var TRINITY_TTS_WP_CONFIG={“cleanText”:”US House hearing pumps CFTC, dumps SEC, achieves little.u23f8Tuesday saw the U.S. House of Representatives Committee on Agriculture assemble for yet another u2018cryptou2019 hearing, this one discussingu00a0u201cThe Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets.u201du23f8The hearing centered on a new digital asset legislation, currently only inu00a0discussion draft form, tentatively titled the Digital Asset Market Structure Bill. The draft was crafted by Agriculture and Financial Services committee members and published last Friday.u23f8As detailedu00a0here, much of the bill aims to carve out clearly defined roles for both theu00a0Commodity Futures Trading Commissionu00a0(CFTC) and theu00a0Securities and Exchange Commission (SEC) and stop the u2018turf waru2019 allegedly being waged between these two agencies over who takes the lead in regulating digital assets.u23f8Committee chair Glenn Thompson (R-PA) got things rolling by thanking House Financial Services Committee chair Patrick McHenry (R-NC) for helping to craft the bill in question. Thompson also emphasized that the bill is still very much a draft, with wholesale revisions likely before any potential votes are considered.u23f8But Thompson also emphasized his belief that the federal government currently u201cprovides few rules of the roadu201d for those dealing in digital assets, u201cleading to complicated enforcement actions.u201d Those included this weeku2019s one-two legal punch by the SEC against theu00a0Binance and Coinbaseu00a0(NASDAQ: COIN) exchanges, the latter coming just hours before Tuesdayu2019s hearing got underway.u23f8For his part, the committeeu2019s ranking member David Scott (D-GA) channeledu00a0u2018the rent is too damn highu2019 guy by repeatedly insisting that the CFTCu2019s budget is too damn low, particularly if it wants to handle the significant additional burden of overseeing digital assets. Scott took pains to note that there was nothing about CFTC funding in the draft legislation.u23f8Scott said the proposed legislation u201cdoes not respond to the wants and needs of the CFTC. Instead, it establishes number of complex and untested processes, raising questions as to whether the provisions will meet the industryu2019s stated goals to establish clear regulatory and registration guidelines.u201du23f8Scott added that the digital asset sector u201cexposes all who choose to participate to serious potential financial risk and uncertainties.u201d Citing several grim financial statistics from 2022u2019s cavalcade of collapses, Scott warned that u201cthis is not sustainable and cannot go on.u201du23f8The commishu23f8The first panel the committee heard from consisted solely of CFTC chairman Rostin Behnam, who testified as to the regulatory gaps that heu2019d like to see closed and the additional powers his agency would require to fulfill that goal.u23f8The CFTC currently oversees select digital asset derivatives, including futures markets. Behnam insisted he wasnu2019t looking to encroach upon the SECu2019s traditional oversight of securities. But Behnamu00a0doesu00a0want to take point on u201cthe spot market for digital assets that are not securities.u201du23f8The digital asset sector has been u201cplagued by fraud and manipulation,u201d and while the CFTC has brought over 85 cases against perpetrators, Behnam said, u201cOur legal authority in the spot market for digital commodity tokens is necessarily limited to acting onlyu00a0afteru00a0the fraud has occurred.u201d Behnam wants legislators to give the CFTC the authority to u201cproactively establish rules to minimize fraud in the first place.u201du23f8If the CFTC has an Achilles heel, itu2019s this inability to go after fraud and manipulation until u201cafter consumers complain.u201d Of the CFTCu2019s 80+ digital asset enforcement actions, u201cnearly allu201d were in response to angry customer missives. Behnam said the CFTCu2019s existing regime of registration, surveillance, and enforcement u201chas worked well and can be replicatedu201d in the digital asset spot market.u23f8Fixing this will take additional funding, which Behnam estimated at $125 million over the first three years, to build the necessary teams and implement the new regime. The CFTCu2019s current budget is around $365 million, so the extra funding would represent an 11.5% annual bump.u23f8Behnam later clarified that the CFTC was the only financial regulator without a user-based fee system, something the new oversight regime could address, with registrants paying a u201cproportional feeu201d to fund services.u23f8Rep. Shontel Brown (D-OH) tartly observed that this was the committeeu2019s third hearing on digital assets, while Wednesday would bring the very first hearing on food insecurity. Brown also wanted to know how the CFTC would do its regular job given the significant appropriations cuts recently signed into law by President Biden.u23f8Behnam countered that funding the CFTC was basically a revenue-generating