Yesterday, Sept. 24, CryptoX reported from the United States House Financial Services hearing with the chairman and four commissioners of the Securities and Exchange Commission (SEC). The hearing was informational and touched on a number of issues that have been plaguing the conversation in the U.S. about regulating cryptocurrencies — a conversation that the release of Facebook’s white paper for Libra in June amplified significantly.
Congressional attitudes: A study in contrasts
The range of attitudes on display yesterday among members of the Financial Services Committee was broad. Brad Sherman — who coined the term “Zuck Buck” back in July — retained his hawkish stance, saying:
“The U.S. dollar is extremely good currency […] It fails, however, to meet the needs of tax evaders, sanctions evaders, drug dealers and terrorists.”
On the other end of the spectrum, Warren Davidson took his five minutes to question the representatives of the SEC as an opportunity to plug his Token Taxonomy Act and say: “I do hope that blockchain can play a role in the data security concerns that this country has,” to the delight of the crypto community.
Indeed, the only consistent position among House members seemed to be a shared sense that they really should figure this out quickly. Such disparity in vantage points is not the only reason that no clear course of action has emerged over a summer of congressional hearings to determine how to incorporate cryptocurrencies into the U.S. financial system.
Status of crypto: A study in contradictions
The bulk of the Financial Services Committee has no interest in any extreme preventative measures like trying to ban Libra, and certainly would struggle to do so with other cryptocurrencies that are not tied to a company like Facebook that is easy for the U.S. government to reprimand, as the Federal Trade Commission did to the tune of $5 billion for violating consumer privacy.
In July, Ranking Member Patrick McHenry explained the plight facing regulators, saying:
“The world that Satoshi Nakamoto, author of the Bitcoin whitepaper envisioned, and others are building, is an unstoppable force.”
Broadly speaking, most members of the House Financial Services Committee and their counterparts in the Senate Banking Committee have seemed guarded but curious about cryptocurrencies — though hostility toward Facebook, particularly, is a common theme.
Digital assets have proven new enough territory for regulators and legislators alike that nobody is eager to make the first move. As Rep. Bill Huizenga put it while speaking to CryptoX, he and his colleagues are “trying to figure out regulatorily ‘is it fish or fowl,’ and it turns out it’s kind of a platypus.” When asked whether Libra and cryptocurrencies at large should be interacting with the SEC more closely, Huizenga answered:
“I would put myself in the same category as where a lot of the other regulators are, which is trying to figure out when and how they interact, because you don’t want to be stifling innovation, you don’t want to be stifling the creativity that is there, and at the same time you’ve got to protect investors.”
This double-bind also plagued the other side of the hearing, with the witnesses from the SEC reluctant to refer to specific cryptocurrencies or make unambiguous statements about what should happen next. When asked whether legislation or regulation was the next step, Commissioner Robert Jackson Jr., who testified before the committee, told CryptoX:
“Is this going to be more of a legislative move or an SEC move? […] At the moment I don’t know.”
Perhaps Jay Clayton, Chairman of the SEC, put it best in response to a line of questioning from Rep. Al Green as to how to define a security:
“I think statements like ‘if it doesn’t produce a return, it’s not a security’ — I think that’s a bit of an oversimplification. […] A lot of lawyers will spend a lot of time figuring out just where that line is.”
The Chairman of the SEC is under obligation to be much more of a subject matter expert when it comes to securities law than can be expected from a given congressperson, yet Clayton deferred to future prosecution rather than legislation or declarations from his office. It is doubtful that this is because he lacks opinions on the matter, but he and his colleagues are playing them close to the chest.
Terra nova for securities law
The reality is that securities law is slow to change. The SEC’s authority still rests on two acts passed during the heady days of the Great Depression: the Securities Act of 1933 and the Securities Exchange Act of 1934. As Rep. Jim Himes pointed out at yesterday’s hearing, the SEC prosecutes even an offense as familiar as insider trading without specific legislation behind it, instead relying on anti-fraud and anti-manipulation authorities.
While the Token Taxonomy Act would indeed be useful in establishing baseline definitions for how legislators treat different cryptocurrencies, the bill — like its predecessor — has seen limited action since introduction in April.
Legislation will have to come eventually, but it’s unlikely that Congress is going to be the first party to blink. There will be more hearings. Per an Aug. 23 announcement from Chairwoman Maxine Waters, among the Financial Services Committee’s priorities for the fall were:
“Conducting an ongoing review of Facebook’s proposed cryptocurrency and digital wallet […] exploring data privacy; examining the use of artificial intelligence in financial services; and reviewing the evolution of payments and cash.”
However, hearings have been slow to turn into law, especially when the members of the Financial Services Committee still lack much of the technical knowledge necessary to speak with conviction as to next moves, and especially when later on Sept. 24, Speaker of the House Nancy Pelosi announced that the House would be initiating an impeachment inquiry into President Trump, which is absolutely going to take center stage in the House for the foreseeable future.
What to look for next
Similarly, it’s probably foolish to wait for grand initiatives from the commissioners of the SEC, but the commission is already taking decisive action in the courts and in their approvals — using existing law and limiting grandiose statements.
Blockstack’s $23 million token offering earlier this month was a landmark both thanks to its scale and the fact that the company had received SEC approval in advance — a first. The race to get the SEC stamp for the first Bitcoin (BTC) exchange-traded fund (ETF) will also be one to watch. The same day as the hearing, the commission started publishing that it was looking into Wilshire Phoenix’s request to change a rule to allow NYSE Arca to list their BTC ETF.
On the other hand, the SEC has concluded a huge number of cases against initial coin offerings from 2017 and early 2018 this past summer, many ending in settlements of well over $10 million. Even without a change to formal rules, these cases demonstrate a clear willingness to pursue bad actors and will continue to establish the industry’s guard rails of precedent, which will, for the time being, have to precede new law.
Financial Services Committee Chairwoman Maxine Waters was unavailable for comment, as was the SEC’s Senior Advisor for Digital Assets Valerie Szczepanik.
