Today’s hearing, “The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets” by the House Agriculture marks another step in the legislative process for House Republicans to create a digital asset market structure.
Among the witness list, the first panel included only Chair Rostin Behnam, Commodity Futures Trading Commission (CFTC).
TL;DR – Behnam is ready for this bill or something like it. Near the end of the hearing’s questioning, he suggested decades-old law is not nearly enough.
You can see prepared testimony for participants here.
Video is here.
House Agriculture Committee Chair Rep. Glenn “GT” Thompson (R, PA) – after a brief opening statement – added that today’s Securities and Exchange Commission (SEC) enforcement action against Coinbase is exactly why this hearing was taking place – regulation by enforcement was not the way forward, rather legislation from Congress should be the way, he said.
Next, House Ag Ranking Member Rep. David Scott (D, SC) sounded a hopeful tone in his opening statement by saying, in so many words, to Chair Behnam that he deserves more funding. This became a popular refrain of Democrats in the hearing who may still be smarting from the debt ceiling debacle and various budget cuts.
Scott also said the digital commodity asset spot market operated according to “an ill-suited regulatory regime” that varies substantially in the state in which the trading platform operates. But, he noted the risks inherent with digital assets as well as recent hacks and failures in the space.
Making his opening statement, CFTC Chair Behnam emphasized that, right now, his agency only has jurisdiction once fraud has occurred in the digital asset spot market. He wants regulation that pre-empts the fraud.
House Agriculture Committee Chair Thompson asked Behnam about closing the gap in digital asset “commodity cash markets.”
The CFTC Chair turned to Bitcoin and Ether to illustrate the need for regulation, “… We regulate derivatives – this committee knows that well, we do not regulate cash, commodity markets. The SEC regulates security markets, both cash markets and derivatives markets. So, in this larger Venn Diagram of market regulation, the one area that is not covered is commodity cash markets. And as these financial assets are defined – and I will focus most notably on Bitcoin and Ether – these two assets make up 60% of the digital asset market, at least Bitcoin which we know has a determination by a federal court.
“I’ve argued in the past that Ether is a commodity. We have a listed Ether futures contract. If you take these two tokens alone you’re talking about 60% of the digital asset market that potentially lives inside of this regulatory vacuum. So I’ve been advocating for a number of years, as a market regulator, as the chair of the CFTC, [about] bringing all of these enforcement cases and seeing vulnerable communities being taken advantage, of losing money – customer money, obviously – all of the bankruptcies we saw last year, which Congressman Scott mentioned. This is the area that I am highlighting, advocating for, hopefully, that Congress can address so we can fill that gap and ultimately protect it.”
Ranking Member Scott asked how Behnam could regulate with new authority without additional funding. Chair Behnam said new funds are needed and suggested 3-4 years of joint rulemaking for digital assets by the CFTC (and presumably the SEC if not the bank regulators) to “implement over time.”
Rep. Austin Scott (R, GA), saying he believed that digital assets fell under the jurisdiction of the CFTC and not the SEC, he asked about CFTC resources that were needed to regulate digital assets. Behnam said, “Congressman, what we’ve done thus far – and this has been as a result of numerous efforts that both the House and the Senate have put forward on bills over the past few years – is to estimate resource needs. And I’ve come up with the number roughly as an estimate about $120 million over three years. And that’s to build teams around rulemaking and how we would implement something generally that we would suspect would require registration of exchanges, brokers, custodians and others.”
Rep. Jim Costa (D, CA) asked about the downfall of FTX and if the CFTC could have done more to prevent the implosion. Behnam was unequivocal, “…the answer is no. And the answer is because it’s the reason I’m here today… we don’t have authority over digital commodity tokens. And a lot of that activity occurred overseas, which is the first sort of primary barrier to our jurisdiction offshore. But the larger barrier, of course, is the fact that we don’t have regulatory authority over entities that trade cash commodity tokens.”
Replying to Rep. Costa’s query about Behnam’s biggest fear, he said it was consumers getting taken advantage of and “duped.” He also worried that future growth could create financial instability.
Rep. Jim Crawford (R, AR) said he agreed with Ranking Member Scott about his concerns on whether the CFTC has enough funding to undertake digital assets regulation. Notably, the National Futures Association is perhaps going to be an important market participant in digital asset regulation as Behnam stressed the importance of an SRO (self-regulatory organization).
Rep. Crawford asked Behnam about large banks’ opinion on digital assets. Behnam responded, “I’m having conversations with the leaders of large banks and other brokers and asset managers. I think the general consensus is a bit of skepticism, but also a bit of ‘stay on the sidelines, as long as this market remains unregulated.'”
“I do think a number of the heads of these organizations and institutions view this as a viable – or at least some of the tokens – as a viable financial instrument and one that their clients want exposure to, but they certainly don’t like the idea of getting involved in markets that are unregulated.”
