Back to General Resources

The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem

House Committee on Financial Services

The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem

Tuesday, June 13, 2023

Topline

  • Democrats asked if rushing congressional action on a framework could hurt the digital asset marketplace in the future.
  • Republicans voiced concerns that without swift congressional action, the lack of rules in the digital asset marketplace will hurt the economy and cause the US to fall behind foreign actors.

 

Witnesses

  • Jeremy Allaire, Chairman and CEO, Circle
  • Coy Garrison, Former Counsel to Commissioner Hester M. Peirce
  • Emin Gün Sirer, Founder and CEO, Ava Labs
  • Thomas Sexton III, President and CEO, National Futures Association
  • Aaron Kaplan, Founder and Co-CEO, Prometheum, Inc.

Opening Statements

Chair Patrick McHenry (R-N.C.)

In his opening statement, McHenry discussed how digital assets are now no longer a new technology. He noted that the US is at risk of falling behind competitors around the globe. McHenry said that requirements set out in the draft bill are much more onerous than the requirements for traditional financial intermediaries. He closed by stating that Congress can choose the side of financial freedom, innovation, inclusion, and American competitiveness, or Congress can let this moment pass us by.

 

Ranking Member Maxine Waters (D-Cali.)

In her opening statement, Waters noted that the committee needs the analysis and views of independent regulators, the Administration, and the stakeholders on the implications of proposed legislation. She noted that she’s worried that the proposed Republican legislation would allow crypto firms, that are currently being sued, to continue doing business through provisional registration. Waters said the proposed bill halts any enforcement action by the SEC against crypto firms. She also noted that the door is always open for crypto firms to register with the SEC despite claims from some in the industry. Waters closed by noting that the proposed legislation has a lack of diversity and inclusion protections for consumers.

 

Subcommittee Chair French Hill (R-Ark.)

In his opening statement, Hill noted that the Market Structure Bill would prevent another FTX situation from happening. He noted that the US needs legislative action to ensure that digital asset firms cannot operate in the shadows. He closed by asking for feedback from committee members.

Subcommittee Ranking Member Stephen Lynch (D-Mass.)

In his opening statement, Lynch discussed his grave concerns with key elements of the proposed bill. He also noted that he is deeply concerned about the new roles defined for the SEC and CFTC. He closed by reminding committee members that the US financial system is built on trust.

 

Testimony

Jeremy Allaire, Co-Founder and Chairman, Circle

In his testimony, Allaire discussed the demand for safe and secure dollars on the internet. He noted that with the right regulatory framework, stablecoins and blockchain networks could scale to support billions of users and tens of trillions of dollars in payment activity. Allaire briefly discussed how advancements in blockchains are accelerating, and Web3 technology is widely viewed as strategic infrastructure for the future of the internet. He closed by noting that at the heart of dollar competitiveness must be technological superiority, unleashing the innovation made possible by software and the internet, and open, free-market competition.

 

Coy Garrison, Former Counsel to Commissioner Hester M. Peirce

In his testimony, Garrison noted that the Digital Asset Market Structure Discussion Draft is a thoughtful and measured approach and would create a workable regulatory framework for the industry. He noted that the status quo fails to protect people who trade or hold digital assets on centralized exchanges. Garrison also said that blockchain technology, like nearly any new innovation, does not fit nicely into existing regulatory regimes. He closed by saying the SEC needs direction from Congress to engage in meaningful rulemaking.

 

Emin Gün Sirer, Founder and CEO, Ava Labs

In his testimony, Sirer discussed how blockchains represent the next phase in the evolution of networked computer systems. He noted that blockchains and smart contracts can be the foundation of a more transparent and efficient financial system that enables all participants to share a level playing field. He said that he is confident that the space will develop even stronger techniques for ensuring the correctness of smart contract software.

 

Thomas Sexton III, President and CEO, National Futures Association

In his testimony, Sexton discussed how NFA is solely a regulatory body, and NFA partners with the CFTC to regulate their Members’ derivatives activities. He noted that NFA has a strong track record over the years of closely working with the CFTC to effectively develop regulatory oversight programs targeted to protect retail customers and to prosecute retail trading abuses and fraud. Sexton briefly discussed that Congress should provide the CFTC with regulatory authority to complement its current anti-fraud authority over market participants engaged in spot digital asset commodity activities. He asked Congress to amend the CEA to adopt a federal registration regime for spot digital asset commodity market participants and trading platforms and to provide the CFTC with the authority to adopt critical customer protection rules.

 

Aaron Kaplan, Founder and Co-CEO, Prometheum, Inc.

In his testimony, Kaplan discussed how new legislation is not in the best interest of the investing public or the blockchain industry. He noted that legislative efforts will take years to implement while the American public will continue to operate on reckless, unlawful platforms. He said US capital markets flourish under the established regulations of the FSLs overseen by the SEC and FINRA. Kaplan said that in order for innovation to continue to thrive in the digital asset space, the protections afforded by the FSLs need to be in place. He reassured the committee that proper regulation under the FSLs is not a hinderance to innovation, rather a prerequisite that will allow innovation to flourish.

 

Question & Answer

Foreign Actors and China

McHenry asked how many foreign regulators have proposed new regulatory frameworks for digital assets. Garrison noted that there are about half a dozen to a dozen. He then asked if Europe is more advanced in the digital assets market than the US is. Garrison agreed.

Rep. Blaine Luetkemeyer (R-Mo.) asked Kaplan what percentage of his company is owned by the Chinese. Kaplan said 20%. Luetkemeyer then asked if Chinese actors have access to his company’s data. Kaplan said they do not.

Rep. Bryan Steil (R-Wis.) asked if Kaplan’s company interacted directly with the Chinese government. Kaplan said his company does not interact with the Chinese government.

Rep. Ralph Norman (R-S.C.) asked if Chinese involvement in Kaplan’s company should be considered a national security threat. Kaplan assured Norman that it is not a national security threat.

 

Regulation and the Role of Regulators

Rep. French Hill (R-Ark.) asked Garrison for suggestions on further refining provisional registration that would be best for regulators and market participants. Garrison recommended that the US should drill down and make sure that during a provisional period that there are no fraudulent acts.

Rep. Nydia Velazquez (D-N.Y.) asked Allaire and Kaplan how they view the role of the federal government and states in regard to regulating. Allaire said this is a critical issue and that there needs to be a strong role for states and federal regulators. Kaplan agreed and said there needs to be more clarity on power distribution between the two.Rep. Stephen Lynch (D-Mass.) asked what the consequences will be if new companies have the choice of either being regulated or not having any regulations. Kaplan said the American public will be harmed.

Rep. Bill Foster (D-Ill.) asked if Congress wishes to prevent market abuses if there is any alternative to having regulators in the mix. Sexton says we must have regulators to know who is involved in the market.

 

Commingling and Consumer Protections

McHenry asked if consumers are protected in the US with a lack of clear rules in the market. Garrison said consumers are not protected.

Waters asked Kaplan if he agrees that commingling of customer funds should be a good thing. Kaplan answered by noting that his company does not commingle customer funds.

Hill also asked how a process can be structured to provide actual customer protection in the digital asset markets in the interim. Sexton said he thinks provisions need to be designed to acknowledge the reality that these markets exist now.

Rep. Frank Lucas (R-Okla.) asked how important it is for Congress to act if Congress really wants to protect consumers. Sexton said it’s essential.

Rep. Jim Himes (D-Conn.) stated that commingling is an issue that Congress needs to address. He also pointed out that the language in the Republican proposed bill regarding commingling is inconsistent.

 

For more information on this meeting, please click here.

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