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The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets

House Committee on Agriculture                                                                                                       

The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets

Tuesday, June 6, 2023

Topline

  • Democrats asked how the CFTC and SEC will be able to accomplish working on the digital asset regulations without proper funding.
  • Republicans voiced concerns that too much regulation on markets could cause firms to venture to other countries and hurt the US economy.

Witnesses – Panel I

  • The Honorable Rostin Behnam, Chairman, Commodity Futures Trading Commission

Witnesses – Panel II

  • The Honorable J. Christopher Giancarlo, Former Chairman, Commodity Futures Trading Commission
  • Paul Grewal, Chief Legal Officer, Coinbase
  • The Honorable Dan Gallagher, Chief Legal Compliance and Corporate Affairs Officer, Robinhood Markets, Inc.; Former Commissioner, US Securities and Exchange Commission
  • The Honorable Dan Berkovitz, Former Commissioner, Commodity Futures Trading Commission; Former General Counsel, US Securities and Exchange Commission
  • The Honorable Walt Lukken, President and Chief Executive Officer, Futures Industry Association; Former Acting Chairman, Commodity Futures Trading Commission

 

Opening Statements

Committee Chairman G.T. Thompson (R-Pa.)

In his opening statement, Thompson discussed how improving our banking and financial services to providing data privacy and improving supply chain logistics, these technologies have the potential to transform everyday lives for Americans. He noted that as Congress looks to put up clear guardrails for digital assets, it is important that consumers and market participants benefit from the same customer protections found in traditional financial markets. Thompson said the US has always been a leader in financial and technological innovation, and that the US has the most liquid and robust markets in the world. He closed by stating that the SEC’s actions from this morning against Coinbase are a prime example as to why we are holding this hearing today.

Committee Ranking Member David Scott (D-Ga.)

In his opening statement, Scott noted the CFTC needs and deserves more funding. He noted that the proposal does not have any funding for additional staffing or resources. He noted that the digital asset industry, without a doubt, exposes all who choose to participate to serious potential financial risk and uncertainties. He was concerned about how this industry has lost billions of customer funds due to questionable and inefficient business practices. He closed by noting that this current situation is unsustainable and cannot go on.

 

Testimony – Panel I

The Honorable Rostin Behnam, Chairman, Commodity Futures Trading Commission

In his testimony, Behnam discussed that since his Senate confirmation hearing almost two years ago, he has consistently highlighted the need for Congressional action to address the lack of federal regulation over the digital commodity market. He noted that bringing this volatile market out of the shadows and into the regulatory fold would protect customers, ensure market resilience and stability, and prevent contagion to the traditional financial system. Behnam recommended that Congress enact legislation to fill the clear regulatory gap over the spot market for digital assets that are not securities. He closed by also recommending that Congress provide the resources necessary to implement the new authority regulation of the digital commodity market.

 

Question & Answer – Panel I

Closing the Regulatory Gap

Thompson asked why it’s so important for Congress to proactively work to close this gap. Behnam noted that because of emerging access to these markets that have reduced barriers, retail participants have greater exposure to commodity assets, as they are defined by US law. Particularly ETH and BTC which constitute most cryptocurrency holdings.

Thompson continued to ask if Behnam could briefly elaborate on the recommendations that FSOC has made with respect to addressing the regulatory gaps and non-security digital asset cash markets. Behnam stated that FSOC’s recommendation is that there is a gap for digital tokens that are not securities.

Rep. Jim Costa (D-Calif.) asked what Behnam’s biggest fear is, in continuing without regulations. Behnam said his fear is that if we don’t address this issue from a legislative standpoint, we will continue to bring these cases of fraud.

Rep. Max Miller (R-Ohio) asked how the current lack of regulatory certainty for digital assets hinder innovation. Behnam said that without further guidance from Congress and a sense of where regulators should go, CFTC won’t know how to define these assets.

Rep. Monica De La Cruz (R-Tex.) asked if Congress does not pass legislation if regulators like the CFTC could simply use its existing authorities to cover the regulatory gap. Behnam said it is not possible.

Engagement with Stakeholders and Agencies

Rep. Rick Crawford (R-Ark.) asked what is happening with licensure processes and the National Futures Association (NFA). Behnam noted that CFTC and NFA have a great relationship.

Rep. Jim Baird (R-Ind.) asked the same question, in which Behnam referred to the NFA as the CFTC’s “boots on the ground” partner.

Rep. Andrea Salinas (D-Ore.) asked what the CFTC and other federal agencies are doing to protect Americans from fraud and manipulation in the digital asset arena. Behnam said there are multiple regulatory agencies in the US government, and that there are some benefits and some flaws to that.

Rep. Doug LaMalfa (R-Calif.) questioned Behnam on what it looks like to work with the Futures Association for digital commodities. Behnam said he wants to replicate what he does now in traditional markets.

