Senate Committee on Agriculture, Nutrition, and Forestry:
“Examining Digital Assets: Risks, Regulation, and Innovation”

Summary

The Senate Agriculture Committee hosted a hybrid hearing on Wednesday examining digital assets, their potential risks and benefits, and the role of the Commodity Futures Trading Commission (CFTC) in regulating them.

Chairwoman Debbie Stabenow (D-MI) opened the hearing by outlining a brief history of digital assets, underscoring their potential to democratize finance. She noted, however, that the thousands of digital assets that have been created over the last decade are not backed by a central bank, like traditional currencies, are wildly volatile, and currently cannot be used as a form of payment. Sen. Stabenow stated that despite these challenges, digital assets hold a great deal of promise in allowing greater access to financial services, particularly in traditionally underserved communities. Given the great potential and massive growth of digital assets, the Senator called for a greater degree of consumer protection, which she argued currently pales in comparison to standard financial institutions. She further noted the climate impacts of digital assets, highlighting a need for a more sustainable footprint moving forward.

Ranking Member John Boozman (R-AR) questioned the role of the federal government in simultaneously encouraging innovation and bolstering consumer protections. He explained that digital assets and their underlying blockchain technology have modernized the global financial markets, despite only being regulated by a patchwork of state and federal regulations. He highlighted that the hearing was an opportunity to begin the process of providing needed clarity to the digital asset market, including which digital currencies would be considered securities vs. commodities, the role of the CFTC in overseeing digital asset commodity spot markets, and more.

In his opening remarks, Chair Behnam outlined that the digital asset market is largely supervised through a state money transmitter licensing regime, leaving the CFTC without much transparency into the current market. This lack of transparency, paired with the patchwork of state and federal oversight, has inhibited the ability of the CFTC to prevent fraudulent activities in the digital asset space or institute vital consumer protections.

Chair Behnam then explained that the digital cash market is vastly different from the other cash commodity markets, noting the high number of retail investors, high leverage ratios, extreme price volatility, and the central role of digital asset platforms in maintaining asset custody. While acknowledging the potential behind this technology, he was quick to call for substantially increased transparency and regulation within the digital asset market. He noted that the CFTC was perfectly positioned to provide much needed oversight of the cash digital asset commodity market, if provided with the appropriate authority and resources from Congress.

During both the first and second panels of the hearing, Members of the committee continued to affirm their dedication to approaching regulation of the digital asset market in a bipartisan manner. Generally, questions to the panels of witnesses focused on the need for consumer protections, regulatory clarity, and American competitiveness.

Key Take-Aways

Role of the CFTC

The central topic of the hearing, Members and witnesses alike, focused on the potential role of the CFTC in regulating the digital asset industry. Chair Behnam clearly outlined that the agency is well positioned to oversee digital commodities and cash digital spot markets if provided the appropriate resources and authorities from Congress. He noted that the CFTC is already actively engaged in the industry, as much as it can, through working with the White House on an Executive Order related to digital assets (though timing on the EO is still unknown).

He broadly described that the agency would likely need roughly $100 million more to effectively oversee this additional market and modernize agency systems to appropriately manage and guard industry information and data. Mr. Bankman-Fried later explained that while congressional appropriations could be one way of providing those resources, he anticipated that the industry itself would be supportive of a reasonable fee-based structure in exchange for regulatory clarity. This clarity would be far more beneficial than the fragmented combination of state and federal regulations that currently govern the market, according to Chair Behnam.

Several Members, including Sens. John Hoeven (R-ND), John Thune (R-SD), Amy Klobuchar (D-MN), and Roger Marshall (R-KS), asked how the CFTC and the Securities and Exchange Commission (SEC) would work together to oversee the industry. Chair Behnamn noted that the CFTC and SEC have long worked together to oversee financial markets, drawing clear definitional and jurisdictional lines as to what constitutes a security vs. a commodity. He saw no reason the digital asset market would be any different, following the vital establishment of those definitions.

Sen. Marshall also noted that the industry is clearly calling for such clarity and oversight, as is seen in the recent acquisition of CFTC-licensed firms by crypto companies in an attempt to better operate within the regulatory structure.

Consumer protections.

There was unanimous support throughout the hearing for ensuring sufficient consumer protections in the digital asset market. Sen. Stablenow, Boozman, and Hoeven questioned Chair Behnam on what actions would be necessary to provide consumers with needed protections in this space. He outlined that regulatory structure and clarity was the single most important step needed to provide consumer protections in the digital assets industry, specifically to clarify the definitions of digital securities and commodities, provide pre- and post-trade transparency, clear trade reporting, and rules for execution and custody.

Chair Benhman continued on, in response to Sens. Marshall and Klobuchar, that that same regulatory structure would help limit fraud, scamming, and illicit activity within the market. echoed this sentiment in response to a similar question from Sen. Sherrod Brown (D-OH) who questioned how sufficient Bank Secrecy Act and Anti-Money Laundering Act provisions could be applied.

Finally, following a question from Sen. Tommy Tuberbille (R-AL) on the issue of cybersecurity threats in crypto, Chair Behnam noted that digital assets can be traced using the distributed ledger technology, while also clarifying that increased regulatory oversight into the industry would better enable law enforcement to appropriately police fraudsters.

