SENATE AG COMMITTEE HEARING
OVERVIEW
On July 10, the Senate Committee on Agriculture, Nutrition, and Forestry held a hearing entitled “Oversight of Digital Commodities.” The witness in the hearing was:
- The Honorable Rostin Benham, Chairman, Commodity Futures Trading Commission (CFTC)
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways, followed by summaries of opening statements and a summary of all proposed amendments.
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.
- The hearing focused on efforts to establish a regulatory framework for digital assets, including discussions on the need for federal oversight for digital asset commodity spot markets, resource needs for the CFTC, and coordination between the CFTC and Security and Exchange Commission (SEC). Additionally, issues such as the implications of Supreme Court decisions, consumer protection, and the regulation of decentralized finance (DeFi) were addressed.
SUMMARY
Opening Statements and Testimony
Chairwoman Debbie Stabenow (D-MI):
The trading of spot digital commodities like bitcoin and ether are not overseen by any federal regulator. These and other non-security digital assets account for most of the value traded in crypto markets. If recent history is any guide, we cannot afford to wait any longer to regulate these assets. This is why I have been working so closely with Senator Boozman to advance bipartisan legislation to give the CFTC regulatory authority over digital commodities. We must have clear rules of the road that allow good actors to innovate and grow, and financial regulators need the tools to stop abusive conduct before it happens. Crypto firms must safeguard customer assets, hold sufficient capital reserves, and abide by rigorous cybersecurity standards, just like traditional financial market participants. Customers should have access to accurate information about their investments, presented in a way appropriate for their level of experience. The CFTC needs adequate permanent funding to oversee digital commodity markets. Our bill takes a different approach from the House and focuses on filling the regulatory gaps in overseeing digital commodities.
Ranking Member John Boozman (R-AR):
I believe the CFTC is the right agency to oversee spot digital commodity markets. Policy makers must protect investors and provide regulatory certainty for businesses needing to maintain their operations in the United States. I am committed to continue working on legislation that gives the CFTC the authorities it needs. Digital commodities and regulatory issues they raise are complex and not well understood. I believe we must have broad support within the community we wish to regulate if we ultimately want to protect consumers and innovation.
The Honorable Rostin Benham, Chairman, Commodity Futures Trading Commission:
I have observed the digital asset market evolve significantly, expanding and collapsing with periods of high volatility. It has also facilitated countless scandals and fraudulent activity, some very small and typical, others massive in scale and profile. What has concerned me most throughout the expansion of this digital asset class is that while everyday Americans fall victim to one digital asset scam after another, there remains no completed legislative response. I believe the single most important thing I have done, and continue to do, is advocate to this body to fill the regulatory gaps. Congress must act quickly in order for regulators, like the CFTC, to provide basic customer protections that are core to U.S. financial markets. Further, based on my observations as Chairman, I do not believe inaction will quash public interest for digital assets. It will only result in greater risk to our financial markets and investors. Federal legislation is urgently needed to create a pathway for a regulatory framework that will protect American investors and possibly the financial system from future risk.
Discussion
Debbie Stabenow (D-MI): If Congress does not act to fill this regulatory gap, does any federal regulator have the authority for regulate the market for crypto assets like bitcoin that are not securities? Benham: The short answer is no. The problem is if you measure the crypto economy by market capitalization, upwards of 70 to 80 percent of the market are not securities, which means there is no direct federal oversight. The problem with our enforcement authority is it is reactive. We have a very successful enforcement record, but we are only coming in after the fact, meaning money is lost and we are not able to get it back to customers.
Debbie Stabenow (D-MI): If we give the CFTC the authority to oversee spot digital markets, how much do you anticipate will be needed in resources in terms of annual appropriations for you to set up the regulatory regime? Benham: We have largely estimated we would need $30 million in the first year, and $50 million in the second year.
Sherrod Brown (D-OH): If Congress expands the CFTC’s jurisdiction, how will the CFTC look at for consumers? Benham: If you look at our enforcement record over decades, it is split into fraud and manipulation. On the fraud side, the fraud cases we bring are mostly retail oriented. It is typically directed at vulnerable retail investors, so we have built a very robust officer of consumer education and outreach. If we do get authority, we will have to change the way we communicate out to retail.
