SENATE BANKING COMMITTEE DIGITAL ASSETS SUBCOMMITTEE HEARING
Overview
For questions on the note below, please contact the Delta Strategy Group team.
On February 26, the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Digital Assets held a hearing entitled “Exploring Bipartisan Legislative Frameworks for Digital Assets.” Witnesses in the hearing were:
- Lewis Cohen, Partner, Cahill Gordon & Reindel LLP
- Jonathan Jachym, Deputy General Counsel and Global Head of Policy & Government Relations, Kraken Digital Asset Exchange
- Jai Massari, Chief Legal Officer, Lightspark
- Timothy Massad, Research Fellow and Director of Digital Assets Policy Project, Kennedy School of Government, Harvard University
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways, followed by summaries of opening statements as well as 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 the hearing. Each is discussed in further detail in the Discussion section below.
- The hearing discussed stablecoin legislation to establish clear protections and resolution processes to ensure market resiliency and trustworthiness while maintaining international competitiveness and leadership, particularly in the context of Europe’s Markets in Crypto-Assets Regulation (MiCA).
- Senator Lummis (R-WY) emphasized the need to provide clarity and market regulation for stablecoins, citing the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, Responsible Financial Innovation Act (RFIA), and the House’s Financial Innovation and Technology for the 21st Century Act (FIT21) as good bills to start with.
- Senator Smith (D-MN) raised concerns about stablecoins and financial crime compliance under the GENIUS Act. Massad highlighted that since stablecoins can be transferred outside of centralized intermediaries, current financial crime compliance frameworks face significant gaps.
- Witnesses, led by Massari and Massad, said there are some aspects of international frameworks that the U.S. may not want to replicate. Massari voiced her support the GENIUS Act, noting that the EU and UK stable coin proposals might have made mistakes in making reserve requirements too restrictive or too permissive. Massad suggested the U.S. can do better than the current GENIUS Act and Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act proposals because they fall short of what is needed to establish a robust regulatory structure.
- Senator Hagerty (R-TN) discussed how the clear the lack of clear rules around digital assets has stifled innovation and sent emerging industries offshore, weakening consumer protections by forcing activities into foreign jurisdictions that don’t have the U.S.-favored standards. Senator Tillis emphasized the barriers imposed on innovation in current regulation, warning against future legislation exacerbating the “flight to foreign jurisdictions.
Opening Statements & Testimony
Subcommittee Chair Cynthia Lummis (R-WY)
We want to promote responsible innovation while protecting consumers, with in-depth policy conversations about the intricacies of stablecoin and market structure policy. We are at a point where we can move forward, standing on the precipice of creating a bipartisan legislative framework for both stablecoins and market structure. I hope we can get both the RFIA and the GENIUS Act to President Trump for his signature this year, especially since the RFIA is largely aligned with FIT21. I am optimistic that the Senate Banking Committee will soon markup Senator Hagerty’s legislation, the GENIUS Act, co-sponsored by Chairman Scott, Senator Gillibrand, and myself. The GENIUS Act modernizes the U.S. dollar for the digital age, increases demand for U.S. debt, and makes payments faster and cheaper. The bill fully protects the dual banking system, ensuring parity between state and federal stablecoin charters.
Turning to market structure, I will work with Chairman Scott, our Subcommittee members, Senate Ag Committee Chairman Boozman (R-AR), House Financial Services Committee Chairman Hill (R-AR), and House Ag Committee Chairman GT Thompson (R-PA) to clearly define the line between a security and a non-investment contract commodity. We need to work with Senate and House Committee leaders to clearly define the line between a security and a non-investment contract commodity. We need to establish a clear path for digital asset exchanges to register with the CFTC.
Subcommittee Ranking Member Rueben Gallego (D-AZ)
Congress can deliver bipartisan legislative solutions for digital assets that promote innovation, strengthen U.S. competitiveness, protect consumers, and ensure financial system integrity. These innovations have the potential to enhance financial inclusion, streamline transactions, and spur economic growth, while also raising concerns about consumer protection, financial stability, and the appropriate role of government oversight. Congress has a responsibility to strike the right balance by fostering safe and responsible innovation while establishing clear guardrails to prevent abuse, fraud, and systemic risk. This is not about picking winners and losers among technologies or industries but about creating a stable and predictable regulatory environment that allows legitimate enterprises to grow while protecting consumers and financial markets.
