Division of Market Oversight, Commodity Futures Trading Commission, Washington, DC

In his testimony, McGonagle said that digital assets have been broadly determined by the CFTC and federal courts to be commodities under the Commodity Exchange Act (CEA). He added that the CFTC has anti-fraud, false reporting, and anti-manipulation enforcement authority over commodity cash markets in interstate commerce, including digital asset cash markets, and has aggressively exercised that authority. McGonagle summarized the CFTC’s experience overseeing the trading of digital asset-based derivatives on CFTC-regulated exchanges and the CFTC’s exercise of jurisdiction of its authority over commodity cash markets in interstate commerce to emphasize its understanding of digital assets.

Dr. Christopher Brummer, Agnes N. Williams Professor of Law, Georgetown University Law Center, Washington, DC

In his testimony, Brummer said the future of digital asset regulation will require more than just defining agency jurisdiction and placing digital asset products into varying governmental organizational charts but will also involve revisiting longstanding assumptions about market infrastructures embedded in securities and derivatives law and adapting the regulatory system in creative ways that reflect the best of our experience and collective values. He then said the SEC can and should regulate digital asset securities and that question is whether the CFTC could – or should – regulate the spot market for those digital assets which are commodities and not securities, adding that both agencies could do the job but would each bring to the table different comparative advantages. He also said industry has all too often touted financial inclusion offered by digital assets without thinking seriously about what it means or how to achieve it.

Mr. Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis Inc., New York, NY

In his testimony, Levin said the transparency of blockchains enhances the ability of policymakers and government agencies to detect, disrupt, and deter illicit activity in cryptocurrency markets. He then emphasized the need for clarification of cryptocurrency markets regulator responsibilities.

Mr. Charles Hoskinson, Chief Executive Officer, Input Output Global, Singapore

In his testimony, Hoskinson said, within the context of digital assets, that innovation makes specifics difficult and that we should focus on principles instead. He encouraged Congress to keep three things in mind: the existing regulatory regime never contemplate such an asset; without cryptocurrencies, most blockchain technology simply will not function; and any regulatory goals should be to promote appropriate consumer protections and assure market integrity.

Question & Answer

Regulatory Authority of CFTC vs SEC

Reps. Troy Balderson (R-Ohio), Angie Craig (D-Minn.), and Maloney asked Brummer if the CFTC should have authority over digital asset spot markets. Brummer said the CFTC is up to the job and has a comparative advantage in this area. McGonagle said the CFTC has the intellectual expertise to oversee these markets, is well positioned to regulate those markets, and understands the risks of digital assets. He also said the CFTC has comprehensive oversight of contract markets, and those concepts and their enforcement relate to the trading occurring in digital asset spot markets. Hoskinson said the question is around efficacy and that we need a good notion of decentralization.

Craig asked how the principles-based approach of the CFTC fits with digital asset markets. Brummer said the derivatives regulatory framework allows exercise of oversight while leveraging the self-regulatory capacity of organizations to keep up with innovation. Rep. Kat Cammack (R-Fla.) asked if federal regulation of digital assets under the CEA would raise the floor of required reporting and investor protections above that required by the state-by-state regime. McGonagle confirmed her statement, as did Brummer, who also casted doubt on the comparison. Cammack asked how the CFTC’s expertise in derivatives markets translates to regulation of cryptocurrency markets. McGonagle emphasized the rules the CFTC has in place to protect investors. Cammack asked how productive discussions are with the SEC over digital assets. McGonagle said the conversations are productive and that both agencies know where their jurisdictions overlap. Rep. Randy Feenstra (R-Iowa) asked if the CFTC would need additional Congressional authority to regulate digital assets. McGonagle said yes.

Categorization as a Commodity vs Security

Fischbach and Thompson asked about regulating cryptocurrency as commodities versus securities. Brummer said it is not clear whether cryptocurrency is a commodity versus a security and that the Howey Test leads to clarity in some instances and ambiguity in others because the Howey Test is contextually based. He added that not all digital assets are securities. Hoskinson said cryptocurrencies are like financial stem cells and that we must ask what public policy considerations are meant to be satisfied. He then spoke to the transparency of cryptocurrency – contrary to Brummer’s assertion that cryptocurrency’s transparent information is only accessible to experts, not retail investors – and said it is unwise to categorize cryptocurrencies and that we should instead ask what we are trying to guard against. Rep. Austin Scott (R-Ga.) asked how to determine which cryptocurrencies should be regulated a certain way. Hoskinson said cryptocurrencies carry identity and metadata through their transactions, allowing companies to create self-certification systems to participate in public-private oversight.

Regulatory Regime

Thompson asked what factors Congress should consider in constructing a regulatory regime. Brummer said multiple different actors will operate on the same chain and that we must ask what it means when different digital assets intersect.

CFTC

Fischbach asked what it means to be a principles-based regulator. McGonagle discussed the core principles the CFTC uses and broadly spoke about its enforcement program and offered specific examples of how it exercises its enforcement authority. Thompson mentioned the DCA and asked about the requirements the CFTC imposes on futures exchanges and swap execution facilities (SEF). McGonagle said those platforms are responsible for enforcing their own rules but also have responsibilities to the CFTC, like cyber resiliency.

Rep. Ann Kuster (D-N.H.) asked McGonagle about how the investigation process at CFTC works and if support from Congress is necessary. McGonagle said the CFTC has strong authority, resulting in multiple enforcement cases over anti-money laundering, pump-and-dump schemes, and other activity.

Investor Protection

Rep. Bobby Rush (D-Ill.) asked about preventing digital asset markets from preying on vulnerable communities. Brummer discussed disclosure and how disadvantaged communities will need to be more involved in the development and democratization of blockchain technology.

Craig asked how federal regulation of cryptocurrency trading platforms under the CEA is related to market transparency and retail investor access to information. McGonagle said the CFTC focuses on market integrity and centralization of information for retail market participants as well as disclosure.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.