The Future of Digital Assets: Identifying the Regulatory Gaps in Spot Market Regulation (U.S. House Committee on Agriculture, Subcommittee on Commodity Markets, Digital Assets, and Rural Development)

Hearing	The Future of Digital Assets: Identifying the Regulatory Gaps in Spot Market Regulation
Committee	U.S. House Committee on Agriculture, Subcommittee on Commodity Markets, Digital Assets, and Rural Development
Date	April 27, 2023

 

Hearing Takeaways:

• The Current State of the U.S. Digital Assets Market: The hearing considered the current state of the U.S. digital asset space, including the current use cases for digital assets and the U.S.’s current regulation and oversight of digital assets. Subcommittee Members and the hearing’s witnesses highlighted the growing popularity and volatility of digital assets and stated that the regulation and oversight of these assets is currently not straightforward.
  • Current Applications of Digital Asset Technology: Subcommittee Members, Ms. Maniar, and Mrs. Rubin highlighted how digital assets technology is currently enabling parties to have better control over the storing and sharing of information, engage in smart contracts (which are contracts that can be executed without intermediaries), and engage in transactions that are fast, global, and very cheap. Mrs. Rubin noted how her organization’s blockchain network (the Hedera network) is currently supporting applications related to farming, supply chain, vaccine storage, pharmaceuticals, and music streaming. Rep. Marc Molinaro (R-NY) added that digital assets could provide access to capital in places that often lack access to traditional banking services.
  • Classification of Digital Assets: A key area of discussion during the hearing involved whether digital assets could be classified as commodities, securities, or some other type of asset. Subcommittee Members, Mr. Davis, Ms. Maniar, Mr. Massad, and Mr. Hall expressed concerns over the lack of definitional clarity surrounding digital assets and stated that stakeholders are limited in their ability to obtain definitional determinations for various digital assets. They noted how the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC) have taken conflicting views on the status of certain digital assets, which exacerbates these challenges. Mr. Massad argued that there often does not exist sufficient available information for regulators to determine the status of a given digital asset. Subcommittee Chairman Dusty Johnson (R-SD) and Mr. Hall also expressed concerns with how the SEC relies upon a non-inclusive list of between 50 and 60 characteristics for determining whether a digital asset constitutes a security and noted how none of these characteristics are determinative in nature.
  • Unique Nature of Digital Assets: Subcommittee Members stated that digital assets are often very different than traditional commodities and securities in terms of their function and volatility. They stated that regulators should account for these features. Ms. Maniar and Mr. Hall warned that securities regulation would be ill-suited for digital assets given how securities rules are designed for passive investment instruments and not for governing commercial activities, such as payments. Mr. Hall added that state securities regulation would create additional compliance issues for digital assets.
  • Regulatory Gaps and Uncertainty for Digital Assets: The hearing largely focused on how the aforementioned challenges around digital asset classification and the unique nature of the assets create regulatory gaps and uncertainty for this asset class. They also noted that the SEC and the CFTC are limited in their ability to oversee the digital asset space because neither agency has authority over digital asset activities that occur on spot markets and that do not involve securities or leveraged retail commodity products.
  • Regulatory Treatment of Non-Fungible Tokens (NFTs): Rep. John Rose (R-TN) expressed particular interest in addressing the regulatory treatment of NFTs, which are blockchain-based digital assets that tend not to be used as currencies. Mr. Massad recommended that Congress consider NFTs separately from digital commodities and digital securities. He suggested that Congress consider having the U.S. Consumer Financial Protection Bureau (CFPB) develop rules for governing NFTs.
  • Lack of Protections for Digital Asset Platforms: Mr. Massad stated that retail investors might not appreciate the risks associated with cryptocurrency trading platforms. He attributed cryptocurrency trading platform risks to the fact that the platforms are unregulated. He highlighted how wash trading is rampant on cryptocurrency trading platforms and asserted that large Bitcoin holders can manipulate the price of Bitcoin on these platforms. He also stated that many cryptocurrency investors do not realize that cryptocurrency trading platforms lack robust customer asset protections, deposit insurance, or bankruptcy protections.
  • Current Enforcement Actions within the Digital Assets Space: Subcommittee Members, Mr. Davis, and Mr. Massad noted how the CFTC has brought 70 enforcement actions to date involving digital asset commodities and that these cases have accounted for 20 percent of the CFTC’s enforcement actions filed in the last fiscal year. Mr. Davis stated however that the CFTC only has enforcement authority for fraud, manipulation, and false reporting within the digital asset space and indicated that this authority can only be used to correct problems after they occur.
  • State Regulation and Oversight of the Digital Asset Space: Subcommittee Members, Mr. Massad, and Mr. Hall noted how states also play a role in regulating and overseeing the digital assets space and commented that states are often pursuing their own digital asset policies in response to federal inaction on the topic. Mr. Massad warned that state money transmitter laws are “woefully inadequate” on their own for overseeing the digital assets space and commented that these laws provide minimal protections. 
  • International Competitiveness and National Security Concerns for the U.S. in the Digital Assets Space: Subcommittee Members, Ms. Maniar, Mrs. Rubin, and Mr. Massad expressed concerns that the U.S.’s current regulatory gaps and uncertainty for digital assets are driving blockchain technology innovation to move abroad to countries and jurisdictions with more established digital asset regulatory frameworks. They expressed concerns that this movement of blockchain technology innovation could undermine the global supremacy of U.S. technology and the U.S. dollar. Rep. Rose and the hearing’s witnesses further raised concerns that this movement could result in the development of digital asset technologies that are not aligned with U.S. values (such as the protection of privacy).
• Digital Assets Policy Reforms: Subcommittee Members and the hearing’s witnesses expressed interest in pursuing policy reforms to address digital assets. They contended that these policy reforms are necessary to provide clarity to stakeholders, protect consumers, promote innovation, and ensure the U.S.’s global competitiveness within this space.
  • Classification of Different Types of Digital Assets: Mr. Davis, Ms. Maniar, Mrs. Rubin, and Mr. Hall called on Congress to define and delineate between digital commodities and digital securities and to provide guidelines for when a digital asset does not fall into either category. Mr. Davis added that merely providing explicit clarity regarding the commodity statuses of Bitcoin and Ether would provide regulatory clarity to two-thirds of the digital asset market. Mr. Massad raised concerns however that Congress will be overly prescriptive in working to clarify the differences between a security and a commodity, which can create additional uncertainties and result in potential litigation. He remarked that this incremental approach would entail having the CFTC and the SEC establish some standards for digital asset platforms that elevate investor protection and provide more disclosure. He specifically recommended that Congress enact legislation that mandates that any trading or lending platform that trades Bitcoin or Ethereum comply with a core set of principles (unless the platform has already registered with either the SEC or the CFTC). He stated that Congress should direct the SEC and the CFTC to develop joint rules for implementing the core set of principles or create a self-regulatory organization (SRO) to do so. He contended that this approach would be simple in that its application to trading and lending platforms that trade Bitcoin or Ethereum would capture most (if not all) of the market. He also stated that the use of an SRO would have the digital asset industry pay for this regulatory system.
  • Treatment of Digital Assets as Securities: Ms. Maniar warned that deeming all digital assets to be securities would limit the transferability of these assets. She asserted that the purpose of digital assets is to facilitate value transfers in a disintermediated fashion. 
  • Digital Asset Disclosure Requirements: Subcommittee Democrats and Mr. Massad expressed interest in having Congress adopt additional disclosure requirements for digital assets and digital asset trading platforms. Mr. Massad remarked that many cryptocurrency investors do not realize that cryptocurrency trading platforms do not provide robust customer asset protections, deposit insurance, or bankruptcy protections. He also stated that these disclosures would enable regulators to determine the extent to which a digital asset is decentralized, which will enable them to better define the asset type of a given digital asset. Mr. Davis contended that the CFTC already has relevant experience and authorities to support retail investors in making informed decisions.
  • Digital Asset Business Conduct Standards: Ms. Maniar stated that digital asset spot markets would benefit from the application of some of the CFTC’s business conduct standards. She specifically identified the CFTC’s standards focused on registration, reporting, and disclosure as being beneficial. She stated that her trading platform, FalconX, has found the CFTC’s rules had enhanced their ability to foster a transparent and orderly market for digital asset derivatives.
  • Provision of Adequate Funding for Enforcement Agencies: Subcommittee Ranking Member Yadira Caraveo (D-CO) and Mr. Massad contended that Congress must ensure that the CFTC receives appropriate funding under any digital assets legislation. They called this funding critical for enabling the CFTC to carry out its mission of promoting the integrity, resilience, and vibrancy of the U.S. derivatives market. Ranking Member Caraveo emphasized that the CFTC is the only federal financial regulator that relies solely on appropriations from Congress for its funding.
  • Consideration of a U.S. Central Bank Digital Currency (CBDC): Mr. Massad noted that the U.S. Federal Reserve is currently researching CBDCs and stated that the establishment of a U.S. CBDC is “years away at best.” He stated that the U.S. should continue this research as it decides whether or not to pursue a CBDC.

