Yesterday’s one-day fintech conference in Lincoln, Nebraska dubbed “Flyover Fintech” and organized by freshman Congressmen Mike Flood (R, NE) and his staff, arguably yielded as many insights as a week-long Congressional hearing.
The only thing missing was the physical presence of elected Democrats. Maybe next year? Nevertheless, 250-strong assembled to hear, and share, the latest in digital assets efforts in DC and the U.S. as well as look to the blueprint being laid in Flood’s home state of Nebraska.
The highlight of the day came last when Rep. Flood, a capable interviewer, asked his fellow House Financial Services Committee members – Rep. French Hill (R, AR), Chair of the Digital Assets Subcommittee, and Rep. Warren Davidson (R, OH) – to join him on stage for a 40-minute Q&A that took attendees behind-the-scenes in Congress.
After covering the impact of FTX’s implosion and the buildup to the recent markups of the stablecoin and digital assets market structure bills, the Congressmen shared their best guess on next steps…
Partial spoiler:
1) The return of Senate Agriculture to the digital assets legislative mix;
2) House member education needs to happen before any House floor vote;
3) Lummis-Gillibrand (RFIA) need a state pathway in their bill.
Noting that Rep. Hill has been on the Financial Services Committee for nine years, and Congressman Davidson, has been on the committee for six and a half years, Flood began by asking for perspective on what it took to get the stablecoin bill to last week’s markup stage.
(Transcript lightly edited for clarity.)
REP FRENCH HILL: It’s been 15 months of bipartisan work between Rep. Maxine Waters (D, CA), who was the Chair of the HFS committee in the last Congress, and Rep. Patrick McHenry (R, NC), to come up with a stablecoin bill that would fill the gap. But it goes back a lot further than that.
We’ve had efforts since Rep. Davidson came to Congress. And, Majority Whip Tom Emmer (R, MN) came to Congress in my class in 2014 to try and move this conversation forward with a Financial Technology Task Force, where we uncovered exactly what we ought to be doing and how we ought to be doing it.
But then, the pandemic got in the way – I do think we would have made more progress if we hadn’t gone through the pandemic.
Last summer, [Maxine Waters and Patrick McHenry] set a goal of trying to get a consensus stablecoin bill through as the initial gateway [product] in the digital asset space. They got very close. And we picked up with Chair McHenry’s leadership this year. We’ve gotten a bipartisan bill through the House with more changes to come. But, now we have to obviously work with the Senate.
REP. WARREN DAVIDSON: As we debated the full range of needs in the space, why focus so much on stablecoins? And last Congress, we thought this would be very bipartisan…. kind of a crawl-walk-run mindset and stablecoins are inherently pretty intuitive since there’s no fractional reserve component to it – aside from the US Dollar Tether, which is essentially unregulated and offshore.
The [stablecoins] that are in the ecosystem are regulated at the state level by the New York Department of Financial Services (NYDFS) as trust companies. Trust companies are old, and they’ve been around for a long time, very proven, and have a fairly conservative approach with the oversight of the state providing safety in the market.
So we thought providing some sort of federal framework for something that’s already regulated in a heavily Democrat-controlled state like New York, could be pretty bipartisan. And it’s interesting that one of the breakpoints turned out over how much autonomy states can have – and part of that broke down with language that let states have some discretion over what assets are held as reserves, for example.
For me, one of the brightlines was, you can’t just have whatever the statute is: a level one, high quality liquid asset (like treasuries) or commodity-backed stablecoins. So without saying the word “commodity,” we wanted to give the discretion to states. We had various pieces of language in there… but, that’s where [Democrats] held on to that phrase to say that it could be a race to the bottom.
So it’s like, “Fine, let’s work on something..” since there’s been money, there’s been gold. Since there’s been gold, there’s been money. If nothing else, “Can we at least agree on that?” Maybe we’ll get there on that. But I think, broadly, holding commodities on balance sheets has been a breakpoint for banks for a long time. But if you look at a trust company holding those assets, it seems it could be acceptable.
And certainly if the token doesn’t represent $1, but the token represents an ounce of gold, bushel of wheat or something else – so that might be too far for where we want to go there.
And then the the other breakpoint turned out to be self-custody. And that was a party line break. So, I dropped my insistence of having that as a component to support the bill, personally. Chair McHenry removed it anyway. But, if we can pick up some Democrats on it, I guess that helps. And that’s where we said, we’ll move “Keep Your Coins Act” separately.
So there are things that I don’t think break entirely on party-line issues. But, we found ourselves in quagmires. Can we trust states to make decisions? And even in a state like New York, there was a reluctance to do that.
