Can Lawmakers Agree On Digital Asset Legislation?
Earlier this year, House Financial Services Committee (HFSC) Chairman Patrick McHenry (R-N.C.) said addressing digital assets was a key priority for his committee in the 118th Congress.
Today and tomorrow, his panel will consider a handful of potentially momentous bills on this subject. The committee’s stated goals are to “provide clarity for the digital asset ecosystem” and to “establish clarity for payment stablecoins.” While Republicans and Democrats both have expressed worries – and interest – about digital assets, there are still major differences between the two parties in how to approach oversight over the marketplace.
As one “inside the Beltway” newspaper put it, at the heart of the parties’ disagreement is an issue that has created divides on Capitol Hill for decades: whether digital assets should be considered securities, which are regulated by the Securities and Exchange Commission (SEC), or commodities, which are regulated by the Commodity Futures Trading Commission (CFTC). Who believes what, and will their differing views keep federal lawmakers from writing new rules for the industry?
Let’s take a look.
Where Republicans stand on digital assets
Digital asset legislation is not the only matter on the HFSC’s docket this week. Yesterday, committee Republicans introduced four bills meant “to address the threats environmental, social, and governance (ESG) initiatives pose to the American financial system.” The fact that GOP lawmakers are tackling ESG and digital assets in the same week is not a coincidence.
That’s because, for Republicans, the SEC is at the heart of both issues. Republicans believe the SEC already wields too much power and that its leaders still want more. As Politicowrote last fall, that claim is not entirely untrue. The SEC “is pursuing new rules that would force companies to disclose their carbon emissions and fundamentally revamp the stock market’s inner workings.” HFSC Republicans even created a task force to “combat the threat to our capital markets posed by those on the far-left pushing” ESG proposals. The SEC is target number one for that task force.
While Republicans are normally more skeptical of federal regulation in general, when it comes to digital assets, most GOP lawmakers believe Congress needs to put forth a framework giving the federal government the power to provide strong oversight of the crypto arena. Indeed, at a hearing in June, Chairman McHenry said, “We are at a critical moment for American dynamism. We can choose the side of financial freedom, innovation, inclusion, and American competitiveness and important consumer protections at the same time. Or we can let this moment pass us by and surrender our leadership of the global financial system to other countries.” Rep. McHenry also has said, “Our goal is to strike the appropriate balance between consumer protection and encouraging responsible innovation.”
Republicans would strike that balance by largely sidelining the SEC and putting the CFTC in charge of digital asset oversight. In other words: while SEC Chairman Gary Gensler has said most digital assets act as securities, Republicans, who are not particularly eager to see Gensler lead the charge on crypto, believe they are commodities.
As CNBC explained when Rep. McHenry introduced his draft bill earlier this summer, while the legislation would allow the SEC to regulate digital-asset securities, it also would prohibit the SEC from preventing an alternative trading system from listing crypto securities and it would require the SEC to “modify its rules to allow broker-dealers to custody digital assets.” The bill as formally introduced on July 20 also gives the CFTC primary jurisdiction over digital asset markets.
That digital asset bill, called the Financial Innovation and Technology for the 21st Century Act, also would place new encumbrances on the SEC when it comes to regulation and oversight in general – and not just in the digital assets marketplace. Specifically, according to Yahoo! Finance, the legislation would “require the SEC to take ‘innovation’ into account when enacting new regulations.”
Given their position on digital asset legislation and regulation in general, Democrats may see that single provision as a poison pill and reason to oppose the Financial Innovation and Technology for the 21st Century Act on principle.
Where Democrats stand on digital assets
While Democrats normally are more willing than their GOP counterparts to embrace new regulation, when it comes to digital assets, they are more likely to argue the current financial regulatory regime provides ample options to provide robust oversight. In May, Cointelegraph put the gulf between the two political parties this way: “While some lawmakers (primarily Republican) believe there’s no workable framework for crypto in the country, others (primarily Democrats) are certain the existing regulation is enough to ensure compliance.”
Many Democrats are more comfortable with the existing regime because it would keep the SEC in the driver’s seat.
At a hearing in March, Rep. Stephen Lynch (D-Mass.), the ranking member on the HFSC’s Subcommittee on Digital Assets, Financial Technology, and Inclusion took his Republican counterparts to task, arguing the GOP’s opposition to keeping the SEC in charge of oversight actually would allow the industry to take advantage of consumers.