Hearing Witnesses:

1. Mr. Daniel Davis, Partner, Co-Chair, Financial Markets and Regulation, Katten Muchin Rosenman LLP
2. Ms. Purvi Maniar, Deputy General Counsel, FalconX Holdings, Ltd.
3. Mrs. Nilmini Rubin, Head of Global Policy, Hedera
4. Mr. Timothy Massad, Research Fellow, Harvard Kennedy School Mossavar-Rahmani Center for Business and Government, Director, M-RCBG Digital Assets Policy Project
5. Mr. Joseph A. Hall, Partner, Davis Polk & Wardwell LLP

Member Opening Statements:

Subcommittee Chairman Dusty Johnson (R-SD):

• He expressed interest in identifying gaps in the U.S.’s regulatory framework for digital assets and how these gaps are harming innovators and consumers.
• He applauded the U.S. House Committee on Agriculture and the U.S. House Committee on Financial Services for their cooperation on digital asset issues.
  • He noted how the U.S. House Committee on Financial Services is currently convening a “complementary” hearing that also addresses digital assets.
  • He further indicated that the U.S. House Committee on Agriculture and the U.S. House Committee on Financial Services would hold a joint hearing on digital asset issues next month.
• He remarked that digital assets and their underlying blockchains can support both opportunity and fraud.
  • He commented that there have occurred successes in the digital assets space, including Ethereum, Hedera, and Filecoin, as well as failures in this space, including Banana Coin, KodakCoin, and Mooncoin.
• He stated that the Subcommittee is now beginning to develop a legislative framework that will enable future digital assets to emerge and protect the public from scams and frauds.
  • He commented that this effort will require collaboration across Congressional committees and federal agencies, as well as input from industry stakeholders, the CFTC, the SEC, and state regulators.

Subcommittee Ranking Member Yadira Caraveo (D-CO):

• She discussed how there has recently occurred a “tremendous” amount of volatility within the digital assets space.
  • She noted how the digital asset industry’s market capitalization had fallen from $2 trillion in February 2022 to around $1 trillion today.
  • She added that Bitcoin accounts for about half of the digital asset industry’s market capitalization.
• She stated that the digital assets space has experienced “catastrophic” failures, including the recent collapse of FTX.
• She noted how the CFTC has brought 70 enforcement actions to date involving digital asset commodities.
  • She indicated that these cases account for 20 percent of the CFTC’s enforcement actions that have been filed in the last fiscal year.
• She called it “vital” for the Subcommittee to closely examine current regulations to ensure that investors are appropriately protected and that federal agencies possess the appropriate authorities to oversee the “evolving” digital assets industry.
• She discussed how the digital asset commodity cash market is different from other CFTC-regulated markets in that a significant portion of the investors in the digital asset commodity cash market are individual retail investors.
  • She stated that volatility and failures within this market disproportionately impact ordinary people and that the Subcommittee should account for the lower risk tolerances of these investors. 
  • She also asserted that the Subcommittee must ensure that appropriate disclosures involving these commodities are readily accessible and clearly communicated to retail investors.
• She then remarked that the Subcommittee must ensure that the CFTC receives appropriate funding under any digital assets legislation so that it can provide sound regulation of the U.S. derivatives market.
  • She noted how the CFTC is the only federal financial regulator that solely relies on appropriations from Congress for its funding.
• She stated that Congress’s failure to provide the CFTC with appropriate funding would “severely undercut” any efforts to achieve a comprehensive and cohesive regulatory framework for the digital asset industry.

Witness Opening Statements:

 Mr. Daniel Davis (Katten Muchin Rosenman LLP):

• He remarked that there exists a “significant” gap in federal spot market regulation because most digital asset spot market activity falls outside of the regulatory jurisdictions of the CFTC and the SEC.
• He noted how the major dividing line between the CFTC’s authority and the SEC’s authority involves whether a product is a security.
  • He noted how products that are securities or based on securities (such as securities futures and security-based swaps) fall under the jurisdiction of the SEC.
• He discussed how the SEC has regulatory jurisdiction, which means that it can require registration, require compliance with securities laws and regulations, and conduct examinations and reviews.
  • He added that the SEC can bring enforcement actions involving securities and products based on securities.
• He stated that non-security products will likely fall within some level of the CFTC’s jurisdiction and noted how the CFTC possesses full regulatory authority over several types of products, including futures, options on futures, and swaps. 
  • He indicated that the SEC oversees futures and options based on securities.
  • He also mentioned how the CFTC has regulatory jurisdiction over certain products with a specific retail component, such as certain retail foreign exchange transactions and certain leveraged or margined retail commodity transactions.
• He discussed how the CFTC can require registration, require compliance with all applicable statutes and regulations, and conduct examinations and reviews for the products under its jurisdiction.
• He noted however that if there is a spot product that exists outside of the CFTC’s regulatory authority for leveraged or margined retail commodity products, then the CFTC only has enforcement authority for fraud, manipulation, or false reporting regarding that product.
  • He commented that this authority is “backwards looking” and can only be used to punish bad conduct after it has already occurred.
• He stated that Congress had provided the CFTC with this authority because the prices in the spot market “significantly” impact futures and swaps products.
• He remarked that the CFTC has not hesitated to use its enforcement authority in the digital assets space and noted how the CFTC has brought over 80 enforcement actions related to digital assets.
  • He indicated that 20 percent of the CFTC’s enforcement activities in the past year involved digital assets.
• He stated that neither the CFTC nor the SEC has authority over digital asset activities that occur on spot markets and that do not involve securities or leveraged retail commodity products.
  • He indicated that this activity would only be subject to CFTC enforcement jurisdiction.
• He remarked that many transactions fall under the category of digital asset activities that occur on spot markets and that does not involve securities or leveraged retail commodity products.
• He mentioned how the CFTC had asserted that seven of these top 15 digital assets in terms of market capitalization constitute commodities and indicated that these seven digital assets account for approximately 76 percent of the digital asset market.
  • He noted how the SEC had only asserted that one of the top 15 digital assets in terms of market capitalization constitutes a security and indicated that this digital asset only accounts for 2 percent of the digital asset market.
• He called this finding unsurprising given how the CFTC regulates about 90 percent of total swaps.
• He concluded that there exists a “significant” regulatory gap in the federal government’s spot market regulation of digital assets because most digital asset spot market activity falls outside of the regulatory jurisdiction of the CFTC and the SEC.