And then can we trust individuals [with their] private property? And I don’t think the issues were really those issues. I think the other thing is this broke on generational lines. The median age of Democrats who voted for the bill, I think, was 41. And the median age of Democrats who voted against the bill on Tuesday was like… 63 or something like that. Democrats all go by seniority. They don’t change anything. So the top of the dais for Democrats is significantly older than the GOP.
REP. FRENCH HILL: Yeah, that’s a good point. But, there’s also a power component of this. From the Federal Reserve’s point-of-view, we’re creating a new form of M1. We’re having a stablecoin that’s fiat-backed, it’s dollar-denominated, dollar-for-dollar… But they don’t want anyone to be involved in money creation that they don’t sign off on. So there’s an institutional power issue there. So that’s one issue.
The second issue is internal conflict, I think, the Biden Administration on where we’re going with this. And my point-of-view, and Patrick McHenry and Warren’s point-of-view is, “Let’s take the win here. Let’s win for the United States. It’s a win for the economic growth here.” Let’s win for a jurisdiction that protects consumers and investors are waiting for a jurisdiction that has a great internationally-recognized legal system – all for the US – and move forward. And I don’t think that’s where the White House is.
So the stablecoin bill, which we think after 15 months of work, should have been the more straightforward discussion among the committee members, ended up being the more contentious. And the work we have done – and really only started in March – on the regulatory framework bill, where we’re literally building the plane as we’re flying it, which we thought had a much steeper learning curve, we actually looked at a much more effective, interested debate.
REP. WARREN DAVIDSON: Yes, it was interesting on the market structure bill. Frankly, it sort of felt like we’ve got all this work to do in May and June. “I don’t know, [Patrick] if that’s gonna mark this up in July…” It seemed like we might not get all that work done. And, kudos to the committee staff who put a lot of long hours to get it written and to French, the chairman and a bunch of others who did the negotiations.
But, there are breakpoints in the Administration that weirdly broke differently on stablecoins than on digital assets. And the votes don’t necessarily reflect that, but the negotiations definitely do.
REP. MIKE FLOOD: One of the one of the things we haven’t talked about today is the role of the Agriculture Committee.
What is a security? What is a commodity? – that was one of the biggest hurdles in January. Congressman Hill, can you talk to how your subcommittee work with the Agriculture folks over a jurisdictional issue that could have blown up and stopped everything, and how we got to a place where the Ag Committee simultaneously passed and marked up their bill, if I’m correct, with much less fanfare, and I think almost all unanimous votes while we were in financial services. Can you talk about the dynamic between those two committees?
REP. FRENCH HILL: This is maybe more interesting to the political science majors in here than the technology majors. No matter how long you follow Congress, this is a very interesting case study. People who work in government relations to business in the room certainly recognize that.
So last Fall, there was a huge blow up and controversy in Washington DC, as FTX run by Sam Bankman Fried collapsed leaving 1 million creditors – let that number sink in… 1 million global creditors in an initial bankruptcy filing – that’s kind of mind boggling. A completely self-dealing, menagerie of insanity inside his organization. And that’s the story you know of, because he was on the cover of Forbes magazine saying he was worth $28 billion last July 2022.
But in the interim, unbeknownst to a lot of people, he was in the middle of distributing $40 million in campaign contributions – through individual contributions and through a series of PACs and larger contributions to super PACs substantially aimed at benefiting Democrats – as reported in the press – I’ve never actually seen the full breakdown, but substantially a lot – maybe 90%.
And SBF had also been working with Senate Agriculture on a crypto market regulation bill (DCCPA) which got introduced just a few weeks before this all happened by Senators John Bozeman (R) of Arkansas and Debbie Stabenow (D) of Michigan, the Chairwoman of the Ag Committee.
Well, this was a black eye for them. Now I’m not saying that, and Warren’s not saying that – but that is the perception in Washington. I’m just giving you the politics of it. And these campaign contributions were mind boggling because they just were like sub rosa – people didn’t know the scope of that.
FTX, to me, was a catalyst to get this right: we’ve got to get a regulatory framework done, but for others in the Congress, FTX was: “man, you know, I don’t want to touch that. I’m busy figuring out how to get my campaign contribution back.” And that bill is dead on arrival now because it’s been quote “touched by FTX.”
So here we are coming along with our own regulatory framework and we have to have House Ag participate in that. And we have to have bipartisan Democratic support. So we don’t need to be yelling, “Oh hey, Democrats are in the pocket of FTX.” That’s not going to help move anything along.
And the Democrat Agriculture Committee and the House Financial Services Committee have worked together since 2010 passing the Dodd Frank – the swaps legislation requiring a dual reference to do both committees.
So, none of the people who really work on these committees now were even staffers then for the most part. And there was a lot of “it’s just not going to happen. You can’t get a cross-jurisdictional [product out]..” lot of pessimism.
