It’s not yet officially summer, but the post-Memorial Day season has been a difficult one for federal lawmakers. Congressional leaders have had to navigate a complex – and contentious – negotiation to avert a default, and in the House, Speaker Kevin McCarthy (R-Calif.) spent the last week quelling a mini-rebellion among House Freedom Caucus members who had held up votes on any bills. Legislation can move forward again in the lower chamber of Congress.
One area where both the House and Senate are ready to get something done is digital assets.
The collapse of the crypto exchange FTX happened more than seven months ago. Congress has been circling the notion of a broad crypto regulatory bill since then, but no major piece of legislation has made it out of committee. That could change soon, however, so this week we will take a look at the status of digital asset legislation and the battle for which federal agency will be in charge of overseeing this burgeoning industry.
But, first, let’s take a look at how the American public feels about the digital asset marketplace.
How Americans Feel About Digital Assets
On Capitol Hill, we can make some generalizations about how members of the two parties feel about digital assets. Democrats are highly skeptical, protective of consumers, and want a strong government hand when it comes to oversight, enforcement, and regulation in the crypto arena. While Republicans are not entirely without doubt or anxiety, GOP lawmakers do seem to prefer a lighter regulatory touch.
Americans mirror these mixed feelings. They are quite worried about the potential risks posed by digital assets, but only a bare majority think strong regulation is necessary.
A CNBC survey fielded just days after the FTX collapse found 43 percent of voters had a negative view of cryptocurrencies, up from 25 percent in March 2022. That survey also found 53 percent said digital assets should “have the same or greater regulation and oversight as stocks and bonds.” That number represents a majority, but the surge in favor of strong regulation is hardly overwhelming.
Other polls show different results, however. A survey taken by The Harris Poll in October 2022, for example, found 81 percent of Americans believe there should be clearer cryptocurrency industry regulation. The parties were relatively united: 88 percent of Democrats and 77 percent of Republicans said clearer rules are needed.
Note in that poll, though, the question was about “clearer” rules, not stronger ones.
Still, the worries may be well-founded. According to a poll by LendingTree released earlier this year, of the 28 percent of respondents who said they held some sort of digital asset, a plurality (38 percent) said they ended up selling that asset for less than it was worth when they purchased it.
If digital asset values fall again, we could see a surge in public support for tougher rules.
Is Bipartisanship Possible When It Comes To Crypto?
On June 2, House Financial Services Committee (HFSC) Chair Patrick McHenry (R-N.C.) and House Agriculture Committee Chair G.T. Thompson (R-Penn.) released draft crypto regulatory legislation. The HFSC held hearing on the bill yesterday.
The comprehensive draft represents a rare instance of the two committees working collaboratively to produce a joint bill. In addition to cross-committee collaboration, there is hope for bipartisanship. Indeed, Chairs McHenry and Thompson would like any crypto bill to have the support of members of both parties. When they introduced the bill, the two signaled to Democrats that they are open to amendments. Chair McHenry went so far as to tell his fellow lawmakers yesterday, “Please share your input; this is a draft bill. There’s plenty of time for members to find common ground.”
Chair McHenry said his panel could potentially vote on a digital asset bill when lawmakers return from the Fourth of July recess.
Amendments are likely during that session since the GOP draft bill would cede quite a bit more authority to the Commodity Futures Trading Commission (CFTC) than the Securities and Exchange Commission (SEC) — certainly more than most Democrats would prefer. The legislation does this by:
Providing the CFTC with new, exclusive regulatory jurisdiction over digital commodities trading that occurs via entities established by the bill: digital commodity exchanges, digital commodity dealers and digital commodity broker;
Moving crypto tokens from the SEC’s jurisdiction to the CFTC’s by establishing a certification process;
Prohibiting the SEC from denying a trading platform from operating as an Alternative Trading System on the basis that it trades digital assets; and
Creating an exemption from securities laws for the sale of digital assets that meet a certain set of conditions.