move for the feds, claiming that, over the past ten fiscal years, the CFTC has u201creturned $8 for every $1 appropriatedu201d thanks to $4 billion in penalties assessed against bad actors.u23f8Queried by Rep. Austin Scott (R-GA) as to how the CFTC expects to oversee the 20,000+ digital tokens out there, Behnam suggested the vast amount of spot trading involves u201cdozens at mostu201d tokens, most of which will u201cdisappearu201d over time. Behnam said his focus is onu00a0BTCu00a0andu00a0ETH, the derivatives trading which the CFTC already oversees.u23f8But the CFTC doesnu2019t regulate commodity cash markets, with which retail customers are increasingly involved. Behnam said the Venn diagram of SEC/CFTC oversight allows BTC and ETHu2014which Behnam claimed are commodities and account for 60% of all spot tradingu2014to u201clive inside this regulatory vacuum.u201du23f8Apples v. orangesu23f8Rep. Kat Cammack (R-FL) asked Behnam about the CFTCu2019s reputation as a u2018light touchu2019 regulator, which explains why crypto crooks likeu00a0Sam Bankman-Friedu00a0appeared so keen to have the resource-starved CFTCu00a0take point on digital asset oversight. Behnam suggested a quick survey of current CFTC registrants would show that u201cweu2019re the farthest thing from light-touch.u201du23f8Rep. Dusty Johnson (R-SD) dripped sarcasm over the proceedings by claiming some observers believe the SEC has the situation well under control, so everyone else shouldnu2019t u201cworry your pretty little heads.u201d Behnam insisted that his push for more authority wasnu2019t u201ca zero-sum gameu201d with the SEC and that the existence of regulatory gaps meant the CFTC wouldnu2019t be u201ctaking authority from anyoneu201d by regulating digital asset commodity spot trades. Said authority currently u201cdoesnu2019t exist.u201du23f8The legislation would require the SEC and CFTC to conduct a joint rulemaking process to determine what is and isnu2019t a security. Behnam assured the committee that he frequently talks with Gensler, as CFTC staff do with their SEC counterparts, including discussions on how markets evolve.u23f8Regarding determining a commodity from a security, Behnam said decentralization was u201cthe core question,u201d but the other u201ccritical questionu201d was where a customer obtained a digital asset. The draft bill would require registration of u2018intermediariesu2019 such as exchanges and create new definitions for u2018siloingu2019 digital commodity dealers/brokers.u23f8Rep. Monica De La Cruz (R-TX) quizzed Behnam on how au00a0digital asset might transform from a security to a commodity and vice versa. Behnam admitted that he wasnu2019t a u201ctechnologistu201d and didnu2019t u201cfully embrace or understandu201d some of the processes that might occur. But he suggested a u201cbreak in the linkageu201d between a centralized security token issuer and their token would result in decentralization and render said token a commodity.u23f8Behnam added that one of the other u201ccore argumentsu201d in the security/commodity debate was where/how an investor acquired a token. The presence of a third partyu2014like an exchangeu2014in this acquisition means the token u201cwould most likely become a commodity.u201du23f8Asked by Rep. Barry Moore (R-AL) about vertical integration among major digital asset entitiesu2014the kind that got Binance and Coinbase in such trouble with the SECu2014Behnam said u201cconflict of interest was a pervasive issueu201d in unregulated digital asset markets with u201cno recognitionu201d among these entities that conflicts exist. Behnam added that he was seeing u201cmore requests for vertical integrated structuresu201d domestically, which he said would require more debate.u23f8When you gotta file, you gotta fileu23f8Rep. John Rose (R-TN) asked Behnam about the SECu2019s Tuesday morning lawsuit against Coinbase for breaking securities laws by acting as an unregistered exchange, broker, and clearing agency. Citing active litigation, Behnam declined to offer an opinion on the suitu2019s claims that many of the tokens listed on Coinbase are securities, but noted that the confusion over this question u201cis the reason weu2019re here.u201du23f8Rose pressed Behnam on whether he thought the timing of the filing of the Coinbase suit on the day of the hearing was coincidental. From experience, Behnam said that when it came to enforcement cases, u201cwhen the time is right u2026 you gotta file.u201du23f8Four out of five dentists agreeu23f8The hearingu2019s second panel featured four former CFTC/SEC bigwigs, along with Paul Grewal, Coinbaseu2019s chief legal officer. Grewalu2019s testimony started by addressing the SEC lawsuit, which he called u201cdisappointing but not surprisingu201d for arriving on the day he was scheduled to appear. Grewal insisted it was business as usual at Coinbase, claiming the solution to the current regulatory quagmire was u201clegislation, not litigation.u201du23f8While Grewal was joined by one other private sector