CFTC And SEC Collide Over Prometheum; House Ag Pushes Market Structure Bill

house ag hearing – Prometheum

All the pleasantries of a House Agriculture Committee CFTC oversight hearing aside, yesterday signaled a new – or more transparent – war between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) and the pro- and anti-crypto interests they represent.

House Ag Chair Glenn “GT” Thompson (R, PA) chose to highlight the CFTC-SEC battle at the beginning of his Q&A with Chair Rostin Behnam, a Democrat, who said that a decision by crypto securities platform Prometheum to custody Ether could throw off the whole crypto derivatives market which the CFTC manages -let alone set an unwanted precedent of Ether (ETH) as a security.

The CFTC Chair firmly believes ETH is a commodity.

See the video of Chair Behnam discussing Prometheum and the conflict with the SEC at the hearing (1:38).

The Special Purpose Broker-Dealer license which enables Prometheum’s product capabilities such as ETH custody was issued in May 2023 by the SEC and its Chair Gary Gensler, also a Democrat.

Digital assets proponents – House Ag Republicans, in particular – used the battle as justification for the new digital assets market structure bill known as “Financial Innovation and Technology for the 21st Century Act” [H.R. 4763] or “FIT 21,” as it is known.

Whether yesterday’s House Ag theater will lead to the Senate Agriculture Committee re-entering the digital assets regulation discussion led by Chair Debbie Stabenow (D, MI) and Ranking Member John Boozman (R, AR) remains to be seen.  But, Behnam was senior counsel for Chair Stabenow prior to joining the CFTC and the re-ignition of Senate Ag in digital assets may be inevitable.

In his opening statement, Chair Behnam reiterated what he’s said before: “The lack of legislation addressing the regulatory gap over the digital commodity asset spot market has not hindered the public’s enthusiasm for digital assets, and I continue to believe Congress must act…” Read more.

See full hearing video.

house ag hearing – Dems

During the course of the oversight hearing with Chair Behnam, House Ag members discussed the digital asset market structure bill (FIT 21).

According to Rep.  Nikki Budzinski (D, IL), she believed FIT 21 had “implementation concerns,” but appreciated that the bill’s sponsors had granted her two amendments.

Budzinski wanted to know about a timeline from Chair Behnam in regards to implementing FIT 21, if it’s signed into law. Behnam did not hesitate to say it would take 12 months to create “regulatory structure.”

Notable in her question was what appeared to be Rep. Budzinksi’s support of FIT 21 – breaking from Democratic leadership’s position.

Rep. Darren Soto (D, FL), another long-time, crypto advocate, said in his 5 minutes that the funding from the FIT Act (digital asset market structure bill) is critical. Behnam indicated that half of the CFTC enforcement docket today is taken up by crypto even though the CFTC doesn’t regulate it.

Committee member Rep. Greg Casar (D, TX) represented a Dem leadership point-of view during his questioning of Behnam. Casar tried to compare digital assets with farming saying, “…this other industry (crypto).. I worry about setting up the American people.” Behnam rejected the characterization and said, “There’s a need to act” and “There is real persistent adoption and demand from Americans.”

house ag hearing – Rep. Duarte

Perhaps cut from the same cloth as crypto skeptic and fellow Republican Senator Roger Marshall (KS), Rep. John Duarte (R, CA) showed that he still questions digital assets during his 5 minutes of Q&A with the CFTC Chair. He asked Behnam about listing requirements and how crypto is identified as a commodity versus a security. Rep. Duarte said that cryptocurrencies were being given “credibility that they don’t deserve” with bespoke regulation and that “There is nothing there there…”

This position was not new from the House Republican who expressed opposition to the digital asset market structure bill (FIT 21) at last July’s House Ag markup.

house ag hearing – Rep. Cammack

Rep. Kat Cammack (R, FL) inquired of Chair Behnam about ongoing or planned “workstreams” on DeFi at the CFTC. Behnam identified internal programs and then spoke to “Tricky questions [on Defi]… We should not step back” though. This triggered Cammack (a bit) who worried aloud that innovation could be “stamped out” by over-regulation.

Cammack asked a broader question of Behnam about the use of blockchain technology and where it intersects with regulation. Behnam noted the use of blockchain for settlement and payments and said the CFTC is engaging with industry but didn’t see the need to write rules for “blockchain” – he said “CFTC principles” address it.

house ag hearing – Rep. Nunn

Towards the end of the hearing, and just after another line of questioning on CeFi versus DeFi from House Ag Chair Glenn Thompson (R, PA), Rep. Zach Nunn (R, IA) spent his 5-minutes of Q&A, in part, discussing Prometheum’s decision to custody ether as a security in his questioning of Chair Behnam:

Rep. Nunn: “I am concerned that the SEC  will use this as an opportunity to circumvent Congress and even the CFTC in the space to further use participants who are already in the field…. Do you still believe Ether falls into that commodity area where CFTC can really allow digital assets like this to take root and be successful?”

