HOUSE AGRICULTURE HEARING ON DIGITAL ASSETS
On June 4, the House Agriculture Committee held a hearing entitled, “American Innovation and the Future of Digital Assets: From Blueprint to a Functional Framework.” Witnesses in the hearing were:
- Avery Ching, CEO and Co-Founder, Aptos Labs
- Michael Piwowar, Executive Vice President, Milken Institute, and Former SEC Commissioner and Acting Chairman
- Chelsea Pizzola, Partner, Willkie Farr & Gallagher LLP
- Ryne Miller, Partner, Lowenstein Sandler LLP; Chair of Commodities Futures, and Derivatives Group; Co-Chair of Lowenstein Crypto
Key Takeaways
- Chairman Thompson (R-PA) outlined his support for the CLARITY Act to foster American innovation and bring needed customer protections to digital asset-related activities and intermediaries, alongside working to onshore digital asset innovation.
- Pizzola highlighted that the Act’s allocation of jurisdiction between the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) over primary and secondary markets is appropriately tailored. She emphasized that the CFTC is well-suited for crypto spot market surveillance due to its statutory core principles-based regulatory framework for exchanges and self-certification process for new product listings.
- Pizzola outlined the Act’s registration, examination, auditing, and customer fund segregation requirements, alongside disclosure requirements, as market and customer safeguards. Miller discussed how the Act provides a statutory framework that prompts registration and provides compliance tools for oversight, such as capital and governance requirements, independent directors, and recordkeeping.
- Representative Lucas (R-OK) raised questions about the impact of the prior administration’s regulation-by-enforcement approach to digital assets and the need for a comprehensive framework.
- Representative Johnson (R-SD) asked whether dual registration by the CFTC and SEC works for stakeholders, with Pizzola responding that it does and noting many financial institutions are dually registered as FCMs and broker-dealers, swap dealers, or security-based swap dealers. She said that while more harmonization and coordination would help, mechanisms already exist to reduce regulatory burden and cost, including CFTC capital requirements that incorporate SEC standards, the SEC’s time-limited no-action relief for reporting, and portfolio margining for related products.
- Representatives Lucas (R-OK) and Feenstra (R-IA) raised the necessity of addressing the regulatory gap in spot market trading of digital commodities and how the Act can provide certainty for regulators and participants. Pizzola stated that exactly how the line is drawn between CFTC and SEC jurisdiction is less important than ensuring that a clear, durable line is drawn through lasting legislation.
- Representative Rose (R-TN) outlined how the CLARITY Act requires four joint rulemakings between the SEC and the CFTC on digital commodity markets, with responsibilities clearly delineated. He noted how opponents of the Act have raised concerns about the practical challenges of coordination between the CFTC and SEC. Piwowar recommended narrowing the scope of joint rulemakings, noting that they are difficult and slow.
- Miller emphasized that FTX U.S. Derivatives, as a CFTC-registered Designated Contract Market (DCM) and a Derivatives Clearing Organization (DCO), was able to return all customer funds without loss due to simple but critical safeguards. He contrasted CFTC safeguards with the current fifty-state regime, which lacks consistent governance, audit, and examination standards.
- Representative Feenstra (R-IA) questioned how to address banks’ concerns about engaging with crypto markets, with Miller responding that banks need regulatory clarity to ensure they are permitted to operate in a given asset class. Miller discussed that allowing banks to deploy capital in crypto markets increases liquidity and market resiliency through increased and broader market participation, as alongside providing necessary certainty to designated markets.
- Democrats, led by Ranking Member Craig (D-MN), focused on consumer protections such as segregation of funds and disclosures included in the CLARITY Act. She voiced her support for the Act but stated that it is not perfect and improvements can still be made.
- In response to Representative Lucas’s questions on regulations falling behind innovation in the agricultural and energy industries, Ching emphasized the potential for blockchain applications in agriculture. He said that, given four years of enforcement, there is no certainty to rural users that they are allowed to engage with this technology.
SUMMARY
Opening Statements and Testimony
Chairman G.T. Thompson (R-PA)
The promise of digital assets depends on getting the right market structure legislation across the finish line. Current federal laws and regulations do not provide adequate rules of the road for those who want to engage with these emerging technologies. Last week, ten bipartisan members of the House Agriculture and Financial Services Committees introduced the Digital Asset Market Clarity Act, or CLARITY Act, as a product of years of vigorous debate, stakeholder feedback, and technical assistance. The administration is elevating this issue and recognizing the urgency of action in the digital asset space, and the agencies who offer technical assistance. Other nations have already put pen to paper and created and enacted frameworks, seeking to establish themselves as hubs for the development of the digital asset ecosystem. It is time the U.S. implements a framework for trusted, reliable, and useful markets for digital assets.
