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Senate Agriculture Committee Legislative Hearing to Review The Digital Commodities Consumer Protection Act

Senate Agriculture, Nutrition, & Forestry Committee                                           

Legislative Hearing to Review S.4760, The Digital Commodities Consumer Protection Act

Thursday, September 14, 2022

Topline

  • Examining how the Commodity Futures Trading Commission (CFTC) and Securities Exchange Commission (SEC) would work together to regulate cryptocurrency was a key topic of discussion.
  • Senators on both sides agreed that regulatory clarity and consumer protection are needed, while also still fostering innovation.
  • Members and witnesses agreed the U.S. is behind and needs to move forward for the sake of American competitiveness and economic and technological advancement.

Witnesses

  • The Honorable Rostin Behnam, Chairman, Commodity Futures Trading Commission, Washington, DC
  • Todd Phillips, Director, Financial Regulation and Corporate Governance, Center for American Progress, Washington, DC
  • Christine Parker, Vice President, Deputy General Counsel, Coinbase, San Francisco, CA
  • Denelle Dixon, Chief Executive Officer, Stellar Development Foundation, San Francisco, CA
  • Shelia Warren, Chief Executive Officer, Crypto Council for Innovation, San Francisco, CA
  • Heath Tarbert, Chief Legal Officer, Citadel Securities, Chicago, IL

Opening Statements
Chairwoman Debbie Stabenow (D-Mich.)

In her opening statement, Stabenow discussed the rapid number of Americans investing in cryptocurrencies and the lack of federal oversight. She also discussed the losses Americans have suffered by investing in cryptocurrency and noted that cryptocurrency and blockchain technology offer an alternative to using large financial institutions. She said there should be clear regulatory rules that allow actors to grow and innovate while also keeping consumers safe, adding that it is Congress’s job to bring the needed protections to the crypto marketplace. She concluded by discussing the Digital Commodities Consumer Protection Act (DCCPA) and what it would do.

Ranking Member John Boozman (R-Ark.)

In his opening statement, Boozman discussed how the Digital Commodities Consumer Protection Act would bring needed regulation to the commodity ecosystem and said regulation of cryptocurrency must ensure market integrity and consumer protection while also fostering an environment that encourages innovation. He discussed the patchwork regulation at the state and local lever of spot cash markets, which are inadequate, and said it is imperative that both Congress and regulators work with the digital commodities industry to ensure the laws and regulations for market participants are created through a transparent process that results in a clearly understood set of rules. He concluded by saying the Committee’s goal is to create a framework that allows the digital commodity industry to innovate and grow.

Panel I 

Testimony

The Honorable Rostin Behnam, Chairman, Commodity Futures Trading Commission, Washington, DC

In his testimony, Behnam said digital commodity cash markets have significant speculative retail participation, often use high levels of leverage, and rely on platform based custody arrangements outside the traditional regulated banking sector. He said many digital assets constitute commodities and touted how the DCCPA recognizes the Commodity Futures Trading Commission (CFTC) as the Commission with the proper expertise and experience to regulate the digital commodity market.  He said the CFTC has often adapted its oversight capabilities to meet the demand of evolving markets, adding that all digital commodity platforms must maintain adequate financial, operational, and managerial resources and separate customer funds and comply with Commission requirements for the treatment of customer assets. He concluded by discussing the requirements of the DCCPA. 

Question & Answer

Customer Protection mandate

Stabenow asked about the CFTC consumer protection mandate. Behnam said the rules the Commission promulgates from the Commodity Exchange Act directly support customer protections. He pointed out they have inspections and examinations and ensure individuals are held accountable for breaking the law. He said the bankruptcy aspect of the bill is another important part because it ensures customer protections. 

Cryptocurrency Markets

Sen. Amy Klobuchar (D-Minn.) asked if the CFTC is in a position to oversee cryptocurrency markets. Behnam said the unregulated digital assets platforms are, in many ways, setup similar to how traditional markets operate, adding the Commission will apply the same regulatory core principles over the digital commodity market as it has with traditional markets. He noted that with regulation will come reduced volatility. 

Environmental Impact

Sens. Cory Booker (D-N.J.) and Klobuchar asked how the bill approaches the environmental impact of crypto currency mining. Behnam said the bill requires the CFTC to draft and provide a report within six months to the Agriculture Committee in consultation with other U.S. regulators.

CFTC Resources/User Fee

Boozman asked if the bill as written prevents any application of the user fee onto derivative market activity. Behnam said yes, the fee would only be assessed on digital commodity platforms. Sen. John Hoeven (R-N.D.) asked if the CFTC has used the user fee before and what Behnam’s thoughts are on using it for the first time. Behnam said structurally, it should not be difficult to implement, adding that it will be important that we work with appropriators to set the level of what we can assess, but that it is critically important to the success of the DCCPA. Sen. John Thune (R-S.D.) asked what experience CFTC has in regulating digital commodities. Behnam said the CFTC has been overseeing the digital commodities market since 2014 utilizing the Commission’s fraud and manipulation authority. He discussed the various futures contracts the Commission has over seen and the number of enforcement cases brought against crypto firms. Sen. Dick Durbin (D-Ill.) asked how much money the CFTC needs to regulate crypto. Behnam said $112 million for the first three years, with $40 million just for the first year. He said he thinks this is feasible with the user fee laid out in the bill. Sen. Durbin said he felt that was low and that the CFTC would need more.