Rep. Shontel Brown (D, OH) expressed skepticism that digital asset hearings were necessary in light of the import of other bills such as the Farm Bill. Nevertheless, she inquired about mining and its environmental impact. Behnam offered, “There have been efforts by some in the industry to change the method of mining which I applaud, but it doesn’t necessarily remove the issue that you raised and it’s one that we have to be very focused on. So I do think (…) further studying the issue and getting a better sense of what the mining capacity is and what the energy usage really is here domestically.”
Rep. Mike Bost (R, IL) asked about expanding the CFTC rulemaking and used Dodd-Frank’s expansion of responsibilities for the Commission as an example. Behnam reitered – using his unspoken Senate experience with Digital Commodity Consumer Protection Act (DCCPA) – $120 million over 3 years and 6-24 months for rulemaking.
Rep. Yadira Caraveo (D, CO), current Ranking Member the Commodity Markets, Digital Assets and Rural Development Subcommittee, pointed out the current market structure bill has left off funding, similar to other Democratic committee members. Behnam sympathized with her concerns about a provisional registration strategy.
On Caraveo’s question on definitions, Behnam said: “I think from a definitional standpoint, it’s critical to when we think about this question about a commodity versus a security what the bill does well, is focuses on decentralization as a key characteristic of what would constitute a commodity or security. I’ve said this for years. This really goes to the heart of any definitional discrepancy between the two financial assets, whether it’s wheat, crude oil or copper or in this case, a digital asset. So that really should be the sort of nucleus of how we define and how we start the conversation.”
“I also think it’s really important to think about where the investor is getting the asset from and is it from an issuer which, given the securities laws, that would most notably represent or reflect a security. Or, is the investor purchasing the token from a registered CFTC exchange? In that case, you have that more decentralized connection between the investor and the issuer…”
Rep. Dusty Johnson (R, SD), Chair of the Commodity Markets, Digital Assets and Rural Development Subcommittee, asked about Behnam’s early impression on the bill. Behnam responded that decentralization is the core question for deciding whether a token is a commodity or a security. Another question is where the token is being bought by the consumer.
Rep. Johnson pointed out the new market structure bill uses similar terminology to the current regulatory regime for financial markets and asked if Behnam thought that worked for him. He said it was “a great starting point” and said the approach of “siloing” entities – i.e. digital assets – was the way to go.
Rep. Andrea Salinas (D, OH) brought up crypto scams and what’s being done right now by the CFTC and SEC. Behnam noted the gap in what’s regulated. He said today’s they police cash markets if there is fraud or manipulation – it’s reactive, not proactive. Hence, the need in the future is for pro-active regulation and moving beyond today’s structure which addresses just a “tip of the iceberg.”
Rep. Jim Baird (R, IN) inquired about Behnam’s thoughts on segregation of customer funds which is part of the draft bill. He agreed this was critical.
On the National Futures Association (NFA) partnership with the CFTC on digital assets, Behnam sees them as the closest relationship with registrants: “We are thinking about the depth and breadth of the markets we oversee both here in the US and overseas. And an SRO like the NFA is an absolute necessity. So I am also encouraged by the fact that the draft bill considers a relationship with a self regulatory organization and building off of some of the principles and foundations that have worked quite well for the CFTC and our traditional markets to use in this digital asset market.”
Rep. Nikki Budzinski (D, IL) asked about how underserved communities, low income communities are being affected by digital assets. Behnam agreed that more and expanding education was necessary for these communities. “Ultimately, I think, to your point, more examination by the agency in partnership with other agencies to see what are in fact the use cases, are we seeing a development in this space that is helping and supporting financial inclusion, or is it in fact just a mirage and are we not seeing it. And I think we don’t we shouldn’t dismiss it, but we also shouldn’t embrace it as a success story quite yet so we can,” said Behnam. He also pointed out the benefit of digital assets through sending payments globally and instantly.
Rep. Doug Lamalfa (R, CA) asked Chair Behnam about the NFA relationship and how it would work with digital assets. “I feel like [the NFA structure] is adaptable, but we will certainly have to take a look and make sure that we make appropriate tweaks and adjustments to reflect the unique nature of digital assets.”
Behnam said that if CFTC had spot market authority how might that have affected events in the digital assets space. Behnam pointed out that LedgerX was regulated all along and recently sold for $50 million and that this shows, in part, how regulation would have helped keep things stable.
Rep. Jonathan Jackson (D, IL) asked technical questions – in particular around wash trading and the difference between bidders and bids. Jackson was concerned about transparency.
Behnam answered, “Congressman,… you’re raising the really the most fundamental important question and I hope the reason we’re here today is we can set up a side-by-side of regulated markets and unregulated markets. And all these concerns you raise about bids and offers and customer funds being secure and siloed from other customers and other brokers versus an unregulated market where you don’t have those legal and regulatory requirements. And you have that incentive or that ability for some market participants to conduct themselves in a way that is essentially contradictory to what we have traditionally done and know that works in US financial markets.”
Rep. Frank Lucas (R, OK) asked about the importance of consistency with existing laws and new additional framework. Pointing out the U.S. markets’ strength, Behnam said, “We use the traditional futures and options market and the structures around those markets, and essentially superimpose them on the swaps market with some tweaks, understanding that swaps are very unique and different than futures and options. I don’t think it needs to be any different with this asset (digital assets).”