Benefits of blockchain technology

Seeking a better understanding of the role of digital assets and blockchain technology, several Members explored how this growing industry could benefit Americans. In response to Sens. Boozman and Thune, Ms. Boring described the benefit of digital assets and blockchain technology as enabling peer-to-peer financial transactions without intermediaries, operating via smart contracts, and more. She gave the example of a small cattle rancher utilizing blockchain technology to create a smart supply chain that tracks every stage of cattle development to establish credibility and improve efficiency for the rancher, all in a cost-effective way.

Sen. Booker also focused on the potential benefits of digital assets as he underscored their potential role in expanding financial inclusion. Sen. Booker, Chair Behnam, and Mr. Bankman-Fried agreed that digital assets offer “hopeful optimistic possibilities” for including minority communities and the underbanked by providing direct access and control of financial assets without overdraft fees or the inconvenience of traditional brick and mortar financial institutions.

One area where the future benefits of digital assets were unclear was their potential role as a risk management tool (like traditional commodities). Following a question from Sen. Marshall, Chair Behnam explained that unlike other commodities, digital assets have yet to show the same predictability and consistency that would allow them to be utilized to hedge, but that could change as coins are developed and more widely adopted.

Digital assets and their climate impacts

Consistently increasing as an area of discussion, members of the committee focused on the impact of digital assets and cryptocurrencies on climate change. Sen. Tuberville was concerned that banks could start to limit credit to crypto firms due to high climate impacts. Chair Behnam argued that while choking off credit to crypto firms was likely not appropriate, the financial industry as a whole would need to manage transition risk of carbon intensive industries in the long term.

Chair Benhman further noted, in response to Sen. Kristen Gillibrand (D-NY) that potential climate disclosures could serve as an incentive for digital asset firms to be better held accountable for their climate impact and encourage a transition toward renewable energy as the industry default. Sen. Stabenow and Mike Braun (R-IN) similarly worried about the digital asset industry potentially exacerbating climate change. Ms. Boring clarified, however, that the sector was actually leading the transition to renewable energy, with 59 percent of mining being powered by renewable sources.

American competitiveness.

Given the global impact of digital assets, Senators outlined concerns with ensuring that America remains competitive in the financial sector. While Chair Benhman didn’t give a clear answer to Sen. Tuberville’s question as to whether the U.S. needs a central bank digital currency to remain competitive, he did note that he was supportive of the Federal Reserve’s current approach to studying the question. He further detailed that the federal government must begin to prepare for the very real likelihood that digital assets could become a larger part of our macro economy.

Sens. Booker, Thune, and Tuberville further questioned how America could maintain global competitiveness in the financial space. Ms. Boring and Mr. Bankman-Fried made it clear that the solution to ensuring America’s competitiveness lies in providing regulatory clarity to digital asset firms. Witnesses all agreed that the idea that a lack of clear rules for cryptocurrency firms was the greatest threat to driving them offshore.

Quotables

Sen. Debbie Stabenow: “Digital assets may have been designed to democratize the transfer of money but that does not mean they should operate without rules…the good news: regulation and innovation are not mutually exclusive. If they were, our financial markets would not be the strongest in the world. But we can’t afford to wait until the next crisis. Congress must work with regulators and the Biden Administration to design a framework that protects consumers and our environment, and keeps our markets fair, transparent, and competitive.”

Chairman Rostin Behnam (referring to recent DOJ announcements on the recovery of digital asset funds used for illicit purposes): “I think the lessons from that announcement from the Justice Department are that this technology is traceable, that we can work through the the the web of sources and the movement of these funds, but it takes time and that the technology is going to be incrementally improving over the next few years. But that said, we face adversaries across the globe who will use this technology to move money around and to take action that will negatively affect the United States. I firmly believe that bringing transparency through a regulatory structure to financial markets will only be a positive step in shedding more light and giving our prosecutors, whether it’s at the Justice Department or at the state level, more access to information of individuals, institutions, and the flow of this digital commodity so that we can root out fraud and bad actors.”

Sen. Cory Booker: ”I actually believe, with some urgency, that we act in this space. I think that we can create a more sensible regulatory framework. I’ve always been concerned about … [the] lack of government’s ability to move at the speed of technology [which] undermines the ability for Americans to apply this technology.”

Ms. Perianne Boring: “Digital assets are helping to usher in a truly global and inclusive economy, while blockchain technologies are revolutionizing and disrupting entire industries. This revolution is not only in financial services and banking, but also can be seen in innovations in the agriculture industry focused on supply chain, government records, title and asset ownership, digitization and encryption of records, and digital identity.”

Chairman Rostin Behnam: “Markets are markets and what we’ve observed, to the extent that we can, is that these assets, regardless of the fact that they’re so unique from traditional derivatives, or securities…they function and trade just like any other asset would.”

Ms. Perianne Boring: “America’s global competitiveness is a huge concern of mine. This technology as a digital technology does not see national borders… We have members today started by Americans, U.S. small businesses – they’re not comfortable operating here because they don’t understand the rules of the road, and they’re going overseas. So, having legal certainty and regulatory certainty is absolutely essential. And this committee has a key role to play in that conversation.”

Mr. Kevin Werbach: “Over the long term, this is the future of financial services. And so there’s certainly an urgency to make these kinds of modifications. But I think Congress needs to start the process of thinking about how we might restructure, fundamentally, our financial regulatory system, given the kinds of innovations and changes that these technologies herald.”

Sen. Cory Booker (speaking to Mr. Bankman-Fried): “I’m offended that you have a more glorious afro than I once had.”