Digital Assets Hearing Highlights House Democratic Support for Digital Assets Legislation

Today’s inaugural hearing of the Digital Assets, Financial Technology and Inclusion Subcommittee titled, “Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem,” took place under the auspices of the House Financial Services Committee and Subcommittee Chair Rep. French Hill (R, AR).

See the 2+-hour video of the hearing.

In spite of the title and with a couple of exceptions (such as Rep. Brad Sherman (D, CA)), rather than a partisan food fight, the hearing was largely about creating a regulatory framework and what was needed.

With Republican support for digital assets legislation well-known, the hearing reaffirmed that some Democratic voices are pro-crypto, too, with members such as Wiley Nickel (D, NC), Bill Foster (D, IL) and the Subcommittee’s Ranking Member Stephen Lynch (D, MA) who each talked hopefully about the space but were eyes-wide-open about its challenges.

In his opening statement, Hill pointed out that the Subcommittee’s Ranking Member Stephen Lynch (D, MA) had partnered on a financial technology task force previously. Read his complete opening remarks.

Payment stablecoin legislation started by HFS Chair Rep. Patrick McHenry and Ranking Member Maxine Waters (D, CA) appears to be at the top of the list for regulation, Chair Hill wants to see move forward in the 118th Congress.

Ranking Member Lynch expressed optimism about the digital asset space in his opening statement, but acknowledged the challenges and irresponsible actions within the ecosystem including a lack of transparency. He wanted the “consumer’s voice” considered more in the overall digital assets discussion.

Rep. Warren Davidson (R, OH), who is Vice Chair of the Subcommittee, also made opening comments saying that “no clear” framework was available for crypto assets currently and also trumpeted an announcement about his “Keep Your Coins Act (PDF),” which focuses on allowing private, self-custody of cryptocurrencies.

Witnesses began the testimony by repeating edited versions of their remarks included below. :

- Mr. Mike Belshe, CEO and Co-Founder, BitGo (remarks (PDF))
- Ms. Tonya Evans, Professor, Penn State Dickinson Law (remarks)
- Mr. Jonathan Gould, Partner, Jones Day (remarks)
- Mr. Paul Grewal, Chief Legal Officer, Coinbase (remarks)
- Mr. Lee Reiners, Policy Director, Duke University (remarks)

Q&A

The following members participated in the Q&A:

Rep. French Hill began the Q&A with a speech on the need for a regulatory framework rather than Securities and Exchange Commission (SEC) Chair Gary Gensler’s position that the existing framework (Howey Test, etc.) is sufficient.

Hill began asked witnesses about their interaction with and helpfulness of the SEC. BitGo’s Belshe and Coinbase’s Grewal responded with predictable criticism – it isn’t easy, in so many words.

Rep. Stephen Lynch

Ranking Member Stephen Lynch (D, MA) asked more about the registration process and why crypto firms are reluctant to come in to the SEC. BitGo’s Belshe said the traditional models that the SEC regulates do not fit with novel crypto models: “You cannot be the broker, the exchange, the market maker, the clearing agent, the custodian in some cases, they have venture arms that are investing in tokens that they end up listing.”

Rep. Maxine Waters

Guiding her question to Lee Reiners, House Financial Services (HFS) Rep. Maxine Waters (D, CA) brought up Republican efforts to get the SEC to divulge its communications around the timing of the arrest of FTX CEO Sam Bankman Fried (SBF). Her position was identical to what she had expressed in mid-February: SBF should be brought to appear in front of the HFS Committee. No need to investigate the SEC.

She also brought up bank holding company Silvergate and asked Reiners if he agreed that the implosion of Silvergate over the past week proved bank regulators were correct in their caution about mixing crypto and the U.S. banking system. He did.

Rep. Frank Lucas

Rep. Frank Lucas (R, OK) brought up the SEC’s “regulation by enforcement” approach and asked Professor Evans to break it down. And then Lucas asked about spot market authority for crypto assets with both Coinbase’s Grewal and Professor Evans agreeing that there’s a gap in regulation.

On Silvergate, Grewal said Coinbase had no exposure to the bank “at present” among other comments.

Rep. Bill Foster

The Congressional Blockchain Caucus co-chair of the 117th Congress, Bill Foster (D, IL), brought up crypto assets being used as part of ransomware strategies and whether there is a way to prevent this. Mr. Reiners raised adoption of global FATF requirements as a possible solution.

Rep. Foster advocated for the use of crypto wallets that are “registered” – secret but registered, similar he said to the way cars are licensed and as a way to inhibit the goals of ransomware criminals. Grewal said, “We think it’s possible…”

Rep. Tom Emmer

“Crypto technology is shifting economic power from centralized institutions back into the hands of the people,” began Majority Whip Rep. Tom Emmer (R, MN). He believed the banking system was being weaponized and blamed the Biden Administration for wanting control. In asking Jonathan Gould, a lawyer, a series of questions about posturing by the Biden Administration and its regulatory agencies, Emmer brought the discussion to the idea of a “Choke Point“-like initiative (but did not say it aloud) which is “already chilling innovation.”

Rep. Ritchie Torres

In discussing questions raised by SEC Chair Gary Gensler whether Ether is a commodity or security, Rep. Ritchie Torres (D, NY) brought to light what he termed “creative use of [Gensler’s] authority.” He poked at whether there is a centralized nature to Ether with Mr. Belshe who responded that there may be a need for some tokens to be allowed to be centralized and become decentralized over time. Coinbase’s Grewal agreed with this assessment.

