The United States House of Representatives was abuzz with talk about crypto on April 27, as both the Financial Services Committee and the Agriculture Committee held hearings with nearly identical titles and covered nearly the same ground with many similar conclusions.
The Financial Services Committee, in its hearing “The Future of Digital Assets: Identifying the Regulatory Gaps in Digital Asset Market Structure,” heard from Davis Polk partner Zachary Zweihorn, who argued that “securities market structure laws and regulations do not align with digital asset securities.” He said:
“We’ve all heard the siren’s call to ‘come in and register.’ It sounds enticingly attractive. But this is an oversimplification that conflates registration, which may theoretically be possible, with compliance, which is not.”
American University law professor Hilary Allen, a noted opponent of cryptocurrency, disagreed with Zweihorn. “This is a misdirection,” she said of the industry’s claim of incompatibility with current regulations. “It is entirely possible for a blockchain-based technology business to comply with existing investor protection and financial stability regulation.”
Gattaca Horizons founder and CEO Daniel Gorfine was a voice of moderation in the discussion. He said:
“Some of the problems we have observed in the crypto space over the past year are a result of too much focus on novel digital assets rather than real-world applications that yield productive gains and improve lives.”
Similar sentiment was echoed in the Agriculture Committee’s hearing “The Future of Digital Assets: Identifying the Regulatory Gaps in Spot Market Regulation.”
Katten Muchin Rosenman partner Daniel Davis said much of the spot market in digital assets is outside the jurisdiction of both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Digital assets that are not securities or a leveraged retail commodities product, for example, are not regulated, although the CFTC has “backward-looking authority” to prosecute fraud.
Of the top 15 digital assets traded, two have been identified by the SEC as securities, and seven have been identified by the CFTC as commodities, leaving considerable confusion even in the most actively traded assets.
Related: US House Financial Committee Republicans look for records to show crypto debanking
Several witnesses gave examples of the shortcomings of the current SEC regulatory framework when it is applied to crypto. FalconX deputy general counsel Purvi Maniar said mandatory SEC disclosures would make peer-to-peer transactions impossible.
Regulatory gaps made such market issues as the FTX collapse possible, former CFTC Chairman Timothy Massad said. He suggested the SEC and CFTC jointly write a set of principles for all traders that use Bitcoin (BTC) or Ether (ETH) but are not currently regulated. He referred the audience to the op-ed he and former SEC Chairman Jay Clayton wrote for The Wall Street Journal in December.
Digital asset securities get “regulated out of existence or at least out of the United States,” Davis Polk partner Joseph Hall said. He also held that digital assets are “different in kind from what preceded them” and not well regulated within the current SEC framework. He said:
“I believe competition between our regulators is a feature, not a bug, of our system. So I believe it is time to move on beyond the tired debate.”
The two committees will hold a joint hearing next month.
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