Casey Wagner

The House Committee on Agriculture Subcommittee on Commodity Markets, Digital Assets and Rural Development gathered Thursday to discuss “regulatory gaps” in cryptocurrency spot market regulation.&nbsp;



The conversation revolved around token classification: Are cryptocurrencies securities or commodities? Both sides of the aisle expressed interest in making the passage of a comprehensive legislative framework a priority.



Subcommittee Chair Dusty Johnson, R-S.D., kicked off the conversation by emphasizing the need for innovation; we need to ensure “the next Ethereum” is able to emerge, he said. Johnson added that bipartisan cooperation is key, and the CFTC, SEC and state banking regulators also need to be a part of the conversation around spot market policy.



Hearing witness former CFTC Chair Timothy Massad used his prepared <a href="https://docs.house.gov/meetings/AG/AG22/20230427/115803/HHRG-118-AG22-Wstate-MassadT-20230427.pdf">testimony</a> to advocate for what he called an “alternative approach” to the crypto token classification issue: Congress should direct the SEC and CFTC to “develop joint rules” to determine what constitutes both commodities and securities.&nbsp;



The SEC’s current regulation-by-enforcement strategy is time consuming and inadequate; court case precedent is not enough clarity, Massad added.&nbsp;



While crypto fans can certainly get behind this opinion, Massad cannot answer one burning question from the industry: Is ether a security or a commodity?



“I don’t have enough information,” Massad said in response to the question posed by Rep. Zach Nunn, R-Iowa.&nbsp;



“The concern about ether…was in the Merge, where they changed the system of validating transactions, there seemed to be a foundation, a group of people involved in that…is that, under the Howey test, a common enterprise?,” Massad added.&nbsp;



It’s the same query <a href="https://blockworks.co/news/regulatory-clarity-ethereum-gensler">SEC Chair Gary Gensler himself could not answer</a> last week before the <a href="https://blockworks.co/news/gensler-house-financial-services-committee">House Finance Services Committee</a>. 



Rep. Warren Davidson, R-Ohio, asked <a href="https://blockworks.co/news/gary-gensler-crypto-holdings">Gensler</a> if ether was a security, “yes or no,” during last week’s hearing. Gensler started to answer, without a ‘yes’ or ‘no,’ and was cut off by Davidson.&nbsp;



The House Agriculture Committee and the House Financial Services Committee, chaired by crypto-friendly Patrick McHenry, R-N.C., are set to hold a joint hearing on digital assets next month, Johnson said.



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Former CFTC Chair Massad Also Can’t Say if ETH Is a Security

Michael Bodley

A trio of US House Republicans are on the offensive against federal cryptocurrency regulations efforts again, saying they are “demanding information related to potential coordinated efforts by the agencies to deny banking services to digital asset firms and the ecosystem as a whole.”



The broadside effort undertaken by Reps. Patrick McHenry, R-N.C.; Bill Huizenga, R-Mich.; and French Hill, R-Ark., marks one of the latest attempts at the US federal level to push for digital asset regulation this year. And it comes at a time when a growing number of prominent US-based crypto companies are <a href="https://blockworks.co/news/coinbase-abu-dhabi-bermuda-derivatives">establishing outposts overseas</a> — or going as far as saying they’ll move their headquarters outside of the US altogether.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><a href="https://twitter.com/hashtag/NEW?src=hash&amp;ref_src=twsrc%5Etfw">#NEW</a>: Chairmen <a href="https://twitter.com/PatrickMcHenry?ref_src=twsrc%5Etfw">@PatrickMcHenry</a>, <a href="https://twitter.com/RepFrenchHill?ref_src=twsrc%5Etfw">@RepFrenchHill</a>, and <a href="https://twitter.com/RepHuizenga?ref_src=twsrc%5Etfw">@RepHuizenga</a> are demanding information on prudential banking regulators&#39; efforts to de-bank the digital asset ecosystem. ⬇️ Read more on their letters 🔗 <a href="https://t.co/IjbxDEapzj">https://t.co/IjbxDEapzj</a> <a href="https://t.co/GInBcOCm90">pic.twitter.com/GInBcOCm90</a>&mdash; Financial Services GOP (@FinancialCmte) <a href="https://twitter.com/FinancialCmte/status/1651324120888377346?ref_src=twsrc%5Etfw">April 26, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



In a joint <a href="https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=408737">statement</a>, the US politicians referenced recent letters they sent to the Board of Governors of the Federal Reserve, as well as Federal Reserve Chair Jerome Powell; plus FDIC Chair Martin Gruenberg. Michael Hsu, who holds the title of acting comptroller of the currency in the US, also received a letter this week.