Ms. Purvi Maniar (FalconX Holdings, Ltd.):

• She noted how FalconX is a prime broker in the digital assets space for the world’s leading financial institutions and how FalconX Bravo is a CFTC-registered swap dealer.
  • She indicated that FalconX’s institutional only business includes regulated over-the-counter (OTC) derivatives with digital asset underliers.
  • She expressed FalconX’s commitment to orderly, fair, and liquid markets for all market participants.
• She discussed how digital asset technology is underpinned by blockchains and stated that this technology can provide innovative growth and offer more secure, transparent, and decentralized alternatives to traditional structures.
  • She commented that this technology can better facilitate control over the sharing and storing of information.
  • She stated that Ethereum constitutes a positive example of the benefits of digital asset technology and highlighted how Ethereum enables smart contracts, which are contracts that can be executed without intermediaries.
• She remarked that the U.S.’s current rules and tools are insufficient for addressing the unique challenges presented by digital asset technology.
• She discussed how different federal regulators have issued their own rules and guidances in response to the evolution of digital asset technology and stated that these rules and guidances have often resulted in inconsistent enforcement and an opaque and conflicting regulatory regime.
  • She commented that the U.S. does not have a clear single regulator for digital assets and noted how many federal regulators have claimed some form of jurisdiction over this space.
• She remarked that the U.S.’s lack of clear oversight and jurisdictional boundaries for digital asset regulation creates barriers to entry and confusion.
  • She asserted that this absence of regulatory clarity has hindered the U.S.’s global competitiveness.
• She called on the U.S. to take “resolute” action and to assert leadership through developing an unambiguous regulatory system for digital assets.
• She stated that most digital assets are used and traded like commodities and testified that FalconX had decided to pursue CFTC registration because the CFTC constitutes the best-suited and available regulatory framework for the digital assets that FalconX makes markets and trades.
  • She noted how CFTC-registered swap dealers are subject to “very robust” regulatory requirements.
• She stated that while some digital assets might constitute securities, she asserted that the U.S.’s securities regulatory structure is ill-suited for most digital assets.
  • She commented that SEC mandated disclosures designed for factors like earnings, cashflow, and material events have no analogy for digital asset commodities and that these disclosures would prevent many of the benefits of these assets (such as peer-to-peer transactions).
• She called the U.S.’s current regulatory framework for digital assets fragmented and asserted that this fragmentation would continue to reduce U.S. economic opportunities and technological advancements.
• She contended that digital asset spot markets would benefit from the application of some of the CFTC’s business conduct standards.
  • She specifically identified the CFTC’s standards focused on registration, reporting, and disclosure as being beneficial.
• She stated that FalconX has found the CFTC’s rules had enhanced their ability to foster a transparent and orderly market for digital asset derivatives.
  • She asserted that CFTC rules that considered the unique characteristics of a digital asset spot market could greatly enhance market integrity, promote market participation, confidence, and protection, and facilitate innovation.
• She called on Congress and market regulators to work together on establishing a regulatory framework for the digital asset ecosystem to ensure that markets are safe, transparent, and orderly for all participants.
  • She commented that the Digital Commodity Exchange Act would achieve these objectives and applauded the Committee for its work on this legislation in the previous 117th Congress.

Mrs. Nilmini Rubin (Hedera):

• She discussed how her public blockchain, Hedera, provides a layer of trusted internet infrastructure for applications with “real world impact.”
• She noted how the internet constitutes a system of open protocols and how these protocols now enable personal control of data (which is often referred to as Web3).
  • She explained that public blockchains are Web3 platforms for other applications and are operated by a network of independent computers (or nodes).
• She stated that network nodes do not fund their operations through showing advertisements or selling subscriptions and indicated that nodes are instead paid for by users directly through fees.
• She noted that node fees are typically tiny and frequent and highlighted how hundreds or thousands of transactions can be processed every second on these blockchain networks.
  • She commented that it is not possible to use the traditional financial system to send fractions of a penny quickly, efficiently, and globally.
• She explained that public blockchains use a digital asset or cryptocurrency to rapidly transfer value between users and node operators.
• She testified that the Hedera network had processed over 1 billion transactions in March 2023 and noted that each transaction costs between one-tenth and one-hundredth of a penny.
  • She indicated that these transactions had been paid for using the Hedera network’s cryptocurrency: HBAR.
• She remarked that public blockchains need digital assets to operate and that the ability of blockchains to provide trusted and time-stamped records enables people to store, track, and monitor data in new and powerful ways.
• She discussed how the Hedera network supports multiple applications, including the DOVU marketplace, atma.io, and Everyware.
  • She explained that the DOVU marketplace allows for farmers to generate additional income from adopting environmentally friendly practices.
  • She explained that atma.io helps brands to reduce waste across their supply chains.
  • She explained that Everyware monitors vaccine cold chain storage across the supply chain and identifies irregularities before the vaccines are administered to patients.
• She stated that the current U.S. regulatory framework for digital assets provides no clear path for compliance for U.S. network and market infrastructure providers.
  • She commented that that lack of regulatory clarity forces these providers to either cease their U.S. operations or hope that they will not be subject to unpredictable enforcement from federal regulators.
• She recommended that Congress pass legislation creating an activities-based framework to regulate digital assets based on the nature of the transaction.
  • She stated that Congress should define and delineate between digital commodities and digital securities and provide guidelines for when a digital asset does not fall into either category.
  • She also stated that Congress should empower the CFTC to regulate certain digital asset activities (such as operating a centralized spot marketplace).
• She further contended that Congress should establish a U.S. policy for digital assets that recognizes the importance of public blockchains to extend the U.S.’s global leadership and competitiveness.
  • She commented that other jurisdictions, including Dubai, Europe, Singapore, and the United Kingdom (UK), are creating regulatory certainty for digital assets.
• She warned that the U.S.’s failure to establish a policy for digital assets risks shutting out businesses that rely upon digital assets, risks shutting out the ability to regulate the digital assets industry, and risks removing the access of Americans to useful blockchain tools.