Ranking Member Angie Craig (D-MN)
The CLARITY Act is not a perfect bill and improvements can still be made, but I support the Act because we need to bring consumer protection and a market structure to digital assets in the U.S. financial system. Digital assets, including cryptocurrencies, are no longer a novel financial product. Congress must establish clear protections for consumers and retail investors, as well as rules of the road for businesses dealing in digital assets. Industry currently lacks common-sense regulations, such as requiring the sequestration of consumer funds for broker exchanges, ensuring consumer deposits are not misused, and ensuring that retail investors are not left holding the bag when bad actors commit fraud. If Congress does its job well with this legislation, legitimate enterprises will innovate and thrive, and consumers will be able to engage with their services and products without undue financial risk. We cannot ignore that the President is making this debate more difficult. Under current law, Members of Congress, judges and their respective staffs, and other federal employees may not use nonpublic information to trade in markets overseen by the CFTC or share nonpublic information with others so they can trade. The Act rightly adds digital commodities to those prohibitions. Yet these limits, which apply to us, do not apply to the President.
Avery Ching, CEO and Co-Founder, Aptos Labs
Digital assets or tokens are essential for decentralized systems to function by providing incentive, security, and governance mechanisms that keep the network running. More than 1,000 developers are building on Aptos, and some of the world’s largest financial institutions, including BlackRock, Franklin Templeton, and Apollo, have launched regulated tokenized money markets and other funds on Aptos. Doing so increases transparency, enables real-time peer-to-peer transfers, and boosts operational efficiency. Decentralized networks will form the core infrastructure of the coming digital economy, delivering systems that are transparent, interoperable, and designed for innovation. For blockchain innovation to grow responsibly in the U.S., developers need clear regulatory guidance to run token issuance and distributions. Market structure legislation that defines consistent rules around token issuance and distribution will ensure that networks can function as designed, U.S. builders can innovate while staying compliant and competitive, and regulators can enforce meaningful consumer protections. The infrastructure is ready, and regulatory clarity will ensure U.S. leadership.
Michael Piwowar, Executive Vice President, Milken Institute, and Former SEC Commissioner and Acting Chairman
We support legislation that will establish a workable framework to bring clarity to the digital asset market. The CLARITY Act crafts a framework that addresses regulatory gaps, jurisdictional boundaries, and pathways for responsible innovation. s we look to future innovations and capital raising activities in digital asset markets, the critical role played by the SEC will become even more important for the U.S. to maintain economic competitiveness. The SEC plays a critical role in regulating our capital markets and how that expertise can be applied to digital asset markets. The SEC is already applying their existing authorities to do so. Key provisions grant new authorities to the SEC that align its mission with the functional application to the digital asset markets. We must continue efforts in finding bipartisan and cross-committee solutions, and for building bicameral consensus to create a clear and workable regulatory framework for digital assets in the U.S. and promote innovation.
Chelsea Pizzola, Partner, Willkie Farr & Gallagher LLP
The Act’s allocation of jurisdiction between the SEC and the CFTC along the line between primary and secondary markets is appropriately tailored to their specialized expertise, experience, and statutory remit. The SEC is well-suited to regulate primary market transactions in digital assets, which are often viewed as similar to capital raises involving traditional securities under the SEC’s remit, while the CFTC is the natural regulator for secondary market digital asset transactions, which are widely viewed, including by multiple federal courts, as transactions in commodities. Since 2015, the CFTC has aggressively and successfully pursued fraud and manipulation in spot and derivatives markets, as well as failed-to-register cases involving digital asset derivatives. It worked closely with exchanges and their clearinghouses to prepare for the first bitcoin futures listings in 2017, and it did the same with ether futures listings in 2019. The CFTC is well-suited for its responsibilities under the Act by virtue of its statutory core principles-based regulatory framework for exchanges and its self-certification process for new product listings, which were specifically designed to promote responsible innovation and fair competition. Statutory core principles are outcomes-based requirements, and exchanges are given reasonable discretion in determining how to comply, preventing the kind of rigid, one-size-fits-all regulatory environment that previously stifled innovation and competition in CFTC-regulated markets prior to the Commodity Futures Modernization Act (CFMA) of 2000. The self-certification listing process has supported innovation and competition in CFTC-regulated markets, reducing market delays for new products from years to days. These flexible, adaptable regulatory approaches are particularly well suited for the novel and constantly evolving nature of digital asset markets. The Act appropriately includes these features in its regulatory regime for digital commodity exchanges. De minimis registration exemptions in areas of overlapping jurisdiction and interagency coordination deference are valuable tools to reduce regulatory burden and promote regulatory efficiency. Beyond these limited exemptions and targeted deference, holistic CFTC oversight of the secondary digital commodity markets is necessary to avoid fragmentation in market regulation, monitoring, and surveillance. Exactly how the line is drawn between CFTC and SEC jurisdiction is less important than ensuring that a clear, durable line is drawn through lasting legislation.
