What You Need to Know From the U.S. House Committee on Financial Services’ Hearing on “Digital Assets and the Future of Finance”
A GBBC Overview of the Latest U.S. Congressional Hearing on Crypto
Opening Statements
Chairwoman Maxine Waters (D-CA) said there is no centralized regulatory authority for digital assets, leaving them vulnerable to manipulation and fraud; expressed concern about environmental impact but stated there are many potential benefits.
Ranking Member Patrick McHenry (R-NC) stated this technology is already regulated, though it may be clunky or outdated. He wondered whether colleagues know enough about the technology to have a serious debate. Need to increase understanding to see how to update regulations and laws.
Testimony
Jeremy Allaire, Co-founder, Chairman and CEO, Circle, said the reserves backing USDC are held in the custody of the US-regulated banking system. He said the company plans to pursue a national banking charter from OCC.
Samuel Bankman-Fried, Founder and CEO, FTX, emphasized crypto’s ability to improve the global financial system, especially for people who have the least access to the financial system. Crypto can make it easier, faster, and cheaper for individuals to manage their finances. He said FTX is regulated around the world, and FTX US is regulated at both at the state and federal level in the US.
Brian Brooks, CEO, Bitfury Group, said Americans deserve to know the national policy on blockchain and digital assets. This is a big difference from the advent of the internet. He argued crypto policy should take into account not just new risks, but risks that exist in the current system. He wondered why countries like Canada and Germany are more open to crypto.
Charles Cascarilla, CEO and Co-founder, Paxos Trust Company, said a state or federal regulator should regulate digital asset companies, ensuring customer assets are segregated from company balance sheets and reserves are held safely. He said regulated stablecoins and/or a CBDC, it will be increasingly less viable for other countries and companies to use the US dollar.
Denelle Dixon, CEO and Executive Director, Stellar Development Foundation, said the President’s Working Group on Financial Markets (PWG) Report on Stablecoins goes too far by proposing to limit stablecoin issuance to insured depository institutions (IDIs) because most stablecoins are fully reserved. Regulatory approach should focus on reserves, ensuring they are held at IDIs.
Alesia Jeanne Haas, CEO, Coinbase Inc. and CFO, Coinbase Global Inc., said Coinbase stores 12 percent of the world’s crypto across 150 asset types. Crypto has moved past its investment phase and we are now in the utility phase. She said Coinbase is regulated on both the state and federal level. Coinbase believes the government should recognize digital assets under a new comprehensive regulatory framework; the responsibility for this framework should be given to a single federal regulator.
Q&A
Chairwoman Maxine Waters (D-CA) expressed concern about Paxos’s partnership with Facebook. Cascarilla said Novi is a customer of Paxos, and noted Novi is a regulated MSB.
Representative Al Green (D-TX) asked when Congress should be concerned about a bubble in crypto. Brooks suggested the newness of the market is largely responsible for volatility. Traditional markets also have better price discovery. Need more liquidity and price discovery. Dixon said the industry needs to focus on consumer-oriented products that help educate the individual. UX design is extremely important. SBF noted crypto is able to trade 24/7, thus doesn’t have overnight/holiday/etc. risks that exist in traditional markets. Brooks said the US can’t take dollar primacy for granted, and needs to focus on utility. Strong supporter of internet-supported dollars. The crypto economy provides some incentives for the Fed to limit inflationary policies, as people will flee to crypto.
Representative Ed Perlmutter (D-CO) asked if FTX is registered with the SEC. SBF said they are in discussions but FTX US does not list securities on their platform, but would be interested in doing so in the future. Want to see a joint SEC/CFTC regime to harmonize.
Representative Andy Barr (R-KY) asked if Congress needs to introduce legislation to clarify laws/regulations. Brooks said legislation defining securities or giving an agency authority to define a security is crucial. Endorsed the Crypto Rating Council test for determining a security.
Asked about the differences between a potential CBDC and stablecoins, Allaire said stablecoins are active and growing, CBDCs would likely not be as accessible. Most payment system innovations have been driven by the private sector. The US dollar is winning the stablecoin race already, it has the potential to grow and benefit the US dollar and American households. Development of this technology should be a strategic priority for the US.
