Senate Bipartisan Agreement With Industry On Scope Of Crypto Regulation For CFTC

This week, the U.S. Senate Committee on Agriculture, Nutrition, and Forestry held a full committee hearing on “Examining Digital Assets: Risks, Regulation, and Innovation” on the 9^th of February. The top Democrats and Republicans on the committee last month sent a letter to the CFTC calling for the regulator to take a more active role in overseeing cryptocurrencies.

As the committee with authority over the Commodity Futures Trading Commission (CFTC), the Senators were interested in understanding what steps they could take to improve regulation of digital assets, while encouraging innovation and being mindful of risks. Chair Debbie Stabenow (D-MI) and Sen. John Boozman (R-AR) indicated they were open to expanding the CFTC’s mandate beyond its traditional role of oversight of the derivatives and options markets.

“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,” stated Stabenow.

“There’s a gap in the oversight of digital assets. This poses a danger to the American consumer and could threaten the resiliency of our financial markets if left unchecked. We have an opportunity here to broaden participation in our financial markets, but this must be paired with consistent rules of the road that protect investors and our markets,” said Boozman who is also calling for a clearer regulatory framework that does not stifle market growth or innovation.

The committee held two panels, the first with new CFTC Chairman Rostin Behnam, and the second panel comprised of industry, associations, and academia including: Ms. Sandra Ro, CEO, Global Blockchain Business Council and Global Digital Finance Board Director, Mr. Samuel Bankman-Fried, Founder and CEO, FTX; Ms. Perianne Boring, Founder and CEO, Chamber of Digital Commerce; and, Mr. Kevin Werbach, Professor, Wharton School at the University of Pennsylvania.

Panel One – CFTC Chairman Rostin Behnam

CFTC Chairman Rostin Behnam was solo on the first panel and testified that the “digital asset market…is unique and presents many novel issues for the CFTC, given our limited authority to police these markets.” He further stated that the CFTC was “well-suited” to play a role in the oversight and regulation of the digital asset cash commodity market, though surveillance tools are currently limited and enforcement actions have relied on whistleblowers and tips.

He noted that these markets are unique because they involve retail traders taking on high levels of risk, including leverage. He also said that any regulatory action should involve increased transparency around the energy use of miners. He requested that Congress grant the CFTC additional authority to regulate crypto spot markets, including visibility into order books and rules around custody and execution.

Members of the Committee were curious as to why state-based regulations are inadequate and expressed concerns about mission creep if they granted the CFTC additional authority. Chair Behnam encouraged Congress to be extremely targeted in any additional authority they give the CFTC to avoid mission creep. He said state-based regulators are extremely important, but it would be best to have a single point of entry for market participants.

Chair Behnam highlighted that the biggest regulatory gap is what constitutes a security or a commodity. Other members of the Committee pointed out that minorities are over-represented in the crypto space and advocated for consumer protections while avoiding over-regulating the industry.

It was a masterful performance, and Chairman Behnam should be commended for the clarity of his comprehensive consideration of the regulatory landscape and his response to the committee, in what is and has become, a regulatory minefield for the (global) crypto and digital assets sector in the U.S.

Panel Two – Crypto and Digital Assets Industry

Ro outlined the key attributes of blockchain technology and its importance as a secure store of value and consensus mechanism saying that blockchain “makes cooking the books or tampering the records extremely difficult”. She cited several relevant use cases including; First National Bank of Omaha using blockchain for cattle identification and record keeping; Circulor, using blockchain to track critical minerals from mines to market to recycling; and, the InterWork Alliance and Microsoft working on the tokenization of the voluntary carbon credit market.

In her written testimony, Ro emphasized the U.S.’ role in leading the industry and the role of the CFTC in establishing “the guardrails and market environment for blockchain and digital assets, especially as the volume of crypto-related futures and options markets has expanded.”

Bankman-Fried stressed the equitable access in the crypto industry, as data is freely available, as opposed to the traditional finance industry. In the traditional finance industry, retail consumers have to go through a variety of intermediaries, and only sophisticated market participants can transact directly with exchanges and access the best liquidity. In the digital asset ecosystem, everyone is allowed to send orders directly to an exchange in the same way.

Bankman-Fried highlighted the lack of clarity around the regulation of cash commodity markets, such as those on which bitcoin trades and indicated the CFTC is well suited to regulate these markets and welcomed additional federal oversight, which would help move volume and liquidity back to the U.S.

Boring, who following the financial crisis was a staffer in Washington dedicated to the improvement of the financial system for greater social inclusion, believes blockchain technology is the best hope we have for achieving this. Boring emphasized that bitcoin and blockchain and the democratization of financial services represent American values at their core and pointed out that other countries, singling out China, have fully embraced the “digital space race” and have prioritized blockchain at the center of their digital infrastructure policies, while the U.S. has hardly begun.

Boring encouraged the U.S. government to recognize the private sector as its greatest asset and urged the committee to increase regulatory clarity and cohesion.

Werbach focused on blockchain and digital assets potential to increase efficiency, promote privacy, and create fairer markets, suggesting the dream of a decentralized Web3 is not inevitable. He recommended the CFTC be given regulatory authority where the market activity involved is something that it is well-suited to address.

Werbach highlighted the divide between regulators and emphasized that they should not be allowed to create gaps in regulations and stressed the importance to identify and take down bad actors to create more trust in the industry. He noted that things like pump and dump schemes, wash trading, and exchanges listing tokens they are invested in, are distressingly common.

During the committee’s questioning, Ro addressed climate concerns related to Bitcoin mining, saying that “what we have today is actually an opportunity… mining has shifted to the U.S., Canada, and Nordic countries… [so, Congress] should encourage crypto mining firms to set up in an environment with (global) oversight, [to] champion the increase in renewables for the industry.”

Ro encouraged the committee to consider how other jurisdictions, such as Switzerland, have created comprehensive regulatory regimes to encourage and attract innovation citing the economic transformation of the region of Zug, south of Zurich known as crypto valley stating, “FINMA has been very early and clear to define [digital assets], whether something is a utility token, security token, or whatever token it is. They have made very clear definitions. Further, they have come out in front on how they deem different classifications of activities and what falls under their oversight or not. They were also one of the first to come out with a licensing regime.”

The industry panel was unanimous in the need for greater regulatory clarity for the sector and Boring pointed to 60 percent of the global value of the crypto spot market consisting of bitcoin and ether, which the CFTC has classified as commodities, as the indicator for increased CFTC purview. She further highlighted that that this should not be confused with the nascent rise of intentional digital securities which have not been regulated due to the lack of regulatory clarity from policymakers.   

Senate Bipartisan Agreement With Industry

The industry panel was a masterclass in industry advocacy and education, with a single and unified voice on a common message from the global blockchain sector’s largest global member’s association, GBBC, and the largest U.S. member’s association, the Chamber.

The crypto industry and lobby should pay attention. The recent heightened rhetoric and threats from industry voices following the avalanche of agency intentions from the SEC and the President’s Working Group is not helpful to anyone, in particular, the sector, which now in its early and (often) rebellious teens, is seeking its rites of passage in society.

The CFTC leadership from Chairman Behnam with bi-partisan agreement across the Senate Ag Committee and the crypto and digital assets sector is a rare moment for crypto and digital assets. The moment should be embraced as a very positive signal and the right direction of travel for consumers, the sector, and regulators in the U.S. and globally, and is the harbinger for greater collaboration between policymakers, regulators, and industry.