At last week’s “Future of Digital Assets” conference produced by the Milken Institute, Rep. French Hill (R, AR), chair of the House Financial Services’ Digital Assets, Financial Technology and Inclusion Subcommittee, spoke at length regarding digital assets legislation prospects in the 118th Congress.
Nicole Valentine, FinTech Director at Milken Institute moderated the discussion.
(Transcript edited for clarity)
On key priorities for the House Digital Assets Subcommittee…
REP. FRENCH HILL: The Digital Assets Subcommittee is a priority for the House Republicans and the House Financial Services Committee because back in 2019, we had two task forces: a task force on artificial intelligence and we had a task force on FinTech, financial technology. Those were bipartisan. It was agreed to and set up by then-Chairwoman Rep.Maxine Waters (D, CA) and then-Ranking Member Rep. Patrick McHenry (R, NC).
And digital assets and financial technology have been a priority for the committee for many years to help solve many of the challenges that the existing financial structure has and lay a framework for innovation for the future. And so it was a “natural” that when Patrick [McHenry] became the chairman of the committee that he would want to have a subcommittee on digital assets. That’s the background – it has the full jurisdictional aspects of all things FinTech, inclusion and the broader picture of digital assets.
In the House and in the Senate, you don’t have clean jurisdiction in some of these key areas. The House Agriculture committee and the Senate Agriculture Committee play a role here as well because under market regulation conditions they might be involved in the futures market or certain aspects of the currency oversight of an exchange.
Our goal is to create a regulatory framework for digital assets. And there’s no doubt in my mind that this country needs that – we’ve seen that through the willy-nilly formation, so far, with no guidance – just pure innovation out there. We’ve seen it in the malfeasance in the industry that we witnessed last year culminating in the collapse of FTX. And we see it in the competition across the globe where other jurisdictions are establishing a legal framework and regulatory framework for digital assets, whether it’s in Europe or Asia. And so that is a critical element to take into account.
And finally, the United States has been at the forefront of financial innovation in the capital markets for certainly the 20th century and into the 21st century. We want to see that continue in a digital format. This is a big agenda for this subcommittee and I look forward to leading it as its initial pioneering chairman, and it’s gonna be a fun ride this year.
On Central Bank Digital Currencies (CBDCs)…
REP. FRENCH HILL: So go back to that 2018-19 timeframe, Congressman Bill Foster, a member of Congress from Illinois – we encouraged [Secretary of the Treasury Steven Mnuchin] and [Federal Reserve Chairman Jerome Powell] to have their staffs look into CBDCs as a part of the payment system because the US is at the center of global payments because of the US dollar.
We weren’t making a statement about central bank digital currencies. We were saying, “Study it, get familiar with it. Have a view, strategize, do the analysis, what would be the impact on the banking system? What would be the impact on monetary policy transmission? How might it work? Could it work? Is this an academic idea that’s ready for primetime or not?”
And at the time Secretary Mnuchin and Chairman Powell, I think were a bit, you know, “That’s not something that we think we need to consider right now.” But, we kept after it. And as a result, the Federal Reserve set up their formal study, led by the Federal Reserve Bank of Boston using talent at MIT. And so we’ve made progress on getting them to look through those pros and cons of it.
Now in Congress, you have people who think that such a thing is an anathema and it absolutely shouldn’t be done. And you have members of Congress who think it’s nirvana, that it will solve all problems -that it’s a “Garden of Eden” to have a CBDC in the United States.
My personal view is we should continue to study and evaluate it to see how it might be used and if it can be successful, and that that should be conducted by the Treasury and the Federal Reserve. And as you’ve seen, just in the last few minutes, if you read Politico this morning, you’ve seen that Lael Brainard, who is the new head of the National Economic Council for the White House, has asked Nellie Liang, the undersecretary of Treasury, to proceed with pulling together those study items around the CBDC at the Treasury. So we look forward to engaging with her on that.
There’s also lots of versions of a CBDC. It does not have to be where every citizen banks at the Fed, and all the debits and credits of their life are exposed at the Federal Reserve on a government run and operated blockchain – the CBDC – and then we take your picture coming and going, and we post it and when you go through the Holland Tunnel, we know it, and we say you’re going to Bergdorf’s and we’re shutting down your account. And you can’t travel -and it’s a Chinese surveillance state. But that’s the allegation at the extreme.
But, one could have a government-issued digital dollar through intermediaries just as we issue cash and have intermediary payment today. But one would be using it on a blockchain.
This issue is an emerging issue. But sometimes it takes all the air out of the room, I think, and I think you’re you’re focusing on a giant redwood, but you’re ignoring the forest when you start debating this and drag off into the fringes of this debate. Because what we need to be focused on is a regulatory framework for digital assets that preserves the ability for developers and innovators to use the blockchain with a tokenized payment in the United States and for people to be able to custody that for people to be able to value it fairly, transparently, in a regulatory safe and sound framework that complies fully with American law including AML and BSA.
We’re around the fringes, we’re taking this argument in a bunch of directions that I don’t think are constructive. And we’re also now confronted with an administration that while they might set up this CBDC Working Group and Lail [Brainard] is going to make sure that works fine, blah, blah, blah. But then meanwhile, that’s the right hand. The left hand is shutting down through enforcement every aspect of the ecosystem.
Again, stepping back looking at the forest, not any one of these complex trees, if this is what we had done in 1996, we would not have reaped the benefits of the world wide web and the internet to the extent that we have. And people are quick to point out “Oh gosh, consumers were hurt last year in the crypto space – true. But, investors between March 3, 2000 and October 2001 lost $5 trillion in the .Com failures that were fully compliant with the SEC laws – I’m excluding frauds like Worldcom and Enron and the usual suspects down in Houston and Jackson, Mississippi.