panelistu2014Robinhood Marketsu00a0chief legal officer Dan Gallagheru2014the latter was once a former SEC commissioner. Dan Berkovitz was both a former SEC general counsel and CFTC commissioner, while Walt Lukken andu00a0J. Christopher Giancarlou00a0each formerly served as CFTC chairman.u23f8All spoke in favor of the proposed legislation, while most warned that the United States would effectively crumble into the sea without swift action to catch up to the digital currency-friendly regimes in foreign jurisdictions like the U.K., EU, Singapore, and Hong Kong. The panelists also basically thought the CFTC was, well, justu00a0super and would most certainly shine like a diamond if given new powers to regulate digital assets.u23f8Only Berkovitz sounded a real note of caution, warning that u201ccarving out a specific asset class from SEC oversight based on a particular technology of creation or distribution or degree of centralization in its market for distribution would upend decades of settled securities laws, create confusion and delay compliance.u201du23f8Berkovitz acknowledged that assets can change over time, u201cbut the technical description of an asset isnu2019t determinate of its nature.u201d Better to u201cfocus on the functional nature of the instrument or asset to raise capital from investorsu201d to resolve the security v. commodity conundrum.u23f8Bloody foreignersu23f8Giancarlo, aka u2018CryptoDadu2019 and who formerly served as au00a0BlockFi director, warned the committee that other jurisdictions were u201cstamping their valuesu201d on digital asset regulation and if America wanted to enshrine God, Mom, and Apple Pie on the blockchain, it had better get a move on.u23f8When Rep. Scott again brought up the issue of CFTC funding, Gallagher questioned the cost of digital asset markets and companies moving offshore. Gallagher insisted theu00a0relocation threats issued by the likes of Coinbase were u201creal, not the boy crying wolf.u201du23f8Gallagher also claimed the U.S. digital asset sector was suffering from lower investment, which he tried to blame on regulatory uncertainty, without acknowledging that VCs may have finally realized thereu2019s no u2018thereu2019 there when it comes to all these utility-free tokens.u23f8Both Gallagher and Grewal lamented their history ofu00a0dealing with the SEC, with Grewal claiming that u201cthere hasnu2019t been a dialogue, only a monologue.u201d Gallagher said Robinhood spent 16 months with SEC staff u201cproactivelyu201d trying to register as a special purpose broker-dealer, but was told in March that u201cit wasnu2019t going to happen.u201d (Others have had better luck.) Gallagher said the u201ctechnical term for the state of Robinhoodu2019s SEC process is u2018DOA.u2019u201du23f8Missing in actionu23f8When Rep. Yadira Caraveo (D-CO) asked what was missing in the draft bill, Berkovitz warned that u201cregulatory regimes are fit for purpose.u201d The SEC was designed for the retail market, and the CFTC for wholesale markets. There are different standards when dealing with peopleu2019s retirement funds rather than cattle.u23f8Berkovitz noted that advisers have a fiduciary duty to customers. The CFTC lacks sufficient consumer protection obligations, something the billu2014which u201cassumes a level of sophisticationu201d on the part of the consumeru2014doesnu2019t address.u23f8Lukken said the bill contemplates a u201cdisintermediated marketplace,u201d i.e., no brokers, meaning u201cprotections will now be placed with the exchange itself.u201d Gallagher agreed, saying Robinhood could simply shift these protections from its registered broker side. Lukken acknowledged there might be conflicts with vertically integrated exchanges, but the bill u201cimposes firewallsu201d to address these conflicts.u23f8Giancarlo said the bill should impose hard deadlines for the SEC and CFTC to complete their joint rulemaking process because u201cdeadlines focus the mindu201d of staff and will force organizations to bring the necessary resources to bear.u23f8Berkovitz cautioned the committee regarding u201cfreezing regulatory categoriesu201d given the rapid pace of change in blockchain technology. Apart from creating potential loopholes, u201cfixed technology definitions may not allow the innovation this technology needs.u201du23f8Tuesdayu2019s hearing was a marathon session, lasting nearly five hours. Passing this bill will take infinitely longer if it ever passes. While the committee members clearly have a favorite dog in this hunt, there are plenty of u2018cryptou2019 skeptics on Capitol Hill cheering on SEC chairman Gary Gensler as he looks to rein in some of the sectoru2019s excesses.u23f8Watch: SEC Commissioner Hester Peirce on BSV Blockchain Associationu2019s Blockchain Policy Mattersu23f8 u23f8″,”pluginVersion”:”5.6.2″}; |
Tuesday saw the U.S. House of Representatives Committee on Agriculture assemble for yet another ‘crypto’ hearing, this one discussing “The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets.”