Mr. Timothy Massad (Harvard Kennedy School Mossavar-Rahmani Center for Business and Government, M-RCBG Digital Assets Policy Project):

• He mentioned how he had first raised concerns with the Committee regarding the U.S.’s lack of a comprehensive regulatory framework for cryptocurrencies nearly a decade ago.
  • He also noted how he had written a paper four years prior calling for the U.S. to strengthen its regulation of cryptocurrencies.
• He remarked that the U.S. still has gaps in its regulatory framework for digital assets and emphasized that the U.S. lacks a federal regulator for digital asset commodity spot markets.
• He asserted that this absence of a federal regulator explains why investor protection in the cryptocurrency market is “extremely weak.” 
  • He commented that the recent failure of several cryptocurrency firms (including FTX) demonstrates the downsides associated with this lack of regulation.
• He discussed how industry participants complain about the U.S.’s lack of regulatory clarity for digital assets and how trading and lending platforms claim that they are only dealing in digital asset tokens that are securities (which enables them to avoid direct federal oversight).
  • He noted however that SEC Chairman Gary Gensler contends that most digital asset tokens are securities and that these tokens are failing to comply with existing requirements.
• He indicated that while the SEC has brought enforcement actions against digital asset tokens that are purportedly failing to comply with securities laws, he commented that these enforcement actions will need to be fully adjudicated before market participants will have sufficient clarity regarding the status of the tokens.
  • He also expressed concerns that legislative proposals that revise regulatory categories for digital assets could generate confusion for market participants.
• He stated that necessary investor protection standards are largely the same, regardless of whether a token falls under the definition of a security or a commodity.
• He recommended that Congress enact legislation that mandates that any trading or lending platform that trades Bitcoin or Ethereum comply with a core set of principles (unless the platform has already registered with either the SEC or the CFTC).
  • He indicated that these principles would include the protection of customer assets, the prevention of fraud and manipulation, and the prohibition of conflicts of interest.
• He stated that Congress should direct the SEC and the CFTC to develop joint rules for implementing the core set of principles or create an SRO to do so.
• He remarked that this approach would be simple in that its application to trading and lending platforms that trade Bitcoin or Ethereum would capture most (if not all) of the market.
• He also noted how over 90 percent of spot trading volume occurs on centralized intermediaries.
  • He commented that this approach would “dramatically” raise the level of investor protection on those platforms.
• He stated that this approach could address wash trading (which refers to when someone trades with themself or an affiliate to inflate the price or trading volume of an asset) 
  • He noted how wash trading is estimated to account for between 50 percent and 90 percent of the trading volume on many platforms.
• He asserted that this approach would be practical and would not require a bifurcation of trading between a securities token platform and a commodity tokens platform.
• He also stated that the use of an SRO would have the digital asset industry pay for this regulatory system.
• He further stated that this approach would not require policymakers to rewrite securities and commodities laws and commented that this rewriting of laws could foster additional confusion.
• He stated that this approach would have the SEC and CFTC maintain their existing authorities and indicated that the SEC could still assert that a given token constitutes a security.
  • He elaborated that if the SEC prevailed in its assertion under his proposal, then the intermediary would need to stop dealing in that token or move the token to a registered platform.
  • He noted however that the intermediary in this scenario would not be shut down.
• He lastly stated that this approach would be incremental and would establish a foundation for digital asset regulation that could be improved overtime.
  • He mentioned how he had proposed this approach along with former SEC Chairman Jay Clayton in a Wall Street Journal op-ed.

Mr. Joseph A. Hall (Davis Polk & Wardwell LLP):

• He remarked that the U.S.’s lack of regulatory certainty for digital assets has had “real costs” in terms of reduced consumer confidence and protection, lost economic activity, and “unnecessary hurdles” for competing with foreign markets.
• He stated many digital assets are inherently different from the stocks, bonds, options, and futures that existing regulatory structures have been designed to oversee.
  • He commented that digital assets might not represent a claim on the revenues or assets of a business or resemble the agricultural products, natural resources, or financial commodities with prices that need to be hedged.
  • He indicated that digital assets might instead be deployed to verify a transaction between two strangers, facilitate decision makers by a dispersed network of coders, or encourage honest behavior in the fulfillment of an obligation.
• He remarked that digital assets are different in kind from other types of assets because they combine functionality with ease of tradability.
• He stated that the U.S.’s system for financial market regulation depends on the ability to distinguish between securities and commodities and asserted that this determination can be unclear within the digital asset context.
  • He noted that the U.S. Supreme Court has stated that when a purchaser is motivated by a desire to use or consume the item purchased, then securities laws do not apply to the item.
• He highlighted how different federal regulators (including the SEC and the CFTC) have taken conflicting positions on whether many of the most common digital assets constitute securities.
  • He noted how the SEC suggests that market participants consider a list of 50 or 60 different characteristics (of which none are necessarily determinative) to ascertain when a digital asset has a greater likelihood of being a security.
  • He asserted that this approach from the SEC does not foster predictability.
• He remarked however that digital asset issuers could not easily or practically register their products with the SEC.
• He stated that the obligations attached to securities make it impractical for them to be used in everyday transactions because the securities framework had been designed for passive investment instruments.
  •  He commented that this regulatory framework had not been designed to govern commercial activities, such as sending payments.
  • He also commented that the SEC has not taken any apparent actions to adapt its rules and regulations to facilitate activities involving digital assets.
• He further asserted that market participants would continue to face “insurmountable” barriers to conducting business across state lines, even if the SEC did adapt its rules.
  • He noted how each state regulates the sale of securities and maintains their own registration processes.
  • He indicated that digital assets are not exempt from these state regulations and registration processes.
• He remarked that digital assets deemed to be securities are effectively driven outside of the U.S. (or existence).
  • He commented that the remaining digital assets do not provide consumers with reliable information or the protection of federal market oversight.
• He contended that the U.S. should establish a new regulatory approach that is tailored to digital assets and commented that concepts drawn from federal securities and commodities laws could inform this approach.

Congressional Question Period:

Subcommittee Chairman Dusty Johnson (R-SD):