Rep. Frank Lucas (R-Okla.) asked about the collaboration between the CFTC and the SEC regarding treatment of digital assets and their intermediaries. Behnam said that the CFTC talks frequently with the SEC.

Rep. Zach Nunn (R-Iowa) asked Behnam if he thinks regulatory coordination between CFTC and SEC is important. Behnam said it is.

Funding Cuts

Scott asked what the effect of not providing additional funding to the SEC and CFTC would be. Behnam said that neither agency would be able to appropriately and impactfully implement any laws at hand.

Scott also asked Behnam to estimate the amount of time that the joint rule making process would take without additional resources. Behnam said it would be hard to estimate, but with existing funding it would take 3 to 4 years.

Rep. Shontel Brown (D-Ohio) asked how funding cuts would impact the CFTC’s ability to implement legislation like the bill proposed during the hearing. Behnam said the impact would be devastating.

 

Testimony – Panel II

The Honorable J. Christopher Giancarlo, Former Chairman, Commodity Futures Trading Commission

In his testimony, Giancarlo discussed how his team knew that blocking Bitcoin products would not stop the rise of virtual currencies. He noted that if new products are blocked, Americans are deprived of smart regulation. Giancarlo said doing nothing would be irresponsible. He closed by asking Congress to support innovation. 

Mr. Paul Grewal. Chief Legal Officer, Coinbase

In his testimony, Grewal discussed how Coinbase has embraced regulation. He noted that it’s disappointing, but not surprising, that the SEC has decided to bring legal action against Coinbase. He noted that the US is falling behind with digital asset technology. She reassured the committee that crypto is solving real world problems and we need a clear path forward to protect responsible innovation.

The Honorable Dan Gallagher, Chief Legal Compliance and Corporate Affairs Officer, Robinhood Markets, Inc.; Former Commissioner, US Securities and Exchange Commission

In his testimony, Gallagher discussed how he has seen innovation occur under responsible regulation. He noted that there are legitimate questions about whether certain digital asset transactions involve investment contracts. Gallagher briefly discussed that the lack of federal regulation is bad for consumers who want access to digital assets, bad for innovation, and bad for the competitive position of the US. He closed by asking Congress to prioritize getting the details right.

The Honorable Dan Berkovitz, Former Commissioner, Commodity Futures Trading Commission; Former General Counsel, US Securities and Exchange Commission

In his testimony, Berkovitz discussed how digital assets and the associated blockchain technologies have the potential to transform the availability, scope, and efficiency of financial services to American consumers and businesses. He noted that certain unregulated markets are operating in a manner that presents significant risks to customers and investors in these markets. Berkovitz closed by telling Congress that legislation should provide for the regulation of intermediaries in these markets.

The Honorable Walt Lukken, President and Chief Executive Officer, Futures Industry Association; Former Acting Chairman, Commodity Futures Trading Commission

In his testimony, Lukken discussed the CFTC’s strong track record of protecting customer funds and stamping out fraud and abuse affecting retail customers, which could benefit the spot digital asset market. He said the CFTC has experience in the regulation of spot markets where retail participants were experiencing abuse. He also noted that beyond digital assets, the CFTC has a proven track record of preserving market integrity through enforcement using its expertise on market manipulation. Lukken closed by noting that the agency has brought forward successful manipulation cases against energy and agricultural commodity companies.

 

Question & Answer – Panel II

Funding Cuts

Scott asked all the panelists what amount of funding proper regulation will take. Berkovitz and Giancarlo said $120 million. Lukken and Grewal could not answer.

Regulation and Regulatory Gaps

Lucas asked what will happen if Congress does not pass legislation to fill regulatory gaps. Lukken noted that the rest of the world will fill in regulatory gaps and take the lead. Giancarlo added that countries look at the US for guidance and that legislation is important.

Rep. Mark Alford (R-Mo.) also asked what would happen if Congress failed to act to fill regulatory gaps. Grewal said that the spot market for digital asset commodities will continue to lack federal supervision in a way that will assure integrity and protections for consumers. Gallagher again noted that firms are moving to other countries and that it hurts the US economy.

Rep. Nikki Budzinski (D-Ill.) asked what protections could be provided for agency regulation. Berkovitz said that the current structure of the CFTC regime does not provide the same level of investor protection as the SEC regime provides.

Rep. Marc Molinaro (R-N.Y.) asked if the risk of scamming is more likely with or without Congressional action to help with regulation. Everyone said it is more likely without.

Value of Digital Assets and Commodities

Rep. Randy Feenstra (R-Iowa) asked what the value of commodities are, and how their value could change in the future. Giancarlo said that commodities hold a lot of value depending on how we view them.

 

For more information on this meeting, please click here.

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