Ryne Miller, Partner, Lowenstein Sandler LLP; Chair of Commodities Futures, and Derivatives Group and Co-Chair of Lowenstein Crypto
The failure of FTX is often talked about as a run on the bank or a liquidity crisis, but FTX was not a bank; it was a cryptocurrency exchange, charged with protecting customer assets. The FTX failure was the result of a concealed fraud and misappropriation of billions of dollars in customer funds for personal use. Had the federal market structure regulation contemplated in this Act been in place, offshore companies would have come to and centered in the U.S. and centered their businesses here. Customer asset segregation, regular examination, governance requirements, and auditing would have been in place, and they would have provided guardrails to prevent the fraud. The drafted CLARITY Act is thoughtful, balanced, functional, and ready. It creates a path for registration, draws a sensible line between the SEC and the CFTC, and prompts coordination where appropriate. It protects investors while enabling responsible innovation. It gives regulators the tools they need to move from enforcement to proactive supervision and regulation, as well as ends the state-by-state regulatory patchwork that is pushing innovators offshore. A federal framework will restore confidence and competitiveness in the U.S. digital asset markets. Regulation enables innovation. D
DISCUSSION
Chairman Thompson (R-PA): Why is the CFTC is best suited for spot market jurisdiction? Pizzola: The CFTC is best suited to regulate secondary digital commodity markets in furtherance of responsible innovation due to its experience, expertise, and statutory remit. It currently monitors and surveils spot commodity markets closely, given the close relationship between derivative contracts and their underlying commodities. As noted in the FTX bankruptcy, CFTC-regulated entities were the only ones able to return all customer funds without loss and outside of bankruptcy due to diligent CFTC oversight. The CFTC has 25 years of experience implementing a flexible, core principles-based framework and self-certification process, which are key elements of the Act’s regulatory regime. These have supported responsible innovation through thousands of product listings and dozens of new market entrants.
Chairman Thompson (R-PA): Are you concerned that something similar to the FTX debacle could occur in the United States if digital assets market structure legislation is not enacted by Congress? Miller: FTX U.S. Derivatives was registered with the CFTC as both a DCM and DCO. Customer assets were in separate accounts, subject to rules and legal structures that protected them, and they were not accessible by FTX US Derivatives or the broader enterprise. We need capital requirements, customer asset segregation, and examination and audits. The states do a great job ensuring their standards and registration requirements are followed, but federal market regulators bring 25 to 50 years of experience in regulating these type of markets. The Act, as drafted, prompts registration, and registration brings examinations, auditing, governance requirements, independent directors, and recordkeeping. That toolset allows both regulators and the governance body of an entity to ensure that what the entity says is happening is, in fact, taking place. The registration provisions and accompanying compliance programs in the Act clearly do what is being asked for.
Ranking Member Craig (D-MN): Do you have any suggestions for improving customer education and outreach surrounding digital commodities? Piwowar: The SEC Office of Investor Education and Advocacy engages in a number of financial literacy or financial education efforts. The SEC is already using its existing authority in the digital asset space, with one way as issuing staff statements. For example, the SEC has said memecoins are not securities and do not fall under the protection of federal securities laws. They also issued a number of other statements, such as on proof of work, staking, and other things. They have a number of different mechanisms.