While House lawmakers are barreling ahead, legislation is moving more slowly in the U.S. Senate. Last August, Senate Agriculture Committee Chair Debbie Stabenow (D-Mich.) and Ranking Member John Boozman (R-Ark.) released digital asset legislation that would have given the CFTC the role as primary crypto overseer. That bill effectively died last December when the 117th Congress adjourned. Sens. Stabenow and Boozman have not reintroduced their bill in the current Congress.
Perhaps that is because there are mixed feelings. According to Reuters, at the time she introduced her bill last year, Chair Stabenow said the legislation was not meant to undermine the ability of the SEC to police crypto products. “We’re not defining what a security is. I have great confidence in [SEC Chair Gary] Gensler to be able to use his authorities,” Chair Stabenow told reporters.
In a Senate Agriculture Committee hearing a few months ago, CFTC Director Rostin Behnam made it clear the CFTC needs enhanced powers. Specifically, Behnam testified, “By the time the CFTC is able to exercise its enforcement authority, it is generally too late for defrauded customers and too late to isolate and contain the fallout from attendant bankruptcies, failures, and flights to liquidity. Comprehensive regulation would enable us to establish market structures and regulatory barriers, guardrails, and guidance that would prevent fraud before it happens, and fully deploy transparency and surveillance tools to see fraud when it does occur.”
Will The SEC Fight Republicans’ Digital Asset Legislation?
Based on developments last week, it does not seem the SEC and Chair Gensler are likely to give up control over digital asset oversight without a fight. Politico noted Chair Gensler “has given no indication that the SEC is easing up on crypto firms that resist its authority even after nailing the market’s largest players. If anything, the SEC chair appears more emboldened — and empowered — than ever to go after the ‘Wild West,’ as he has long called crypto.” (To be sure, as Politico also has noted, the House bill would not “eliminate the SEC’s role in the market.”)
Shortly after Chairs McHenry and Thompson announced plans for a joint hearing, the SEC dropped the news that it was suing crypto exchanges Binance and Coinbase. Among other things, the agency alleged the companies were operating unregistered stock exchanges.
Rep. French Hill (R-Ark.), who chairs the HFSC’s digital assets panel, called the timing of the lawsuits “an interesting coincidence.” Coincidence, indeed.
And how involved will the White House be in this fight? While the Biden administration has put down markets when it comes to digital assets, it is not been entirely clear about which agency, the SEC or the CFTC, it prefers to be in charge.
Last September, the White House released the “first-ever” comprehensive framework for the development of digital assets. That framework “encouraged”:
The SEC and CFTC “to aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.”
The Consumer Financial Protection Bureau and Federal Trade Commission “to redouble their efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices.”
Relevant agencies to issue guidance and rules to address current and emergent risks in the digital asset ecosystem; to collaborate to address acute digital assets risks facing consumers, investors, and businesses; and to share data on consumer complaints regarding digital assets.
The Financial Literacy Education Commission (FLEC) to launch a public-awareness campaign “to help consumers understand the risks involved with digital assets, identify common fraudulent practices, and learn how to report misconduct.”
Of course, we’re in the midst of the 2024 presidential campaign, and President Joe Biden’s opponents for the 2024 Democratic presidential nomination are making their opinions known. At least one is taking a less-than-Gensler-like approach.
After President Biden proposed a huge tax on crypto as part of his fiscal year 2024 budget outline, Robert F. Kennedy Jr. said, “It is a mistake for the U.S. government to hobble the industry and drive innovation elsewhere.” According to Coindesk, Kennedy also has said U.S. regulators are waging “an extra-legal war on crypto.”
Based on the polling cited above, while those opinions are somewhat out of step with the American public, they do make one thing clear: when it comes to what Congress should do about digital asset regulation, the potential for Republicans to find strange bedfellows in support of their pro-CFTC legislation is real.