Rep. Warren Davidson

Giving a brief history of government’s interaction with the industry, Rep. Warren Davidson (R, OH) said he’s still dismayed that some of his congressional colleagues are still asking the same questions, or, are still confused between the difference of centralized and decentralized assets.

On stablecoins, Rep. Davidson warned SEC Chair Gary Gensler that his Commission does not regulate the payments industry.

Drawing the connection between cash and crypto, Davidson noted the similarities and the necessity of both assets which share a privacy element.

Rep. Al Green

Rep. Al Green (D, TX), a crypto critic, compared the crypto industry and FTX to what happened with Bernie Madoff. “All innovation isn’t positive,” said Green. In questioning Mr. Reiners, he poked holes in the idea that innovation is being inhibited by the rejection of crypto within the U.S. regulatory system. Reiners agreed and believed “a robust regulatory environment” will offer protection.

In sharing an anecdote about seeing a Bitcoin ATM, Rep. Green said he thought the industry was more interested in making profits than helping investors.

Rep. John Rose

Rep. John Rose (R, TN) got to the question of who would/should be the crypto regulator -even bringing up a SEC/CFTC merger. Asking witnesses their thoughts on the idea, almost everyone was against a merger but Coinbase’s Grewal wanted a unified regulation system. Still, he didn’t want the SEC/CFTC to be combined. Reiners saw value in a potential unification of the two regulators.

Rep. Sean Casten

Rep. Sean Casten (D, IL) brought up Silvergate again and questioned if the size of the industry is really that big and important. He wondered aloud if there were any systemically important crypto players. Reiners quickly said it wasn’t and that was a “policy success.” Casten said he believes their are good arguments for crypto being securities and commodities and closed saying that “blockchain is a fascinating technology.”

Rep. Bryan Steil

Rep. Bryan Steil (R, WI) concentrated his 5 minutes of Q&A time on the SEC – Steil believed a strong regulatory framework would set up critical U.S. leadership in crypto. Coinbase’s Grewal stressed that the European Union and United Kingdom, among others, are moving ahead of the U.S. whether the U.S. government approves or not. Grewal revealed that his company has received no response to petitions his company has sent to the SEC.

Rep. Wiley Nickel

Expressing his support of digital assets, Rep. Wiley Nickel (D, NC) said that he was happy to co-sponsor the McHenry-Torres “Keep Innovation in America Act.” And, given recent fraud and financial implosions such as FTX, Nickel believed a regulatory framework was necessary.

Rep. Mike Flood

Nebraska Republican Rep. Mike Flood asked about Staff Accounting Bulletin 121 and the chilling effect of the rule on the custody of digital assets by public companies. Banks, in particular, were a focus by Flood who seemed to think they should be allowed the ability to custody more easily. Rep. Flood talked about crypto asset legislation he pushed through in Nebraska and his general concern that current rules around custody may prevent any customer to be served.

Rep. Brad Sherman

Rep. Brad Sherman, famously a crypto critic, advocated for more efforts by the Biden Administration to shut down crypto and that this would serve investors. Sherman also used his time to say that FTX and Sam Bankman-Fried (SBF) lobbied Congress because SBF didn’t want the SEC to regulate crypto which would have resulted in more restriction for FTX’s business.

Rep. William Timmons

Rep. William Timmons (R, SC) asked witnesses to talk use cases of crypto and whether regulating every token as a security was a good idea. On the question of use cases in digital assets, Coinbase’s Grewal brought up carbon credit management and health record use cases. Timmons asked that if tokens were securities would it inhibit innovations that Grewal described. Grewal said it would. Professor Evans pointed to healthcare and collectibles use cases.

Bringing up Silvergate, Timmons raised the idea of a threat of concentration risk if there are too few players.

Rep. Erin Houchin

Rep. Erin Houchin (R, IN) wondered if it was possible that innovation related to digital assets could result in innovators leaving the United States and also about whether the U.S. will lose its leadership role in the world. BitGo’s Belshe said the migration out of the United States was already happening. In a response to Rep. Houchin, Coinbase’s Grewal said that “serious democratic” institutions are moving ahead and still maintaining critical elements common in the traditional financial system such as Know-Your-Customer requirements.

Rep. Byron Donalds

After criticizing President Biden’s budget proposal, Rep. Byron Donalds (D, FL) posed the idea of a “regulatory sandbox.” BitGo’s Belshe thought existing regulators will just result in inferior rules and regulations. Professor Evans said she believed SEC Commissioner Hester Peirce and CFTC Commissioner Kristin Johnson were thoughtful on crypto regulation – but wasn’t sure either Commission could handle regulation of the digital assets industry.

Rep. Zach Nunn

Rep. Zach Nunn (R, IA) announced the re-introduction of the “Financial Technologies Protection Act of 2023” which was originally proposed in 2021 by Rep. Ted Budd (R, NC), who is now a Senator. Nunn raised the threats of crypto if the United States didn’t use it. His argument was that not allowing crypto in the U.S. would be a threat to the Country if the rest of the World is using it and the U.S. doesn’t have sufficient expertise.

And then, Rep. Hill concluded the hearing.