HOUSE FINANCIAL SERVICES COMMITTEE SUBCOMMITTEE HEARING ON DIGITAL ASSETS
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On April 9, the House Financial Services Committee Subcommittee on Digital Assets, Financial Technology, and Artificial Intelligence held a hearing entitled, “American Innovation and the Future of Digital Assets Aligning the U.S. Securities Laws for the Digital Age.”
Witnesses in the hearing were:
- Rodrigo Seira, Special Counsel, Cooley LLP
- Tiffany Smith, Partner and Co-Chair of the Blockchain & Cryptocurrency Working Group, WilmerHale
- Jake Werrett, Chief Legal Officer, Polygon
- Alexandra Thornton, Senior Director, Financial Regulation, Center for American Progress.
Key Takeaways
The following is a summary of the main topics explored in the hearing, with further details in the Discussion section below.
- Committee Chairman Hill (R-AR) criticized the Securities and Exchange Commission (SEC) under Chair Gensler for its inconsistent and unclear approach to digital asset classification, citing the Commission’s ambiguous and duplicative regulatory definitions of digital assets. He stated that inconsistency has contributed to market uncertainty alongside making compliance and regulatory interpretation more difficult for stakeholders. Representative Huizenga (R-MI) emphasized that Congress and regulators must recognize the unique regulatory needs of the industry in establishing a regulatory framework that targets the activity and not the technology.
- Witnesses highlighted that while the SEC has taken steps within its jurisdictional limitations to rollback Gensler-era regulations negatively effecting the industry, Congressional action is the means to providing lasting and effective clarity around decentralized finance (DeFi) regulation. Smith noted that the core federal securities laws are difficult to apply to digital assets and their market participants, explaining how legal ambiguities and regulatory burdens has resulted in discontinued products, halted operations, or avoidance of the U.S. market altogether.
- Seira stated that while Financial Innovation and Technology for the 21st Century Act (FIT21) is a strong step toward regulatory clarity, its dual-jurisdiction framework splits oversight between the SEC and CFTC, introducing operational complexity and regulatory overlap that will detract from effective implementation and navigation. He stated that attempts to force crypto into the traditional securities regime, particularly through major overhauls, would be counterproductive, both stifling innovation and misaligning regulatory goals.
- Smith raised how the CFTC has jurisdiction over the futures and derivatives market but does not have jurisdiction over the spot market nor the ability to make rules or regulations for that market. Seira and Smith agreed that Congress must step in to define regulatory boundaries, especially to determine when a digital asset becomes a digital commodity, and which agency has authority over the spot market.
- Werrett discussed why the Howey test needs to be refreshed, not abolished. He proposed that securities analysis could be expanded to include a test for decentralization, recognizing that the presence or absence of a centralized intermediary or promoter is critical to determining whether an investor is relying on others for profit.
- Representatives Huizenga (R-MI) and Davidson (R-OH) asked questions on the importance of the self-custody of digital assets. Werrett urged the Committee to protect individuals’ rights to own and control their digital property on-chain, asserting that self-custody reflects core constitutional principles tied to property rights.
- Committee Ranking Member Waters (D-CA) and Subcommittee Ranking Member Lynch (D-MA) raised the dangers of conflicts of interest and degradation of independent regulatory oversight, citing pressures from the cryptocurrency industry and administration’s ties to DeFi ventures. Representative Sherman (D-CA) questioned why the crypto industry is against patchwork of regulations, highlighting that many industries would prefer patchwork due to the regulatory options varying by location.
- Thorton expressed concerns over intentions to create an overly light regulatory framework for stablecoins and other digital assets, despite a track record of dysfunction in crypto markets. She emphasized that the digital asset market has been marked by volatility, widespread fraud, and billion-dollar investor losses. She stated these are not simply the growing pains of a new industry, but rather the result of absent investor protections and regulatory oversight.
- Thornton argued that a new regulatory framework should resemble existing U.S. capital market rules, designed to account for changing risks and characteristics over the lifespan of a tradable asset as well as requiring a disclosure framework that adapts to changes in risk, structure, and value over time. She underscored that regulatory treatment should not be based solely on the definition of an asset, but rather on the function it performs in the market. She cautioned that tokenized securities, such as blockchain-based representations of stocks or bonds, could undermine existing regulatory regimes if the tokens are not subject to the same rules as their underlying assets.
