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Volume XIII, Number 39

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Senate Hearing Advocates Limited Digital Asset Regulation Reform Including CFTC Regulation of Bitcoin and ETH

On September 15, 2022, the Senate Committee on Agriculture, Nutrition, and Forestry (the “Ag. Committee”) held a hearing to discuss Senate Bill 4760, titled the Digital Commodities Consumer Protection Act of 2022 (the “Bill”) which was introduced by Senators Debbie Stabenow (D-MI) and John Boozman (R-AR). Senate Minority Whip John Thune (R-SD) and Senator Cory Booker (D-NJ) joined as original co-sponsors. The Bill lays out a framework for potential oversight by the Commodity Futures Trading Commission (“CFTC”) over certain parts the cryptocurrency market.

The Ag. Committee has been charged with overseeing the CFTC ever since the CFTC’s creation roughly one hundred years ago following the enactment of the Grain Futures Act of 1922. The CFTC was created in large part to oversee what was, at the time, a new and developing commodities futures market. The Bill is one of a number of bills currently before Congress regarding the regulation or reform of the digital asset industry, including Senate Bill 4356 titled the Responsible Financial Innovation Act, sponsored by Senator Cynthia Lummis (R-WY) and Senator Kristen Gillibrand (D-NY) which also attempts to create a more comprehensive regulatory framework for digital assets

Current CFTC Chairman Rostin Behnam commented in his opening remarks the appropriateness of discussing the CFTC’s potential role in overseeing another developing market, the digital asset commodities market, on this hundred-year anniversary. Chairman Behnam’s complete opening remarks are available here.

The Ag. Committee meeting was split into two sections: the first of which Chairman Behnam served as the sole witness for, and during the second session committee members asked questions of various industry experts who were invited to speak.

Through both sessions, digital assets were classified in three separate groupings: (1) digital asset commodities (which Ag. Committee Chairwoman Deborah Stabenow specifically said Bitcoin (“BTC”) and Ethereum (“ETH”) fall under); (2) digital asset securities; and (3) stablecoins. The bill’s proponents made clear that this bill only sought to regulate the first grouping (digital asset commodities) and merely be a “piece of the puzzle” on digital asset regulation which necessarily would require other regulations covering digital asset securities and stablecoins.

Topics of Discussion During Hearing

Throughout both sessions of the hearing, there was an emphasis on the need for regulation which provides regulatory clarity and keeps innovation and market development in the United States, while also providing much needed consumer protection. Some potentially interesting discussions from the hearing include:

  • As stated above, Chairwoman Stabenow and many others on the committee treated it as a forgone conclusion that BTC and ETH are in fact commodities and should be regulated as such. This somewhat follows the position of the now controversial  “Hinman Speech” in which then acting SEC Director of Corporation Finance Bill Hinman took the position that ETH along with BTC had become “sufficiently decentralized” to no longer be considered securities. The SEC has since distanced itself from that position with respect to ETH.

  • There was significant focus about the access digital assets can provide to individuals and communities who are underserved by the traditional banking industry, while also noting the lack of regulation has made these already vulnerable communities even more vulnerable to fraud and mismanagement. There seems to be strong interest by the Ag. Committee to get at least some regulation related to digital assets through Congress in the next 6-12 months, even if political realties make that unlikely.

  • Chairman Behnam stated his office estimates it will need an additional $112 million in the next three years to fund the necessary resources to oversee the digital asset commodities industry, including rulemaking, hiring, training, and outreach. This increased budget is anticipated to be paid for by user fees on digital asset commodities trading platforms under the Bill. This request does open the Chairman to the cynical view that at least part of his motivation is to expand his judication and budget.

  • Multiple Senators emphasized that they do not believe blockchain technology and the overarching Web3 ecosystem is a phase, and the pressing need for regulatory clarity in the United States on many issues facing this industry to prevent the country from falling behind economic rivals (primarily, China).

  • Senator Gillibrand and many of the industry expert witnesses applauded the Bill as a great first step, but they noted that the Bill’s current form, including definitions of decentralized finance (“DeFi”), what constitutes a “digital asset commodity” vs. a “digital asset security”, and what actions make an entity a broker/dealer, will need revisions before the Bill can move forward.

While there appeared to be almost universal acknowledgement of the committee members and witnesses that this Bill is not a complete solution to the lack of regulatory clarity in the digital asset industry, committee members generally indicated support on a bipartisan basis. There is hope that due to the bipartisan nature of the Bill, its seemingly large support amongst Ag. Committee members, and the almost unquestioned need to have some regulatory clarity in this space, that the Bill’s next round of edits and comments can be expected on an expedited basis. However even if the Ag, Committee were to vote in support of the Bill, its passage by the full Senate and of a comparable bill in the House remains fraught with challenges.

Other Digital Asset Related Hearing on September 15, 2022

The Ag. Committee hearing on the Bill took place at the same time as the Senate committee on Banking, Housing, and Urban Affairs conducted a hearing to question Gary Gensler, Chair of the U.S. Securities and Exchange Commission (“SEC”) regarding the SEC’s regulation of the digital assets industry. It is unclear if these overlapping hearings were coincidental. During the Ag. Committee hearing on the Bill, multiple committee members questioned the CFTC’s ability to work together with the SEC to avoid creating a bureaucratic quagmire of competing federal agency oversights which would be harmful to the industry and, ultimately, the consumers. While Chairman Behnam was confident the agencies could work together on this, similar to how they work together in the swaps markets and oversight of other duel registered entities, Chair Gensler indicated that the two agencies often have overlapping jurisdiction and suggested that the SEC should implement a security-based swap execution facility regime similar to that implemented by the CFTC when Gensler was the head of that agency.

It remains to be seen, however, if the SEC will endorse or support the Bill’s attempt to place a level of regulatory oversight over the digital asset industry into the hands of the CFTC instead of being under the sole purview of the SEC.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume XII, Number 259
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About this Author

Associate

Jonathan Schmalfeld is an Associate with Polsinelli's St. Louis office. He is committed to understanding how privacy, data security and technology impact each client’s business model, practices, and objectives to help protect their investment in various technologies. He negotiates complex technology and related transactions for clients across a variety of industries. Jonathan’s practice focuses on advising clients in privacy and data security matters, including both litigation and counseling on compliance with domestic and international privacy and data security laws and regulations.

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Dan McAvoy focuses his practice on private closed-end investment funds, corporate finance and M&A with a focus on private investment fund transactions, including complex GP-led restructurings and secondary transactions. Dan is a trusted adviser to numerous investment advisers, fund sponsors and investors, and has represented a range of companies, from startups to Fortune 500 companies. Dan has also represented portfolio companies and sponsors through all parts of the corporate life cycle, including formation, venture financings, add-ons, stock sales, asset sales, private and...

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Stephen Rutenberg’s practice focuses on the intersection of special situations investing and FinTech including cryptocurrency and blockchain technology. 

A significant component of Stephen’s practice relates to his work in the distressed debt market, representing clients in the purchase and sale of loans and securities of distressed and bankrupt companies. Recent representations include advising on the purchase, sale and financing of bankruptcy trade claims in several major chapter 11 cases, including Lehman Brothers, and the MF Global and Icelandic bank liquidations. He works with...

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