This morning’s 90-minute Senate Banking hearing, “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets,” offered a snapshot of the partisan divide existing on the committee as it relates to crypto. See the hearing’s video.
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- Democrats focused on fraud, illicit financing and consumer protections with some exceptions.
- Republicans focused on innovation with consumer protections and blamed the Securities Exchange Commission (SEC) and its Chair, Gary Gensler, for part of crypto’s problems.
- SBF: The damage done to digital asset legislation prospects by former FTX CEO Sam Bankman Fried cannot be overstated.
Senate Banking Chair Senator Sherrod Brown (D, OH), who controls the agenda on the Committee on behalf of the Democratic majority, expressed skepticism about the efficacy of cryptocurrency from the start which helped set the tone for the day.
The three witnesses present for the hearing were from academia:
Within the prepared testimony, Mr. Reiners, a critic of the crypto industry, suggests that bipartisan stablecoin legislation should be possible.
Mr. Yadav argues for an SRO (self-regulatory organization) “Opting into an SRO model gives industry a chance to take advantage of this crisis, to engage in reform, mature, and to innovate…”
Ms. Jeng, who is also Chief Regulatory Officer & General Counsel at industry trade organization Crypto Council for Innovation, has previously served in financial regulation roles in the U.S. government including Treasury. She showed her industry tilt by concluding her testimony with a request for Committee members on creating effective legislation, “… moving the dial, whether it be on consumer and investor protection, or financial inclusion, requires understanding the technology, its limitations, and opportunities – and having a builder’s mentality.” In other words, legislation should not be about consumer protections exclusively.
the hearing – Chair and Ranking Member
Chair and Senator Brown started off the hearing with listing all the lowlights for crypto in the past year mentioning “high fees, outright theft” associated with crypto in addition to the multiple implosions including FTX – making note of the Senate’s December hearing on FTX.
Everything… everything about crypto was bad in the Senator’s estimation, “When it comes to crypto, it doesn’t favor the brave, it favors wealthy insiders. (…) It was an industry created to skirt the rules.” He advocated for legislation and reminded that “access to financial markets is a privilege and not a right.” See the press release for Brown’s opening statement.
Ranking Member Senator Tim Scott (R, SC) began his statement with his desire to see Chair Gary Gensler at a Banking hearing soon since Gensler has time “to make the rounds” at morning talk shows. Scott’s opening statement used the word “innovation,” unlike Brown, and, said that the promise of crypto needs to be implemented in “a safe and sound manner.” Scott noted that people of color bore the brunt of the most recent crypto crash given their interest in the asset class.
He argued that any legislation should promote innovation and opportunity as well as protection consumers. See the press release for Scott’s opening statement.
witnesses begin
Mr. Reiners repeated concerns in his prepared statement and said cryptocurrencies have no use cases. He wants a change to securities laws such that cryptocurrency regulation will be assigned to the jurisdiction of the Securities and Exchange Commission (SEC). This includes Bitcoin, which he admits is a commodity. Reiners believes the SEC is best suited to manage crypto with a larger workforce and refined skillset that can handle the scale and challenge of the crypto industry.
Empowering consumers, increasing efficiencies and equity for consumers were among the principles advocated by Ms. Jing during her opening statement. “The development of a flourishing digital ecosystem ultimately relies on innovators, as well as laws, regulations and policies that guide policymakers, investors and businesses to facilitate long term value,” she said. Ms. Jing complained that the SEC has not initiated any formal rule-making and urged Congress to take action.
Ms. Yadav urged for regulation from the start of her testimony. She noted that proper custody arrangements, for example, were not part of any regulatory guidance and argued for a self-regulatory regime (SRO). She said her proposal would task cryptocurrency exchanges with writing rules. For industry participants, they would have to “pay” to use their markets according to Ms. Yadav. She said her proposal was not a substitute for federal regulation but intended to supplement it and added that responsibility and accountability were required for the heart of the cryptocurrency markets.
Questions
Asking a softball, Chair Brown asked if the witnesses believed the crypto industry should “operate with basic consumer protections.” Reiners agreed as anyone might. After asking Ms. Yadav about conflicts of interest in crypto, Brown went back to Reiners about what legislation was needed. Separating crypto assets from crypto firm assets was clearly needed said Reiners.
Chair Brown guided the discussion to disclosure principles and what was needed. And then Ranking Member Scott reminded everyone how complex disclosures can be even in traditional markets.
Then, Scott read from a statement urging a “rules of the road” for digital assets which are clear and consistent. He reiterated that SEC Chair Gensler needs to appear before Banking and long before September.
Scott then asked Ms. Jeng about how to strike a balance on “legislation versus innovation”. Jeng argued that consumer data rights could be at the core of any legislation related to a digital economy.