All of the coordinated communications appear to be the latest Republican attempt to ramp up pressure against US crypto oversees to get legislation done on industry oversight this year.&nbsp;&nbsp;



“Today, we are seeing the resurgence of coordinated action by the federal prudential regulators to suppress innovation in the United States,” the joint statement said. “There is no clearer example than in the digital asset ecosystem.”



Even Coinbase CEO Brian Armstrong has entered the political and regulatory fray this year. Armstrong at one point in 2023 said he’d consider moving the domicile of his US-based and publicly traded exchange outside of the country.&nbsp;



The <a href="https://blockworks.co/news/could-coinbase-leave-us">industry consensus has been mixed on</a> whether Armstrong would seriously consider doing so. Some have referred to the move as a political gambit. Efforts driven at the state level in the US, including legislation drafted in Montana, have been<a href="https://blockworks.co/news/montana-mining-bill-passes-house"> largely met with greater progress so far this year.</a>&nbsp;



<h2 class="wp-block-heading">Europe crypto industry moves in the cards?</h2>



Amid all of the US federal turmoil and congressional infighting, industry participants based in the US say they’re paying close attention to ongoing crypto regulatory developments in Europe and other regions this quarter.&nbsp;



It’s unclear whether Republican efforts to advance stablecoin legislation <a href="https://blockworks.co/news/republican-stablecoin-bill-wont-survive">have a chance of succeeding</a>, for example, this year.



During an interview with Blockworks on Thursday, Ilya Volkov, CEO and co-founder of YouHodler, noted a growing trend of influential figures in the industry looking to set up shop in his home base of Switzerland.&nbsp;



Volkov has been involved in efforts to shore up the presence of crypto firms in the EU via <a href="https://blockworks.co/tag/mica">MiCA</a>, the region’s ongoing effort to establish its own regulation and jurisdiction over digital asset operators.&nbsp;



Though Volkov’s firm has no presence in the US and no customers based in the region, he said, they’re still “monitoring the developments in the US, just because they’re much connected to everything happening on the global level, and it [has always been] like that.”



He said that crypto companies, such as stablecoin issuer Circle, have been recently exploring opportunities to expand their presence in Europe. 



He also mentioned Circle&#8217;s <a href="https://www.benzinga.com/markets/cryptocurrency/23/03/31440302/france-goes-crypto-friendly-as-stablecoin-giant-circle-sets-up-shop-in-paris">plans</a> to open a new office in Paris, which started circulating about a month ago. The firm’s representatives, Volkov said, started to consider paying a visit Zurich, Switzerland, a couple of weeks ago in an effort to keep “continuing some presence here” on the continent.



Update: May 1 at 12:13pm. Clarifies the timing of Circle&#8217;s plans to open an office in Paris, as well as the intention of the firm&#8217;s executives to visit Zurich, Switzerland. 



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As US House Efforts to Push Crypto Oversight Ramp Up, EU Move in Cards?

House Republicans have some work to do if they want their stablecoin bill to pass, Hill insiders say, but both parties seem inclined to leave the SEC out.&nbsp;



The current draft, which was revamped earlier this week, doesn’t have much chance of making it to the floor, people familiar with the matter said.&nbsp;



Democrats and Republicans appear to agree somewhat on keeping the SEC out of stablecoin regulation. Both the new draft bill and <a href="https://blockworks.co/news/republicans-democrats-stablecoins-policy">former draft based on bipartisan negotiations</a> have the Federal Reserve listed as the applicable regulator, according to Congressional documents obtained by Blockworks.&nbsp;



But, insiders added, House Financial Services Committee Chair Patrick McHenry, the current draft’s main champion, will be giving up his seat as chair at the end of next session, so he may prioritize pushing this legislation through the House. 



An additionally amended version, ideally with some bipartisan support, is more likely to get introduced this session. A bill only endorsed by Republicans has next to no chance of making it through the Senate, sources added.



House Republicans unveiled the first iteration of their stablecoin bill ahead of <a href="https://www.youtube.com/watch?v=ti0CDUxTAWI">last week’s subcommittee hearing</a>. The newest version, released Monday, gives state legislators more control over the asset class, presumably in response to comments made at the hearing.&nbsp;



Rep. Ritchie Torres, D-N.Y., said last week that he was unlikely to support any legislation that undermines the current stablecoin regulatory framework in New York. Hearing witness Adrienne A. Harris, superintendent of the New York State Department of Financial Services, highlighted advantages in allowing states to be more proactive in their approach.&nbsp;



“Federal regulators are able to comprehensively address macroprudential considerations and establish foundational consumer and market protections,” Harris said. “[States can] act more nimbly to respond to industry developments and support responsible innovation given their ability to modernize regulations more quickly and leverage their more immediate understanding of consumer needs.”



