Analysis: House Financial Services Hearing

December 10, 2021

The House Financial Services Committee, “Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States,” held on December 8 2021, surprised some in the industry by not featuring the indignation and skepticism many expected. Instead, CEO’s from 6 companies, including Chamber members Circle, FTX, Paxos, and Stellar, were greeted with curiosity, informed questions, and even some encouragement. If you missed the hearing, a replay is available here.

The Chamber has been focused on educating our legislators for numerous years. And prior to Wednesday’s hearing, we invested significant, dedicated time over the past several weeks meeting with HFSC Committee members and their staffs to better understand their immediate concerns, address them, and educate them more broadly on the fast-evolving innovations in the digital asset marketplace.  The lack of fireworks and considered questions posed at Wednesday’s hearing is a testament to all our efforts. It is a sign of progress that we are together building greater understanding of these financial innovations and engaging constructively to shape digital asset policy and regulatory clarity.  Rep. Patrick McHenry (R-NC) noted, “This technology is new and exciting. It promises a new direction for financial economies, services, and products.” 

Both the level of Committee Member participation, and the extended length of the question-and-answer period, indicate that in both content and demeanor, the collaboration our industry is undertaking – and the willingness of policymakers to understand the many facets of cryptocurrencies and blockchain technologies – is taking hold. 

This hearing also reinforced that there is much more work to be done both in Congress and among regulators to bring about the needed regulatory clarity for digital assets and blockchain.  In his opening statement, Ranking Member Patrick McHenry (R-NC) stated “As with any fast-growing industry, there are questions that should be answered, but this industry is already regulated.  I do not think that many in Congress know enough about this technology to have a real debate on these issues.  The goal today is to listen, learn, and ask questions.  We need to ensure that the crypto revolution happens in the U.S. and is not pushed overseas.  We need smart rules of the road, not kneejerk regulatory reactions.  We must avoid overregulation.  We should create a regulatory framework that encourages innovation instead of stifles it.  This industry should not be dictated by unclear public statements and regulation by enforcement.  We should dispel the notion that digital assets are a major threat to financial stability or are used primarily for nefarious behavior.”

We heard agreement from both sides of the aisle that digital assets are regulated today at both the state and federal level, but that the predominant federal approach of “regulation by enforcement” at both the SEC and the CFTC was undesirable. As Rep. Jake Auchincloss (D-MA) noted, the approach “is not fair, it’s not efficient or conducive to U.S.-based innovation. Congress needs to provide clarity and predictability by statute.”  Rep. Van Taylor (R-TX) posed a question to all of the witnesses, asking, “Everyone here has multiple licenses in multiple states.  Is this working and effective? In my briefing notes I was surprised to read that crypto is considered to be an unregulated industry. Do you feel unregulated?”

CEO of FTX Samuel Bankman-Fried said that, despite many implications, large exchanges such as FTX are already heavily regulated and licensed, both through state money transmitter licenses and registration with the CFTC to trade derivatives.  He said that he supports fully transparent disclosures and the sharing of market data, ensuring that all participants in crypto markets are on a level playing field. 

Getting these policies right is important for several reasons. As both Reps. Gregory Meeks (D-NY) and Ritchie Torres (D-NY) noted during the hearing, digital assets and blockchain offer great promise for financial inclusion and economic opportunity for the unbanked and under-banked. With the appropriate regulatory framework, greater access for consumers to financial services and faster payments for small businesses, for example, can grow. “I think a component of digital asset markets is this concept of democratizing access to financial markets,” stated Circle CEO Jeremy Allaire. “Digital asset markets do that. There is more democratized access, there are fewer barriers of entry to individuals. I think that affects the adoption rates of minority communities.” 

Related to that, it was also good to see policymakers making distinctions between the varieties of digital assets, particularly stablecoins, which the Chamber highlighted as being crucial to enabling greater financial inclusion in our letter to the President’s Working Group on Financial Markets last month, and within our consultation response to the Bank of International Settlements Committee on Payments and Market Infrastructures (“CPMI”) and the International Organization of Securities Commissions (“IOSCO”). As Stellar Development CEO Denelle Dixon stated, “With near-instant settlement flows and an accelerated collection of funds, consumers, some of whom may have been limited to using cash for various payments. … Their transactions are traceable on the network, safer and more secure than transacting in cash. It provides consumers with options for improved efficiency, reduced risk, and strong competitive pricing pressure.” 

Not only was it encouraging to see policymakers display a greater level of understanding of the evolving technologies, such as Web3, but also the crucial role crypto and blockchain can play for U.S. economic competitiveness and security.  With seeming growing bipartisan consensus that it is important establish clarity within the crypto policy framework for innovators and investors alike, there is also the realization that such policies can ensure that the U.S. dollar remains the competitive currency for stablecoins globally and that the U.S. remains a preferred base of operations for crypto and blockchain innovators.    

Crypto, and its role within ransomware, has increasingly been under the microscope of law enforcement and regulators. Over the past several months, the Chamber has been proactively conducting ransomware briefings to reinforce the importance of adequate cyber-security to prevent ransomware attacks, but once they’ve occurred, the crypto industry should be seen as an investigative partner to trace, track and recover payment demands, as well as discourage future attacks.  We were encouraged to see that our message is getting through when Rep. William Timmons (R-SC) asked, “I am concerned about the increasing growth of ransomware attacks and would like to better understand crypto’s role within this. I understand that the crypto industry believes it can and currently does play an important role in preventing illicit finance, including ransomware. Could you describe for us how your firms play an active role, when these ransomware attacks occur? I’d like to better understand the role centralized exchanges play within the flow of funds. And what tools can Congress put in your toolbox through legislation to help you?”

The overall tenor of the hearing was bi-partisan and pragmatic – dare we say positive? Several members of the Committee indicated that they were working on bills to streamline crypto regulation and support the industry, and the Chamber will continue to be proactive in our engagement with Congress to support feedback and our members subject matter expertise as these bills are drafted.

Our team is enthusiastic about the positive engagement and interest from our Congressional leaders. We believe that DC engagement in the crypto industry has reached a turning point and we expect interest in this space to further increase. We will continue to work with our members to advocate for public policies that benefit our membership.

ADDITIONAL RESOURCES

Majority Hearing Memo

Minority Hearing Memo

Paul Kiernan (8 Dec 2021), “Crypto Executives Defend Industry as Congress Considers” The Wall Street Journal.

Nikhilesh De (8 Dec 2021), “LIVE BLOG: House Meets on Crypto Regulation.”

Pete Schroeder, et al. (8 Dec 2021), “Crypto executives urge light touch as Congress mulls new regulation.”

Kevin T. Dugan (8 Dec 2021), “Crypto Gets its Day with Congress.” New York Magazine.