On current collaboration between the CFTC and SEC and token designation (commodity vs. security), Behnam took a moment to reiterate his belief that Ether was a commodity, “So, I’ve been very vocal in my belief that Bitcoin and [Ethereum] are commodities, and that’s in part because they’re listed on my exchanges, but in part because we did the legal analysis. we’ll continue to do that if that’s the case. Thus far no other participant has come and tried to list the contract a different token on our exchange.”
Rep. Jahana Hayes (D, CT) asked Behnam about consumer protections. Behnam noted today’s reactive enforcement undertaken by the CFTC. He said, “… Nearly every single one of those enforcement actions has been because someone has come to the CFTC. And I don’t think anyone in this room agrees that that’s how to conduct an effective regulatory scheme or regime. So, I’m hopeful that as this bill goes forward, we can get to a place to fill this gap around commodity tokens. And in that case or scenario we can prevent or eliminate some of these … offerings to vulnerable citizens.” Rep. Hayes also reiterated that the bill made no provision for funding. Behnam agreed that funding will be important.
Rep. Tracey Mann (R, KS) asked about lessons learned from expansion of responsibilities of the CFTC coming out of the implementation of Dodd-Frank over a decade ago.
On funding, Behnam said the return on investment with the CFTC is 8 to 1, meaning for every dollar invested in the CFTC and its infrastructure, the CFTC returns $8 to the American people through fees and enforcement actions.
As he consistently does, Behnam expressed optimism about his agency and its future, “I would say, arguably, more so than any other regulator in the globe. We have been one step ahead in terms of our intersection with the digital asset market. So when it comes to commodity digital assets, as you point out, I do think this is a natural next step (this new legislation) and as we continue to see this market at least stabilize and maintain its current price level and, you know, it will change over time. This is actually a good time to be having this policy discussion so we can get ahead of a next move or a next growth in the market and not be caught on our back feet here.”
Rep. Barry Moore (R, AL) asked about “top 3 asks” from Behnam in regards to digital assets authority beyond funding. Behnam said policing the commodity digital token market beginning with rules around conflicts of interest was important.
Rep. John Rose (R, TN) brought up the coincidence around the timing of the announcement of the SEC’s lawsuits against Binance and Coinbase. Chair Behnam said his agency would never do such as thing but declined to comment on the SEC’s modus operandi. Then, Rose summoned his best imitation of House Financial Services Chair Rep. Patrick McHenry (R, NC) (see Oversight hearing), saying bluntly, “Is Ethereum a commodity or a security?”
Rep. Jasmine Crockett (D, TX) said, notably from a bipartisan perspective,, everybody here agrees on the need for this legislation, but the appropriations committee is potentially going to cut the CFTC’s budget. How is that gonna work, she asked Behnam – who said there would be layoffs if the budget were pushed through.
Rep. Randy Feenstra (R, IA) wanted to talk about exchanges and oversight impact if the market structure bill becomes law. Behnam said, “We’re going to register and regulate brokers. We’re going to register and regulate asset managers. We’re going to regulate and register exchanges – all the things that we do that are core components in our traditional markets. And there will be a cost associated with it, there’s no doubt – but with that cost comes transparency, fairness, and hopefully – and I believe history has proven this – less abuse fraud and manipulation.”
Rep. De La Cruz
Rep. Monica De La Cruz (R, TX) brought up the idea that all digital assets are securities and if Behnam agreed – he did not. She then brought up Bitcoin and discussed whether existing frameworks are enough (as the SEC’s Chair Gensler suggests). Behnam reiterated, “The tools that we have [are] from an enforcement perspective at the CFTC – but these tools are so limited. They are powerful, but limited. I know that sounds like a little bit of a contradictory statement. but the fact of the matter is, we have to wait for individuals to come to us and to raise alarm bells or flags about wrongdoing or violations of the law. And I don’t think any of us believe that that’s how a sound effective impactful regulatory scheme should should function.”
Rep. Max Miller (R, OH) echoed his belief that digital asset innovation is endanger of moving offshore. In this context, he asked Behnam his thoughts on how current regulation affects digital assets: “It’s not necessarily the best idea to lean on a decades-old legal decision about what is a security and then de facto what is a commodity, if it’s not a security.” Effectively, this is a repudiation of the SEC Chair’s stance that the Howey Test and laws established in the 1930s and 40s was enough.
Rep. Zach Nunn (R, IA) again asked Behnam if Ether was a commodity or a security. Behnam once again said it was a commodity. On whether the SEC is picking “winners and losers” in the digital assets space – Nunn said the United States was a “loser” in the space due to the SEC’s position.
Rep. Kat Cammack (R, FL) stated the desire to not change what a security is but as Behnam pointed out, “No one has current jurisdiction of digital asset cash markets currently.”
On the “light touch” reputation the CFTC is known for, Behnam was having none of it, reiterating the 8 to 1 return on investment and the fact the CFTC is more than just a principles-based regulator.
And with that, questioning of Chair Behnam was complete and the Committee went on recess until the next panel.