Ranking Member Craig (D-MN): Is it a critical moment in time to make sure that investors know what is not protected with respect to the CFTC? Pizzola: The CFTC’s Office of Customer Education and Outreach has been engaged for almost ten years in educating customers regarding digital assets. It put out virtual currency primers explaining what is bitcoin, what is ether, what are virtual currencies as things of that nature. I agree that there is and always is more could be done, particularly in the outreach arena, in making sure that more customers are aware and knowledgeable of the types of fraud and other abuses that can take place. The CFTC has engaged in robust efforts in that regard.
Ranking Member Craig (D-MN): Does the CFTC currently have the resources that would be necessary to regulate the digital assets appropriately? Miller: The CFTC is an agency where resources are critical. It is important to focus on funding the agency at the level of resources it has requested; Pizzola: I agree.
Ranking Member Craig (D-MN): Do you believe the same prohibitions on using non-public information for trading in CFTC markets, now rightly extended to digital commodities under the CLARITY Act, should also apply to the President and Vice President? Miller: The Act brings transparency and disclosure requirements that apply to all participants in these markets. That is appropriate; Pizzola: I could not agree more. The disclosure requirements of the Act are appropriate, and it is appropriate that they are broadly applied; Piwowar: Memecoins are not under the jurisdiction of the SEC, so no comment; Ching: I agree, more disclosure and Commission rules are going to help with that in the future.
Representative Lucas (R-OK): What are the challenges posed by the previous administration’s regulation-by-enforcement approach, and why is it important for Congress to provide a comprehensive regulatory framework for digital assets so the SEC is not relying on after-the-fact enforcement? Piwowar: The last administration’s regulation by enforcement had several negative effects, pushing activity offshore instead of keeping customer assets protected within the regulatory framework. There was no actual regulation, with firms going to the SEC and asking to be regulated to protect customer assets. Innovation went offshore with fewer consumer protections. An underrated consequence was the waste of SEC resources, with dozens of staff pursuing cases outside its jurisdiction. The SEC lost multiple times in court, using resources that could have provided regulatory clarity. Now they are catching up, but that was four years wasted.
Representative Lucas (R-OK): Can you describe some of the challenges producers face when regulations fail to keep up with innovation and technology advancements in the agriculture and energy industries? Ching: There is a lot of innovation that can happen right now inside rural America and agriculture, such as cattle tracking, data lineage, and more. Blockchain is one of those great utilizing technologies to access the pure power of a decentralized network that is globally accessible. We are very excited about the work that this Committee is doing to help advance these technologies and make them more accessible to developers who can help build these technologies in agriculture and rural America; Miller: Access to new technology is often gated by the providers of the technology and the willingness of the users to adopt it, oftentimes by legal and regulatory certainty. Given four years of enforcement, there is no certainty to these rural users that they are allowed to engage with this technology. The Act and the work of this Committee will bring that clarity and allow more access to take place.
Representative Lucas (R-OK): What is the necessity of addressing the spot market gap? How does the Act provide regulatory certainty for the spot market trading of digital commodities? Pizzola: The Act provides beneficial clarity in the spot market. We currently have a morass of confusion when it comes to whether particular transactions are under SEC jurisdiction or are spot commodity transactions that are not regulated other than under the CFTC’s antifraud and antimanipulation authority. Under the previous administration, there was case after case, with time wasted, resources misallocated, and general confusion. It deterred market participants and entrepreneurs from participating in the space and drove well-meaning firms, both entrepreneurs and financial institutions, offshore or out of digital asset markets altogether. The Act provides a beneficial set of rules of the road that draw a clear line between SEC and CFTC jurisdiction. It includes registration, examination, auditing, customer fund segregation requirements, disclosure requirements, and other important aspects of a regulatory framework necessary to establish clear rules and ensure these markets can flourish.
Representative Brown (D-OH): Should regulators be empowered to develop a national digital asset consumer protection standard? What should it include, such as disclosures, recourse mechanisms, or real-time fraud monitoring? Piwowar: The SEC and CFTC have the tools and the necessary authorities, not only existing ones but also ones provided in the Act. It exempts digital commodity issuers from traditional securities regulation, but applies a very tailored approach using the SEC’s expertise. The SEC provides disclosures not only for public companies, but also for investment companies like mutual funds, ETFs, and closed-end funds. They have the expertise and the tools to apply those that fall under their jurisdiction, and I have the confidence that the CFTC also does.