The digital asset sector is evolving rapidly, and the U.S. must lead in this space. Innovation should be encouraged while remaining safe, transparent, and accountable. Without robust oversight, bad actors can exploit loopholes, undermine trust, and harm consumers and investors. Digital assets must not be used to circumvent existing laws on money laundering, tax evasion, or illicit financing. We must ensure innovation is productive and beneficial to everyday Americans, such as the growth of meme coins being driven by flashy headlines and social media trends, not by efforts to help traditionally unbanked communities gain financial access. Bipartisan legislation should provide clarity and consistency, allowing innovators to operate with confidence while ensuring regulators have the tools needed to address risks effectively. The growth of digital assets must not come at the expense of the stability of the traditional banking system. Stablecoins and other digital assets linked to the financial sector could pose risks if not properly managed, as it is essential to ensure that digital asset usage does not jeopardize depositors or lead to government-backed bailouts for banks. Congress needs to work together to craft legislation that meets these goals and ensures America’s leadership in the digital economy.
Lewis Cohen, Partner, Cahill Gordon & Reindel LLP
Innovation in the digital asset sector has raced ahead of the legal and policy frameworks that were designed decades ago for traditional finance. This has resulted in divergent regulatory approaches, inconsistent agency pronouncements, and a fragmented legal landscape that throttles U.S. competitiveness. The uncertain regulatory environment has also left consumers and digital asset users at risk. A clear, practical, and flexible federal statutory regime is urgently needed to regulate digital asset activity in both primary and secondary markets.
Unlike securities, which cease to exist if their issuer is dissolved, digital assets continue to circulate indefinitely on global decentralized networks. Without an issuer required to register and disclose information, current law struggles to address secondary trading of digital assets, leading to confusion over the boundary between securities transactions that fall under SEC oversight, and commodity-like activity. The Howey Test established that fundraising schemes where a person invests money expecting profits from the efforts of a promoter are considered securities transactions, even when the items sold are not themselves securities. A sensible regulatory framework must distinguish between fundraising activity that results in a securities transaction and a non-security ancillary asset sold in that transaction. A change in law is necessary to require sellers of ancillary assets, the issuers of these securities transactions, to provide ongoing disclosures subject to SEC oversight. Once the ancillary assets become widely traded and the fundraising team’s entrepreneurial efforts are no longer essential to maintaining the asset’s value, the disclosure requirements would cease. This framework, as outlined in the Lummis-Gillibrand legislation, would preserve the SEC’s critical role in capital formation and fundraising while also introducing new securities law-based disclosures from fundraising parties.
Jonathan Jachym, Deputy General Counsel and Global Head of Policy & Government Relations, Kraken Digital Asset Exchange
The first drafts of comprehensive market structure legislation were introduced in the Senate over three years ago, and since then, we have seen fraud, poor management, and business failures. We have also witnessed misguided regulatory attempts to oversee the industry through enforcement actions rather than sound policy development, which has driven innovation, investment, and market activity offshore. Bipartisan collaboration in Congress has persisted and the House passed FIT21 with strong bipartisan support, laying the foundation to finalize and deliver market structure legislation to the President’s desk this year.
Today, nearly ninety percent of digital asset market activity is conducted through centralized intermediaries like Kraken. Market structure legislation is critical to establishing a level playing field in consumer protection, security, and market integrity; a step that many other markets have already taken. Innovation in this industry evolves rapidly, and emerging areas will require further study and deliberation before finalizing policies. Solving every policy issue should not delay the establishment of a basic regulatory foundation for centralized markets in the U.S. and this critical first step must happen here in Congress. Effective market regulation should include: 1) spot market authority for the CFTC to register and oversee centralized intermediaries and secondary market transactions; 2) effective disclosure rules; and 3) clear jurisdictional cooperation between the CFTC and SEC. Jurisdictional lines in statute should not be overly complex; they should be clear, effective, and durable.
Jai Massari, Chief Legal Officer, Lightspark
Payments can and should function as seamlessly as modern technology allows, and stablecoins can help make this a reality, as they enable 24/7 dollar transfers online and are uniquely suited for digital commerce when properly regulated. Unlike bank deposits, stablecoins are fully backed by reserves, rather than FDIC insurance or the creditworthiness of an issuer. In an ideal system, users would not need to distinguish between stablecoins like USDC, USDP, or USDT, yet that is not the reality today. Legislation should ensure that stablecoins are backed one-to-one with high-quality liquid assets and have calibrated capital buffers and liquidity requirements. Issuers must be able to redeem stablecoins at face value, and in the event of resolution or bankruptcy, reserve assets should be segregated, beneficially owned by stablecoin holders, and quickly liquidated for orderly payout.
