Congressional Crypto Hearing Illustrates Political Stalemate on Digital Assets
On May 10, the United States House of Representatives Financial Services Committee and Agriculture Committee held their first joint hearing on digital asset regulation. The event felt like a logical continuation of another recent hearing where representatives lambasted Securities Exchange Commission Chair Gary Gensler for perceived regulatory overreach.
The principal narrative, articulated by the hearing’s initiators, was that Congress should intervene with its own regulatory project to provide certainty, stop “regulation through enforcement” and address the competition between regulating agencies. But maybe it actually shouldn’t, believe many lawyers as well.
Hill and Lynch
Despite the intercommittee nature of the hearing, dubbed “The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital Asset Markets,” the members of the Financial Services Committee set the tone of the event.
In his opening remarks, Representative French Hill, a Republican from Arkansas, summarized the existing conflict over digital assets: While some lawmakers (primarily Republican) believe there’s no workable framework for crypto in the country, others (primarily Democrats) are certain the existing regulation is enough to ensure compliance. Hill rushed to debunk the partisan nature of the conflict, stating:
“No one here is claiming that crypto should be exempt from rules or that we should create an entirely new regime for it. Instead, we’re trying to apply the principle of ‘same risk, same regulation’ to amend current law.”
In a hardly surprising move, Representative Stephen Lynch, a Democrat from Massachusetts, laid out the exact opposite position following Hill’s speech. Lynch urged not to fall into the false “industry-fueled narrative” about a turf war between the Commodity Futures Trading Commission (CFTC) and the SEC.
In his opinion, industry advocates continue to make claims about current legislation not fitting the innovative economy because they know that crypto business models are incompatible with orderly markets or investor protections law. Hence, creating a new carve-out for digital assets seems unnecessary and redundant. Per Lynch, lawmakers should take a step back and examine intermediaries, which he claimed are generally failing to comply, and seek to combine multiple financial functions despite the existing prohibition.
If one were to distinguish the existing positions among the congresspeople as “pro-reform” or “anti-reform,” the majority of the hearing’s witnesses belonged to the former.
Andrew Durgee, head of Web3 investment platform Republic Crypto, echoed some of the representatives, highlighting the perceived incompatibility between current regulations and the decentralized and disintermediated trading technology of blockchains.
He claimed that digital assets registered as securities could not be traded on existing crypto exchanges, none of which are registered as national securities exchanges. Durgee advocated change, proposing to include a number of legal definitions in any future amendments, such as the autonomous smart contract, deployers of the smart contract, liquidity providers and front-end websites operators.
Matthew Kulkin, former director of the CFTC Division of Swap Dealer and Intermediary Oversight, told the committee that most of the largest digital assets by market size and trading volume are commodities and, as such, should be regulated by CFTC. That could be achieved if Congress recognizes the inherent differences between digital assets that are securities and those that are commodities.