On July 26 and 27, the House Financial Services and Agriculture Committees held markups of H.R. 4763, The Financial Innovation and Technology for the 21st Century Act. The bill is designed to create a regulatory structure for digital asset markets that provides the CFTC with regulatory authority over digital asset commodities and the SEC regulatory authority over digital asset securities.
Both the House Financial Services and Agriculture Committees passed the bill out of Committee with some minor amendments. The bill will now require a vote on the floor of the House of Representatives before it can advance to the Senate.
Please let us know if you have any questions about this legislation, these markups, or the future of this bill.
Below are high-level takeaways of statements made by Committee Members in the markups and the amendments proposed in the markup that were ultimately accepted by the Committees prepared by Delta Strategy Group.
House Financial Services Committee:
Hearing Discussion:
Committee Chairman Patrick McHenry (R-NC):
- Today, we are working to take a historic step in consumer protection and American innovation as we undertake the first ever legislative markup for digital assets. This work is over a decade in the making. America has been a global leader in technology and innovation for over 100 years, and digital assets have the potential to be at the core of future progress. We are at risk of falling behind, and we intend to change that today.
- Digital assets that may not be securities themselves may be offered as part of an investment contract, but that does not make them securities. This legislation acts as a direct response to calls from the Biden administration for Congress to act to create consumer protections in this space.
Committee Ranking Member Maxine Waters (D-CA):
- I am disappointed that Republicans have moved forward with this massive market structure bill to rewrite our existing consumer protection rules without bipartisan support and without heeding calls from the Biden administration and the SEC. We do not need to invent new regulatory structures just because crypto companies refuse to follow the rules. Our securities laws have protected investors for almost 100 years while facilitating innovation.
- This bill fails to adequately fund the creation and maintenance of the complex new regulatory framework it envisions. While this bill claims to create more regulatory clarity, it only creates more confusion. This undercuts the protections of existing securities laws. This bill is a wish list of the crypto industry, and it is unworthy of any support.
- This bill cedes SEC power to the CFTC which would drastically remove this industry from this Committee’s oversight. The CFTC is underfunded and considerably smaller than the SEC. This bill does not provide sufficient funding for the CFTC to address the framework laid out in this bill.
Representative French Hill (R-AR):
- Following the collapse of FTX, it became clear that we need Congress to act to establish clear rules of the road for good actors. Failing to act means leaving investors at risk. This bill provides the CFTC with much needed authorities over digital asset commodities and clarifies the SEC’s remit over digital assets offered as a part of an investment contract. This bill creates an appropriate disclosure regime to allow the SEC to certify that an asset is sufficiently decentralized. This bill does not create a light-touch provisional registration period; it gives the SEC explicit authority to go after digital assets that are not sufficiently decentralized.
Representative Brad Sherman (D-CA):
- The SEC should have full authority over this space. Cryptocurrency is rife with fraud and designed to avoid enforcement and appropriate taxation.
Representative Warren Davidson (R-OH):
- A key reason that we have so many risks from the cryptocurrency space is that a lack of regulation has pushed these businesses offshore where the U.S. cannot appropriately regulate them. This is legislation will start to fix that imbalance.
Representative Jim Hines (D-CT):
- This bill, while not perfect, makes the status quo better. Most of the charges leveled at this bill by Democrats of the aisle are demonstrably false, and this bill could prevent some of the worst abuses we have seen in digital asset markets.
Representative Stephen Lynch (D-MA):
- This is the worst piece of legislation that has been presented for markup in the twenty years that I have been on this Committee. It significantly strips the SEC of authorities it has for both digital asset markets and traditional markets. This bill requires lengthy rule implementation while offering a safe harbor to bad actors as they are implemented. This bill grants authority to the CFTC which has significantly less retail protection mandates than the SEC. The SEC is not regulating by enforcement; it is regulating by the application as law. It has won almost every case it has ever brought in this space except for Ripple, which it essentially won as well.