Stablecoin issuers should compete based on innovative payment use cases rather than how they structure their reserves. If reserve requirements are too loose, issuers lack incentive to innovate, while overly strict requirements make stablecoin issuance viable only for the largest institutions or those that can subsidize issuance through other business models. To strike the right balance, legislation should promote a competitive and diverse issuer landscape, allowing banks, bank affiliates, and non-bank issuers to participate with different business models. It should establish minimum operational and compliance requirements for all issuers, address conflicts of interest through limits on affiliate transactions, and impose enhanced standards for issuers accessing Federal Reserve payment systems and master accounts. It should also modernize our approach to financial crimes, compliance, and privacy protections, as the industry has developed new compliance tools, such as chain analytics and transaction freezing technologies, to meet Bank Secrecy Act (BSA) requirements for stablecoin issuers and money transmitters. Legislation should set strong, clear standards for illicit finance compliance and sanctions enforcement, while also allowing for flexibility and incentives to develop better financial crime and privacy solutions. This is a unique opportunity to establish a secure, competitive, and innovative framework.
Timothy Massad, Research Fellow and Director of Digital Assets Policy Project, Kennedy School of Government, Harvard University
There is broad agreement that clear regulations are necessary, but they must foster responsible innovation rather than fueling speculation and abuse. Stablecoins represent the most practical application of this technology to date, and legislation such as the GENIUS Act includes several important provisions, such as strict reserve requirements and limits on issuer activities. There are also significant deficiencies in the proposal, as it is substantially weaker than the McHenry-Waters proposal, which was negotiated between House Republicans and Democrats last fall, and it falls short compared to regulations in Europe and other jurisdictions. Prudential requirements in the Act must be strengthened, including how reserves are held and invested and whether regulators have sufficient authority to establish rules regarding capital, liquidity, and risk management standards. The bill limits state authority for licensing and supervision to cases where a state has a substantially similar regulatory framework, and an issuer holds less than $10 billion in market capitalization. This is a good concept, but the threshold should be lowered, and states should still be required to follow minimum federal standards.
The bill does not adequately address the bankruptcy process for a stablecoin issuer because as written, corporate bankruptcy procedures would likely apply, which could lead to long, drawn-out proceedings. While the Act prioritizes claims for stablecoin holders, it does not guarantee full recovery at the end of the process and should instead create a dedicated resolution process to ensure that holders receive their money quickly while minimizing collateral damage. It does not go far enough in addressing financial crime risks and the evasion of sanctions. While it is positive that it explicitly applies the BSA to stablecoin issuers, the BSA only applies to centralized intermediaries, and transactions can occur through centralized platforms in jurisdictions that do not comply with BSA-type rules. The regulatory perimeter must be extended, and more creative approaches are needed to tackle anti-money laundering (AML) and countering the financing of terrorism (CFT) challenges. It also lacks strong enforcement provisions, with three of the five largest U.S. dollar-denominated stablecoin issuers are offshore, including Tether. It should include clear enforcement mechanisms, robust criminal and civil penalties, and explicit extraterritoriality provisions to address foreign issuers operating outside U.S. jurisdiction. The Act lacks clear limitations on affiliate relationships and transactions, and it does not address how to ensure a level playing field among competing platforms. Consideration should also be given to allowing these platforms access to the central bank payment infrastructure to prevent large institutions from dominating the space.
The process of clear rules and guidance from the SEC and CFTC is underway, with the SEC dropping enforcement cases and launching a Task Force. These regulatory initiatives should develop before we go rewriting securities laws, as many market structure proposals could create more confusion than clarity regarding whether a digital asset is a security, a commodity, or neither and could undermine existing securities laws. There are alternative ways for Congress to enhance clarity in market structure without substantially rewriting securities laws at this time. The best course of action is to focus on stablecoin legislation first and allow existing regulatory efforts to take shape before taking on broader market structure reforms.
