HOUSE FINANCIAL SERVICES COMMITTEE HEARING
OVERVIEW
For questions on the note below, please contact Edmund Perry at (202) 547-3035 or Ruth Lunsford at (434) 238-7224.
On September 18, the House Financial Services Committee Subcommittee on Digital Assets, Financial Technology, and Inclusion held a hearing entitled “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets.” Witnesses in the hearing were:
- Michael Liftik, Partner, Quinn Emanuel Urquhart & Sullivan LLP
- Dan Gallagher, Chief Legal, Compliance, and Corporate Affairs Officer, Robinhood Markets, Inc.
- Teddy Fusaro, President, Bitwise Asset Management
- Jennifer Schulp, Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives
- Lee Reiners, Lecturing Fellow, Duke University
Legislation noticed for the hearing:
- H.R. 5741, the “Uniform Treatment of Custodial Assets Act”
- H.R.___, the “New Frontiers in Technology (NFT) Act”
- H.R.___, the “Securing Innovation in Financial Regulation Act”
- H.R.___, the “Bridging Regulation and Innovation for Digital Global and Electronic (BRIDGE) Digital Assets Act”
- H.R. ___, To codify the special purpose broker dealer, and for other purposes
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 the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Today’s hearing featured discussions on the SEC’s approach to regulating digital assets and the challenges faced by market participants in navigating compliance and registration processes.
- Proponents of a more supportive regulatory framework argued that the SEC’s current approach is overly politicized and enforcement-heavy, which stifles innovation and drives companies offshore. These advocates believe that bipartisan legislation, such as the Financial Innovation and Technology for the 21st Century Act (FIT21), is essential for fostering a competitive and innovative market environment.
- Other witnesses cautioned against loosening regulatory oversight, highlighting the risks associated with digital assets, particularly regarding illicit activities and market manipulation. They argued that the crypto industry often seeks to evade regulation and that existing frameworks should be strengthened rather than restructured, calling for robust enforcement of current regulations to protect consumers and uphold market standards.
SUMMARY
Opening Statements and Testimony
Subcommittee Chairman French Hill (R-AR-02):
The SEC inserting politics instead of being an independent regulator is troubling, injecting even more confusion and uncertainty into the markets. These politicized enforcement actions are creating a lose-lose situation. The SEC rulemaking agenda has been broad and hard to implement, failing to provide clarity while imposing significant compliance burdens on digital assets. The apparent prejudice against digital assets is evident through the US losing 14 percent of blockchain developers since 2018. Implementing a regulatory framework does not mean we are against the SEC going against bad actors or modernizing existing rules to incorporate digital asset securities and other unique instruments. We are against SEC enforcement abuse that makes it hard for legitimate actors who are trying to follow the rules in digital assets.
Subcommittee Ranking Member Stephen Lynch (D-MA-08):
The narrative that the SEC is politicized is ironic given the $119 million the crypto industry has contributed to federal elections. The industry seeks to evade regulation, pushing for exemptions while facing SEC lawsuits that establish digital assets as securities. A lack of oversight stems from noncompliance, and companies should not shape laws for their benefit. Legislation that weakens the SEC’s authority could enable criminal activity, as the crypto industry has a track record of insolvency crises, mishandling funds, and market manipulation. Additionally, a proposed bill to prevent regulators from requiring financial institutions to record crypto assets as liabilities oversteps and opposes necessary guidance. I urge my colleagues to refrain from being a mouthpiece.
Michael Liftik, Partner, Quinn Emanuel Urquhart & Sullivan LLP:
Cryptocurrency is a 21st century asset that necessitates 21st century regulation. The innovators in this space need certainty and predictability, as do their customers and the public. As new assets emerge or as financial innovation changes market processes, the SEC routinely engages in rulemaking to address it. Our markets are stronger with vigorous and vigilant law enforcement, but since 2013, the SEC has missed its chance to lead in digital asset regulation, opting for a reactive enforcement strategy instead of issuing new rules or guidance. This has stifled innovation and pushed companies offshore, ultimately harming U.S. consumers.
Dan Gallagher, Chief Legal, Compliance, and Corporate Affairs Officer, Robinhood Markets, Inc.:
Cryptocurrency is a multi-trillion-dollar market involving millions of Americans. The SEC’s enforcement-focused approach harms consumers and innovation while weakening the U.S. competitive position. The SEC should establish a basic provisional regulatory regime for digital assets, including registration requirements, books and records requirements, anti-fraud protection for consumers, custody requirements, and transaction reporting. Only Congress can truly provide the necessary long-term regulatory clarity for digital assets.