Representative David Scott (D-GA):
- This bill is deceptive and cruel. It creates an entirely new set of loopholes that make a mockery of our securities laws. We should not alter the authorities that the CFTC or SEC have today.
Representative Sean Casten (D-IL):
- This bill gives us less oversight, transparency, and accounting standards for digital assets than we have for any other asset class.
Representative Bryan Steil (R-WI):
- This bill will onshore this industry so that we can have more oversight over the actors in this space. This bill will allow policymakers to dictate policy instead of trying to piece it together through enforcement actions.
Representative Bill Foster (D-IL):
- A key issue in this space is in the abuse of wash sales. We need to have digital IDs associated with cryptocurrency traders so that we can understand whether or not trades represent market abuses. I will be introducing an amendment just to ensure that we insert this type of trader ID.
Representative Byron Donalds (R-FL):
- This is the first step in providing appropriate clarity to these markets. The main obstacle to innovation and investment in the U.S. in this space is regulatory uncertainty.
Representative Willy Nickel (D-NC):
- This bill lays out clear rules of the road to enhance consumer protections, foster innovation, and improve national security.
Representative Tom Emmer (R-MN):
- I compliment the leadership of the House Financial Services and Agriculture Committees on this legislation. We have an opportunity to lead in creating a new digital economy, and this legislation will help us in this work.
Representative Ritchie Torres (D-NY):
- The status quo is dangerously unregulated. Congress is often the most powerless powerful institution as we have ceded so much power to the courts and to regulators. We need to reclaim this authority by actually legislating, as we have done here. This bill does not circumvent the SEC; it codifies its authority.
Accepted Amendments:
Representative Stephen Lynch (D-MA):
- Representative Lynch introduced an amendment that removed a section of the bill that would have added “innovation” to the SEC’s mandate due to concerns that it could allow for firms in the future to evade oversight.
Representative Josh Gottheimer (D-NJ):
- Representative Gottheimer introduced an amendment that would direct the SEC and the CFTC to create a codified process for delisting an asset from a CFTC-registered or SEC-registered exchange.
Representative Jim Himes (D-CT):
- Representative Himes introduced an amendment that would extend the SEC’s timeframe for considering whether a token is sufficiently decentralized from thirty days to sixty days.
Representative Willy Nickel (D-NC)
- Representative Nickel introduced an amendment to insert a Sense of Congress expressing that blockchain and digital asset networks represent significant innovation in the U.S. which should be embraced.
Representative Steven Horsford (D-NV):
- Representative Horsford introduced an amendment requiring the SEC and CFTC to conduct a study of digital asset investors’ financial literacy and promote investor education.
House Agriculture Committee:
Hearing Discussion:
Committee Chairman GT Thompson (R-PA):
- This bill provides the CFTC with jurisdiction over digital asset commodities, establishes a process to permit the secondary market trading of digital commodities if they were initially offered as a part of an investment contract, and it imposes robust customer protections on all entities registered with the CFTC. It also requires the CFTC and SEC to conduct a joint study on decentralized finance and financial market infrastructure improvements.
- This bill includes providing $120 million over the five years the CFTC to carry out the implementation, administration, and enforcement duties in these markets.
Committee Ranking Member David Scott (D-GA):
- This bill is inadequate as it lacks necessary consumer protections and encourages vertical integration by allowing entities to register as an exchange and as brokers. This legislation will allow hedge funds and pension funds to invest in these markets without their dealers even being registered. By not registering, they won’t have basic customer protections like segregation of funds.
- This funding scheme in this bill is inadequate. The CFTC is already underfunded, whereas the SEC’s appropriations are offset by user fees making it a deficit-neutral regulator.
- The bill should require third-party audits and disclosure requirements so investors can make educated investment decisions.
Representative Dusty Johnson (R-SD):
- In the current digital asset space, there are no consumer protections. The SEC has never asserted jurisdiction over the tokens or the products that make up 70 percent of the market volume in this industry now.
