On June 23rd, the House Agriculture Committee Subcommittee on Commodity Exchanges, Energy, and Credit held a hearing entitled “The Future of Digital Asset Regulation.” The hearing had two panels. The witnesses were:
- Vincent McGonagle, Director, Division of Market Oversight, CFTC
- Christopher Brummer, Professor, Georgetown University Law Center
- Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis
-
Charles Hoskinson, CEO, Input Output Global
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of some of the topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Vincent McGonagle, Director of the Commodity Futures Trading Commission (CFTC) Division of Market Oversight (DMO), said that the CFTC is well positioned to oversee digital asset spot markets due to its experience in the space, its principles-based regulatory framework, and because the structure of designated contract markets (DCMs) and self-regulatory organizations (SROs) would work well to protect investors in digital assets. He also pushed back against any assertion that the CFTC is a more permissible, less strict financial regulator.
- McGonagle said that the Securities and Exchange Commission (SEC) and the CFTC have long worked together to establish strong regulatory frameworks in their respective jurisdictions, but he said there is not currently a path for a digital asset to become sufficiently decentralized and move from SEC jurisdiction to CFTC jurisdiction.
- Subcommittee Ranking Member Michelle Fischbach (R-MN) praised the Digital Commodity Exchange Act (DCEA), saying that it provides a clear regulatory framework that would foster innovation while still providing the necessary customer protections.
SUMMARY
Opening Statements and Testimony
Subcommittee Chairman Sean Maloney (D-NY)
Digital assets are popular, but they are troublingly volatile and could pose risks to investors. It is of vital importance that we have Congressional direction to establish the rules of the road for American retail investors. While the CFTC has dutifully exercised its enforcement authority in digital asset spot markets, its authority is strictly limited. There is an oversight gap for digital asset spot markets. Digital asset growth has been centered on transparency and innovation, two things that we should foster in the U.S. The most popular cryptocurrencies have entirely public ledgers allowing for total transparency. We should promote digital assets’ ability to foster financial inclusion, but we cannot allow market participants to be exposed to undue risks of fraud or manipulation.
Subcommittee Ranking Member Michelle Fischbach (R-MN)
Real risks to market participants exist in digital asset spot markets. This Committee has proposed legislation, the Digital Commodity Exchange Act (DCEA), that would lay down clear parameters for both the SEC and the CFTC. The DCEA would extend the CFTC’s oversight of digital asset commodities and would give certainty to retail participants. Congress can provide true legal clarity in a way that enforcement actions will never be able to, and we must create a clearer legal framework for digital assets.
Committee Ranking Member GT Thompson (R-PA)
This Committee should be at the table for discussions on digital assets regulation. The CFTC has been a leader in bringing clear regulations to these nascent markets. The DCEA offers a framework for this regulatory clarity that protects market participants and establishes clear jurisdictional lines between financial regulators. Most importantly, the DCEA provides a pathway for regulatory compliance so that innovation can continue in this new space.
Vincent McGonagle, Director, Division of Market Oversight, CFTC
The CFTC has a principles-based regulatory regime that protects customer funds, ensures market integrity, avoids systemic risks, and monitors derivatives markets for abuse while fostering innovation and new technologies. Our framework is designed to ensure that markets are safe for all participants. Markets must establish and maintain a program to minimize instances of market risk. DCMs also must act as SROs. The CFTC is already active in bringing enforcement actions in digital asset spot markets. The CFTC has a keen understanding of digital assets, and we will continue to protect customers to the fullest extent of our statutory authority.
Christopher Brummer, Professor, Georgetown University Law Center
Deeming an asset a commodity or a security will not fix the disclosures issues in digital asset spot markets. Irrespective of which regulator is in charge, we will need to work on building a framework for these assets. Enforcement is an important tool, but it does not offer everything these markets need in terms of audits and transparency. The CFTC has extensive experience with the digital asset industry’s infrastructure from its work in digital asset derivatives and swaps. The CFTC has gained expertise in overseeing the institutionalization of digital asset spot markets. Extending oversight of digital asset spot markets to the CFTC could be viewed as a natural extension of its ongoing work in this space. The CFTC is less developed, however, in disclosure regimes in spot markets. It is also a smaller and less funded agency than the SEC.
Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis
Cryptocurrencies can be used by both good and bad actors. There is certainly fraud and abuse in digital asset markets, and these risks must be mitigated if we are to unlock the potential benefits of cryptocurrencies. There must be a clear understanding of market risks that enables proper surveillance and oversight. There are many transactions taking place off of blockchains that would be beneficial in understanding market manipulation that may be taking place in these markets. We should aim to create a stable, regulated market so that the world will look to the U.S. for established asset-referenced cryptocurrency prices as it does with many other commodities. If America wants to lead in this sector, we must lead in regulation.
Charles Hoskinson, CEO, Input Output Global
The dominance of the U.S. has historically rested upon our financial services, our technology companies, and our manufacturing capabilities. If we plan to be a leader in the global economy, we must continue to develop. When considering regulation this space, we should work within a principles-based system that does not pick technology winners and losers or try to predict the future innovations that will come in this space. We must decide on fundamental consumer rights and the risks we want to prevent. It is prudent to focus on concepts such as how to define decentralization, information dissymmetry, and the accessibility of data.