Senator Menendez
Reiners addressed Sen. Robert Menendez’s (D, NJ) question regarding rulemaking for “non-security digital assets” with his idea about carving out crypto including Bitcoin and putting it all under the SEC. Ms. Yadav advocated for her self-regulatory organization approach for crypto exchanges which service the “vast swath of the population.”
Ms. Yadav later said to the Senator that the United States is falling behind in effective legislation compared to the rest of the world: “It feels like we’re following others.” Ms. Jeng noted the progress in the European Union, Australia, UK and other countries in regulating assets.
Mr. Reiners didn’t think the U.S. was falling behind as it relates to rules of the road for crypto. He said the United States doesn’t need to be first, it needs to be right with its regulation. Reiners framed the discussion around consumer protections and financial stability.
Side note: During the Q&A with Democratic committee members, Senator Menendez and Senator Chris Van Hollen (D, MD) asked practical questions about proper regulation which perhaps signaled an interest in a more neutral or industry-friendly approach.
Senator Vance
Senator J.D. Vance (R, OH) said that he owns cryptocurrency and admitted the skepticism in light of FTX is understandable but equated it to the early days of the Internet before its function was clear.
Mr. Reiners responded saying crypto is not new – in fact, it’s 14 years old, he said, adding that “there are no fundamentals.” Conversely, Ms. Jeng agreed with Senator Vance adding that open and interoperable standards are needed just as they were in the early days of the Internet.
Ms. Yadav took issue with Mr. Reiners’ comment that “growth is slow” and pointed to the rapid growth of DeFi (decentralized finance). She believed consumer protections and financial stability can be balanced with promoting innovation.
Senator Van Hollen
Senator Chris Van Hollen (D, MD) was curious about the idea of restricting crypto for regulated banks. He asked Mr. Reiners for ideas on how interaction between traditional banks and crypto might be facilitated.
Reiners said that if the banking system had been integrated into crypto during the FTX implosion, risks to the financial system would have been much worse. He thought that banks should not hold cryptocurrency on their balance sheets.
Senator Britt
Senator Katie Britt (R, AL) asked Ms. Jeng if she could elaborate about commonsense guardrails that encourage transparency for consumers and what Congress needs to keep in mind. Among other points, Jeng said that “we need to make sure fiat-backed stablecoins and other types of digital money – which could include CBDCs as well – are going to be free of interest or title, and hence… putting it under the SEC framework was problematic because I cannot pay you with a security.”
Senator Smith
Senator Tina Smith (D, MN) said she was worried about the volatility with crypto and its possible effects on the financial system. She asked Mr. Reiners to elaborate. He said that the “financial inclusion” argument for crypto is merely “predatory inclusion” where minority communities are being targeted. He added, “Voyager said it was FDIC insured.” It was not, he said, and typical in the lies that consumers have had to deal with.
Senator Smith concluded, “It does seem to me that in this field a lot of people are losing money and being taken advantage of.” She wants consumer protections, she said.
Senator Tillis
Wanting to “hit some singles and doubles,” Senator Thom Tillis (R, NC) asked witnesses to think about realistic regulations that could be put in place versus potentially over-reaching. He asked about a “proof-of-reserves” regulation as an option that Congress can act on. Mr. Reiners said that proof-of-reserves aren’t worthwhile, but audits could be. He emphasized the separation of firm assets from customer assets.
Ms. Jeng advocated simple GAAP accounting measures which could verify what is on-chain and off-chain. Ms. Yadav wasn’t sure that “proof-of-reserves” would expose all the liabilities in play for any crypto company. She thought a regular cadence of proof-of-reserves and solvency audits made sense -and done much more than just every three months.
Senator Warren
“Big time financial criminals love crypto,” began Senator Elizabeth Warren (D, MA) as she outlined for the Committee the $20 billion of known illicit financing that she said occurred via crypto rails last year. She asked Mr. Reiners why criminals like crypto. Reiners pointed out the anonymity of the currency and its immediate nature. He agreed that ransomware would go away if there was no crypto.
Senator Warren then asked if crypto “was too special” to follow anti-money laundering (AML) rules. He agreed it was not. Sen. Warren said she and Senator Roger Marshall (R, KS) were about to re-introduce their December bill which would implement strict AML rules for crypto.
Senator Hagerty
Senator Bill Hagerty (R, TN) began with the idea that the United States needed to stay at the forefront of technological innovation. Looking at stablecoins, he noted his own stablecoin bill last year requiring audited reserves.
Next, Senator Hagerty brought up “Operation Choke Point” which he said was potentially taking place among financial regulators in regards to digital assets. In response, Ms. Jeng said that if crypto doesn’t have access to the traditional banking system, “shadow banking” was the only option and could result in innovation moving offshore.
And with that, the 90-minute hearing was adjourned.