Representative Bost (R-IL): Is it important for market participants to proactively know which assets fall under CFTC versus SEC oversight? Does providing clear lines enhance customer protection by showing where the guardrails are and who they’re dealing with? Miller: It is important to know who one’s regulator is and who one’s service providers regulator is. We have long-standing laws that govern how those assets are protected and how those assets are treated, depending on who the regulator is in the case of insolvency or otherwise. It is critical that a customer can look at a business and understand who its regulator is. Clear lines and guardrails enhance customer protection.
Representative Bost (R-IL): Why would the CFTC’s principles-based approach be a good fit for regulating digital assets? Pizzola: The principles-based approach under the CEA is a flexible framework that sets outcomes-based requirements and gives exchanges and other registered entities reasonable discretion in how to comply. It is expressly designed to promote responsible innovation, which is important in the digital asset space. Since enacted, it has allowed exchanges to tailor compliance to their unique business models. That flexibility works well in the digital asset space due to constant innovation and its evolving nature. It has supported the proliferation of new entrants in the exchange space, including multiple CFTC-regulated platforms specializing in digital asset products. It is a great fit for the digital asset industry because of those features.
Representative Salinas (D-CA): How do scam coins hurt investors’ perception of digital assets as legitimate investment vehicles? Pizzola: It has deterred participation from financial institutions that otherwise be interested with increasing regulatory clarity and the types of SEC staff actions that Commissioner Peirce mentioned. In general, it deters market participation and has left a vacuum of the professional and well-regulated space. Disclosure and customer protection, customer asset segregation requirements, registration, recordkeeping, and reporting in the drafted Act would really professionalize the space and address identified concerns.
Representative Salinas (D-CA): How can the CFTC and SEC be expected to meet the expectations of the Act without additional resources? What are the potential harmful consequences of establishing a more regulated market structure that cannot be properly enforced? Miller: Funding market regulators has been a great return on investment and been proven over the years. If we are going to add responsibilities, we have to add resources; Piwowar: I defer to Chairman Atkins’ response in Senate Appropriations, but the SEC is already redeploying assets from some enforcement staff that have been doing some of these cases that should have been focused on protecting consumers. It started, under Acting Chairman Uyeda, the Cyber and Emerging Threat Unit that specifically focuses on these types of things and redeploying resources is one way to do that.
Representative Taylor (R-OH): What is the value of digital assets today, and their potential future value beyond trading on an exchange? Ching: Tokens are an incredibly neutral way to interact on a blockchain. They provide governance features, staking features, which is security, as well as opportunities to do payments and represent digital identity and verification of digital identity. There are new entrepreneurs and new ideas in these areas to support new applications. Innovation supports the global economy by making these products accessible from a larger standpoint. We are very excited about this Committee’s work on token issuance and management to make these innovations possible.
Representative Taylor (R-OH): Do you share concerns about the fairness of enacting a comprehensive cryptocurrency framework using the resources of all Americans before ensuring it is accessible to all Americans? Is it the case that until we ensure everyone has access to the Internet, they will not be able to fully participate in the digital asset economy? All: Yes; Miller: Blockchain provides an opportunity for inclusion and access to financial services. If that is the promise of it, then we need to distribute it and deliver it to those who need to access it. I am exceptionally pro Internet and pro blockchain legislation.
Representative Taylor (R-OH): How does the lack of a federal framework and current patchwork of state licensing regimes force regulators entrepreneurs to focus on regulation over operations? Miller: There are at least forty states that have clear licensing requirements for many types of digital asset businesses that involve transferring assets between customers. In certain states, it can be a multi-year process. The cost estimate, if someone wants a fifty-state program, can be millions of dollars. It is a burden that many have faced and decided not to start their business in the U.S.
Representative Taylor (R-OH): Has there been an estimate of the cost that goes into building the rulemaking framework? Piwowar: I have not seen an overall cost, but both Commissions are required by law when they engage in particular rulemakings to look at the cost and benefits of each of the particular regulations being put in place on an individual basis.
Representative Johnson (R-SD): Are the CFTC and SEC able to handle dual registration, and does it work for stakeholders and market participants? Pizzola: Yes, it does work. Numerous financial institutions are dually registered with both, such as dual FCMs and broker-dealers, swap dealers, and security-based swap dealers. While the Commissions could do more in harmonization, deference, and coordination, many mechanisms are already in place to minimize the regulatory burden and cost of dual registration. The CFTC has capital requirements that incorporate by reference SEC requirements for dual registrants, easing compliance with both regimes. The SEC has a time-limited no-action position allowing compliance with CFTC security-based swap reporting requirements in lieu of its own. Portfolio margining also reduces burden for entities with offsetting positions in related products within each agency’s jurisdiction, such as Treasuries and Treasury futures. These tools exist today and could apply under a dual registration framework in the Act.