Discussion
Subcommittee Chair Lummis (R-WY): Why are most digital assets not classified as securities today? Has the Howey test historically required some kind of written or verbal legal relationship after the sale of an asset? Cohen: A security is characterized by the legal relationship between an issuer and the investor. When considering a share of stock, there is a legal relationship, though not necessarily a contractual relationship, that identifies who the issuer is. A security is a relationship that the law recognizes whether that is debt or equity. Most digital assets that are traded right now simply do not evince that relationship with any other person. The reason this is so important from a securities law perspective is that there is no one who can take permanent responsibility for the asset. This is unlike any security that exists. The Howey Test has historically focused on transactions that purported to be commercial in nature, and many digital assets have been sold in the same way. In none of those cases has any court stated that such a relationship makes an asset that is not a security an embodiment of a securities transaction. The law has not recognized or placed on non-security assets some characteristic of being a security simply because they were sold in digital assets.
Subcommittee Chair Lummis (R-WY): Where does the U.S. stand in comparison to other countries on setting up a framework for digital assets? How does the GENIUS Act put in place common sense credential standards for stablecoins? Jachym: We are behind, but in a strong position to catch up quickly. We have seen progress as a global company, witnessing major jurisdictions, including G10 markets, advance legislation, complete regulatory phases, and finalize rules; Massari: The GENIUS Act goes a long way in providing the foundational elements that will make stablecoins good money. Prudential standards for reserves and requirements for stablecoin redemption by issuers are essential to ensuring their stability and reliability. These are the factors that make stablecoins function effectively as money.
Subcommittee Ranking Member Gallego (D-AZ): What lessons or elements from international frameworks should Congress consider incorporating into the legislative approach to ensure U.S. competitiveness and innovation? Jachym: Regulation of centralized intermediaries is the most fundamental and basic step. There are common components in regulating centralized markets, but digital asset markets also present unique risks and opportunities. Registration, disclosures, market integrity rules, and operational resilience requirements are all core elements of market regulation, and we have seen other jurisdictions take this foundational step. The second component is simplicity. Instead of forcing traditional regulatory frameworks onto digital asset markets, many jurisdictions have adopted a straightforward approach, classifying this market and new asset class under the broad category of crypto assets; Massari: Some jurisdictions that have rushed to implement regulations for stablecoins and digital asset markets may have moved too soon and taken a backward-looking approach in their regulatory frameworks. Legislation should be designed with a forward-looking approach that reflects the full potential of stablecoins in enabling better and more efficient financial systems; Massad: Some jurisdictions that have moved ahead have implemented strong regulatory measures, and Europe has developed a stronger prudential and customer protection framework than what is currently proposed in the GENIUS Act or the STABLE Act. European authorities have more discretion to specify necessary rules across a variety of requirements, like stress testing and diversification requirements. One key aspect of Europe’s approach is the prohibition of interest payments on stablecoins, as allowing stablecoins to pay interest turns them into more of an investment vehicle, which raises complex regulatory issues. If stablecoins are exempt from being classified as securities, then permitting interest payments would create regulatory inconsistencies. Under the MiCA framework, a crypto asset does not include a financial instrument, and their definition of a financial instrument is very similar to the U.S. securities definition.
Subcommittee Ranking Member Gallego (D-AZ): What mechanisms should we consider so that if a stablecoin issuer fails, users can still get their money back quickly? Massari: This issue is not only a matter of fairness for stablecoin holders when something goes wrong, but a fundamental requirement to ensure that stablecoins function as reliable money and build consumer confidence. Just as in bank resolutions through the FDIC, where the priority is to give depositors access to their funds as quickly as possible, the same concept applies to stablecoins. Even with this priority, the bankruptcy process could still be lengthy. Reserve assets should be excluded from the bankruptcy estate so they can be paid out immediately rather than being tied up in a prolonged legal process, reinforcing confidence in stablecoins as a reliable form of digital money while also ensuring fair treatment for issuers.
Senator Smith (D-MN): Would the GENIUS Act extend obligations on issuers to detect and prevent money laundering and terrorism under the BSA, and what would happen to those obligations once the stablecoin is issued? Massad: Yes, the obligations in the GENIUS Act would extend to issuers. The challenge with stablecoins is that they can be transferred without passing through a centralized intermediary, but the entire BSA, AML, and CFT framework relies on centralized intermediaries, ensuring that all transactions are processed through regulated entities that are responsible for compliance checks. To address this, stablecoin issuers could be required to actively monitor transactions, ensuring compliance with financial crime regulations. Another approach involves designing smart contracts so that transactions cannot be completed unless the parties involved have been effectively cleared by an appropriate authority. We need to ensure compliance while maintaining the functionality of stablecoins in a way that aligns with broader financial security objectives. The GENIUS Act, as currently written, does not require a participant that facilitates transactions after issuance to meet BSA obligations, unless they are classified as a money services business (MSB) registered with Treasury.