Opening Statements and Testimony
Subcommittee Chairman Bryan Steil (R-WI)
We passed the STABLE Act out of this Committee last week we advance the first half of President Trump’s digital asset agenda and now turn to the second of comprehensive digital asset market structure legislation. Chairmen Hill and Thompson outlined their vision for digital asset market structure legislation in an op-ed titled “A Blueprint for Digital Assets in America. They also outlined six core principles to guide the development of market structure legislation. The Biden-Harris administration’s hostility drove the digital asset ecosystem to jurisdictions with established frameworks. We can correct course and make the U.S. the epicenter of this ecosystem. We recognize that digital assets have use cases beyond financial markets, but also feel strongly that there is a role for the SEC to play in the digital asset ecosystem, and projects raising capital through the sale of new digital assets should fall under the jurisdiction of the SEC. Issuers should be required to disclose relevant information that helps users understand the unique characteristics of the digital asset networks they are investing in. We must work to modernize our securities laws to better accommodate the unique characteristics of digital assets, which includes examining the classification of digital assets, the adequacy of current disclosure requirements, and the applicability of various requirements for intermediaries.
Ranking Member Stephen Lynch (D-MA)
We must focus on preserving market integrity, not fulfilling an industry wish list with aims of lowering regulatory standards and removing securities laws that protect consumers and investors, viewed as obstacles by the crypto industry. The U.S.’s robust securities laws are designed to protect investors, encourage competition, and ensure financial stability, especially in times of high inflation and market instability caused by reckless tariffs. Crypto prices fell in line with stock market dips following tariff announcements, with bitcoin’s price dropping over ten percent. If these speculative products resemble traditional securities, they should be treated as such. Under Trump, the SEC dropped almost every lawsuit against major crypto offenders, and under the nominated Chair, the SEC will continue this trend. Crypto still lacks meaningful use cases, other than for money laundering, terrorist financing, and illicit activities. They are speculative products, similar to securities, and we cannot continue to ignore the clear conflicts of interest between the President’s personal crypto ventures and his support for industry-friendly legislation. We cannot allow the crypto industry to write its own rules.
Chairman French Hill (R-AR)
Last week, the Committee took an important step in delivering real legislative certainty for payment stablecoins by advancing Chairman Steil’s STABLE Act. We must build on momentum for a comprehensive regulatory framework. Last Congress, we passed FIT21, which aimed to establish clear, fit-for-purpose federal standards for digital assets. Since then, the Committee has engaged with a wide range of stakeholders, from government agencies to leaders in the ecosystem, to identify ways market structure legislation can be further refined and strengthened. We are actively working to release a legislative discussion draft that reflects feedback from members and market participants, with strong bipartisan efforts to bring clarity and stability to the ecosystem.
Rodrigo Seira, Special Counsel, Cooley LLP
Current securities law framework is not fit for purpose when regulating crypto, and an attempt to force crypto into this regime with significant overhauls would be counterproductive. We must capitalize on our opportunity to develop a new regulatory framework that protects crypto consumers and our capital markets while allowing crypto to flourish. Crypto enables individuals to organize, interact, and collaborate based on rules enforced by transparent code, serving as a general-purpose technology with countless applications. Fraud and abuse undoubtedly occur in crypto, like in any emerging technology sector, but the idea that crypto projects can register with the SEC is demonstrably false. Virtually no crypto projects have successfully registered their tokens under federal securities laws and projects that tried to comply with the SEC’s rigorous regulatory requirements expended significant resources and effort, only to fail or survive in a state of regulatory uncertainty. Registration is not a simple one-time process, carrying an ongoing obligation to operate as a publicly reporting company, subject to extensive requirements, including CEA reports, proxy rules, and sender offers. Even if a project manages to register a token, its ability to trade is severely constrained because tokens that are registered as securities can only be traded on national securities exchanges, through ATSs or broker-dealers, or over the counter. The SEC’s disclosure frameworks regime is relevant when applied to initial fundraising transactions described above or to tokenized securities, but certain types of crypto assets, such as the native tokens of decentralized networks, fundamentally differ from securities. Network tokens can persist independent of any corporate issuer, conferring technological abilities in the network rather than legal claims against an issuer and often accruing value based on network utility and market forces over company profit. The current securities disclosure forms focus on irrelevant corporate and financial information while ignoring critical crypto-specific aspects, such as governance mechanisms, network design, tokenomics, cybersecurity, and the network utility of the assets as a result. Pushing crypto into the traditional securities disclosure regime is harmful to the very public securities laws are intended to protect, as it fails to provide purchasers with the material information they need to determine the value and risks of their crypto holdings. FIT21, which passed with broad bipartisan support in the House last year, marked a significant step toward regulatory clarity in the digital space, and would provide much-needed clarity for participants and foster innovation within a structured regulatory environment.
