On July 10, 2024, the Senate Agriculture Committee held a hearing entitled, “Oversight of Digital Commodities.” The hearing lasted approximately three hours and it was a consensus-driven hearing with a unified call from both sides of the aisle for more regulatory clarity in the digital commodity space.
Witnesses
CFTC Chair Rostin Benham [Testimony Link]
A detailed summary of the hearing is below. If you have any questions, please reach out to Mack LaBar, mackenzie@digitalchamber.org.
Summary: Democrats and Republicans found common ground in their desire to grant the Commodity Futures Trading Commission (CFTC) jurisdictional authority over digital commodity spot markets, but remain divided on how to grant that authority. Chair Benham consistently stated that an underfunded and underpowered CFTC remains a major issue for tackling digital commodity consumer protection issues, and a continuation in lack of resources would result in lost and unrecoverable money for investors after scams, hacks, etc. He highlighted the tools that CFTC uses to regulate currently including registering broker-dealers, exchanges, custodians and emphasized that the CFTC would not be “reinventing anything” if granted additional authority for the digital commodity space and would largely be using the same principles applied to traditional financial markets.
Overall Impression: This hearing was a strong message to the industry and public that there is bipartisan motivation to get a deal done for a Senate market structure bill. However, rough spots such as concerns over illicit finance, custodial and reserves requirements, levels of CFTC funding, how the SCOTUS’ Chevron reversal decision affects the CFTC’s jurisdictional authority, and consumer protections will need to be smoothed out.
Republican Position: Generally, Republicans agreed that the Commodity Futures Trading Commission (CFTC) should be granted regulatory authority over digital commodities. However, led by Committee Ranking Member John Boozman (R-AR), Republicans expressed alignment that they will not be supporting any bill [i.e., Chair Debbie Stabenow’s (D-MI) ‘market structure’ proposal] unless it has broad industry support.
Democratic Position: Democrats focused on consumer protection, illicit finance, CFTC funding levels and additional tools that the agency may need to regulate the digital commodity sector. Senators Stabenow (D-MI), Sherrod Brown (D-OH), Ben Ray Luján (D-NM) and Cory Booker (D-NJ) raised the number of digital asset-related cases the CFTC handles on limited resources, despite the fact the Commission “does not have the authority to regulate” the industry from Congress. Additional points addressed by Senator Lujan (D-NJ) related to the reporting process for suspicious financial activity and illicit financing with crypto exchanges, and his concerns with how these reports are stored and used by Treasury. Finally, Senator Booker (D-NJ) highlighted that a large stake of minority racial groups have invested in crypto to emphasize the urgency needed for bipartisan digital asset legislation that bolsters consumer protections.
Key Points
Chairwoman Stabenow’s Proposed Market Structure Legislation
Overview: Chairwoman Stabenow and Ranking Member Boozman each discussed their bipartisan efforts to introduce legislation granting the CFTC regulatory authority over digital commodities. Stabenow informed committee members that the text of the market structure bill would be distributed by the end of the week.
Stabenow additionally highlighted her three principles for digital asset legislation:
(1) safeguarding customer assets
(2) protecting retail customers
(3) ensuring adequate funding for the CFTC
Quote from Chairwoman Stabenow: “Our colleagues in the House have recognized that protecting customers and providing clear rules of the road is not a partisan issue and have passed crypto market structure legislation out of their Chamber. While our bill takes a somewhat different approach and focuses on filling the regulatory gap that exists for digital commodities, I am confident we can come together to pass legislation.”
Perspective: With many committee members and stakeholders yet to review Chair Stabenow’s proposal, and limited time left in the legislative calendar, the Chairwoman would have to act swiftly to get her bill passed before the end of this Congress.
CFTC Resources and Interagency Coordination
Overview and Quote from Boozman: Ranking Member Boozman highlighted concerns with interagency coordination between the SEC and CFTC, asking what the impact will be if “Congress puts the CFTC in the losing position of having to sue the SEC every time they disagree?” Boozman is referring to Chair Stabenow’s new legislation, which includes this framework. Chair Benham responded negatively, stating “Short answer, that would be a very difficult position and one that is practically unlikely”.
Perspective: Not only would the constant use of courts to settle interagency disagreements be a high cost to taxpayers, but it could stall the development of practical rulemaking.
Illicit Finance
Overview: Senator Luján expressed disapproval of how Suspicious Activity Reports (SARs) were reported and stored in relation to crimes involving money-laundering through crypto exchanges. Chair Benham agreed that this was an important point and highlighted reliance on data from regulated industry participants to understand illicit finance threats.
Quote from Sen. Lujan (D-NM): ” So, in the same way a SAR report is held at treasury, when a financial institution has been found of wrongdoing or laundering money for the cartel or someone else, the current system requires that financial institution to appoint somebody to be approved by treasury to be the watcher from inside. So let me ask, why is it important to have federal requirements to report suspicious activity to law enforcement?”
Perspective: Democratic sentiment on crypto has centered on illicit finance for some time, and even as crypto gains steam and becomes a major campaign issue for both presidential candidates, the illicit finance concerns such as money laundering have continued.
Tax Treatment of Mining Rewards
Overview: Senator Tommy Tuberville (R-AL) asked Chair Behnam how he believes mining rewards should be tasked. Tuberville asked whether Benham thought it was fair that mining rewards are taxed at point of acquisition and at point of sale. Benham acknowledge that he had not thought about this, but stated, “principally speaking, and the way you articulated the analogy, it doesn’t sound fair.”
Quote from Sen. Tuberville (R-AL): “If we’re going to encourage people to get involved in crypto, we need to address this problem as quickly as people are getting harassed.”
DeFi Regulation
Overview: Given the IRS has excluded DeFi from the newly finalized broker rules, Ranking Member Boozman urged Chair Behnam to focus on centralized exchanges rather than DeFi projects.
Response from Chair Behnam: “I’m a firm believer there is a regulatory nexus for DeFi but perhaps we have to take a unique look given the unique nature of it.”
Perspective: It is crucial that any regulation for DeFi be custom-built to accommodate its unique characteristics, rather than shoehorned into existing laws designed for existing entities. Lawabiding software developers should not be punished for simply publishing open-source software.
TDC experts are available for comment, please contact: press@digitalchamber.org