The hearing centered on a new digital asset legislation, currently only in discussion draft form, tentatively titled the Digital Asset Market Structure Bill. The draft was crafted by Agriculture and Financial Services committee members and published last Friday.
As detailed here, much of the bill aims to carve out clearly defined roles for both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) and stop the ‘turf war’ allegedly being waged between these two agencies over who takes the lead in regulating digital assets.
Committee chair Glenn Thompson (R-PA) got things rolling by thanking House Financial Services Committee chair Patrick McHenry (R-NC) for helping to craft the bill in question. Thompson also emphasized that the bill is still very much a draft, with wholesale revisions likely before any potential votes are considered.
But Thompson also emphasized his belief that the federal government currently “provides few rules of the road” for those dealing in digital assets, “leading to complicated enforcement actions.” Those included this week’s one-two legal punch by the SEC against the Binance and Coinbase (NASDAQ: COIN) exchanges, the latter coming just hours before Tuesday’s hearing got underway.
For his part, the committee’s ranking member David Scott (D-GA) channeled ‘the rent is too damn high’ guy by repeatedly insisting that the CFTC’s budget is too damn low, particularly if it wants to handle the significant additional burden of overseeing digital assets. Scott took pains to note that there was nothing about CFTC funding in the draft legislation.
Scott said the proposed legislation “does not respond to the wants and needs of the CFTC. Instead, it establishes number of complex and untested processes, raising questions as to whether the provisions will meet the industry’s stated goals to establish clear regulatory and registration guidelines.”
Scott added that the digital asset sector “exposes all who choose to participate to serious potential financial risk and uncertainties.” Citing several grim financial statistics from 2022’s cavalcade of collapses, Scott warned that “this is not sustainable and cannot go on.”
The commish
The first panel the committee heard from consisted solely of CFTC chairman Rostin Behnam, who testified as to the regulatory gaps that he’d like to see closed and the additional powers his agency would require to fulfill that goal.
The CFTC currently oversees select digital asset derivatives, including futures markets. Behnam insisted he wasn’t looking to encroach upon the SEC’s traditional oversight of securities. But Behnam does want to take point on “the spot market for digital assets that are not securities.”
The digital asset sector has been “plagued by fraud and manipulation,” and while the CFTC has brought over 85 cases against perpetrators, Behnam said, “Our legal authority in the spot market for digital commodity tokens is necessarily limited to acting only after the fraud has occurred.” Behnam wants legislators to give the CFTC the authority to “proactively establish rules to minimize fraud in the first place.”
If the CFTC has an Achilles heel, it’s this inability to go after fraud and manipulation until “after consumers complain.” Of the CFTC’s 80+ digital asset enforcement actions, “nearly all” were in response to angry customer missives. Behnam said the CFTC’s existing regime of registration, surveillance, and enforcement “has worked well and can be replicated” in the digital asset spot market.
Fixing this will take additional funding, which Behnam estimated at $125 million over the first three years, to build the necessary teams and implement the new regime. The CFTC’s current budget is around $365 million, so the extra funding would represent an 11.5% annual bump.
Behnam later clarified that the CFTC was the only financial regulator without a user-based fee system, something the new oversight regime could address, with registrants paying a “proportional fee” to fund services.