Representative McClain Delaney (D-MD): Are there structural elements within the MiCA framework, such as rules preventing market abuse and involving traditional banks, that we could consider incorporating into the Act to enhance its overall effectiveness? Piwowar: I am not familiar with specific provisions of MiCA, but the SEC does learn from what other regulators do. The SEC has an Office of International Affairs that regularly works with regulators overseas, either bilaterally or multilaterally, through an organization called IOSCO, where we learn from the mistakes of others. In some cases, there is a second-mover advantage.
Representative Mann (R-KS): How does the CFTC address potential conflicts of interest with current registered entities and registrants? Pizzola: There are a variety of mechanisms for addressing conflicts of interest within the CEA. For exchanges, a Core Principle requires DCMs to have policies, procedures, or a program in place to mitigate and a procedure to resolve conflicts of interest in the exchange’s decision-making process. There are also more prescriptive requirements for FCMs, including policies and procedures to disclose any material incentives or conflicts of interest to their customers regarding decisions to transact in the markets. A very robust regime is in place today to ensure conflicts of interest are mitigated or disclosed at both the exchange level and the broker intermediary level.
Representative Mann (R-KS): What about digital assets compared to other commodity markets warrants expanded regulatory oversight? Pizzola: Many commodity markets do not have centralized exchanges similar to those that exist for securities and futures. A lot of commodities are commonly bought and sold in OTC bilateral transactions. Digital assets often trade in a manner similar to securities and futures contracts, both in being available for trading on centralized exchanges and in being more readily accessible to retail and more widely traded by retail. Ease of access also brings a dynamic of more of a need for retail protection than we would maybe see in other markets. It might make more sense for states to regulate other commodities where those transactions in the spot markets are taking place at a single physical location within the state. Crypto assets are inherently borderless, an interstate problem that requires federal regulation in a way that other commodities perhaps do not.
Representative Budzinski (D-IL): How could a regulator protect customers in a truly decentralized environment, where there is no responsible entity and no traditional custody of assets, if decentralized finance or DeFi is excluded from regulation under provisions of the Act? Piwowar: One answer from the SEC to DeFi operating without a regulated entity was smart contracts, basic computer code that routes orders as customers intend. The code does take transaction-based compensation, which meets the legal definition of a broker-dealer, so some claimed DeFi may not be truly DeFi. The Act includes a study to examine such issues, as even experts do not yet have clear answers, and both agencies are still learning and evolving; Pizzola: It is appropriate to continue studying DeFi as an area of innovation we do not want to be quashed by rushing to regulate it in the same way as centralized markets. I would also agree that if you have activities that closely resemble activities taking place in a more centralized market, it would question whether it truly is DeFi. One unique aspect of DeFi that warrants regulating it differently from centralized finance is that under a truly decentralized setup, you would have participants self-custody. They would not be giving control over their assets to a third party, a fundamental difference from intermediaries that are regulated under the Act, where they are taking custody of customer funds. We need to ensure segregation and customer protection measures are in place; Miller: Current regulators have statutes that give them the authority to do something here, such as a safe harbor or pilot program. But the benefits of those is they get to put conditions on them, and those conditions might look like the Act in certain respects.
Representative De La Cruz (D-TX): Why is the Act critical to farmers and ranchers? Do you agree we need a regulatory infrastructure for producers to use these tools? Miller: Payments and the flow of transactional finance. Producers want access to credit alongside easy and transparent payments. They do not want to be stuck behind a broker or an agent unnecessarily; Ching: It means faster payments for their products. Infrastructure on blockchain is immensely much more efficient than traditional payment methods to get out to us. You can send money around the world for 1/100th of a cent and have it settled in under a second and maybe simultaneously. It is globally accessible, and not limited to one area or another. It is crucial to support this technology and also build on program infrastructure. There is no credit risk nor other settlement risk that comes into play. It is a much more efficient financial infrastructure; Pizzola: There are many real world use cases of being able to have instantaneous payments. It’s a very promising technology that can allow for growth.