Representative Ritchie Torres (D-NY) asked about the potential for crypto to improve remittances. Cascarilla said it’s easy to download a wallet and send money to anyone else in the world quickly and with low fees. Torres asked how to enforce the law when there is no central authority. Brooks said the easiest way would be to allow them into the supervised banking system and give the OCC authority. Lots of these protocols are designed to solve the problems that are the reason for regulation and supervision (human error/greed/etc.). Torres said he was concerned that crypto could challenge the US dollar but leading stablecoin issuers have chosen to peg their stablecoin to the US dollar, which seems a vote of confidence.
Representative Al Lawson (D-FL) asked about the “broker” provision included in the infrastructure bill. Brooks aid it would be like requiring YouTube to get an FCC license.
Representative Bill Foster (D-IL) suggested there is no logical alternative to having all crypto transactions associated with a legally traceable identity. They must be capable of being de-anonymized. No panel members raised objections. SBF said this highlights the importance of a harmonized regulatory approach, it makes it more burdensome and less effective when each asset is subject to different regulations.
Rep Tom Emmer (R-MN) said the SEC has approved bitcoin futures ETFs that get 100% of their pricing from US crypto spot markets. Confused how concern over manipulation applies to spot but not futures with regard to ETFs.
Representatives Alex Mooney (R-WV) and Josh Gottheimer (D-NJ) stressed the importance of ensuring crypto isn’t used to avoid sanctions on Cuba and Hamas, respectively.
Responding to a question from Representative Ted Budd (R-NC), Brooks said that the US doesn’t need another regulator; crypto lenders should probably be regulated by FDIC, trading platforms regulated by SEC/CFTC. There’s something about crypto that scares people.
Representative Stephen Lynch (D-MA) asked why the industry objected to proposed rulemaking from FinCEN that would require banks and MSBs to submit reports and verify the identity of customers with wallets hosted in low compliance jurisdictions or unhosted wallets. Allaire said FinCEN has done an excellent job at looking at money laundering in the digital assets industry. Reporting requirements must take into account the unique aspects of public blockchains. What we need are ways to provide proof of digital identities, firms could provide cryptographic proof that someone has been KYCed, could be carried around in a hardware or software wallet. The industry needs more time to develop the technology.
Representative David Kustoff (R-TN) asked about the Crypto Rating Council. Haas explained that law firms look at whitepapers and make a judgement on how likely a token is to be a security based on the Howey Test. Kustoff asked about the ability to track illicit activities on the blockchain. Brooks said tracing blockchain transactions is much easier than tracking banking transactions.
Representative Alexandria Ocasio-Cortex (D-NY) asked how the panelists would respond to people who say that crypto is a not a new financial system but an expansion of our existing system. Allaire disagreed and said we are seeing the creation of a new, open infrastructure layer on the internet that is designed around value exchange. It needs to be well integrated with the existing system.
Representative Anthony Gonzalez (R-OH) said it is absurd to think that a handful of big banks and tech leaders created and control crypto. He asked what problems crypto can solve. Brooks noted the biggest critics of crypto have been big banks. He said crypto eliminates many fees that banks rely on. Gonzalez asked how crypto can empower creators. Haas explained that play-to-earn is growing quickly. Gonzalez asked how the regulatory environment is contributing to Web3 companies going abroad. SBF said it is contributing but he is optimistic that there will be changes in the coming years.
Representative Rashida Tlaib (D-MI) asked how policymakers can encourage a shift away from energy-intensive mining. Dixon emphasized the importance of research to see how all different consensus mechanisms can become more environmentally friendly.
Representative Madeleine Dean (D-PA) asked whether Congress needs to start over on its regulatory approach to crypto. Haas replied that there would be benefits to having a single regulator that can address the broad strokes of crypto. She said she agrees with much of SBF’s written testimony as well as Brooks’ statement that if it is a security it will fall under the SEC’s authority.
Representative Jake Auchincloss (D-MA) asked about the most important thing Congress should do to regulate stablecoins. SBF replied that it should ensure that reserves are what they say they are. This is the single largest risk from a consumer protection and systemic risk perspective. He expressed support for daily attestations and periodic third party audits to confirm backing is important. Allaire expressed support for this framework. Clarity on disclosure, reporting, liquidity, and reserve requirements would be valuable and provide confidence to the market. Cascarilla agreed that this is the most important.