Rep. Shontel Brown (D-OH) tartly observed that this was the committee’s third hearing on digital assets, while Wednesday would bring the very first hearing on food insecurity. Brown also wanted to know how the CFTC would do its regular job given the significant appropriations cuts recently signed into law by President Biden.
Behnam countered that funding the CFTC was basically a revenue-generating move for the feds, claiming that, over the past ten fiscal years, the CFTC has “returned $8 for every $1 appropriated” thanks to $4 billion in penalties assessed against bad actors.
Queried by Rep. Austin Scott (R-GA) as to how the CFTC expects to oversee the 20,000+ digital tokens out there, Behnam suggested the vast amount of spot trading involves “dozens at most” tokens, most of which will “disappear” over time. Behnam said his focus is on BTC and ETH, the derivatives trading which the CFTC already oversees.
But the CFTC doesn’t regulate commodity cash markets, with which retail customers are increasingly involved. Behnam said the Venn diagram of SEC/CFTC oversight allows BTC and ETH—which Behnam claimed are commodities and account for 60% of all spot trading—to “live inside this regulatory vacuum.”
Apples v. oranges
Rep. Kat Cammack (R-FL) asked Behnam about the CFTC’s reputation as a ‘light touch’ regulator, which explains why crypto crooks like Sam Bankman-Fried appeared so keen to have the resource-starved CFTC take point on digital asset oversight. Behnam suggested a quick survey of current CFTC registrants would show that “we’re the farthest thing from light-touch.”
Rep. Dusty Johnson (R-SD) dripped sarcasm over the proceedings by claiming some observers believe the SEC has the situation well under control, so everyone else shouldn’t “worry your pretty little heads.” Behnam insisted that his push for more authority wasn’t “a zero-sum game” with the SEC and that the existence of regulatory gaps meant the CFTC wouldn’t be “taking authority from anyone” by regulating digital asset commodity spot trades. Said authority currently “doesn’t exist.”
The legislation would require the SEC and CFTC to conduct a joint rulemaking process to determine what is and isn’t a security. Behnam assured the committee that he frequently talks with Gensler, as CFTC staff do with their SEC counterparts, including discussions on how markets evolve.
Regarding determining a commodity from a security, Behnam said decentralization was “the core question,” but the other “critical question” was where a customer obtained a digital asset. The draft bill would require registration of ‘intermediaries’ such as exchanges and create new definitions for ‘siloing’ digital commodity dealers/brokers.
Rep. Monica De La Cruz (R-TX) quizzed Behnam on how a digital asset might transform from a security to a commodity and vice versa. Behnam admitted that he wasn’t a “technologist” and didn’t “fully embrace or understand” some of the processes that might occur. But he suggested a “break in the linkage” between a centralized security token issuer and their token would result in decentralization and render said token a commodity.
Behnam added that one of the other “core arguments” in the security/commodity debate was where/how an investor acquired a token. The presence of a third party—like an exchange—in this acquisition means the token “would most likely become a commodity.”
Asked by Rep. Barry Moore (R-AL) about vertical integration among major digital asset entities—the kind that got Binance and Coinbase in such trouble with the SEC—Behnam said “conflict of interest was a pervasive issue” in unregulated digital asset markets with “no recognition” among these entities that conflicts exist. Behnam added that he was seeing “more requests for vertical integrated structures” domestically, which he said would require more debate.
When you gotta file, you gotta file
Rep. John Rose (R-TN) asked Behnam about the SEC’s Tuesday morning lawsuit against Coinbase for breaking securities laws by acting as an unregistered exchange, broker, and clearing agency. Citing active litigation, Behnam declined to offer an opinion on the suit’s claims that many of the tokens listed on Coinbase are securities, but noted that the confusion over this question “is the reason we’re here.”
Rose pressed Behnam on whether he thought the timing of the filing of the Coinbase suit on the day of the hearing was coincidental. From experience, Behnam said that when it came to enforcement cases, “when the time is right … you gotta file.”
Four out of five dentists agree
The hearing’s second panel featured four former CFTC/SEC bigwigs, along with Paul Grewal, Coinbase’s chief legal officer. Grewal’s testimony started by addressing the SEC lawsuit, which he called “disappointing but not surprising” for arriving on the day he was scheduled to appear. Grewal insisted it was business as usual at Coinbase, claiming the solution to the current regulatory quagmire was “legislation, not litigation.”