“Crypto companies must come into compliance with existing securities laws that ensure that investors and markets are protected,” Rep. Lynch said. “The crypto industry, and many of my Republican colleagues, have spun a false narrative that the SEC regulates through enforcement and makes it impossible for the industry come into compliance, when in reality, the SEC is enforcing the laws that Congress directed it to and has provided appropriate direction. … This attack on the SEC is a tactic employed by the crypto industry to evade compliance with the law because the industry knows that it would not meet the justifiably high standards that make our financial system the envy of the world.”
HFSC Ranking Member Maxine Waters (D-Calif.) has expressed similar concerns. At the committee’s June hearing, she noted the GOP draft bill appeared to “halt any enforcement actions by the SEC against crypto firms, even when they have committed fraud.”
Like Rep. Lynch, Ranking Member Waters also believes Congress does not really need to create a specific set of laws for digital assets. She told Roll Call, “[W]e do not need to create an entirely new and special framework for crypto — we already have one.”
According to Punchbowl, the two parties also have differences when it comes to stablecoins, which are cryptocurrencies whose value is tied to another currency, commodity, or financial instrument. Specifically, Republicans and Democrats do not see eye-to-eye on the Federal Reserve’s role. GOP lawmakers want to empower state regulators to approve nonbank stablecoin issuances while limiting the role of the Federal Reserve, which “means state-regulated firms that aren’t banks will have virtually no direct federal oversight.” Democrats oppose that measure and say the Fed must be involved in stablecoin oversight.
Ranking Member Lynch also has criticized the HFSC’s process for developing digital asset legislation so far. He has said the “consumer’s voice has been missing.”
So what are those consumers voices telling lawmakers to do?
What consumers want Congress to do
The data indicates that Americans clearly are worried about, and skeptical of, digital assets.
According to a Pew Research Center survey taken in March, 75 percent of Americans who say they have heard about cryptocurrency are not at all confident or not very confident in the reliability and safety of these assets. Only six percent are extremely or very confident in cryptocurrencies. (The rest of the sample told Pew they are “somewhat confident” in the reliability and safety of digital assets.) About half of Americans (45 percent) who have invested in digital assets said they are worse off because of it.
When Americans are fearful of an industry or a product, they generally favor more regulation and, indeed, that is what at least one other survey has found.
As CoinDesk reported at the time, a national poll conducted by the Crypto Council for Innovation last fall found 52 percent of Americans want more regulation of the digital asset industry. Only seven percent said they think the industry should be less regulated. The other 41 percent were evenly split between thinking the industry already was sufficiently regulated or not having an opinion. In another poll, Coinbase found institutional investors overwhelmingly favor additional regulation.
Take these polls, which were fielded by representatives of the industry, with a grain of salt. Independent polls tell a different story.
The independent polling firm Morning Consult has been tracking all things digital assets for several months. One of the questions it has asked Americans is whether cryptocurrency should be more, less, or similarly regulated relative to financial assets such as securities and investment funds. Support for more regulation has grown over the last several months, from 17 percent in January 2022 to 29 percent in April 2023, but those numbers are far from the majority in favor of regulation that the Crypto Council found. More respondents still told Morning Consult the industry should be similarly regulated (27 percent) or less regulated (10 percent) than securities and investment funds.
On this issue, Americans are as divided as Congress.
How likely is it that Congress will act?
As Roll Call reported, Democrats are open to “narrowly tailored legislation to close specific gaps in regulation.”
The broad digital asset legislation the HFSC will tackle today and tomorrow is far from narrowly tailored. While the GOP’s legislation may make it out of the committee and even find favor among the majority of the U.S. House of Representatives, the Senate is highly unlikely to embrace it — especially when Sen. Cynthia Lummis (R-Wyo.), a self-described crypto champion, has worked more closely with Democrats to craft an alternative. Senate Agriculture Committee Chair Debbie Stabenow (D-Mich.) and Ranking Member John Boozman (R-Ark.) also have been working on bipartisan legislation. (To be sure, these bills also limit the SEC’s role in digital asset regulation.)
In May, Cointelegraph concluded, “Efforts to explicitly strip the SEC of regulatory and enforcement authority are not likely to succeed, whether they are aimed at conferring that authority on the CFTC or a new self-regulatory organization.”
Two months later, that still seems to be the case.