• Chairman Johnson mentioned how all of the witnesses had stated that the U.S.’s current lack of regulatory certainty for digital assets is impacting the digital assets marketplace. He also noted how the CFTC and the SEC have had disagreements about the classification of certain digital assets (including Ether). He asked Mr. Davis to address how these disagreements between the CFTC and the SEC impact the market for digital assets and digital asset product development.
  • Mr. Davis testified that it is difficult for him to provide legal advice to his digital asset clients because of the conflicting statements from the CFTC and the SEC. He asserted that there is a very strong case that Bitcoin and Ether do not constitute securities. He noted how the CFTC has asserted for at least a decade that Bitcoin constitutes a commodity and has asserted for at least five years that Ether constitutes a commodity. He also noted how Bitcoin and Ether have been trading on CFTC-regulated markets for years. He indicated that the combined market capitalization of Bitcoin and Ether account for roughly two-thirds of all digital assets. He commented that providing explicit clarity regarding the commodity statuses of Bitcoin and Ether would thus provide regulatory clarity to two-thirds of the digital asset market.
• Chairman Johnson then discussed how Mr. Hall’s testimony had noted that the SEC could rely upon a non-inclusive list of between 50 and 60 characteristics for determining whether a digital asset constitutes a security. He emphasized that none of these characteristics are necessarily determinative of a digital asset’s status as a security. He commented that this SEC process might result in regulatory outcomes that are not reproducible, predictable, or certain. He asked Mr. Hall to address why this dynamic is problematic.
  • Mr. Hall remarked that digital asset market participants must be able to draw conclusions about whether their proposed activities will be subject to regulation and how their proposed activities will be regulated. He stated that the SEC’s current reliance on numerous characteristics that are not necessarily determinative of a digital asset’s status as a security forces people to make judgment calls on whether a given digital asset constitutes a security. He commented that the potential for conflicting determinations by people and regulators means that the SEC’s current approach does not lead to reproducible results. He further noted that while the SEC has stated that Bitcoin does not constitute a security, he emphasized that the SEC has never explained its reasoning for this determination. He remarked that the SEC’s lack of direction causes market participants to draw their own conclusions, which might ultimately differ from the SEC’s conclusions.
• Chairman Johnson called on Congress to provide regulatory clarity for digital asset market participants.

Subcommittee Ranking Member Yadira Caraveo (D-CO):

• Ranking Member Caraveo mentioned how Colorado had recently become the first state to permit residents to pay their taxes using cryptocurrencies. She remarked that Congress must address regulatory gaps for digital assets to promote innovation and protect consumers. She noted how Mr. Massad had begun to oversee certain virtual currencies determined to be commodities during his previous tenure as CFTC Chairman. She asked Mr. Massad to recount the CFTC’s initial process for determining which assets had constituted commodities. She also asked Mr. Massad to address the resources that had been necessary to support the CFTC’s work in this area.
  • Mr. Massad noted that while the definition for the term “commodity” does not contemplate digital assets, he indicated that the definition does refer to all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in. He recounted how market participants had expressed interest pursuing swaps and futures involving Bitcoin and stated that these instruments had led the CFTC to conclude that certain cryptocurrencies constitute commodities. He indicated that the CFTC had made these conclusions in its settlements with Coinflip and TerraExchange and noted that the CFTC then built upon these settlements. He emphasized that the CFTC’s conclusions had been based on the fact that market participants had pursued derivatives using digital assets. He then noted how a very small portion of the CFTC’s activity had involved digital assets during his tenure as CFTC Chairman. He remarked however that the digital assets market is now “huge” and commented that neither the CFTC nor the SEC has sufficient resources to police the digital asset market. He stated that recent failures in the digital asset space demonstrate that digital asset market participants can fail to protect customer assets, engage in fraud and manipulation, maintain conflicts of interest, and lack governance principles.
• Ranking Member Caraveo asked Mr. Massad to predict what would happen if Congress were to pass legislation to address the regulatory gaps for digital assets that did not provide federal regulators with additional funding and/or resources.
  • Mr. Massad remarked that it would be a mistake for Congress to pass digital asset legislation that did not provide federal regulators with additional funding and/or resources. He stated however that the establishment of an SRO could lead the digital asset industry to cover most of the costs associated with regulation. He asserted that federal regulators need additional resources to oversee the digital asset space.
• Ranking Member Caraveo then mentioned how the CFTC had recently brought several major enforcement actions against major players in the digital asset industry, including FTX and Binance. She noted how many of these enforcement actions involved cases of fraud and misrepresentation. She asked the witnesses to recommend additional authorities and disclosure requirements that Congress should provide to the CFTC.
  • Mr. Massad remarked that Congress should work to provide authority and resources to the CFTC to raise the level of investor protection before considering revisions to the law. He commented that while the U.S. might want to create new definitions for digital assets, he stated that the U.S. currently lacks sufficient disclosure regimes that would enable regulators and market participants to determine whether a given digital asset resembles a security.

Full Committee Chairman Glenn “GT” Thompson (R-PA):

• Chairman Thompson remarked that digital assets can provide “significant value” to Americans in terms of economic benefits and innovation. He stated that digital asset developers, users, and institutions require clear and thoughtful “rules of the road” to realize the full benefits of digital assets. He mentioned how the U.S. House Committee on Agriculture is working with the U.S. House Committee on Financial Services to develop digital asset legislation. He then noted how Mrs. Rubin’s testimony had discussed how several organizations are using the Hedera network to improve their businesses. He asked Mrs. Rubin to provide examples of how the Hedera network is being used to accomplish daily or commercial activities.
  • Mrs. Rubin mentioned how the Hedera network supports the DOVU marketplace and explained that this marketplace allows for farmers to tokenize their work and sell the work as carbon offsets. She also mentioned how the Hedera network supports Tune.fm, which is a blockchain-based music streaming application that enables artists to receive immediate payments whenever their music is played. She further mentioned how the Hedera network supports AVC Global’s Medical Value Chain, which is an application that allows medical stakeholders to track and confirm the legitimacy of pharmaceutical products.
• Chairman Thompson then mentioned how there currently exists significant debate surrounding whether digital assets constitute securities or commodities under U.S. laws and regulations. He asked Ms. Maniar to address how deeming all digital assets to be securities would impact FalconX’s customers.
  • Ms. Maniar remarked that deeming all digital assets to be securities would limit the transferability of these assets. She asserted that the purpose of digital assets is to facilitate value transfers in a disintermediated fashion. She stated that deeming all digital assets to be securities would be “extremely disruptive” to FalconX’s customers.

Rep. Don Davis (D-NC):

• Rep. Davis commented that most of his constituents have likely never heard of the CFTC or the SEC. He stated however that cryptocurrencies are becoming increasingly popular amongst most Americans. He asked the witnesses to explain how the CFTC and the SEC impact most Americans on a daily basis.
  • Mr. Massad noted how an estimated 17 percent of Americans have purchased cryptocurrencies and commented that younger people and lower income people are more likely to purchase cryptocurrencies. He stated that many of these people have suffered significant cryptocurrency losses because of asset price declines and cryptocurrency firm failures. He acknowledged that while having a regulatory framework for digital assets would not provide a guarantee against failure, he asserted that a regulatory framework could help to prevent failure in the digital assets space. He noted how many failed cryptocurrency firms had improperly used customer assets and had failed to combat fraud and manipulation. He remarked that a good regulatory framework could prevent these issues. He then stated that the U.S. should not consider the merits of cryptocurrencies when deciding whether to regulate the cryptocurrency space. He commented that there already exists significant investment activity surrounding cryptocurrencies. He stated that the U.S. must establish a regulatory framework that gives people assurances that the cryptocurrency markets have integrity and transparency and will protect customer assets.
• Rep. Davis then asked Mr. Massad to discuss the prospects of the federal government pursuing a CBDC. He also asked Mr. Massad to address how a CBDC would impact the average consumer.
  • Mr. Massad noted that the U.S. Federal Reserve is currently researching CBDCs and stated that the establishment of a U.S. CBDC is “years away at best.” He added that it remains unclear whether the U.S. will decide to establish a CBDC. He highlighted how there already exist cryptocurrencies and stablecoins (whose values can be tied to the U.S. dollar) and stated that these digital assets could facilitate payments. He commented however that the U.S. lacks a regulatory framework for these digital assets. He contended that the U.S. should create regulatory frameworks for unbacked cryptocurrency tokens and stablecoins, as well as pursue research into CBDCs and payment system improvements.

