Congressional Crypto Hearing Illustrates Policy Deadlock Over Digital Assets

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On May 10, the U.S. House of Representatives Financial Services Committee and Agriculture Committee held their first joint hearing on digital asset regulation. The event felt like a logical follow-up to another recent hearing in which representatives lambasted Securities Exchange Commission Chairman Gary Gensler for perceived overregulation.

The main narrative, articulated by the initiators of the hearings, was that Congress should step in with its own regulatory plan to provide certainty, stop regulation by enforcement, and settle competition among regulators. But maybe it shouldn’t actually, many lawyers also believe.

Hill and Lynch

Despite the cross-commission nature of the hearing, titled The Future of Digital Assets: Measuring Regulatory Gaps in Digital Asset Markets, members of the Financial Services Commission set the tone for the event.

In his opening remarks, Representative French Hill, a Republican from Arkansas, summed up the existing conflict over digital assets: while some lawmakers (mostly Republicans) believe there is no viable framework for crypto in the country, others (mainly Democrats) are certain of the existing regulations. is sufficient to ensure compliance. Hill was quick to debunk the partisan nature of the conflict, saying:

No one here is arguing that crypto should be exempt from the rules or that we should create an entirely new regime for it. Instead, they were trying to apply the principle of same risk, same regulation to change the current law.

In an unsurprising move, Rep. Stephen Lynch, a Democrat from Massachusetts, laid out the exact opposite position after Hills’ speech. Lynch urged not to fall for the industry-fueled false narrative of a turf war between the Commodity Futures Trading Commission (CFTC) and the SEC.

In his view, industry advocates continue to claim that the current legislation is not suitable for the innovative economy because they know that crypto business models are incompatible with orderly markets or investor protection law. Therefore, creating a new exclusion for digital assets seems unnecessary and redundant. According to Lynch, lawmakers should take a step back and look at intermediaries, which he says generally do not comply, and seek to combine multiple financial functions despite the existing ban.

Testimonials

If one were to distinguish existing positions among members of Congress as pro-reform or anti-reform, the majority of witnesses at the hearings belonged to the former.

Andrew Durgee, head of investment platform Web3 Republic Crypto, echoed some of the representatives, pointing out the perceived incompatibility between current regulations and the decentralized, disintermediated trading technology of blockchains.

He claimed that digital assets registered as securities cannot be traded on existing crypto exchanges, none of which are registered as national stock exchanges. Durgee advocated for change, proposing to include a number of legal definitions in all future amendments, such as standalone smart contract, smart contract deployers, liquidity providers and front-end website operators.

Matthew Kulkin, former director of the CFTC division of Swap Dealer and Intermediary Oversight, told the committee that most of the largest digital assets in terms of market size and trading volume are commodities and, as such , should be regulated by the CFTC. This could be achieved if Congress recognized the inherent differences between digital assets that are securities and those that are commodities.

Kraken Chief Legal Officer Marco Santori outlined how current regulatory gaps could be filled by Congress, saying the House of Representatives should establish a functional framework, define the jurisdiction of the SEC, and expand the authority of the SEC. CFTC to regulate spot digital asset markets and exchanges. His Web3 Foundation counterpart, Daniel Schoenberger, broadly agreed, warning against attempts to apply laws and regulations not explicitly designed for blockchain technology to the digital asset space.

Harvard Kennedy School researcher Timothy Massad offers an alternative to the proposed approach of taming the SEC and potentially expanding the powers of the CFTC.

In Massads’ view, many principles of investor protection are the same whether a token is a security or a commodity. From there, any trading or lending platform that trades Bitcoin or Ethereum must adhere to a set of fundamental principles for all tokens traded or used on that platform, even if it is not registered with of the SEC or the CFTC as an intermediary in securities or derivatives.

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However, the resolution carries no power itself and was sponsored solely by Republican Representative Mike Johnson. It was really a rebuke of the SEC by members of Congress, Richard Hong, a former SEC attorney and now a partner at Morrison Cohen, told Cointelegraph. Given SEC Chairman Gensler’s support within the Democratic Party, he wouldn’t be too concerned about the resolution.

What we are witnessing is a political stalemate, and it is not going to collapse any time soon, according to Fischer. Efforts to explicitly strip the SEC of regulatory and enforcement authority are unlikely to succeed, whether they seek to vest that authority in the CFTC or a new self-regulatory body. And the crypto industry’s financial climate won’t help those efforts, Fischer suggests:

This would be seen by many as a backdoor way to free digital asset companies from regulation. While this might have been politically feasible early last year, the crashing crypto cycle since then makes it unlikely.

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