Tiffany Smith, Partner & Co-Chair of Blockchain & Crypto Working Group, WilmerHale
While the SEC has taken steps within its jurisdiction to provide regulatory clarity, congressional action is necessary to achieve true regulatory clarity for the digital assets industry. The lack of regulatory clarity has led to the expenditure of significant resources to determine how to comply with discontinued offerings and offshoring. Congress can provide concrete action to provide clarity for the industry and support domestic innovation, while ensuring market integrity and participant protection. Any formal guidance or rulemaking must consider the differences between digital assets and traditional securities, including the specific aspects of digital assets that may not be of concern for traditional securities to ensure compliance is feasible and regulation is effective. Notwithstanding the progress the SEC’s crypto task force is making, the SEC and other federal agencies have jurisdictional limits; agency action alone is not sufficient to provide regulatory clarity for digital assets. A patchwork across agencies and states created the regulatory uncertainty that currently exists.
Jake Werrett, Chief Legal Officer, Polygon
While other countries have developed and adopted frameworks to entice innovators, we have not. Decentralized blockchains facilitate global coordination, enabling self-custody, user governance, and transparency. Digital asset self-governance allows one to decide day-to-day activities, such as fee structures, user fairness grants, and leadership, is a key feature. Decentralization is inherently democratic, as decentralized technology facilitates self-governance and allows individuals the freedom to control their own property, making decentralization uniquely American. We should not allow legislation enticing innovation for blockchains to offshore and outpace legislation enticing innovation in the U.S. We should not assume that archaic security structures cannot be refreshed to address innovative technologies. We must not allow stablecoins pegged to foreign assets or foreign currencies to outperform stablecoins pegged to the U.S. dollar.
Alexandra Thornton, Senior Director, Financial Regulation, Center for American Progress
Congress seems determined to pass legislation creating a light regulatory regime, ignoring that digital asset markets have not functioned well so far. A lack of transparency and regulatory oversight results in an inefficient market in which end-users were prevented from making informed trades, and dealers could increase their profits. This administration is crippling the regulators that protect investors and borrowers from scams and manipulation, endangering the stability of the U.S. financial system. Any new rules for crypto should be similar to the existing rules for U.S. capital markets. Regulation of asset creators should match the asset’s tradable lifespan. The initial disclosure of a physical commodity when the derivative is created should remain accurate for the entirety of its tradable life. Capital market intermediaries perform different functions, each with different incentives and responsibilities and in natural conflict. Industry mergers eliminate the long-standing checks and balances in profit motives and offsetting conflicts of interest that promote fair competition, protect investors, and maintain market integrity. Due to a significant amount of crypto trading occurring off the blockchain, crypto rules should apply both off-chain and on-chain. Congress should take extreme care to avoid upending the traditional securities markets in efforts to create a regulatory regime based on the definition of the asset in question rather than on the market function. Harm could also arise with tokenization of securities, where a corporate bond or stock has an associated token. If the token is not subject to the securities rules, there would be two assets that look economically similar and trade together, but one would be free of effective regulation. These risks could destabilize the existing stock and bond markets, similar to the Archegos Capital disaster. Without similar rules similar to securities on position reporting in crypto markets, identities can be hidden on and off blockchain.
Discussion
Representative Steil (R-WI): In the early phase of getting projects off the ground, who is typically involved, and what is the general structure of key participants at that stage? Seira: The initial outreach is normally from developers with a new idea to develop a new protocol. The first decision we go through is, where are we going to form a legal entity, and what structure will it have? Is it in the U.S. or elsewhere? The second question is usually, how are we going to finance this? There are two basic approaches as most projects will raise funds from venture capital funds, while other projects try to do more grassroots fundraising by distributing tokens. The current regulatory regime makes getting those tokens into a distributed token holder base nearly impossible. Token issuances are largely permissionless and are typically set up for capital raising, with the intention of distributing governance to the token holder base. In traditional securities, the issuance timeline depends on whether it is a registered offering or an exempt offering and can take nearly a year or more, with substantial costs of compliance. With crypto, that process is almost instantaneous and permissionless.
Representative Steil (R-WI): How is the recording different between securities and digital assets? Seira: Most digital assets are native to a blockchain, which means an entry on a ledger. Most securities today are digital securities, custodied by large custodians like DTCC and reflected in brokerage accounts.