Rep. Nick Langworthy (R-NY):

• Rep. Langworthy mentioned how the European Parliament had recently passed their crypto-asset legislative framework, known as the Markets in Crypto-Assets Regulation (MiCA). He stated that several cryptocurrency companies have told him that the U.S.’s absence of a regulatory framework for digital assets is leading many companies to domicile in jurisdictions that do provide regulatory clarity for digital assets. He also mentioned how a recent study published by the Developer Report finds that the U.S.’s global share of blockchain developers has fallen from 40 percent of blockchain developers to 29 percent of blockchain developers. He asked Mrs. Rubin to indicate whether she was observing blockchain innovators leaving the U.S. and to provide recommendations for reversing this trend.
  • Mrs. Rubin remarked that blockchain innovators are leaving the U.S. for jurisdictions that provide regulatory clarity for digital assets. She stated that these innovators want to have confidence that their innovations are legal and lamented that the U.S. is ceding global leadership in digital asset technology to other countries. She asserted that this situation deprives U.S. consumers of access to innovative technologies. She noted how the Hedera had been founded by U.S. veterans and expressed Hedera’s hope that it can remain in the U.S. She remarked that the top action that Congress could take to support domestic blockchain innovation would be to provide regulatory clarity for the space.
• Rep. Langworthy then discussed how adversarial countries (including China and Russia) are exploring ways to undermine the U.S. dollar and the U.S.’s global leadership in the finance space. He stated that U.S. leadership in the global finance space has promoted economic freedom, capital formation, and consumer protections. He asked the witnesses to address how the U.S.’s failure to regulate digital assets will impact the global financial system.
  • Ms. Maniar called it “incredibly important” for the U.S. to remain a global leader in digital asset technology. She remarked that the U.S. has always been a global leader in technology and financial markets and contended that the U.S. should seek to be a global leader in digital assets.
  • Mr. Massad remarked that the U.S. should be focused on payments technology. He asserted that the U.S. dollar’s global dominance does not currently face significant threats and commented that this dominance is predicated on several factors (including the strength of the U.S. economy, the U.S.’s rule of law, and the stability of the U.S. government). He stated however that countries could move away from using the U.S. dollar as a payment mechanism, even if they continue to invest in U.S. Treasuries. He recommended that the U.S. research CBDCs, payment improvements, and stablecoin frameworks to protect and preserve its global leadership.

Rep. Nikki Budzinski (D-IL):

• Rep. Budzinski remarked that Congress must ensure that consumers are protected within the digital assets space. She asked the witnesses to provide recommendations for how the U.S. could better communicate to consumers the risks associated with cryptocurrencies. She commented that better communication could enable consumers to make better informed decisions.
  • Mr. Massad commented that while retail cryptocurrency investors may be cognizant of the risks associated with cryptocurrencies based on their volatility, he stated that these retail investors might not appreciate the risks associated with cryptocurrency trading platforms. He attributed cryptocurrency trading platform risks to the fact that the platforms are unregulated. He highlighted how wash trading is rampant on cryptocurrency trading platforms and asserted that large Bitcoin holders can manipulate the price of Bitcoin on these platforms. He also stated that many cryptocurrency investors do not realize that cryptocurrency trading platforms lack robust customer asset protections, deposit insurance, or bankruptcy protections. He remarked that a stronger regulatory regime for digital assets should involve an education campaign so that consumers are aware of the risks associated with cryptocurrency trading platforms.
  • Mr. Davis remarked that the CFTC maintains “robust” consumer protection mechanisms as part of its rules and regulations. He stated that the CFTC did oversee a large amount of retail transactions, including retail foreign exchange transactions and leveraged retail commodity transactions. He also noted how the CFTC does regulate leveraged Bitcoin transactions. He remarked that the CFTC thus has experience considering appropriate disclosure levels and exchange requirements for retail products. He stated that a positive feature of the CFTC’s regulatory approach would be that it requires the exchange to implement core principles and enforce CFTC-approved rules. He commented that these rules could involve “common sense” and comprehensible customer disclosures. He concluded that the CFTC already has relevant experience and authorities to support retail investors in making informed decisions.
• Rep. Budzinski then asked Mr. Massad to briefly identify his proposed guiding principles for a new regulatory framework for digital assets. 
  • Mr. Massad remarked that guiding principles for digital asset regulation should be “very similar” to the regulatory principles currently present in the U.S. securities and commodities markets. He indicated that these principles include the protection of customer assets, systems to prevent fraud and manipulation, governance measures (including fitness of directors), regular reporting (both of trades publicly and to regulators), risk management, cybersecurity, and know your customer (KYC) and anti-money laundering (AML) rules compliance.

Rep. John Rose (R-TN):

• Rep. Rose called it important for Congress to clarify the distinction between digital assets that are commodities and digital assets that are securities. He stated however that there also exist digital assets, including NFTs, that are unlike the traditional products regulated by the CFTC. He asked Mr. Massad to address how Congress should approach this third type of digital assets.
  • Mr. Massad recommended that Congress consider NFTs separately from digital commodities and digital securities. He suggested that Congress consider having the CFPB develop rules governing NFTs and commented that NFTs do not create the same issues as securities and commodities. He asserted that Congress should create a separate regulatory framework for NFTs. He also noted how NFTs tend to be traded on different types of platforms than securities and commodities.
• Rep. Rose then noted how the European Union (EU) Institute for Security Studies had reported that the Chinese government has leveraged blockchain technology’s traceability and immutability in the field of policing, explored the use of blockchain technology for the dissemination of propaganda, and has used blockchains to gather information against dissidents. He asked whether Congress should consider guardrails to ensure that bad actors, such as the Chinese Communist Party (CCP), cannot use digital assets that are developed and/or supported in the U.S. to assist in the repression of their citizens.
  • Mr. Davis remarked that the U.S. heavily values privacy and stated that the CFTC could adopt privacy as a core principle. He commented that this could manifest in requirements for exchanges and regulated entities to maintain certain privacy protections. He asserted that the U.S. is very capable of adopting privacy as a core principle for digital asset regulation.
  • Ms. Maniar remarked that the U.S. must be the global leader in developing digital asset technology so that the U.S. could set the standards for the technology.
  • Mrs. Rubin remarked that the U.S. should include guardrails against repression as part of digital asset legislation. She also stated that the U.S.’s absence of leadership in digital assets provides China with an opportunity to influence the global digital assets space. She asserted that the U.S. must fill this vacuum.
  • Mr. Massad called it important for the U.S. to be a global leader in regulating cryptocurrencies and stablecoins and to consider the potential merits of a CBDC. He stated that these efforts would enable the U.S. to ensure that payment systems are developed in a manner that is consistent with Western values (which include the protection of privacy).
  • Mr. Hall remarked that the U.S.’s current lack of a regulatory framework for digital assets prevents corporate and institutional investment in the digital asset sector. He commented that this investment would allow for U.S. entrepreneurs to develop and explore use cases for digital assets. 