Joni Ernst (R-IA): How does the agency plan to apply the Supreme Court’s decision of reversing Chevron? Benham: We will certainly do everything to comply with the decision. If you look at the Commodity Exchange Act, there is a fair amount of discretion given to the agency in certain areas. We will review our rules and decisions and ensure compliance.
Deb Fischer (R-NE): Do you have any concerns about federal legislation preempting strong and effective state laws regarding digital assets, and is the CFTC equipped to fill any gaps that might exist there? Benham: Having a national market system is more efficient and effective to bringing liquidity and trading to a single point. I think there is a balance between creating some federal system and ensuring we are preserving elements of states’ rights.
Cory Booker (D-NJ): What is the consequence of not getting this legislation done in the coming months? Benham: Our number one priority and responsibility is to protect customers, and, if we do not have the authority, we will continue to see fraud, manipulation, and individuals across the country losing money.
Tommy Tuberville (R-AL): Can you assure us that your event contracts rule will encourage innovation and not attempt to limit event contracts? Benham: I will ensure we support innovation in any rule in the future.
Tommy Tuberville (R-AL): If you grow corn, it does not get taxed until you sell it. Do you think taxing bitcoin mining before you sell it is fair? Benham: It does not sound fair by your analogy, or there is not a clear analogous policy around it. Perhaps, there is a policy reason the IRS is looking at through their lens, but I will live that to the IRS.
Roger Marshall (R-KS): Why is crypto the currency of choice for criminals? Benham: Essentially, it is a borderless currency, so it is easy to move across borders.
Roger Marshall (R-KS): Do you feel it is just as important for the crypto industry to know their customer as it is for banks? Benham: Yes.
Roger Marshall (R-KS): Do you support the SEC dictating what is considered a digital commodity under the CFTC’s jurisdiction, and do you think it is a good use of the federal government’s time to have two agencies fighting over the designation of digital commodities? Benham: No, but it is important that we have in the past worked together to make determinations around certain assets that exist in a grey area, around what is a security and commodity.
Roger Marshall (R-KS): Do you share the concern that there will be a fight in the court between the SEC and CFTC over jurisdiction of digital assets since there is not complete clarity in proposed legislation? Benham: I do share that concern. We want to get these contracts and tokens on a regulated market as soon as possible.
Roger Marshall (R-KS): Would it be easier if all authority was just given to the CFTC? Benham: I would be happy with that. I think we have the capacity, expertise, and experience to do that. There would have to be some definitions of what is classified as a commodity and security to accomplish that outcome.
Kirsten Gillibrand (D-NY): How does the CFTC coordinate with the SEC in regulation, rulemaking, and enforcement in the current regulatory vacuum? Benham: Ultimately if Congress does not fill this gap, we will continue to see enforcement cases build, and consumers will be unprotected. We also work closely with the Department of Justice. On the regulatory side, it is much more limited, and that is why we are here today.
Amy Klobuchar (D-MN): Are on chain activities and DeFi harder to regulate and do you have any recommendations how we should approach DeFi oversight? Benham: It is certainly not centralized, and it raises interesting policy and legal about what we want to do from an elected legal perspective and regulatory perspective. We want to properly regulate it but not overregulate it because there could be potential innovations and efficiencies developed from it.
John Boozman (R-AR): Is the CFTC not equipped or not capable to handle spot digital commodity self-certification? Benham: We are certainly equipped and certainly capable. If this Committee acts and provides additional authority to regulate these markets, we will certainly need additional funding to do it.
John Boozman (R-AR): Should we focus on regulating centralized exchanges? Benham: The priority should be centralized exchanges. The larger challenge as it relates to customer relations is fraud and manipulation is happening around these centralized exchanges. I would focus on that area because that gap is most concerning to me. DeFi is more challenging, and we have had our fair share of complaints from the industry. I am a believer there is a regulatory nexus for DeFi, and we would have to look at it given its unique nature. I disagree with the notion DeFi should live in a regulatory vacuum.