Representative Steil (R-WI): How does the timing of settlement differ between traditional securities and digital assets? Smith: Digital assets rely on either centralized platforms or decentralized protocols. Most securities transactions settle on T+1, while digital asset transactions typically settle immediately. Traditional securities markets are open from 9-5 p.m. in the U.S., while digital assets trade 24/7 globally. The digital asset model available on the blockchain model is more transparent than the traditional securities model.
Representative Lynch (D-MA): Do you believe policymakers should respond to the rejection of conflict-of-interest standards, particularly when it occurs at the White House? Thornton: There have been several actions taken by the Trump administration that have favored crypto, including letting go of many enforcement staff and dropping numerous cases against crypto. Ideas like crypto reserves and incorporating cryptocurrency and blockchain into routine spending and accounting practices at agencies are all concerning because they will introduce an enormous amount of risk into the federal government and the U.S. financial system.
Representative Hill (R-AR): What are the distinctions between the four crypto asset categories outlined by Commissioner Peirce? Smith: The greatest need for is in situations where an asset is sold as part of an investment contract but is not itself a security. Since 2017, the SEC has used the three-part Howey test to assess whether a digital asset transaction qualifies as a securities transaction. This ambiguity extends to “all other crypto assets,” including assets like Bitcoin, which is widely recognized as not being a security. No federal regulator has clear jurisdiction over that market, raising questions about who should have authority.
Representative Hill (R-AR): If we are trying to establish a spot market for bitcoin, would that fall under the CFTC’s regulatory authority? Smith: That is the open question.
Representative Hill (R-AR): Can you highlight an example of a real-world application from Polygon Labs’ use case database? Werrett: There are many, with one as Bravado ID, which provides an opportunity for a person to work with the issuer of identification or an organization that certifies information.
Representative Huizenga (R-MI): What rulemakings from the SEC under Gensler impacted on the digital asset ecosystem? Smith: I proposed several rulemakings that referenced digital assets, including efforts to broaden the definition of an exchange. Although the primary focus was on Treasury markets, the proposals had implications for DeFi protocols as well. One raised concern by noting that DeFi protocols often lack the centralized intermediaries necessary to meet compliance obligations. If finalized, it could have driven DeFi activity offshore.
Representative Davidson (R-OH): Why is there the need for legislation to prevent federal regulators from issuing any rule or regulation that would impair an individual’s ability to maintain custody of their own digital assets? Smith: The rules anticipate physical custody, meaning the possession of a tangible asset, which is not the case for digital assets. The rules need to incorporate how to ensure proper custody, meaning possession or control, of an asset that only exists in digital form; Werrett: Self-custody is at the core of blockchain and DeFi, and a core principle of our Constitution. Lawmakers need to balance risks against benefits here, but the benefit of owning and controlling one’s property significantly outweighs the risk of possible misuse. This Committee must protect the right to own property and to control one’s own property on-chain.
Representative Garcia (D-TX): What is the ripple effect of the SEC staff statement clarifying that memecoin purchasers or holders are not protected by federal securities laws? What impact will this have on broader enforcement and oversight of cryptocurrencies, particularly in relation to memecoins? Thornton: It would essentially create a loophole to use a memecoin and not have to follow securities laws. It would become a way to bypass regulations, leaving investors without the protections that securities laws provide. We have seen how there are winners and losers with memecoins.
Representative Rose (R-TN): What specific steps should the SEC and Congress take to foster a conducive environment for cryptocurrency growth and innovation? Smith: Congress should clarify when the SEC has jurisdiction and who has jurisdiction when the SEC does not, specifically in the case of spot commodities markets. When the SEC clarifies its jurisdiction, as it is already doing with the crypto task force, it needs to provide clarity on how the rules apply to digital asset securities, given that these assets have fundamental differences from traditional securities; Seira: It begins with recognizing that the status quo is not working for U.S. consumers or the industry. Legislative action is needed, with market structure being a central focus. There is a regulatory gap in the spot markets for digital commodities, which currently lack oversight. Congress must clarify when digital assets transition into digital commodities and designate who will regulate those spot markets.
Representative Rose (R-TN): How close is FIT21 to the right balance? Seira: FIT21 would be a great step forward and would bring much-needed clarity, but it could do more in a few areas. The dual market it creates for tokens that could be regulated by both the SEC and CFTC introduces some complexity, so fixing that would be helpful.
Representative Rose (R-TN): Can the digital asset ecosystem be cleanly divided between regulators, or will effective oversight likely require coordinated, multi-agency involvement going forward? Smith: It is too early to determine due to regulatory uncertainty and the lack of clear jurisdictional boundaries between the SEC and CFTC. It remains unclear whether, even with greater clarity, overlap would persist or if responsibilities could be clearly divided. Some assets, like securities indices and securities futures, are already jointly regulated.