Representative Riley (D-NY): What are the best ways to address concerns, particularly with respect to the Act, about digital asset trading on margins with high leverage? Piwowar: During the Financial Crisis, there was too much leverage in the system that regulators did not know about, with the OTC derivatives market holding the real credit risk. The law at the time prohibited the SEC and CFTC from collecting information on that market. Dodd-Frank addressed this through Title VII, which split jurisdiction, similar to today’s swaps and security-based swaps discussions. While the front end could have been stronger, regulators now have tools to see the levers in the system. Many exposures were with banks, and the recent response was to keep crypto out of banks over fears it could bring them down. But in the case of Silicon Valley Bank, it was almost the opposite. Crypto actually removes credit, market, and systemic risk concerns, and the Act is working in the right direction; Ching: DeFi has more freedom around products, and the Act will help clarify consumer protections. Another advantage of DeFi is transparency.
Representative Feenstra (R-IA): What would you say to banks concerned about engaging with crypto markets due to the lack of clear trade surveillance, market monitoring, and market conduct obligations? Miller: Banks want to ensure that they have clarity from their regulators that they are permitted to operate in any given asset class. With more clarity around the types of products the CFTC and the SEC are regulating, regulators get more and more comfortable about giving the banks the ability to deploy capital into these markets. That ultimately brings up liquidity, and resiliency of markets with more participants.
Representative LaMalfa (R-CA): What Core Principles applied to digital exchanges in the CLARITY Act are similar to the CFTC’s? Pizzola: Key Core Principles in the Act that apply to DCMs include requirements to provide a competitive, open, and efficient market to protect on-exchange price discovery, timely publication of trading data, and monitoring to prevent manipulation, price distortion, and abusive practices. These mechanisms have supported the success of CFTC-regulated markets. The Act’s inclusion of these principles is promising for robust digital commodity markets and appropriately adds principles tailored to digital assets, such as disclosure of digital asset economics, source code, and transaction history, which are not applicable to other commodities. The Core Principles ensure exchanges are well-run through recordkeeping requirements, system safeguards, obligations to undergo examinations, and financial integrity and resourcing standards. These allow regulators like the CFTC to examine records, assess financial wherewithal, and ensure there are no cybersecurity or system safeguard concerns.
Representative Thanedar (D-MI): Where does the CLARITY Act improve upon FIT21, and where does it take a step backwards? Miller: The Act provides direct and clear registration requirements that tells businesses, founders, and entrepreneurs where to go and which licenses they need. It also creates space for innovation around decentralized finance and instructs regulators to continue thinking about that topic while leaving space for innovation. Those are two critical components.
Representative Rose (R-TN): Regarding Section 109 of the Act, which pertains to international cooperation, what safeguards would the SEC likely implement when entering into information-sharing agreements with foreign regulatory authorities? What measures would be taken to ensure that sharing sensitive information does not compromise U.S. national security or the proprietary business interests of digital asset companies? Piwowar: The information sharing agreements with the SEC are primarily in the enforcement context and involve information about fraud that is global in nature. If someone perpetrates fraud from one country that affects U.S. investors, and the proceeds are placed in a bank or financial institution in another country, these agreements allow the SEC to learn from regulators where the fraud was being perpetrated, to try to stop the fraud, and to work with foreign regulators to freeze bank accounts and recover customer money.
Representative Rose (R-TN): Can you speak to the four joint rulemakings required by the Act and explain why it is essential for the CFTC and SEC to coordinate on these matters? Are joint rule makings not ideal but inescapable? Piwowar: I recommended narrowing the amount of actual joint rulemaking. Joint rulemaking can be difficult. Talk to the staff and see how much can be done on the front end, because it slows things down on the back end. Their time could be better spent implementing the regulations rather than writing them. It is not that they do not work well together, but they have different authorizing statutes and different ways of looking at things. There are some issues where the SEC and CFTC just have to get together and do it. One example is futures contracts on stock market indexes, where the SEC and CFTC had to come together, under frameworks like Shad-Johnson, to hammer out jurisdiction. The more these issues are handled on the front end, the quicker the rulemakers can get things done; Miller: We are trending toward a single marketplace with equities, cryptocurrencies, and other tokenized assets. If an exchange is registered with both agencies, they need to identify a primary regulator and determine the role of the other. I agree with Commissioner Peirce that the more instruction included in the legislation, the better.