Chair Behnam:Yes.”

Rep. Nunn: “Until FIT 21 becomes law, what can the CFTC do to continue to bring clarity to this?”

Chair Behnam: “Ultimately it goes down to the contracts are listed on an exchange. We don’t do this without legal analysis, policy analysis. So as the Bitcoin futures contracts were listed in 2017, and then the either futures contracts were listed in 2020, we work closely with your fellow regulators. But we also do the analysis internally about the underlying asset: whether it’s a physical commodity, whether it’s interest rate, currency, or credit product or a digital asset. We do the analysis under the Commodity Exchange Act. We work with the exchanges and we ensure that what they are listing, above all else, is a commodity.”

digital assets taxonomy

The CFTC Global Markets Advisory Committee(GMAC) led by Commissioner Caroline Pham took place yesterday and the GMAC’s digital assets subcommittee provided its first take on a Digital Assets Taxonomy.

The committee members, comprised of industry participants such as BNY Mellon and Franklin Templeton, said its intent with the taxonomy presentation is to help policymakers understand the subtleties of digital assets. This was a deep dive on taxonomy and will likely add to congressional staffers’ toolkit in creating digital assets legislation and educating members.

Another goal of the taxonomy, according to GMAC digital asset subcommittee members, is to provide an agreed upon framework – and, therefore, something to build on.

Next steps are for the taxonomy to be sent to the CFTC Commission for “consideration.”

Download the Classification Approach For Taxonomy (PDF).

Download the Taxonomy slides (PDF).

Republican SEC dissent

Republican SEC Commissioners Hester Peirce and Mark Uyeda roasted their Democratic counterparts in a dissent on Tuesday.

They began: “The Commission’s enforcement action against ShapeShift is the latest installment in the serial drama of the Commission’s poorly conceived crypto policy. The current episode recounts the tale of an early innovator in the market for crypto assets. In August 2014, ShapeShift AG started an online platform that facilitated trading in crypto assets. (…) This enforcement action underscores the adverse consequences of the Commission’s approach to regulation in the crypto space and adds to the ambiguity that hangs over the crypto world….” Read the dissent.

Sen. Marshall on CBDCs

Senator Roger Marshall (R, KS) is co-sponsoring Senator Ted Cruz’s (R, TX) anti-Central Bank Digital Currency (CBDC) bill as of Tuesday [S.3801]. There are now 8 Republican co-sponsors.

The Senate bill is a version of Majority Whip Tom Emmer (R, MN) anti-CBDC bill in the House [H.R.5403]. There are 123 Republican co-sponsors in the House.

Marshall also co-sponsors Sen. Warren’s Digital Asset Anti-Money Laundering [S.2669] bill – his participation in the bill has been reviled by some Republican special interests such as the Club For Growth (see letter).

what you should know: According to Politico in late February, as part of their conservative scorecard, Heritage Foundation has made the rejection of CBDCs a key element. Perhaps this will help Marshall score a few more points with Heritage.

hear ye, hear ye

A new hearing from House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion titled, “Bureaucratic Overreach or Consumer Protection? Examining the CFPB’s Latest Action to Restrict Competition in Payments” takes place at 9 a.m. next Wednesday, March 13. See announcement.

what you should know: A key element of this hearing will probably be CFPB’s proposal for oversight of digital wallets in November. Cato Institute’s Jack Solowey, a potential hearing witness, broke down that proposal here saying that if self-hosted crypto wallets gets roped into this rule, “it would be yet another example of subjecting a core crypto technology to poorly conceived regulation.”

states – New York bill

A new bill passed out of a New York State Senate committee that  “establishes the New York state cryptocurrency and blockchain study task force.” See Senate Bill S8136.

Bain Capital policy executive Khurram Dara explains the details on X, “The 16 person task force would have to include a representative from 1) the financial services industry, 2) a state/national environmental org and 3) the faculty of a NYS college/university who has ‘experience in economic studies.’ The head of NY’s DFS, DEC and the Comptroller would also be on it. Oddly enough, there’s no explicit requirement that a representative from the crypto or blockchain industry be included (but presumably the rest of the appointments would be folks in the space). The remaining 10 spots would be appointed by the governor (2), the assembly speaker (4) and the senate president (4).”

still more tips

‘Playing politics to win’: Crypto spends big on Super Tuesday – Politico

Tether’s $100 billion stokes stablecoin stability concerns – Reuters

He Lost $500,000 on Bitcoin. Now He’s Celebrating. – The Wall Street Journal

BlackRock’s IBIT spot bitcoin ETF hits record daily inflow of $788 million – The Block