Representative Rose (R-TN): Why is it difficult for crypto projects to register under federal securities laws, and what steps should Congress take to fix this problem? Seira: Crypto assets sold as part of fundraising transactions should fall under securities laws and be either registered or exempt. Most are exempt today, but two main challenges remain. Existing disclosure requirements often fail to surface the material information relevant to digital asset purchasers, forcing issuers to provide disclosures that are not useful. There is no clear off-ramp to distinguish initial capital-raising transactions from later transactions once the network becomes decentralized and no longer under the issuer’s control.
Representative Foster (D-IL): If there were a clear regulatory option for NFTs issuers, would it improve the chances of success for the NFT market overall? Thornton: It depends. It is hard to tell whether so-called license plates would achieve all of that. There does need to be a central place where everyone can see what is being traded, by whom, and how much; Smith: Types of data analytics cannot give a direct identity but still give an idea who owns certain wallets.
Representative Nunn (R-IA): How does the SEC determine what qualifies as a security, what factors challenge that approach, and how legislation could help clarify the definition? Smith: Since 2017, the SEC has applied the Howey test to determine whether a digital asset transaction qualifies as a securities transaction, but market participants have found the test difficult to apply in practice. In 2019, the SEC issued guidance to clarify its application to digital assets, but challenges persisted. It also does not address secondary market transactions.
Representative Nunn (R-IA): Are we ceding this opportunity to other nations and offshore innovators by making it too difficult for domestic players to remain competitive? Werrett: It is clear that a digital asset is not a security without something more. Innovators look to backstop their actions by relying on regulations, with Reg S causing innovation to move offshore and pushes tokens offshore. This causes the protocols and the use of those protocols to be pushed offshore as well. Innovation and the use of this technology are both being driven offshore.
Representative Nunn (R-IA): How is the CFTC approaching the regulation of commodities like Bitcoin or Ether? Smith: The CFTC has jurisdiction over the futures and derivatives market. It does not have jurisdiction over the spot market and does not have the ability to make rules or regulations for that market.
Representative Liccardo (D-CA): Are there significant criminal uses of cryptocurrency that we should be concerned about? Smith: There are criminal uses in all types of financial markets, criminal and fraudulent uses are not unique to crypto. Any cases of that nature should be prosecuted, with criminal prosecutorial authority falling on the DOJ.
Representative Timmons (R-SC): How could market structure legislation support the integration of blockchain technology into governance systems? Werrett: It is a good start. The Howey test needs to be refreshed, not abolished. An additional test might consider the decentralization of a project. Whether something is a security depends on the presence of a promise, reliance on that promise, and an expectation of profits based on others’ efforts. This directly ties into whether the project is being managed by a centralized intermediary or promoter, which the investor relies on for information. Decentralization is a part of securities analysis.
Representative Donalds (R-FL): Why is a native token fundamentally different from a security? Are all digital assets native tokens of decentralized networks? Seira: Tokens on decentralized networks serve as economic incentive mechanisms, rewarding or penalizing certain behaviors. They do not derive their value or existence from a centralized issuer. Digital assets include more than just native tokens and span a variety of uses. Commissioner Peirce and others have proposed different taxonomies to categorize them. Memecoins and NFTs are distinct types. Tokenized securities, like shares issued on blockchain rails, should not be treated differently.
Representative Donalds (R-FL): How does blockchain support the tokenization of real-world assets? Werrett: Real-world assets can be hard to transfer, lend against, or trade, but tokenization enables fractional ownership recorded on the blockchain. These fractions can then be transferred or lent between owners. In a tokenized investment fund, ownership could be represented by a blockchain-based token that can be transferred or used as collateral.
Representative Donalds (R-FL): Would the accredited investor rule impede retail investing in tokenized securities? Smith: Retail or non-accredited investors cannot participate in restricted offerings or private placements. While tokenized public shares may be accessible to retail investors, tokenized restricted offerings functioning like the underlying stock, would remain off-limits. Restrictions apply to both the offering and security, regardless of tokenization.
Representative Flood (R-NE): How do traditional custody practices conflict with the nature of digital assets? Which aspects of custody regulation appropriately apply to the digital asset space? Smith: Traditional custody rules are based on the existence of a physical asset and there is tension when applying them to native digital assets, which do not have the same physical form. Separation between customer assets and proprietary assets is key to the custody framework, so if the firm goes bankrupt, assets are identifiable and can be returned.