- There is no spot market regulator in this space today, and investors and innovators alike need certainty and predictability. This bill provides these markets with the same protections and efficiencies that traditional markets have today.
Representative Yadira Caraveo (D-CO):
- I appreciate that we have worked on this bill in a bipartisan manner. This is not a perfect bill, but I believe that it is a step in the right direction. Making sure that consumers and retail investors are protected is my number one priority, and I believe this bill provides significant improvements in that direction.
- Funding will be vital in the CFTC taking on oversight activities and engaging in a rulemaking process, and I hope that we can continue to work together to make sure that the CFTC remains properly funded in the future.
Representative Marc Molinaro (R-NY):
- I support this bill because we need to harness blockchain technology with a robust regulatory structure. SEC rules cannot govern this space properly, and a lack of regulation will push blockchain offshore, setting our innovation back.
Representative Alma Adams (D-NC):
- I do not support this bill because it will create investor confusion.
Representative Austin Scott (R-GA):
- I support this bill, but I want to ensure that Title 3 of the bill does not give the SEC any opportunity to be overly aggressive and relitigate matters that have already been settled. This bill should not give any jurisdiction to the SEC from the CFTC.
Representative Jim Costa (D-CA):
- Although I appreciate that this bill has been a bipartisan effort, and I commend Representative Caraveo’s amendment, I think there is more work to be done. Providing a regulatory framework that will maintain competitiveness and protect consumers is the end goal.
Representative Ronny Jackson (D-TX):
- We should remain committed to advancing the regulation of these emerging technologies. Requiring custodians and exchanges to provide verifiable information that confirms assets is essential to create trust in the digital asset space.
Representative Elissa Slotkin (D-MI):
- This bill may be a work in progress, but it is an important start to regulate the digital asset space as the industry has demanded.
Representative Tracey Mann (R-KS):
- I support this bill as it addresses proper consumer protection measures with the provision that requires crypto exchanges to be registered dealers or brokers. $120 million are available for the CFTC which is a fully funded request that the CFTC made.
Representative John Duarte (R-CA):
- My concern with this bill is the regulation of the cryptocurrencies that have no fact sets behind them and lack capital structure. We do not help protect retail investors by presuming that these fact-free assets can even be regulated by the SEC or CFTC.
Representative Sharice Davids (D-KS):
- I appreciate the bipartisan efforts Representative Dusty Johnson has made in this Committee.
Amendments:
Representative Nikki Budzinski (IL):
- Representative Budzinski introduced an amendment that will provide a process for new exchanges to have their products approved as a part of their registration process prior to their full registration.
- This amendment was withdrawn to be discussed in the future.
Representative Crockett (TX)
- Representative Crockett introduced an amendment that would allow the CFTC to require particular problematic digital assets be delisted without having to make a joint determination with the SEC.
- This amendment was withdrawn to be discussed in the future.
Accepted Amendments:
Representative Yadira Caraveo (D-CO):
- Representative Caraveo introduced an amendment that would require a person desiring to file a notice of an intent to register to be a member of the National Futures Association (NFA). This registration will assure that they comply with the rules of the association pertaining to disclosures and protection of customer assets. Additionally, this amendment would require entities to disclose that they are not registered with the CFTC in a prominent manner to reduce deception in the markets.
Representative Nikki Budzinski (IL):
- Representative Budzinski introduced an amendment to give the CFTC the right to prescribe minimum capital requirements that address the risk associated with digital commodities.
Representative Crockett (TX)
- This amendment makes three changes to the provisional framework. It requires that entities trying to file a notice of intent must do so with a physical address. It also requires that entities trying to file a notice of intent provide a list of characteristics of the digital asset they offer. Finally, this amendment requires digital asset exchanges and brokers to provide disclosures to customers about the CFTC’s anti-fraud authority and how to address any violations.