House Financial Services’ hearing on “The Future of Digital Assets” contained a wealth of information about the potential future of the digital asset space in the United States.
Following the recent SEC lawsuits against Binance and Coinbase, the industry feared for the future of web3 in the US due to the listing of several top crypto projects, including Cardano, Solana, and Polygon, in the cases against the crypto exchanges.
The recent release of the Hinman emails suggests such a clarification would affect Ethereum, which has previously been determined to be “adequately decentralized.”
“Nearly 15 years since the Bitcoin white paper, an idea has become the new internet architecture, with ownership, digital identity and store of value inherent in technology.
Digital assets are now no longer a new technology, they are used all over the world, and America has always led the technological invention and, if not invention, implementation, and today we risk falling behind competitors around the world. ..”
This was the opening statement of the hearing, presided over by Representative Mr. McHenry. He further stated the intention for a version of the 160-page bill by July this year and highlighted the proposed directive on the registration of digital assets as securities.
Notably, “sufficient decentralization” seems to be retained as a key factor in whether or not a digital asset is defined as a security.
The hearing also included testimony discussing the potential for a digital asset to have its security label removed if it became sufficiently decentralized.
Hear testimony
Other testimonials compared the SEC lawsuits against Coinbase and Binance to the collapse of FTX, a company that has yet to receive formal action from the SEC. There were also fears that digital assets would undermine the current financial system through carve-outs.
Mr Scott argued that the current draft of the bill “could potentially lead to less protection for our investors than is currently provided”.
Circle CEO Jeremy Allaire strongly argued for the need for digital asset regulation to prevent the US from falling behind China and devaluing the dollar. Allaire also stated that crypto reserves should be more secure than banks by limiting fractional reserve practices by restricting rights to FED services.
In addition, he called for stronger digital custodial protections, suggesting that all stablecoin issuers should be required to use registered “qualified custodians.”
However, Benjamin Kaplan, the co-CEO of Prometheum Capital, a company that claims to be “building Wall Street 2.0,” noted that discussion of the need for more or less regulation is flawed as the “application of existing regulatory frameworks on digital assets” is necessary because “federal securities laws have been tried and tested for nearly 90 years.”
Kaplan’s company states that it is “one of the first to provide investors with a [sic] SEC-registered, full-service digital asset securities market ecosystem. Prometheum Chairman Martin Kaplan has long been a proponent of SEC regulation of digital assets. In 2018 he stated,
“A new industry like cryptocurrency only needs to follow the established regulatory treaty, and you don’t have to worry that the United States will introduce stricter laws to restrict the development of the new industry.”
Aaron Kaplan, also co-CEO, added that “the U.S. cryptocurrency industry must actively comply with SEC regulations,” which supports the current framework and believes no change is needed.
Sufficiently decentralized
Coy Garrison, a partner at law firm Steptoe & Johnson, stated that the bill’s current draft works and is necessary to support innovation. Garrison argued that sweeping claims that all digital assets are securities miss the complexity of the assets. Currently, there’s no clear guidance on what “sufficient decentralization” means, which is why there’s confusion within the industry that holds back innovation, Garrison said.
According to Garrison, there is no case law to provide guidance on how to apply the Howey test, which is used to assess whether an asset is a security, to assets traded on secondary markets.
Digital assets are traded on multiple internationally decentralized secondary markets, creating a clear regulatory gap. In his closing remarks, Garrison called for a “more workable regulatory regime” that would provide guidance on how to make a security sufficiently decentralized, as well as how to apply the guidelines in the secondary market.
Allaire also commented on the absurdity of other countries defining regulations for US-denominated digital assets, especially stablecoins, so that other countries “don’t regulate the dollar.”
National Futures Association CEO Thomas Sexton III called on NFA to regulate “Bitcoin and Ether” spot markets with the support of the CFTC.
Critics of the crypto industry
Ms. Waters “didn’t expect” that there would be a desire to cooperate with the crypto industry’s CFTC or SEC. Waters repeatedly referred to FTX and Sam Bankman-Fried’s alleged crimes when discussing the topic of digital assets and asked if the industry supports “raising” funds similar to FTX’s alleged crimes.
Mr. Sherman claimed that the crypto industry’s goal, citing SBF, was to “get the SEC out and put in a patina of regulation.” His statements came after several members of the crypto community issued statements calling for a regulatory regime that took into account the complexity of digital assets compared to the types of securities available for review when the Howey test was created in 1933.
Sherman stated that Ava Labs was “selling unregistered securities” and asked if Ava Labs CEO Emin Gün Sire had sold unregistered security tokens. Sire replied stating that “we have complied with every regulation to the best of our ability.” After being repeatedly asked to confirm whether Ava Labs had filed a registration statement for an ICO, he added, “I don’t know the right answer to that; I believe we didn’t.”
Sherman concluded his time by stating that “Taylor Swift turned down millions of dollars to be associated with it.”
Continued discussion
The hearing went on to discuss the risk of exposure to China from, for example, Representative Mr. Luetkemeyer, who was deeply concerned that US companies are trading with Chinese companies in any form.
This is an ongoing story and further information will be reported separately. The hearing can be viewed in full on the GOPFinanceServices YouTube channel.
