"Recent House Financial Services Committee Hearing: 'Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States,'" The US-Israel Legal Review 2021

On December 8, the House Financial Services Committee conducted a hearing entitled Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States. A video recording of the hearing is available here.

At the hearing led by Maxine Waters (D-CA-43), CEOs of six major companies in the digital asset space, from digital asset exchanges to stablecoin issuers, were called upon as witnesses. Each answered questions from members of congress on issues such as: understanding the crypto space, protecting investors against losses and fraud, ransomware, and helping the unbanked.

Many of the executives seem to support new regulation, saying that banking on existing bank rules may not be the ticket for how to regulate this asset class.

According to a Yahoo Finance Article, Coinbase CEO Alesia Haas stated that existing laws show that Bitcoin should not be classified as a security, noting that it is a new form of digital property or a new way to record ownership. She stated that the industry needs clarity and would benefit from a new definition of what constitutes a digital asset. Charles Cascarilla, the CEO of Paxos, says he thinks we need a new regulatory framework and that we shouldn't be banking on the current banking rules.

Among notable quotes, former acting Comptroller of the Currency Brian Brooks, currently the CEO of Bitfury Group, asked: "Is it consistent to take the position that only banks should be allowed to issue stablecoins, but then fail to grant bank charters to the largest issuers of stablecoins? Does it make sense to bring enforcement actions challenging certain crypto assets as unregistered securities, but then fail to allow those assets to be registered and trade on a National Securities Exchange?" He also stated that right now, 80% of holders of Bitcoin actually hold that Bitcoin. They don't sell it. And he added that if we have more price discovery, that will cut down on some of the volatility. Further, he said that the US should do with crypto what it's been doing with stocks, which is to offer crypto in mutual funds. He says, that's a safe, diversified way to offer folks exposure to the space, much like we do with the stock market.

Interestingly, some of the members of Congress present at the hearing also supported legitimizing digital assets. For example, Patrick McHenry (R-NC-10) stated, "Technology—and its adoption—are moving fast…. Entrepreneurs and innovators are building and deploying this next generation of the internet. And firms, like the ones our witnesses represent, are making it easier for Americans to participate in the digital asset ecosystem…How do we make sure the cryptocurrency revolution happens in the U.S. and not overseas?...Of course, we need reasonable rules of the road, but the knee-jerk reaction of lawmakers to regulate out of fear of the unknown will only stifle American ingenuity and put us at a competitive disadvantage."

The related press release about his comments, available here, states "Digital assets have the potential to revolutionize the way Americans participate in our financial system. Lawmakers must fully understand and embrace this new technology, not stifle it with burdensome regulations."

FTX Trading Ltd. Chief Executive Sam Bankman-Fried said he believes that "it is important, and it is healthy that the [digital asset] industry will be regulated." Regarding spot markets, Bankman-Fried said that he "would be very much supportive of a similar regime for spot commodities markets like Bitcoin USD markets, as we see for the derivatives markets." When asked how United States regulators can maintain innovation in the area of digital assets, Bankman-Friend said "on the market side, having a framework with a single regulatory structure – and it might have multiple regulators involved in it – the CFTC and SEC are both likely to be involved to some extent, but having a single unified framework for futures and spot digital assets could go a long way towards providing the sort of experience that you can offer in a lot of jurisdictions today." He continued by encouraging more clarity from regulators on the stablecoin side of audit requirements for the reserves, but without "squashing innovation by requiring only a very limited number of institutions to be able to issue them could go a long way on that side." Finally, he encouraged "moving towards a structure where we identify the necessary disclosures for certain digital assets related to the issuance, related to the supply, related to anti-fraud measures so that they can all be part of our financial ecosystem with appropriate disclosures and anti-fraud mechanisms and regulatory oversight."

DISCLAIMER: This article was originally published by McGonigle PC prior to their combination with Davis Wright Tremaine LLP.  The article is published here with permission.