The Future of Digital Assets: Identifying the Regulatory Gaps in Digital Asset... (EventID=115821)

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Connect with the House Financial Services Committee Get the latest news: https://democrats-financialservices.house.gov/ Follow us on Facebook: https://www.facebook.com/HouseFinanci... Follow us on Twitter: https://twitter.com/FSCDems ___________________________________ On Thursday, April 27, 2023, at 2:00 p.m. (ET) Subcommittee on Digital Assets, Financial Technology and Inclusion Chair Congressman Hill and Ranking Member Congressman Lynch will host a hearing entitled, “The Future of Digital Assets: Identifying the Regulatory Gaps in Digital Asset Market Structure." ___________________________________ Witnesses for this one-panel hearing will be: • Marta Belcher, President & Chair, Filecoin Foundation • Daniel Gorfine, Founder & CEO, Gattaca Horizons, LLC; Adjunct Professor of Law at the Georgetown University Law; and former Commodity Futures Trading Commission Chief Innovation Officer and Director of LabCFTC • Joshua Rivera, General Counsel, Blockchain Capital • Zachary Zweihorn, Partner, DavisPolk • Hilary Allen, Professor of Law, American University Washington College of Law ___________________________________ Jurisdiction of the U.S. Securities and Exchange Commission The central question of whether the SEC has jurisdiction over a digital asset is whether it falls within the definition of a security. The Securities Act of 1933 (the “Securities Act”) requires every offer or sale of securities to be registered with the SEC or meet a condition for exemption from registration. The Securities Act defines a security to include an “investment contract,” which was in turn defined by the Supreme Court in SEC v. W.J. Howey Co. Under Howey and the cases that followed, an arrangement qualifies as an investment contract if it is: 1) an investment of money; 2) in a common enterprise; 3) with the expectation of profits; 4) derived from the efforts of others. The test is not a “balancing test,” rather, all four factors must be present for the arrangement to constitute an investment contract. Several characteristics central to digital assets may cause it not to meet the Howey test. These characteristics include functional use that negates the expectation of profit and sufficient decentralization such that it is no longer reliant on the efforts of others. While the Securities Act focuses on the registration of securities, the Exchange Act regulates secondary trading of securities. The Exchange Act imposes registration requirements on intermediaries that engage in or facilitate the trading of securities, including digital assets offered as part of an investment contract. These intermediaries include broker-dealers, exchanges, and clearing agencies, among others. Under current law, market participants that act in these capacities in connection with a digital asset deemed to be a security may be subject to registration and regulation, as with any other security. However, certain Exchange Act requirements do not apply neatly to digital assets. The regulations governing these entities must be evaluated and enhanced to better protect consumers and investors. Jurisdiction of the Commodities Future and Trading Commission (CFTC) The CFTC is the primary market regulator for derivatives in the United States. Derivatives markets, unlike equity or debt markets, are not intended as capital raising venues. Rather, they are best understood as risk transfer markets, permitting an individual or entity with a commodity price risk (an end-user) to transfer that risk to a speculator. In doing so, the end user can achieve some certainty over future operating costs. This risk transfer mechanism is invaluable for entities as diverse as farmers selling wheat to their local grain elevator, pensions planning for their beneficiary’s retirement, and multinational corporations conducting business in foreign countries. Recent case law confirms the CFTC’s view that the term commodity includes “virtual currencies” or digital commodities. As such, digital commodities are subject to the same jurisdiction of the Commission as any other commodity. However, in the instances in which a digital commodity is determined to be a security, CFTC jurisdiction does not apply. The CFTC’s regulatory authority is limited to transactions, participants, and intermediaries in the commodity derivatives markets. Regulated intermediaries include but are not limited to trading venues, clearinghouses, brokers, dealers, investment advisers, among others. The Commission currently does not have regulatory authority over spot market transactions, unless the transaction is a margin, leveraged, or financed retail commodity transaction or retail foreign exchange transaction. As such, the CFTC currently does not have regulatory authority over spot market transactions or intermediaries in the digital commodity spot markets. Risks of Inaction by Congress and Continued... Hearing page: https://democrats-financialservices.house.gov/events/eventsingle.aspx?EventID=410331