Notes from Senate Hearing Regarding Proposed Bill Which Would Give CFTC Oversight on the Digital Asset Commodities Industry

On Thursday, 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 which was introduced by Sens. Debbie Stabenow (D-MI) and John Boozman (R-AR). Senate Minority Whip John Thune (R-SD) and Sen. Cory Booker (D-NJ) also joined as original cosponsors. The bill lays out a framework for the Commodity Futures Trading Commission (“CFTC”)’s potential oversight over the crypto market. Coincidentally, committee hearing on Senate Bill 4760 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 Securities and Exchange Commission (“SEC”) regarding, among other things, the SEC’s regulation of the digital assets industry.

Background on Hearing and Committee

The Senate Ag. Committee has been charged with overseeing the CFTC ever since the agency was created 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. 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 hearing 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, the digital asset industry was discussed with assets being classified in three separate groupings: (1) digital asset commodities (which committee Chairwoman Deborah Stabenow specifically said Bitcoin (“BTC”) and Ethereum (“ETH”) fall under); (2) digital asset securities; and (3) stable-coins. 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 would necessarily include separate regulations covering digital asset securities and stable-coins.

Initial Takeaways from Hearing

Throughout the hearing there was an emphasis on a need for regulation in this space. The goals of the regulation is to provide legal clarity for innovators and builders in the space, 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 infamous “Hinman Speech” in which then acting SEC Director of Corporation Finance Bill Hinman took the position that ETH had become “sufficiently decentralized” to no longer be considered a security. The SEC has since distanced itself from that position.

• Lots of the focus of the hearing was the access to financial markets that digital assets provide to underrepresented minorities and other individuals who are underserved by the traditional banking industry, while also noting that the lack of regulation has made these already vulnerable communities even more vulnerable to fraud and mismanagement. There seems to be a push to get at least some regulation over the industry pushed through Congress in the next 6-12 months.

• Chairman Behnam stated his office estimates it will need $112 million over first three years to fund the necessary resources for the CFTC to oversee the digital asset commodities industry, including rule making, hiring, training, and outreach. This increased budget is anticipated to be paid for by user fees on digital asset commodities trading platforms, which is provided for under Senate Bill 4760.

• Multiple Senators emphasized that they do not believe blockchain technology and the overarching Web3 ecosystem is a phase, and the pressing need for United States regulatory clarity 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 believe the bill’s current definitions regarding decentralized finance (“DeFi”), what constitutes a “digital asset commodity” vs. a “digital asset security”, and what actions make an entity a broker/dealer all need revisions before any such bill is passed.

Overall, Senate Bill 4760 seemed to be overwhelmingly supported by members of the Ag. Committee. While all committee members and witnesses present acknowledged this is not a complete solution to the lack of regulatory clarity in the digital asset industry, it was viewed as a step in the right direction. Due to the bipartisan nature of the bill, the seemingly large support amongst Ag. Committee members, and the often repeated need to move quickly on this issue, the hearing seemed to indicate the bill’s next round of edits and comments could be expected on an expedited basis.

Conclusion

I think the Senate Bill 4760 (regarding digital asset commodities) and the related bills on stable-coin regulations and general cryptocurrency regulation are all a general step in the right direction. This belief is tempered, knowing the failure of legislators to listen to key industry experts could result in regulations which do more harm to the industry as a whole than protects consumers and other industry participants. While regulatory certainty is important, getting the right kind of regulations which both protect consumers and also are tailored to the existing crypto industry without disrupting ongoing development is more important.

My takeaway is that while Senate Bill 4760 is a good step forward, there is still a ton of work that needs to be done before any bill regulating this industry is enacted into law.

If you have any questions or would like me to write about anything else, let me know on either of my twitter pages. As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.