But Rep. Glenn “GT” Thompson (R) of Pennsylvania, the House Agriculture Committee Chairman, and Patrick McHenry, Chairman of House Financial Services Committee, set a high standard. They said, “We’re going to write guiding principles on how to do this.” And they agreed on just one sheet of paper. What are the guiding principles to do a market framework bill for digital assets? We did that first.
That broke the ice between their (Agriculture) staff director and our staff director.
And in the meantime, “GT” Thompson appointed Rep. Dusty Johnson (R, SD) to be the chairman of the digital asset committee and they named that committee, a “digital asset” subcommittee. We named our committee “digital assets.”
We created this parallel track through leadership of Patrick McHenry and GT Thompson. And then we, we broke tradition. The staff start working together. They wrote a common product. They do member education. They do roundtables. We had a And, it just worked “textbook.”
I’m taking a little extra time on all this because it is unusual. And it was fully bipartisan. And once again, leadership from the top, gets stuff done even in an organization like Congress that’s made up of 435 people who think they’re each President of the United States.
REP. WARREN DAVIDSON: I’d say that it started last Congress. Maxine Waters, she created a task force which isn’t quite the same status as a subcommittee, but there was collaboration going on, really for two Congresses to get to here. So it laid some some groundwork to get this done.
Nevertheless, it still seemed like the the layup was going to be the stablecoin bill. And, the bigger digital asset market structure seemed like a much heavier lift, and it may be by the time we get it through the Senate. But getting it through the House was pretty clean. It’s really impressive.
REP. MIKE FLOOD: What would be the best case scenario… what three or four steps would happen going forward in Congress – when we go back on September 12 – that would give you the confidence this is going in the right direction? And I’m talking about the House and the Senate. What would you like to see if you were writing the next chapter from where we are today to get something done?
REP. FRENCH HILL: Well, first, we’re working on it right now. We’re working on it today while we’re in Lincoln.
But, in the House, it’s member education.
What’s terrific in the House is that we have two committees that have a handle on this. You have some 80 members+ that have actually studied this issue, participated in a debate, participated in a markup our of 435 in Congress.
We need to carefully brief and educate all those other members before we schedule these bills to go to the full House. In the Senate, I think it’s time to close the past chapter and open a new one.
So, we’re going to going to talk to Senator Cynthia Lummis (R) of Wyoming and Senator Kirsten Gillibrand (D) in New York who reintroduce their bill. But ironically, strangely to us, they were pioneers on this topic in the Senate – one Democrat, one Republican. But in the bill they just dropped a few weeks ago, there is no state pathway, and yet they both represented states that demand a state path: Wyoming and New York. So we thought that was odd. But we want to listen to them. We want to talk about their priorities and we want to compare what we’ve done to what they’ve done.
And then I think importantly, we want to go back to John Boozman of Arkansas and Debbie Stabenow of Michigan, who is not running for re-election, and let GT Thompson, Dusty Johnson and our Democrat Ranking Member [Waters], talk about how well this worked in House Ag. And how well we believe it can work in Senate Agriculture while we look for new partners, new voices over in the non-Ag part of the Senate -in Senate Banking. Warren, I’d love to hear your views, too.
REP. WARREN DAVIDSON: You nailed it. First thing is member education. We’ve got members of Congress that think that Warren Davidson likes Bitcoin, “he probably supports central bank digital currency,” – and they don’t know the difference.
So we’re hosting a number of member education events in September. The shiny object right now for a lot of people is that they are hearing about Central Bank Digital Currency (CBDC) in their districts – that will allow us to point out some of the things on market structure, on stablecoins, on what is crypto versus what is a central bank digital currency.
And the reality is, all this is an incredibly important issue to be solved for our financial markets and a huge opportunity for the future of our economy – it’s not a top issue in any congressional district. Everyone would care about other issues ahead of this in terms of priority. So, when people want to spend time on it, how do we get people to do it – we have a little member education kit to make sure people are reaching out dealing with fears, whether it’s from prosecutors or law enforcement or things like that.
But French was right on the Senate side, we’ve got some work to do to kind of fix where the Senate is right now. And then hopefully, we can find some new allies over there. And, maybe the best, most optimistic case – since you’re an optimist – is that since there’s this Ag jurisdiction, and there’s this noteworthy piece of legislation called the Farm Bill, that has to pass… if we can hook it to that, those are things that might become law in a tough arena.
The Senate usually doesn’t like taking up standalone legislation. And they like having ways to cover their votes or be not accountable for their votes, in my experience, so far. So, how do we help risk-averse Senators? How do we deal with their fears on it? And I think finding other things to hook it to might be part of that deal.
And we have a little work to do to get ready for primetime over there. We don’t have a companion truly yet.