America innovation, you know, disruptive capitalism – you’ve got to have exuberance. And you got to have failure to have capitalism. But people have got to be comfortable with that. But we need a regulatory framework so that we can let people succeed or fail based on transparent, fair-minded rules. In ’96, the Congress took a bit of a hands off view, “We’re going to facilitate innovation.” In fact, when you go back and read former member of Congress and Chairman of the SEC Chris Cox’s 1996 resolution, they don’t even know what they’re talking about. Because when you read it out that was just, you know, 26 years ago or so – now you you have the benefit of hindsight.
You know that while pets.com was a big bust that every day, you can’t walk into your door of your house because of all the boxes stacked up from Amazon for your cat and your dog. So, some people didn’t make it. Others were significant successes from those earliest days of the internet – and that’s where we are in the digital asset space. There will be success. There will be failure, but we have to have that framework that’s transparent, fair-minded to allow that innovation to take place. And to be skewed off in one direction or another prematurely is going to hurt that process.
What’s going to come first on digital asset legislation in the near term? Stablecoins?
REP. FRENCH HILL: We made some progress last fall on a bipartisan basis on a stablecoin bill. And then we ran out of runway because of the impending fall elections – Congress was off for October and November. And then we have a new Congress.
So Maxine Waters and Patrick McHenry, their staffs, the staff of the Treasury – [they] worked very constructively on that process. Because – this is pre-FTX, of course – you know, why don’t we define what a good stablecoin looks like and that will allow people to have more certainty about innovation, more certainty about custody, more certainty about how one might use it. But that was a very narrow part of all the things we’ve got to consider this year. There are non-payment stablecoins that you might call a utility coin – how might those work? -how might those be structured in and around the securities laws and the so called Howey Test? So that needs to be dealt with effectively.
And then market regulation – how might people facilitate the exchange of digital assets and in the right way under a regulatory process. And that’s why I referenced the House Ag Committee, we’re going to do our best to work in tandem with House Ag on this process because I think that’s effective. We have five members in the House Financial Services Committee on the House Ag committee – amazing how that turned out. And so we have knowledge in both committees to make that more effective.
My instinct might say that we’d pick up where we left off on stablecoins first, but I’m not sure I can do that. And part of that is -where is this Administration on constructive work with Congress on a framework? We know where they are on enforcement. Where’s their “1996” vision to benefit financial innovation here in the United States, for next gen approach to Web3 and the value that blockchain affords a whole variety of industry experimentation.
On inclusion within the digital assets and financial technology space.
REP. FRENCH HILL: It’s such an important part of the story when it comes to digital assets and fintech generally, which is people assess that that’s a real gateway for lower costs, more access for more people at all stages of their life. And we should all embrace them.
And that’s actually the impetus around setting up the FinTech taskforces four years ago – how do we use FinTech to lower costs and financial services over on the compliance and regulatory side but [also] how do we use FinTech to enhance client and customer acquisition, service at all levels? -also about lowering the costs but also about increasing the access points. That’s absolutely at the heart of what we’re doing.
And let me touch on just two or three points. I don’t want to repeat the digital assets part. We think that’s by nature, a component. But I’ll press on to say that the House Financial Services Committee generally have this as a policy. I was so pleased last year to attend the Milken Institute session on how do we broaden ownership for employees/associates of large companies that are privately-held.
When I started my career in the late 1970s in the financial markets, the whole dream was to go public. And you could go public [with a] $100 million market cap and you could afford to be a small company and be public.
Today, since Sarbanes-Oxley, since the financial crisis, since all of the regulatory burden that’s been added over the past four decades – that viability number [or] that return on investment number is way up in the billions now. So there are fewer public companies… fewer public companies [to put] in the Union pension plan. There are fewer public companies to put in your 401K plan. They are 50% less than when I graduated from college.
And while private equity has somewhat been made available through ETF formats, and you have companies like Blackstone or KKR that ultimately have gone public -it’s not the same because the vast majority of the capital has been held in private hands before it ever has a shot of going public.
We want to find ways and means to increase ownership for more people who work in private companies. Secondly, we want to lower the burden of being an accredited investor to open up more opportunities for people to participate in private market transactions. And we haven’t fully-reviewed those rules in – again – 40 years.
And look at some of the things the SEC is doing that are not in the interest of democratization -and that is payment for order flow. Gary Gensler – your Chairman is opposed to it – he wants to shut it down and kill it. Well, that is what makes low dollar investors have more access to more products at lower costs out there in the in the brokerage arena.
So inclusion can mean a lot of things and the House Republicans have a big agenda to promote that.
Final thoughts…
REP. FRENCH HILL: We have bipartisan support in the House to work on building out – for digital assets – a regulatory framework and we need all of your engagement and help. And we need you to contact House members and Senators to say that we can’t produce an American, competitive future economy based on innovation and the idea of blockchain unless we have this regulatory framework that we all recognize that’s transparent and secure. It’s good for developers and innovators. And we can do that. But we’ve got to remove roadblocks of people who just want to shut down innovation in the United States and see it all move offshore -or people who are projecting some some things that just aren’t true – which is a big part of American society – on this industry and blocking us from getting that framework.
Our office is always open. You can always contact me at hill.house.gov. And we’d love to hear from you and how you can help us make that framework a reality.
Later in the day, Senators Cynthia Lummis (R, WY) and Kirsten Gillibrand (D, NY) discussed their digital assets legislation. Read that one.