American Competitiveness

Sens. Joni Ernst (R-Iowa), Kirsten Gillibrand (D-N.Y.), and Tommy Tuberville (R-Ala.) asked how the DCCPA will promote the U.S. as a leader in cryptocurrency. Behnam said the regulatory certainty will give innovators and entrepreneurs more incentives to stay in the U.S. and raise capital in the U.S., adding that the U.S. does a great job at moving cautiously to make sure we are embedding the principles that have worked well for the capital markets and derivatives market. Thune asked where the U.S. ranks globally in digital assets and blockchain technology. Behnam said the U.S. is always at the top but that other countries have taken different approaches in an effort to capture innovators in their jurisdiction.

CFTC and SEC Relationship

Sens. Tina Smith (D-Minn.), Deb Fischer (R-Nebr.), Booker, Hoeven, Tuberville, and Stabenow asked how the CFTC and Securities Exchange Commission (SEC) would work together to regulate digital commodities. Behnam said it will not be any different than what the two agencies have done before and referenced Dodd-Frank. He said he and SEC Chair Gary Gensler work well together. He also said it is important that regulators have a mutual understanding between each other on how they will collectively regulate the digital assets market.

Retail Investors

Boozman asked if the bill covers the non-retail consumer as it relates to proprietary trading firms. Behnam said yes, adding that principal trading firms are exempt from the dealer definition within the bill. Smith asked how the CFTC would regulate retail investors. Behnam said commodities have a very different disclosure requirement than securities do, adding that the CFTC’s job is to protect markets and make sure customers understand market-based risks.

State Regulators

Sen. Deb Fischer (R-Nebr.) asked what the relationship between the CFTC and state regulators would look like. Behnam said he enjoys a good relationship working with state regulators and sees them as necessary because they are the boots on the ground.

Cybersecurity

Gillibrand asked what type of work the CFTC is undertaking to tackle cybersecurity threats.

Behnam said cybersecurity is a top priority of the Commission and discussed the core principles they have to provide consumer protection. He also talked about how the custody element will require deep thinking in an effort to have a cyber resilient system.

Panel II

Testimony

Mr. Todd Phillips, Director, Financial Regulation and Corporate Governance, Center for American Progress, Washington, DC

In his testimony,  Phillips discussed the risks retails investors face from crypto, crypto’s consequences for climate change, its negligible effects on financial inclusion, and the existing regulatory regime.

Ms. Christine Parker, Vice President, Deputy General Counsel, Coinbase, San Francisco, CA

In her testimony, Parker discussed how crypto trading platforms are currently regulated, the CFTC and SEC’s current authority over digital assets, and why the DCCPA is needed. She concluded by saying the DCCPA creates a strong foundation for the regulation of digital assets.

Ms. Denelle Dixon, Chief Executive Officer, Stellar Development Foundation, San Francisco, CA

In her testimony, Dixon said the DCCPA focuses on ensuring that the CFTC has the authority to oversee digital commodities, with the understanding that both the SEC and CFTC have key roles to play in regulating digital assets, adding that a more robust CFTC, working alongside the SEC, will provide consumers and the industry a clearer path forward. She said stablecoins are an essential ingredient for safe, secure, and fast payments and that it is encouraging to see the DCCPA set out a process for stablecoins. She discussed how DCCPA calls for a study of the energy impact of digital assets and offered two suggestions where additional structure could help foster innovation in the U.S. First, clarifying when a digital asset is considered a commodity versus security and second consolidating oversight responsibilities.

Ms. Shelia Warren, Chief Executive Officer, Crypto Council for Innovation, San Francisco, CA

In her testimony, Warren said crypto can provide an equal playing field for people and communities

that don’t have meaningful access to the current financial market. She highlighted what is new about crypto and the vast range of activities covered within the Web3 ecosystem and also urged Congress to take a forward-looking approach to cryptocurrency policymaking, saying a proactive approach to policymaking is critical for international competitiveness, national security, and consumer protection.

Dr. Heath Tarbert, Chief Legal Officer, Citadel Securities, Chicago, IL

In his testimony, Tarbert discussed how the digital asset markets require clear and coherent regulation. He said the DCCPA achieves three essential goals: (1) addresses a critical gap in the CFTC’s jurisdiction; (2) promotes U.S. leadership in digital assets; and (3) is designed to stand the test of time. He noted that the new categories of registrants created by the DCCPA could be more clearly defined and that market participants who reasonably apply and rely on principle-based regulations in good faith should not later be subject to arbitrary, post hoc enforcement actions. 

Question & Answer

Recommendations for the CFTC

Stabenow asked the panel if they had recommendations for the CFTC on how to do outreach to connect with underserved populations. Warren said it is important to begin with community need and to understand how crypto can support that demographic’s specific needs, adding that we need education that begins focusing on not only crypto but also baseline digital literacy.

Digital Commodities versus Securities

Boozman asked the panel if they agree that the DCCPA specifically defers to the SEC for those digital assets deemed “securities” and only looks to provide the CFTC regulatory authority over digital commodities. Phillips said this bill specifically defers authority over crypto securities to the SEC. It reserves for the CFTC those assets that are crypto commodities. He added that the CFTC has the expertise and regulatory capacity to oversee this market.

Access to Capital

Gillibrand asked how crypto can transform who has access to capital in times of need. Warren said the crypto community mobilized in the Ukraine effort at the request of their government to bridge financial gaps to aid the country. He said crypto was used for medical supplies, arms, and other vital resources as well as a critical resource for activists in foreign states, and women in oppressed nations can maintain financial resources secretly through crypto.

 

For more information on this hearing, please click here.

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