Industry members and House Republicans are expecting a Democratic bill to drop soon, based on comments from Rep. Maxine Waters, D-Cali., at <a href="https://blockworks.co/news/house-grapples-with-stablecoins">last week’s hearing</a>.



The Republicans’ draft “in no way recommends the final work on stablecoins by negotiations between the two of us,” Waters said, referring to unresolved conversations with Hill. Democrats will have to “start from scratch,” she added.&nbsp;&nbsp;



Neither Waters nor other committee Democrats have provided clarity on when an opposing bill may be introduced, or if one is even in the works. The party has also not yet publicly commented on the Republican’s new version of the bill.&nbsp;



If a Democratic stablecoin bill does make it to the floor, it is likely to focus on issuer requirements; Democrats have largely maintained a view that issuers should be federally insured depository institutions. Clauses requiring stablecoin issuers and/or distributors to maintain some sort of know-your-customer and anti-money laundering standards can also be expected.&nbsp;



Representatives from Waters’ office did not respond to Blockworks’ repeated requests for comment.



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Republican Stablecoin Bill Draft Likely Won’t Make It to the Floor, Insiders Say

A draft of the long-awaited bipartisan stablecoin legislation Congress members have been promising hit the wire last week, but top Democrats say the bill is nothing like what was discussed.&nbsp;



House Representatives <a href="https://blockworks.co/news/house-grapples-with-stablecoins">met last week to discuss stablecoins</a> and hear from expert witnesses about their role, safety and stability. The current <a href="https://docs.house.gov/meetings/BA/BA21/20230419/115753/BILLS-118pih-Toproviderequirementsforpaymentstablecoinissuersresearchonadigitaldollarandforotherpurposes.pdf" target="_blank" rel="noreferrer noopener">draft bill</a> was released by Republicans on the Subcommittee on Digital Assets ahead of the hearing. 



Subcommittee Chair Rep. French Hill (R-Ark.) hailed the legislation as a bipartisan effort that began last fall.&nbsp;



But Democrats beg to differ. The draft “in no way recommends the final work on stablecoins by negotiations between the two of us,” Rep. Maxine Waters (D-Cali.) said, referring to unresolved conversations with Hill. Democrats will have to “start from scratch,” she added.&nbsp;



Hill responded by saying he welcomes collaboration on the bill and stablecoin framework.



As the hearing progressed, the party lines became more clear. Here is a rundown on where leaders stand when it comes to collaboration on stablecoin policy.&nbsp;



<h2 class="wp-block-heading">Where cross aisle agreement can be found&nbsp;</h2>



Several Subcommittee members brought up the collapse of <a href="https://blockworks.co/tag/terra" target="_blank" rel="noreferrer noopener">TerraUSD</a> and <a href="https://blockworks.co/tag/luna" target="_blank" rel="noreferrer noopener">Luna</a> and highlighted the need to protect investors and enforce strict reserve reporting requirements. 



Customer funds should also not be commingled, Republicans and Democrats agreed unequivocally.&nbsp;



There also seems to be some bipartisan agreement that US Dollar dominance should not be undermined, by a stablecoin or otherwise, although there is some disagreement about how stablecoins may impact USD.&nbsp;



House Republicans and Democrats may not agree on how to get there, but both sides of the aisle are calling for some sort of policy to make it through soon.&nbsp;



<h2 class="wp-block-heading">Where party lines remain strong&nbsp;</h2>



Some Democrats maintain the need for more guidelines around who can issue stablecoins.&nbsp;



&#8220;These programs are typically limited to banks who are heavily regulated and that is for good reason,&#8221; Rep. Stephen Lynch (D-Mass.) said. &#8220;It is the danger of allowing shadow banking products, particularly stablecoins, to issue deposits like products without FDIC insurance. So I strongly believe we need to separate crypto assets from our banking system, and this [draft] bill does just the opposite.&#8221;



Others in the party, like Rep. Ritchie Torres (D-NY), counter that stablecoin issuers are nothing like banks; if there are no lending services provided, there is no need to require issuers to be licensed banks.&nbsp;



Lawmakers also disagreed about privacy and KYC policies around stablecoins. Rep. Bill Foster (D-Illi.) suggested regulators would need access to each wallet owner’s identity in order to effectively oversee the industry.&nbsp;



Rep. Warren Davidson (R-Ohio) on the other hand, said private and permissionless blockchains are essential.&nbsp;



Congress members also had a difficult time getting on the same page about state versus federal policy. Rep. Torres said he would not be inclined to support any legislation that undermined New York’s current stablecoin regulatory policy.