Rep. Andrea Salinas (D-OR):

• Rep. Salinas discussed how states have needed to provide consumer digital asset protections while the federal government considers its own regulatory framework for digital currencies. She mentioned how her state of Oregon was the first state to provide control of digital assets to a fiduciary. She also noted how Oregon law requires companies that transfer digital currency from one person to another to be licensed as money transmitters. He stated however that Oregon law has no requirements for companies that only take cash and turn the cash into digital currencies. She asked the witnesses to indicate whether the licensing of money transmitters protects consumers. She also asked the witnesses to identify the shortfalls associated with money transmitter licensing.
  • Mr. Massad stated that while money transmitter laws protect consumers, he asserted that these laws are “woefully inadequate” as a regulatory framework for the digital asset sector. He explained that money transmitter laws simply impose very minimal net worth requirements and very minimal security requirements. He added that some money transmitter laws have permitted investment requirements. He contended that states alone could not address digital assets. He remarked however that states should play a role in clarifying property rights and rules surrounding the transfers of digital assets.
• Rep. Salinas then asked Mr. Massad to indicate whether the CFTC had worked with the SEC to resolve regulatory disagreements during his tenure as CFTC Chairman. She also asked Mr. Massad to indicate whether a clearer process for coordination between federal agencies regulating digital assets would be helpful.
  • Mr. Massad remarked that the CFTC and the SEC had worked closely together on the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (Dodd-Frank) requirements for OTC swaps during his tenure as CFTC Chairman. He stated that this coordination had been “critical” given how both agencies are responsible for overseeing this market. He remarked that cooperation between the CFTC and the SEC dates back to the SEC’s founding. He acknowledged that this coordination between the CFTC and the SEC is not always easy and that the personalities of the personnel at the agencies can impact the success of this coordination. He stated that Congressional expectations of cooperation between the SEC and the CFTC can help to encourage such cooperation. He asserted that cooperation between the SEC and the CFTC is needed in the digital asset space.
• Rep. Salinas then noted how the CFTC had brought at least 70 enforcement actions involving digital asset commodities. She asked Mr. Davis to indicate whether there exist some common themes within these enforcement actions.
  • Mr. Davis remarked that fraudulent schemes meant to separate people from their money are always the same, regardless of asset class. He commented that many types of traditional fraudulent schemes (e.g., “pump and dump” schemes, wash sales) are merely being applied to digital assets. He asserted that fraudulent activities are thus not unique to digital assets. He then mentioned how the CFTC had actively worked to learn more about how the digital asset space operates, the functioning of the digital asset market, and fraudulent schemes being perpetrated within the digital asset market during his recent tenure at the Agency. He stated that this understanding of the digital asset spot markets is key to informing the CFTC’s approach to futures and derivatives markets.

Rep. David Rouzer (R-NC):

• Rep. Rouzer asked the witnesses to identify what too much regulation for digital assets would look like.
  •  Mr. Massad expressed concerns that Congress will be overly prescriptive in its clarification of the difference between a security and a commodity. He stated that many of the existing digital asset legislative proposals contain problems and loopholes that can raise questions of interpretation and can result in litigation. He remarked that policymakers currently do not know enough about digital assets to establish proper definitions and largely attributed this lack of knowledge to the absence of disclosures for digital assets. He contended that the U.S. should therefore take incremental actions to address digital assets. He remarked that this incremental approach would entail having the CFTC and the SEC establish some standards for digital asset platforms that elevate investor protection and provide more disclosure. He stated that policymakers should use these disclosures to gather more information so that they can develop more informed policies.
  • Mr. Hall expressed concerns with Mr. Massad’s proposed approach to digital assets and commented that this approach would be too focused on Bitcoin and Ether. He contended Congress should address the other 23,000 digital assets as part of its work on digital assets. He also stated that Congress must create clear distinctions between securities and commodities because the SEC and the CFTC are currently in conflict regarding who has jurisdiction over digital assets. He acknowledged that while digital assets are very heterogeneous and “endlessly mutable,” he asserted that Congress could establish basic categories for digital assets. He raised concerns that deferring the responsibility of defining digital assets to regulators will result in a maintenance of the status quo, which he commented is not tenable to the digital asset industry.
  • Mr. Massad remarked that the U.S. should not solely address Bitcoin and Ether. He stated that Congress should pass legislation requiring any digital asset platform that trades Bitcoin or Ether be subject to certain disclosure and consumer protection principles. He commented that these principles would apply to all digital assets traded on the platform. He stated that this approach would encompass virtually all digital asset platforms because all relevant platforms offer Bitcoin and Ether. He also stated that focusing on trading platforms that offer Bitcoin or Ether will raise consumer protection and disclosure standards for all tokens. He then discussed how four largest digital asset exchanges list a total of about 400 tokens and noted how these exchanges list different tokens. He commented that this dynamic suggests that the platforms are maintaining different definitions of what constitutes a commodity.
  • Mrs. Rubin recommended that Congress not regulate digital asset technology and instead focus on regulating digital asset activity. She noted how other jurisdictions are focused on regulating digital asset activity.
  • Ms. Maniar stated that the digital asset space is a “very entrepreneurial space” and stated that a principles-based approach to digital asset regulation would allow for digital asset innovation to grow.
  • Mr. Davis remarked that the U.S. should not allow for the “perfect to be the enemy of the good” with regards to digital asset regulation. He stated that adding better guardrails surrounding the line between securities and commodities will “greatly enhance” the ability of digital asset businesses to be compliant with U.S. laws.

Rep. Jonathan Jackson (D-IL):

• Rep. Jackson asked the witnesses to indicate whether digital assets should be considered securities or commodities.
  • Mr. Davis noted how the CFTC has identified seven of the 15 top traded digital assets as commodities and indicated that these seven digital assets account for approximately 76 percent of the digital asset market. He also noted how the SEC has identified one of the 15 top traded digital assets as securities and indicated that this digital asset accounts for 2 percent of the market. He stated that the seven digital assets identified as commodities tend to have some common characteristics, such as being decentralized and being used for consumptive purposes (rather than investment purposes). He remarked that actions from the CFTC and the SEC are thus providing some additional clarity regarding the distinction between securities and commodities. He also stated that digital assets will tend to evolve into commodities over time because digital assets seek to become more widely used and more widely dispersed. He commented that these characteristics resemble those of a commodity (rather than a security).
  • Mr. Hall noted how assets that represent a claim on the assets, the revenues, or the properties of a business or business enterprise are securities. He stated that such assets that are issued on blockchains should be regulated as securities. He remarked however that digital assets that do not represent a claim or promise from a business should have consumer disclosures. He commented that this need for disclosure requirements would make digital assets different from more traditional commodities. He asserted that digital assets are fundamentally different from traditional securities and commodities. He stated that Congress should intervene and determine how digital assets ought to be regulated (rather than solely focus on characterizing digital assets as either securities or commodities).
• Rep. Jackson asked Mr. Hall to identify the point at which a digital asset can be considered decentralized.
  • Mr. Hall remarked that decentralization should not be an important factor for triggering regulation. He asserted that consumers need information about digital assets, regardless of whether the digital assets are centralized or not. He also stated that all digital assets need strong market oversight, regardless of how centralized they are.
  • Mr. Massad remarked that there often does not exist enough information about digital asset tokens to determine whether they are actually decentralized. He stated that the U.S. should first provide more disclosures and consumer protections for digital assets and then further define digital asset types.