Senator Smith (D-MN): Should the GENIUS Act or other legislative options require stablecoin issuers to be vetted for character and fitness, similar to other financial institutions? Massad: The GENIUS Act does not require that, but it should include that as a part of the application review process within McHenry-Waters proposal negotiated in the House. Similar standards are in European legislation and in other countries’ legislation.
Senator Tillis (R-NC): Is there any one regulation that we should prioritize or would put the U.S. ahead of the global pack? Jachym: We need to design rules and policies that are fit for the U.S. markets. Other G20 markets have kept it simple. The U.S. lists over 300 assets with diverse characteristics. If you start drawing complex lines and complex texts and bifurcate markets, that becomes problematic; Massari: On stablecoins, EU and UK proposals might have made mistakes in either too making reserve requirements too restrictive or too permissive. With the right positioning, we can have better competitive markets for stablecoin issuance; Cohen: The U.S. market regulatory structure is bifurcated, with oversight divided between the CFTC and the SEC, with the pressing need to establish clear policy guidance on how market participants can determine whether they are engaging in a securities transaction or not. This lack of clarity has caused significant uncertainty across the industry. The Lummis-Gillibrand RFIA would provide a clear and bright-line test for distinguishing between securities and non-securities in the digital asset space by asking whether an asset has been issued by a legal issuer. If an issuer is identifiable, the transaction in which that asset is sold may fall under securities regulations. Secondary trading between private parties would not be considered a securities transaction. Issuers whose assets are subject to securities laws would be required to provide proper disclosures, while assets that function more like commodities, such as Bitcoin and Ether, would be regulated under a different framework.
Subcommittee Chair Lummis (R-WY): Is the SEC’s legal argument that digital assets embody an underlying investment contract supported in case law, and what would be the effect of using that legal argument as a statutory requirement? Cohen: The reality is that the SEC developed a novel theory after failing with other approaches. Initially, the SEC characterized all digital assets as crypto asset securities and stated this plainly in their complaints and filings. When that approach was rejected by the courts, the SEC attempted to introduce a new theory that while a digital asset itself may not be a security, it somehow embodies a broader scheme that falls under securities regulation. The problem with that theory is that there is no clear way to determine whether a digital asset embodies a securities scheme. There is nothing inherent in the digital asset itself that allows a third party to examine it and make such a determination. Several courts have already rejected this theory from the SEC.
Senator Warner (D-VA): Can you discuss the enhanced monitoring of blockchain during periods of conversion or transition? Massad: A stablecoin issuer can do KYC but that stablecoin can be transferred many times, with no requirement to follow that customer; Massari: The risks to stablecoin markets, issuers, and the use of stablecoins as a true means of payment depend on getting it right when it comes to combatting illicit finance and enforcing sanctions. When transactions occur between self-custody wallets, there are no KYC obligations, meaning these transactions can take place without identity verification, but there is an immutable on-chain record of these transactions that can be monitored by issuers, third parties, and law enforcement. People can use various technologies to obfuscate financial transactions, and this is true not just on blockchains, but also within traditional financial and payment systems. Industry must continue developing new tools to address these challenges. The biggest gap exists in unhosted wallet transfers, where KYC is not required; Jachym: It is important to distinguish in the stablecoin context between primary issuance and transacting on secondary markets. There is an ecosystem outside of centralized intermediaries, but the surveillance and traceability available through blockchain technology are unparalleled; Cohen: The ability of crypto assets to be frozen or seized is different from tracking. If a stablecoin issuer identifies that a particular amount of stablecoin is at an address controlled by an illicit actor, they can functionally disable it in real-time. Stablecoins offer enhanced traceability and provide control mechanisms that do not exist with traditional money.
Senator McCormick (R-PA): Can you elaborate on how the evolution of stablecoins can strengthen the dollar and serve as a force for good in the global financial system? Massari: Stablecoin issuers often discuss their products as a means for individuals outside the U.S. who do not have U.S. bank accounts to access the U.S. dollar in new ways. This is one aspect of dollarization, but it does not fundamentally change the overall demand for dollars outside the U.S. Stablecoins provide a convenient tool for many businesses and individuals who want to hold and use dollar value or make cross-border payments more efficiently.