<h2 class="wp-block-heading">What’s next</h2>



Bipartisan talks between current Chairman of the House Financial Services Committee Patrick McHenry (R-NC), and Rep. Waters began last year, but the two were unable to move their efforts out of committee.&nbsp;



Any bill will ultimately have to get through the Senate as well, and if Senate Banking Committee Chair Sherrod Brown (D-Ohio), doesn’t take interest, the legislation will likely die.&nbsp;



Crypto investment vehicles are “speculative products run by reckless companies — we know that’s true,” Sen. Brown said <a href="https://blockworks.co/news/senate-banking-hearing-on-crypto-crash">during a February hearing after the fallout of FTX</a>.&nbsp;&nbsp;



“It would require, certainly, a change in approach for the Banking Committee to move forward with markup,” Sen. Cynthia Lummis (R-Wyo.) said, <a href="https://blockworks.co/news/gillibrand-lummis-revamped-crypto-bill">during an appearance in DC to discuss her bipartisan crypto bill</a>.&nbsp;



Rep. Waters has not yet released her own draft or proposal for a new stablecoin bill to counter what Republicans unveiled last week. The draft bill has also not yet been introduced on the House floor.



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Stablecoin Policy Progress Impeded by Partisan Disagreements

Sebastian Sinclair

The SEC is facing pressure from the House Committee on Financial Services to produce documents related to recent charges filed against former FTX CEO Sam Bankman-Fried.



Committee and subcommittee chairs Patrick McHenry and Bill Huizenga sent a letter Tuesday expressing dissatisfaction with the agency’s response to their document request on Feb. 10.



In the <a href="https://financialservices.house.gov/uploadedfiles/pmc_bh_to_sec_re_failure_to_produce_sbf_charges_final.pdf" target="_blank" rel="noreferrer noopener">letter</a>, McHenry and Huizenga criticized SEC Chair Gary Gensler for his “insufficient” commitment to comply with the committee’s document requests.



McHenry and Huizenga argue by failing to turn over the documents, the SEC has prevented their staff from discussing the request with anyone inside the agency’s Office of the General Counsel, even after missing the previous deadline.



In February, the committee <a href="https://financialservices.house.gov/uploadedfiles/2023-02-10_mchenry_huizenga_letter_to_sec_on_sbf_charges_final.pdf" target="_blank" rel="noreferrer noopener">requested all records</a> and communications between and among employees within the SEC’s Division of Enforcement and the Office of the Chair, as well as records between the agency and the Department of Justice.



Those documents center on charges filed against Bankman-Fried for his alleged role in “concealing his diversion of FTX customers’ funds to crypto trading firm Alameda Research, while raising more than $1.8 billion from investors on Nov. 2 to Feb. 9.”



“On March 15, 2023, your staff provided a staff-level briefing on the SEC enforcement process. While the briefing provided interesting information related to parallel investigations, it was not responsive to anything requested in the letter,” they wrote.



The pair argue the 232 pages of documents the SEC provided were nothing more than publicly available information and an indirect response.



After complying with the agency’s request for the committee to narrow the scope of documents it was seeking, McHenry and Huizenga allege they were told it was a “time-consuming and extensive process” and were not provided with a definitive timeline.



“This is unacceptable,” the pair said in their letter. “We expect the staff recommendation memo to be produced immediately.”



The documents may contain certain information that could shed light on the SEC’s enforcement activities and decision-making processes against Bankman-Fried, as well as the crypto industry writ large.



<h2 class="wp-block-heading">A question of oversight</h2>



The approach to enforcement is a sore spot for many proponents, who <a href="https://blockworks.co/news/sec-crypto-enforcement-actions-accelerate">accuse</a> the agency of pursuing a campaign of <a href="https://blockworks.co/news/crypto-industry-eyes-secs-regulation-by-enforcement-ramp-up">regulation through litigation</a> against digital assets instead of via open dialogue and debate.



Regulatory agencies like the SEC are accountable to Congress and must cooperate with congressional oversight inquiries or risk legal ramifications and further scrutiny.



Despite subsequent staff-level conversations and a formal request from Huizenga to discuss matters with the SEC’s general counsel, none of the requested documents have yet been produced.



Gensler now has until April 17 to turn over the documents related to the committee’s investigation into Bankman-Fried, otherwise it may take matters into its own hands to compel action, if need be, the pair said. 



Gensler will also be required to present before the committee on April 18. An SEC spokesperson told Blockworks the chairman will &#8220;respond to Members of Congress directly, rather than through the media.&#8221;



Updated April 16, 2023 at 10:51 PM ET: adds response from SEC



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