Rep. Zach Nunn (R-IA):

• Rep. Nunn noted how SEC Chairman Gary Gensler had told the U.S. House Committee on Financial Services that all digital asset tokens constitute securities. He noted however that CFTC Chairman Rostin Behnam had told the U.S. House Committee on Agriculture that digital assets ought to be considered commodities. He stated that Congress should provide clarity regarding the asset type status of digital assets. He asked Mr. Massad to indicate whether Ethereum constitutes a commodity or a security.
  • Mr. Massad remarked that there did not exist enough information to determine whether Ethereum constitutes a commodity or a security. He noted how Ethereum had recently changed its system for validating transactions. He stated that it remains unclear whether this new validation process that involves multiple people constitutes a common enterprise, which could make it a security under the test established under the U.S. Supreme Court’s SEC v. W. J. Howey Co. decision (known as the Howey test).
• Rep. Nunn asked Mr. Massad to address the challenges associated with having conflicting messages on digital assets come from the SEC and the CFTC.
  • Mr. Massad remarked that conflicting messages on digital assets from the SEC and the CFTC confuse people and undermine investor protections. He stated that rewriting digital asset rules without sufficient information could result in poor policies and unintended consequences for the broader markets. He commented that he is not against developing new definitions for digital assets and stated that he is merely calling on policymakers to spend more time developing these definitions.
• Rep. Nunn expressed some disagreement with Mr. Massad’s call for a more gradual approach to defining digital assets. He asserted that businesses want legal clarity for digital assets. He discussed how other countries and regions have recently taken actions to provide regulatory clarity to digital assets. He mentioned how the EU has pursued its MiCA framework and how the UK is finalizing its own digital asset regulation. He asked Ms. Maniar to discuss where FalconX is observing successes in digital asset innovation because of regulation and where FalconX is observing this innovation struggle due to a lack of regulation.
  • Ms. Maniar remarked that regulatory certainty in any industry facilitates business development and that a lack of regulatory certainty impedes such development. She stated that digital asset companies are being founded in jurisdictions that have regulatory certainty (which she emphasized is different from a lack of regulation).
• Rep. Nunn noted how FalconX is the first and only CFTC-registered cryptocurrency-focused swap dealer. He asked Ms. Maniar to discuss how the CFTC’s regulatory approach (which is principles-based) differs from the SEC’s regulatory approach.
  • Ms. Maniar testified that FalconX has had a “very robust and effective” dialogue with the CFTC. She stated that the CFTC has been “very interested” in learning about the digital asset space and learning about FalconX’s business. She remarked that the CFTC is not an easy regulator, which she commented is a good thing. She stated that the CFTC’s engagement with FalconX and the digital asset industry has fostered regulatory certainty, which enables FalconX to pursue innovations.
• Rep. Nunn asked Ms. Maniar to address how Congress could foster a better environment for cryptocurrency-related businesses (such as FalconX).
  • Ms. Maniar stated that Congress could provide more policy certainty to the digital asset industry and commented that this certainty will foster domestic innovation.
• Rep. Nunn asked Ms. Maniar to address how FalconX envisions policy certainty for the digital asset industry.
  • Ms. Maniar remarked that policy certainty for the digital asset industry would involve clear rules that would be in place for an extended period.

Rep. Marc Molinaro (R-NY):

• Rep. Molinaro noted how his Congressional District is rural and stated that digital assets could provide access to capital in places that often lack access to traditional banking services. He stated that the federal government’s failure to regulate digital assets is leading states to regulate digital assets. He noted how his state of New York had taken initial actions to develop a regulatory structure for digital assets. He commented that New York’s regulatory structure for digital assets contained both strengths and weaknesses. He asked Mr. Hall to discuss the strengths and weaknesses of state regulatory approaches to digital assets.
  • Mr. Hall called the New York State Department of Financial Services an “excellent” regulator and stated that the Department had been an innovator in establishing its BitLicense regime around 2016. He mentioned how many of his law firm’s digital asset clients have obtained BitLicenses from New York and commented that these BitLicenses have been effective. He noted however that some digital asset businesses have deliberately avoided serving New York customers due to BitLicense concerns. He remarked that while state regulators have a role in combating fraud and overseeing money transmitter services, he asserted that there must exist a federal regulatory framework for internet-based financial services businesses. He raised concerns that the current state-focused regulatory system for digital assets might lead some New York residents to use virtual private networks (VPNs) to get around state-based trading restrictions.
• Rep. Molinaro asked Mr. Hall to indicate whether a dual regulatory model for digital assets involving federal and state oversight would be viable.
  • Mr. Hall answered affirmatively. He remarked however that policymakers would need to assess how a dual regulatory model would apply to different types of digital assets. He stated that stablecoin issuers ought to be able to decide between obtaining a federal charter or a state charter.
• Rep. Molinaro stated that one of the challenges associated with developing a regulatory framework for digital assets is that many digital asset tokens vary widely in terms of function and underlying value. He noted how there is a trust in New York that offers tokenized gold. He explained that this trust involves a digital asset whose value is pegged to underlying gold bars in a London vault. He asked the witnesses to discuss how policymakers could ensure that a regulatory structure for digital assets would be clear and defined while also sufficiently flexible to consider the underlying value of tokens.
  • Mr. Davis noted how the CFTC currently oversees assets that are based on underlying commodities and commented that the same principle should apply to digital assets. He stated that the U.S. ought to define digital assets in a way that people can understand so that people know how a given asset will be regulated.
  • Ms. Maniar stated that a principles-based regulatory approach for digital assets would consider how a technology operates and not impose restrictions on the technology.

Subcommittee Ranking Member Yadira Caraveo (D-CO):

• Ranking Member Caraveo discussed how the digital asset space has evolved significantly since the founding of Bitcoin. She stated that the U.S.’s lack of a regulatory regime for digital assets creates volatility and harms customers. She remarked that the CFTC should continue to play to ensure the safety, soundness, and orderly operation of digital asset markets. He also called on Congress to pass legislation that would address the current gap in regulation in digital asset commodity spot markets, adopt strong customer protections and disclosure requirements, and provide regulatory agencies with sufficient funding to oversee the digital asset market.

Subcommittee Chairman Dusty Johnson (R-SD):

• Chairman Johnson expressed agreement with Subcommittee Ranking Member Yadira Caraveo’s (D-CO) calls to close the regulatory gap for digital asset commodity spot markets and to provide disclosure requirements for digital assets. He also expressed support for the adoption of a principles-based regulatory regime for digital assets. He further expressed agreement with Mr. Hall’s concerns that the U.S.’s lack of regulatory certainty for digital assets undermines consumer confidence and protections, leads to less investments and economic opportunity within the space, and reduces the U.S.’s ability to compete with foreign markets. He remarked that the Subcommittee must address the digital assets in a bipartisan manner and work with the U.S. House Committee on Financial Services to accomplish this goal.