Discussion
Maloney (D-NY): Should CFTC have direct statutory authority to regulate digital asset cash markets? Brummer: The CFTC is qualified for this job. It will need more resources to carry out this responsibility. All regulatory agencies need a change in their mindset regarding this industry. The most important thing this industry needs is a stronger disclosure regime that more adequately provides market participants with the data they need; McGonagle: The CFTC is a market regulator that thinks of all market participants when we consider risk management. Our system of regulation looks at market participants and how they trade value. We are ready to ensure execution certainty and price transparency in a safe and secure way. There is more speculation in these spot markets than in typical commodities. We are well positioned to facilitate protections so participants understand the risks they face in these assets.
Fischbach (R-MN): What does it mean that the CFTC is a principles-based regulator? Is the CFTC a permissive, light-touch regulator? McGonagle: We operate off of twenty-three core principles to ensure safe and efficient markets. These principles ensure that we are protecting customers without placing undue burdens on innovation. We highly value our strong enforcement program. We carefully monitor for customer protection and market integrity, and we bring swift and strong enforcement actions on any cases of market manipulation or fraud. We have brought many strong digital asset enforcement cases over recent years.
Thompson (R-PA): What are the requirements that the CFTC imposes on futures exchanges and swap execution facilities (SEFs)? Is the law clear on which digital assets are commodities and which are securities? McGonagle: DCMs and SEFs are responsible for establishing their own SROs. They are required to guarantee compliance with the rules they implement on their platform. They also have requirements at the Commission to ensure that their platforms are resilient against market risks; Brummer: The law is unclear on these digital assets. The Howie Test leads to clarity in some instances, but there is still significant ambiguity. It is clear that not all digital assets are not securities. It is important for Congress to consider that as this technology grows, there will be different kinds of actors operating on the blockchain. There are centralized actors with off-chain practices that are more opaque.
Craig (D-MN): How is federal regulation of cryptocurrency platforms related to market transparency for retail participants? Is the CFTC capable of taking on these new markets? McGonagle: In thinking about spot markets, one key focus is the prospect of leverage. Investors need to understand trading risks. We need to have oversight of intermediaries that focuses on retail market participants so that the risks of trading strategies are fully disclosed to market participants. Execution certainty and price transparency are key issues. The CFTC has the intellectual expertise and experience to take on these markets. Chairman Rostin Behnam has been working to understand the additional resources we would need to take on this authority; Brummer: One of the advantages of CFTC regulation is its principles-based nature. The CFTC has a special relationship with DCMs in derivatives markets in that it has strong oversight but emphasizes the use of SROs.
Cammack (R-FL): Is it true that several exchanges registered with the CFTC, such as ICE, ErisX, and Kalshi, offer retail traders the ability to directly access exchanges without brokers? Would CFTC oversight of digital asset markets be the most appropriate path forward for regulation? How productive are conversations between the CFTC and SEC on coordinated regulation in this space? Brummer: There are already direct-to-retail platforms registered with the CFTC; McGonagle: The CFTC intermediated model offers the opportunity for multiple market participants to come together to execute transactions where there is price transparency. We offer additional protections to market participants including risk disclosures and asset segregations. This is well suited to protect consumers in digital asset spot markets. The CFTC has a long-standing relationship with the SEC. Both agencies understand where our jurisdictions overlap.
Balderson (R-OH): Is the CFTC well-suited to oversee digital asset spot markets? McGonagle: The way digital assets are traded on spot markets today strongly resemble how they are traded as derivatives. The CFTC has comprehensive oversight of DCMs, and that concept would apply well to digital asset spot markets. The CFTC has seen its jurisdiction expanded significantly in the past and has successfully expanded its core principles to new markets; Hoskinson: Many commodities, such as hay, are fully decentralized, so the CFTC has been effective in managing decentralized markets already. It makes sense for an agency with this experience to lead in digital asset spot markets. The most important thing to do is create a strong and clear definition for decentralization.
Kuster (D-NH): How prevalent are risky cryptocurrency exchanges without KYC or AML requirements? How does the CFTC enforcement process work, and is there more Congress can do to strengthen CFTC enforcement? Levin: We work to identify exchanges that facilitate money laundering; McGonagle: The CFTC has broad and strong enforcement authority. We have brought many enforcement cases in this space. One trend we see is “get rich” schemes that offer leverage on products that investors do not understand.
Scott (R-GA): How can the CFTC regulate markets this large on top of its existing mandates? Hoskinson: We do not need to regulate each individual cryptocurrency. Instead, we use the tools that exist to track metadata in cryptocurrency transactions to highlight any violations. There are also SROs that help carry this regulatory load.
Feenstra (R-IA): Would the CFTC require additional authority from Congress to promulgate additional requirements if given primary authority over digital asset spot markets? Can digital assets become more decentralized over time and become commodities? McGonagle: Yes. Digital assets are broadly defined as commodities. If the SEC determines that one is a security, it takes it outside of the CFTC’s jurisdiction. There is not currently a framework that would allow the evolution of a product from SEC to CFTC.