Teddy Fusaro, President, Bitwise Asset Management:
We believe that investors benefit from the freedom to choose to invest in cryptocurrencies and digital assets through the familiar and widely accessible format of exchange traded funds (ETFs). ETFs have been one of the most successful financial innovations of the past thirty years, but we believe that the approval of bitcoin ETFs came too late. Investors would have benefited from these approvals many years ago prior to seeing many Americans send their hard-earned money to unregulated and offshore-based cryptocurrency trading platforms. We urge the SEC and the members of this Subcommittee to consider the ways in which we can continue to make these regulated investment vehicles available to Americans with more underlying digital assets packaged in the product. The regulatory regime in Europe offers businesses clarity and the ability to list and launch multiple types of digital asset ETFs.
Jennifer Schulp, Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives:
The SEC’s approach to digital assets under Chairman Gary Gensler’s leadership can be characterized as an enforcement first, make rules never strategy. Existing rules do not provide clear guidance to market participants as to how the SEC’s rules are even applicable. The SEC has claimed essentially limitless jurisdiction over digital assets and insists upon compliance with unworkable rules. Rulemaking by enforcement is suboptimal for many reasons, including that it creates worse rules. An enforcement-first strategy creates a hostile environment for innovation. When actions are brought for failing to comply with unworkable rules, it is impossible to operate in these markets. That hostility is heightened by the SEC’s own enforcement misconduct, including material misrepresentations to a federal district court and raising the question of whether the agency is acting in good faith.
Lee Reiners, Lecturing Fellow, Duke University:
The crypto industry seems to think regulatory change will compel a great product. This notion has led the industry to become mired in endless policy debates and fitful legislative efforts that only benefit their lawyers and lobbyists. Industry-friendly legislation would hand crypto market oversight to the CFTC and would gut our federal securities laws in the process. Cryptocurrency platforms are fundamentally at odds with federal securities laws.
Financial Services Committee Ranking Member Maxine Waters:
I do not care if you deal in paper stock certificates or if you are dealing in crypto coins, you must comply with securities laws.
DISCUSSION
Hill (R-AR-02): What was it like working with the SEC? Gallagher: We spent about a year and a half in meetings with SEC staff, crafting what we thought was a workable model for registration using the special purpose broker regime established by Chairman Clayton, but it became clear that this approach does not work for digital assets. In early 2023, we heard from the Chairman’s office there was no reason to continue discussions. I would argue that it would be in everyone’s best interest to use Section 36 to create a provisional registration and oversight regime, covering the basics like books and records.
Lynch (D-MA-08): How has the industry’s disregard for securities law contributed to scams, and what would happen if the SEC adopted a permissive regulatory framework for crypto? What is the safest way to regulate something that is purely speculative and resembles a collectible more than a currency? Reiners: A lenient regulatory regime could give a false sense of legitimacy, attracting less sophisticated consumers who may fall victim to scams. The best solution is to integrate it within the securities regulatory framework to ensure basic investor protections that have been in place for over ninety years.
Lucas (R-OK-03): What impact does a high turnover rate at the Commission have on morale and market participants? What about staff turnover in the enforcement division? Gallagher: The departure of capable staff is concerning and negatively affects morale, which is a significant issue. A 2023 report found that over two-thirds of enforcement staff felt they lacked the resources to do their jobs, and turnover only worsens this problem, impacting other SEC functions.
Waters (D-CA-43): Since Chair Gensler took office on April 17, 2021, the SEC has filed over 100 crypto-related enforcement actions, securing more than $5.5 billion in settlements. Can anyone point to an action that was settled incorrectly? Reiners: Their track record is very strong.
Davidson (R-OH-08): What issues have you found with the current custody framework? Have any broker-dealers successfully utilized this framework? Fusaro: Established custody banks are effectively barred from digital asset markets, making it difficult to offer custody services for digital assets. Additionally, the ETF structure prevents broker-dealers from handling crypto, limiting our ability to create effective exchange-traded products;. Schulp: No broker-dealers have successfully used this framework. While two have been approved, one is only now beginning to offer partial services, and the other, Prometheium, has not operated with most of its services.
Torres (D-NY-15): What is the legal standing for the SEC’s claim that most crypto tokens are “digital asset securities”? Gallagher: They created the term. There is no real equivalent for securities regulation for a token like ether, as there is no controlling entity at the center of the network.
Torres (D-NY-15): SEC Accounting Bulletin 121 requires custodian banks to put custodial digital assets on their balance sheets. Is this considered good accounting practice for a custodian to put custodial assets on its own balance sheet? Gensler seems to think that using blockchain magically transforms a commodity into a security. The Supreme Court says the substance of the transaction matters. Is it fair to say the economic reality of purchasing a collectible is different from buying a security like Apple stock? Schulp: No, that is typically not how custody is handled under generally accepted accounting practices; Gallagher: Buying crypto is very different from buying a security.
