Government and Politics
May 10, 2023
WASHINGTON, D.C. – U.S. Representative Ritchie Torres (NY-15), as a member of the House Financial Services Committee, today participated in a joint hearing of the Subcommittee on Digital Assets, Financial Technology and Inclusion and the House Agriculture Committee’s Subcommittee on Commodity Markets, Digital Assets, and Rural Development entitled “The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital Asset Markets”.
Testimony was provided by six witnesses, including Michael Blaugrund, Chief Operating Officer, New York Stock Exchange, Timothy Massad, Research Fellow, Harvard Kennedy School Mossavar-Rahmani Center for Business and Government and Director, M-RCBG Digital Assets Policy Project, Andrew Durgee, Head of Republic Crypto, Republic, Matthew Kulkin, Partner and Chair, Futures and Derivatives Practice and former Director of the CFTC’s Division of Swap Dealer and Intermediary Oversight, Marco Santori, Chief Legal Officer, Kraken Digital Asset Exchange, and Daniel Schoenberger, Chief Legal Officer, Web3 Foundation.
Under the Securities Act of 1933 and the Securities Exchange Act of 1934, the U.S. Securities and Exchange Commission (SEC) has full authority over the offer, sale, and the trading of securities, including investment contracts, and the derivatives trading of securities. Under the federal securities laws, every offer and sale of securities must be either registered with the SEC or conducted under an exemption. The Commodity Exchange Act (CEA) and the Commodity Futures Trading Commission (CFTC) regulations promulgated thereunder provide a comprehensive regulatory regime for the trading of commodity derivatives (e.g., buying or selling futures contracts on corn, cattle, or oil).
Under the CEA, the CFTC also has “after-the-fact” enforcement jurisdiction over fraud and manipulation in the “spot” or cash commodity markets (e.g., buying or selling bushels of corn, heads of cattle, or barrels of oil). The CFTC has no power, however, to impose registration and regulatory requirements on participants in the cash or spot commodity markets. Currently, there is no comprehensive federal regulatory regime for the spot trading of commodities.
Determining whether a digital asset is offered as part of an investment contract (i.e., meeting the definition of a security) or falling under the definition of commodity in the CEA has proven difficult in the United States. Until there is a consistent, clear framework in place, market participants, consumers, and investors will continue to seek regulatory clarity given the requirements that stem from the classification of a particular digital asset. Additional information can be found here.
VIDEO of Rep. Torres’s five minutes of questioning can be found here.
VIDEO of the full hearing can be found here.
A RUSH TRANSCRIPT of Rep. Torres’s remarks and questioning is below, as delivered:
REP. TORRES: Thank you, Mr. Chair. Here in Congress, we have what I would describe as anti-crypto derangement syndrome that clouds clear thinking about crypto regulation. Although there are too many myths to dispel, I will take the occasion to address a few of them. Myth, a statutory framework for crypto would underly nine decades of securities law. Fact, the New York State Department of Financial Services has an alternate framework for regulating virtual assets. And far from undermining securities regulation, DFS has shown itself to be the most rigorous regulator of crypto in the world. Myth, there’s no need at all for the SEC to provide regulatory clarity and guidance, and that calls for clarity and guidance are nothing more than a pretext for evading lawful compliance. Fact, even the investor advisory committee, which
favors Gary Gensler’s approach to enforcement, concedes that there was in fact a need for regulatory clarity quote, “the SEC should consider issuing a request for comment regarding areas where additional guidance is needed, related to the application of federal securities laws to crypto assets.” Myth, it does not matter at all if crypto is driven offshore. Fact, offshore, deregulated, overleveraged companies like FTX carry the greatest risk of losing customer funds, a point that Gary Gensler himself did not dispute when pressed under questioning. Myth, registration with the SEC is just a form on a website. Fact, the notion of registration that’s just a form on the website is patently false. So false, in fact, that it would come as a shock to all the securities lawyers and companies spending billions of dollars on SEC registration and compliance. Myth, the SEC has the right to crack down on crypto because the technology has no utility, it does more harm than good. Fact, the SEC is statutorily designed to be a narrative-neutral regulator. Even if the SEC Chair were as omniscient as God Himself, nonetheless, he has no statutory authority to impose his personal judgement about the merits of crypto and blockchain on those of us who disagree with him. The SEC’s only role is to correct information asymmetries and mandate disclosures to protect investors. So, my first question, you know, one can imagine a digital asset that begins as a security, but then over time morphs into something else as it becomes decentralized. Either, for example, was arguably a security at the time of the ICO, but then arguably became a commodity as it became decentralized. If a digital asset no longer has a central team from whose efforts investors expect to derive the profit, should there be a process by which that digital asset transitions from securities regulation to commodities regulation? Mr. Kulkin, do you want to take a shot?
MR. MATTHEW KULKIN, Partner and Chair, Futures and Derivatives Practice and former Director of the CFTC’s Division of Swap Dealer and Intermediary Oversight: Congressman, firstly, thank you for your remarks. I agree with your sentiment, and I think about these issues as being a former markets regulator. And so, it’s really not so much whether I think there’s merit to the products, but for more than market decisions, need to be able to come in and know that the market has integrity, there’s not fraud, there’s not manipulation, activities being surveilled. In terms of transitioning from a security to a commodity, you know, I mentioned this earlier, there’s obviously two endpoints – a token being issued for a capital raise in something that’s a good or an article that’s relatively fungible. The point at which something transitions is really the challenging, it’s challenging to identify that specific inflection point. So, we can look at different characteristics of the security would…
REP. TORRES: You would agree that whatever regulatory framework we developed would have to delineate that process?
MR. KULKIN: Absolutely, yes sir.
REP. TORRES: So, you have no clear sense of how that process should unfold?
MR. KULKIN: It really depends on the facts and circumstances. And we’ve talked today about how these
products and these markets are different than traditional debt, securities, or equity support. And so, I
would love to point out a clear bright line here.
REP. TORRES: So, we typically do with the exception of stablecoin, which we think of as a currency in the strictest sense of the word. You typically think of digital assets as a binary – either a commodity or security, or those two categories exhausted, or are there other categories that you should keep in mind? I see you waving your head. So that’s…
MR. TIMOTHY MASSAD, Research Fellow, Harvard Kennedy School Mossavar-Rahmani Center for Business and Government and Director, M-RCBG Digital Assets Policy Project: Congressman, first of all, something can be a commodity under our laws, such as Ether by virtue of the fact that there is a futures contract traded on it. That doesn’t necessarily mean it is not a security. You can have something that’s both. And the question for a lot of these tokens is, is there still that enterprise behind it, that is affecting its value? I’m not saying Ether is still a security, but I’m saying those questions still exist. And yes, we need a transition. It’s really a transition from when should all the securities laws that go to capital raising, stop applying because you really don’t have an entity behind it and enterprise bonds? We should have a process that addresses that.