While Grewal was joined by one other private sector panelist—Robinhood Markets chief legal officer Dan Gallagher—the latter was once a former SEC commissioner. Dan Berkovitz was both a former SEC general counsel and CFTC commissioner, while Walt Lukken and J. Christopher Giancarlo each formerly served as CFTC chairman.
All spoke in favor of the proposed legislation, while most warned that the United States would effectively crumble into the sea without swift action to catch up to the digital currency-friendly regimes in foreign jurisdictions like the U.K., EU, Singapore, and Hong Kong. The panelists also basically thought the CFTC was, well, just super and would most certainly shine like a diamond if given new powers to regulate digital assets.
Only Berkovitz sounded a real note of caution, warning that “carving out a specific asset class from SEC oversight based on a particular technology of creation or distribution or degree of centralization in its market for distribution would upend decades of settled securities laws, create confusion and delay compliance.”
Berkovitz acknowledged that assets can change over time, “but the technical description of an asset isn’t determinate of its nature.” Better to “focus on the functional nature of the instrument or asset to raise capital from investors” to resolve the security v. commodity conundrum.
Bloody foreigners
Giancarlo, aka ‘CryptoDad’ and who formerly served as a BlockFi director, warned the committee that other jurisdictions were “stamping their values” on digital asset regulation and if America wanted to enshrine God, Mom, and Apple Pie on the blockchain, it had better get a move on.
When Rep. Scott again brought up the issue of CFTC funding, Gallagher questioned the cost of digital asset markets and companies moving offshore. Gallagher insisted the relocation threats issued by the likes of Coinbase were “real, not the boy crying wolf.”
Gallagher also claimed the U.S. digital asset sector was suffering from lower investment, which he tried to blame on regulatory uncertainty, without acknowledging that VCs may have finally realized there’s no ‘there’ there when it comes to all these utility-free tokens.
Both Gallagher and Grewal lamented their history of dealing with the SEC, with Grewal claiming that “there hasn’t been a dialogue, only a monologue.” Gallagher said Robinhood spent 16 months with SEC staff “proactively” trying to register as a special purpose broker-dealer, but was told in March that “it wasn’t going to happen.” (Others have had better luck.) Gallagher said the “technical term for the state of Robinhood’s SEC process is ‘DOA.’”
Missing in action
When Rep. Yadira Caraveo (D-CO) asked what was missing in the draft bill, Berkovitz warned that “regulatory regimes are fit for purpose.” The SEC was designed for the retail market, and the CFTC for wholesale markets. There are different standards when dealing with people’s retirement funds rather than cattle.
Berkovitz noted that advisers have a fiduciary duty to customers. The CFTC lacks sufficient consumer protection obligations, something the bill—which “assumes a level of sophistication” on the part of the consumer—doesn’t address.
Lukken said the bill contemplates a “disintermediated marketplace,” i.e., no brokers, meaning “protections will now be placed with the exchange itself.” Gallagher agreed, saying Robinhood could simply shift these protections from its registered broker side. Lukken acknowledged there might be conflicts with vertically integrated exchanges, but the bill “imposes firewalls” to address these conflicts.
Giancarlo said the bill should impose hard deadlines for the SEC and CFTC to complete their joint rulemaking process because “deadlines focus the mind” of staff and will force organizations to bring the necessary resources to bear.
Berkovitz cautioned the committee regarding “freezing regulatory categories” given the rapid pace of change in blockchain technology. Apart from creating potential loopholes, “fixed technology definitions may not allow the innovation this technology needs.”
Tuesday’s hearing was a marathon session, lasting nearly five hours. Passing this bill will take infinitely longer if it ever passes. While the committee members clearly have a favorite dog in this hunt, there are plenty of ‘crypto’ skeptics on Capitol Hill cheering on SEC chairman Gary Gensler as he looks to rein in some of the sector’s excesses.
Watch: SEC Commissioner Hester Peirce on BSV Blockchain Association’s Blockchain Policy Matters
New to blockchain? Check out ’s Blockchain for Beginners section, the ultimate resource guide to learn more about blockchain technology.