Rose (R-TN-06): Can Robinhood list digital asset securities and non-securities on the same platform if there is uncertainty about a given token’s status? How can Promethium argue that it can make tokens they claim are securities available to the public if they have not been registered? Gallagher: No, that is a nuance we requested relief for in our application. The current special purpose broker letter only allows handling digital asset securities, not non-securities. You cannot just make a non-security a security, so I do not know how they can make that claim.
Rose (R-TN-06): Can Robinhood or any U.S. broker-dealer list unregistered securities for the public without exemptive relief from the SEC? Gallagher: Right now, it is impossible for a regulated broker to deal in both. The current custody, net capital, and customer protection rules do not accommodate blockchain infrastructure, so rulemaking is necessary. As a provisional measure, the commission could use Section 36 to create a tailored registration regime that covers the basics of oversight, registration, and record-keeping. Currently, the Exchange Act’s provisions do not accommodate digital assets.
Timmons (R-SC-04): Did the SEC establish a standard to determine if NFT sales are considered securities? What is the impact of the SEC’s enforcement actions without clear guidance for NFT companies? Liftik: The Howey test is not effective for digital assets, especially NFTs. A buyer’s intent cannot change a non-security into a security, illustrating the flaws in the SEC’s approach. It creates uncertainty, making compliance feel like a roulette wheel. Nickels (D-NC-13): What would be an effective way to regulate the rapidly evolving crypto industry, and how could clearer SEC guidelines have impacted your company? Gallagher: The key is transparency and regulatory certainty, which we lack right now. Regulation by enforcement does not provide that clarity. Companies like Robinhood want to comply with regulations; we see it as a competitive advantage. The SEC should use its exemptive authority to create a provisional regime until Congress can enact comprehensive legislation.
Nickels (D-NC-13): Why is the SEC approaching SAB 121 this way, bypassing certain balance sheet reporting requirements, and what is the impact of this confusing method? Schulp: I cannot explain the SEC’s reasoning, as it is indeed confusing and ineffective. Rather than revising or clarifying guidance, they have rescinded it entirely, leaving us with non-binding staff guidance from SAB 121.
Steil (R-WI-01): The SEC recently amended its complaint against Binance, clarifying that when it refers to “crypto asset securities,” it does not mean the crypto asset itself is a security. What are the implications of this amendment for market participants currently under SEC scrutiny? Gallagher: I found the amendment quite odd; it suggests the SEC has been using the term without a solid basis. The focus is now shifting toward secondary market transactions. Notably, the Ripple case indicated that secondary market transactions do not necessarily constitute investments.
Steil (R-WI-01): We have discussed how current disclosure requirements for stocks do not fit digital asset projects well. Can you give an example of this mismatch? Schulp: The SEC has modified requirements for other asset types, like asset-backed securities, to improve fit. However, the current disclosure regime does not cover vital information for token purchasers, such as tokenomics and supply details. This leaves investors lacking crucial information, and the registration requirements often demand data that may not even exist.
Steil (R-WI-01): The SEC has enforced actions against nearly all U.S.-based digital asset platforms, including those trying to engage with the SEC proactively. What message does that send to startups and developers wanting to enter the U.S. market? Schulp: The message is clear: go away. Foster (D-IL-11): You mentioned that Robinhood has made tough choices about not listing certain tokens. Can you describe the review process you follow for determining whether to list digital assets? Could you explain the criteria you use to determine which tokens are acceptable? Gallagher: Robinhood has a listing process managed by a committee that evaluates potential tokens for listing. One of the key factors our listing committee considers is whether the SEC has publicly weighed in on the security status of a token. Even though we disagree with the SEC’s views, we take their stance into account. I have memos from a national law firm stating that certain tokens are not securities.
Foster (D-IL-11): Do you consider the use of these tokens in illicit finance as a factor? Gallagher: Absolutely. We have a robust Anti-Money Laundering (AML) and Know Your Customer (KYC) program at Robinhood. Our committee spends considerable time discussing the potential role of cryptocurrencies in illicit activities, such as ransomware, and we consider the anonymous and permissionless nature of these assets, as well as their ability to move across chains.
Green (D-TX-09): In many of these lending protocols, the SEC and courts have found that they are indeed securities. Given that new and existing crypto firms may just set up overseas, do you still stand by that? You mentioned that we might be looking at a situation similar to the 2008 financial crisis if we do not address these issues correctly. What do you foresee happening if we do not get it right? Reiners: Yes. I believe we could see another, potentially larger, event similar to FTX that could inflict real damage on the financial system, with interconnections much like those we witnessed in 2008; Gallagher: There is currently no effective regulation in place to oversee these markets. I urge actual regulation and encourage Congress to take legislative action on this matter.