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On Wednesday, September 18, 2024, the House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing entitled “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets.” 

  • Overall Impression: The hearing revealed a stark divide over the SEC’s approach to digital asset regulation, with Republicans pressing for more guidance and transparency while some Democrats defended the SEC’s enforcement actions as necessary, though not without internal dissent. 
  • Summary: Republicans proposed five legislative measures aimed at providing clarity and reducing the SEC’s heavy-handed enforcement tactics. Democrats, while mostly supportive of the SEC’s consumer protection efforts, saw a break within their ranks, with some members criticizing the agency’s approach as politically motivated and damaging to the current administration. 
  • Republican Position: Republicans criticized the SEC’s enforcement-focused strategy as stifling innovation without clear congressional authorization, proposing a suite of five legislative measures to establish a more balanced regulatory framework for digital assets.  
  • Democratic Position: Democrats claimed that without the oversight by the SEC – or Wall Street’s top cop on the beat – predatory crypto scams will continue to harm consumers and investors. The SEC is cracking down on crypto because criminals are breaking the law, hurting families, and scamming investors out of millions of dollars. 
    • Some Democrats like Rep. Wiley Nickel and Rep. Ritchie Torres broke from this position, instead sharply criticizing Gary Gensler’s leadership as harmful to the current Democratic administration.  

Witnesses 

  • Mr. Michael Liftik: Partner, Quinn Emanuel Urquhart & Sullivan LLP – Testimony Link 
  • Honorable Dan Gallagher: Chief Legal, Compliance, and Corporate Affairs Officer, Robinhood Markets, Inc. – Testimony Link 
  • Mr. Teddy Fusaro: President, Bitwise Asset Management – Testimony Link 
  • Ms. Jennifer Schulp: Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives, CATO – Testimony Link 
  • Mr. Lee Reiners: Lecturing Fellow, Duke University – Testimony Link 

Key Points 

Republican Theme: Chair Gensler has pursued an “enforcement-first” strategy, while failing to provide desperately needed guidance, to the detriment of the digital asset ecosystem  

  • Overview: Under Chair Gensler’s leadership, the SEC has not issued clear guidance on how it determines whether a digital asset qualifies as a security, despite publicly asserting that the “vast majority” of digital assets are securities. This ambiguity, paired with the SEC’s enforcement-heavy approach, has led to confusion and frustration within the digital asset industry.  
  • Subcommittee Chair Hill (R-AR): “[Gensler] even took the unusual step of releasing his own statement opposing FIT21 on the morning of the House vote, despite refusing to provide technical assistance as requested by the Committee—and I might add, in contrast to the Biden White House, which did not issue a veto statement on that bill.”  
  • Ms. Jenifer Schulp (CATO): “The [SEC] approach to digital assets under the leadership of Chairman Gary Gensler can be characterized as an ‘enforce first, make rules never’ strategy.”  
  • Rep. Warren Davidson (R-OH): “The idea that you can point out that there’s only one time the SEC was partially wrong, has to be willful ignorance.”  
  • TDC Perspective: The SEC’s enforcement-driven approach is at odds with its mission to protect investors, ensure market efficiency, and facilitate capital formation. By failing to provide clear guidance, the SEC is stifling innovation and capital formation, ultimately undermining investor protection and disrupting market efficiency—the very goals it aims to uphold.  

Democrat Theme (from Leadership): This Congress, MAGA Republicans attempted to push crypto legislation that would have harmed consumer protections and prevented the SEC from being an effective “cop on the beat”  

  • Overview: MAGA Republicans introduced the “Not Fit for Purpose Act,” which would allow crypto and some traditional securities to bypass most regulations, and tried to overturn the SEC’s Staff Accounting Bulletin 121, undermining protections for crypto investors. Now, they are threatening a government shutdown and proposing to gut the SEC’s Reserve Fund, which is used for long-term IT investments and responding to emergencies like crypto company failures.  
  • Rep. Sherman (D-CA): “We’re told that the SEC is ‘going rogue’. No, they’re doing what we appropriated the money to them to do. They have the support of the administration and they have the support of a large number of members of Congress.” 
  • Mr. Lee Reiners: “Industry-friendly legislation would hand crypto market oversight to the Commodities Futures Trading Commission and gut our federal securities laws in the process.” 
  • TDC Perspective: The use of terms like “MAGA Republicans” politicizes the issue and distracts from the real need for balanced, responsible regulation. The proposed bills would not dismantle consumer protections but instead aim to modernize outdated regulatory frameworks, providing clarity and fostering innovation in a way that prioritizes market stability and investor safety.  

