Today, the House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit looked at “The Future of Digital Asset Regulation.” Video stream below.
Previously, the committee members Rep. Glenn “GT” Thompson (R, PA and Ranking Member) and Rep. Ro Khanna (D, CA) as well as Rep. Tom Emmer (R, MN) and Rep. Darren Soto (D, FL) have co-sponsored the Digital Commodity Exchange Act of 2022 (DCEA), which provides the Commodity Futures Trading Commission (CFTC) with oversight of key aspects of the digital assets world.
Four witnesses representing a regulator, an academic from the legal world and two blockchain industry executives have submitted prepared testimony for today as follows:
- Vincent McGonagle, Director of the Division of Market Oversight, Commodity Futures Trading Commission (CFTC) – [See PDF]
- Christopher Brummer, Georgetown University Law Center – [PDF]
- Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis – [PDF]
- Charles Hoskinson, CEO, Input Output Global, Singapore – [PDF]
View the hearing:
Live blog featuring Q&A with The Committee
Ranking members Thompson and Rep. Michelle Fischbach (R, MN) offer opening statements including the need for clearly defined core principles and regulation. Even though the blockchain industry is nascent and its unknown where it will lead,, Rep. Thompson says “that should excite us not intimidate us.” He’s all in on the innovation potential of blockchain and its potential benefits to the United States.
After Vincent McGonagle of the CFTC’s presentation outlining the agency’s management of digital asset regulation to date, Georgetown Law’s Christopher Brummer offers his testimony centering on the differences between the CFTC and the SEC, specifically around disclosure and resources – and then how it all relates to financial inclusion.
Jonathan Levin of Chainalysis joins the hearing via video stream from South Korea and says in his opening remarks that blockchain technology and cryptocurrency are creating “universal access” to this financial system for its users and represents a huge opportunity for the United States. He pitches his company’s abilities to “mitigate the risk” inherent in cryptocurrency. Key recommendation: stable, regulated cryptocurrency market in the U.S. that leads the world.
Input Output Global and Cardano founder Charles Hoskinson is next up and says speed, scale and rapid evolution of blockchain technology and its use is far outpacing the current regulatory structure in the United States. He argues for an approach respects and “measures” decentralization – a key and varying element of blockchain technology applications.
Rep. Sean Patrick Maloney (D, NY) asks Mr. Brummer about who should regulate crypto in the Q&A. Brummer suggests that blockchain tech offers disclosure but only for “expert actors.” More will need to be done for consumers. But, CFTC is up to the job, he says.
The CFTC’s McGonagle responds that his agency is a markets regulator and not about how the commmodity can be used, which he suggested Brummer identified. He does think it’s up to the job and informing customers about risks as well as have protections in place.
Rep. Fischbach is next and asks Mr. McGonagle about the CFTC being a “principle-based regulator.” He notes the 23 core principles for listings on CFTC contract markets – see them here. He reiterates a strong regulatory framework along with equally strong enforcement offering.
Rep. Fischbach asks Charles Hoskinson about the benefits of cryptocurrency. He calls them “stem cells” and more fundamental. “What we do is all about transparency,” in relation to the cryptocurrency industry. He thinks understandability and tooling are what’s missing. He’s encouraged by the DCEA, the FIA and the Executive Order that can help create “a reasonable compromise” for the industry.
Rep. Thompson asks about CFTC oversight of futures markets and CFTC’s McGonagle discusses how self-regulatory organizations (SROs) function and how they connect to the Commission’s 23 core principles. He emphasizes the SRO’s risk management function.
Professor Brummer talks about lack of clarity in response to Rep. Thompson’s question about SEC/CFTC oversight regarding what’s a security and what’s a commodity. He adds that as blockchain technology scales it’s unclear how it will intersect with existing off-chain markets.
Rep. Bobby Rush (D, IL) uses his time with the witnesses to discuss “horrific” decline in crypto markets and identifies Bitcoin and stablecoins in particular. He is also worried about money from cryptocurrency special interests influencing political races. However, he sees a potential for financial inclusion with previously overlooked communities. Brummer responds that the way disclosure is enabled for crypto markets as it relates to the retail market will need to be “re-thought.” His idea overall is – sure its transparent, but it’s hard to understand. Decentralized identity and more innovations will need more explication when intersecting with vulnerable communities.
CFTC’s McGonagle addresses question on spot market regulatory oversight -he discusses compliance, surveillance and enforcement elements and seems to make case for CFTC oversight versus SEC. Mr. Hoskinson adds that decentralized nature of cryptocurrency and will need a regulatory framework that can handle that.
Rep. Angie Craig (D, MN) asks CFTC’s McGonagle about retail investors need for disclosure around digital assets. McGonagle makes his case on how the CFTC handles disclosure and customer protection as part of the agency’s regulatory regime. Rep. Craig asks point-blank if the CFTC can handle regulating this new digital assets space. McGonagle says the Commission has the experience and intellect but will need more resources as the CFTC Chair Rostin Behnam has previously indicated. Brummer notes the self-regulatory nature of the industries the CFTC oversees and connects it to the crypto world and its peculiar needs.
In response to Rep. Kat Cammack (R, FL), CFTC’s McGonagle says the framework for managing and regulating markets in place courtesy of the CFTC directly relates to how crypto markets can be effectively managed by the Commission. On gap of understanding on regulation and enforcement with the SEC, McGonagle says the CFTC and SEC maintain communication -but implied there’s room for improvement.
Chainalysis’ Levin talks about his company’s product works a bit in particular to AML and therefore helping with the smooth function of markets. McGonagle notes the attraction to unnecessarily large leverage and get-rich-quick risk concerns which the CFTC must look to oversee and prevent.
Rep. Austin Scott (R, GA) makes the point that he believes the CFTC is woefully understaffed to regulate 20,000 cryptocurrency. He adds that it’s not possible and asks Hoskinson what the approach is for determining which cryptos should be regulated. Hoskinson advocates for use of algorithms and technology to regulate in concert with regulators and SROs. Software must innovate the regulatory process. Rep. Scott sees self-certification as the way forward. He fears that too much regulation sets the precedent of making crypto seem more safe than it is.
CFTC’s McGonagle tells Rep. Randy Feenstra (R, IA) that the CFTC will need to be assigned more regulatory authority for effective regulation of the digital assets industry on the issue of SEC vs. CFTC jurisdiction. Rep. Feenstra calls digital assets “a great area and we have to embrace it.”
Rep. Michael Cloud (R, TX) fears too much regulation and asks McGonagle and McGonagle about how banking model of current regulation may work in digital assets. Hoskinson warns that regulation can actually enable the big players to win rather than help level the playing field. Decentralization is something which may help obviate this risk. Hoskinson worries aloud about CBDC’s and potential privacy risk.
Rep. Maloney closes the hearing and reiterates cryptocurrency markets potential. He reiterates the leadership role that the United States should have in this space and looks forward to additional hearings.