Democrat Theme (Not from Leadership): SEC representatives have openly acknowledged that Chair Gensler’s designation of all digital assets as securities conflicts with recent statements, making continued enforcement based on this designation hypocritical and untenable

  • Overview: Reps. Nickel and Torres both voiced their opposition to the SEC’s regulation-by-enforcement methods and implications that all digital assets are securities. They mentioned the SEC has the authority to rescind SAB 121 and that there is precedent for revisiting the rule due to bipartisan support from both chambers for resolution [H.J.R.109], which passed both Houses of Congress with bipartisan support in a watershed moment for digital assets, only to be vetoed by President Biden.  
  • Rep Nickel (D-NC): “Not only is Gary Gensler’s approach to digital assets politicized, it’s just downright wrong… the will of Congress and more importantly the will of millions of constituents is falling on deaf ears at the SEC.” 
  • Rep. Torres (D-NY): “SAB 121 contains a cruel irony [in] that it’s asking banks to do what FTX did, which is put custodial assets on its own balance sheet.” 
  • TDC Perspective: The opposition voiced by Reps. Nickel and Torres highlight the growing recognition, even among Democrats, that regulation by enforcement is not a sustainable approach. The SEC’s refusal to rescind SAB 121 ignores the complexities and unique nature of digital assets while undermining the bipartisan consensus that emerged with the passage of H.J.R.109.   

Legislative Proposals  

  • Rep. Timmons (R-SC) introduced a discussion draft of the New Frontiers in Technology (NFT) Act  
    • The bill would ensure that consumptive-use NFTs, and their evolving use cases, are designated as consumer goods, not financial products. 
    • The draft also requires the GAO to conduct a study of NFTs, including an analysis of the size, scope, role, nature, and use of NFTs among other topics within one year of enactment.  
    • “Chair Gensler continues to mislead and stifle a diverse innovative tech industry, driven by what appears to be a misguided power grab. Unfortunately, the American public stands to lose out as a result. My proposed legislation, the New Frontiers in Technology Act, seeks to address chair Gensler’s unjustified assault on non-financial NFTs from exempting them from securities legislation.” 
    • TDC summary and statement available here.
  • Rep. Flood (R-NE) discussed the Uniform Treatment of Custodial Assets Act (H.R. 5741)  
    • The bill would effectively nullify SAB 121 by prohibiting Federal banking agencies, the National Credit Union Administration, and the SEC from requiring banks to include assets held in custody or safekeeping as a liability on the institution’s balance sheet.  
    • There are 20 bipartisan cosponsors.  
  • Rep. Lucas (R-OK) introduced a discussion draft of The Securing Innovation in Financial Regulation Act 
    • The bill would establish the SEC Strategic Hub for Innovation and Financial Technology (FinHub) and LabCFTC in the CFTC.  
    • FinHub will assist the SEC with its approach to FinTech innovations and coordinate the SEC’s response to emerging technologies in financial, regulatory, and supervisory systems.  
    • LabCFTC will serve as an information source for the CFTC on FinTech innovation and will be overseen by a director appointed by the Commission.  
  • Additionally, posted to the hearing was a discussion draft to codify the SEC’s special purpose broker dealer 
    • The bill would extend the SEC’s policy that allowed broker dealers to offer custody services for tokenized securities for an additional five years.  

Conclusion 

Today’s hearing reinforced the urgent, bipartisan calls for regulatory clarity as the SEC’s enforcement-first strategy, without proper guidance, continues to harm innovation and create uncertainty in the digital asset space. TDC appreciates the efforts by lawmakers to introduce legislative proposals aimed at addressing these challenges.  

TDC has been and will continue to work closely with policymakers to ensure that these solutions foster innovation, protect investors, and provide the clear regulatory framework needed for the growth and integrity of the digital asset ecosystem. 

If you have any questions, please reach out to Policy@digitalchamber.org