The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital... (EventID=115885)

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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 Wednesday, May 10, 2023, at 9:30 a.m. (ET) Subcommittee on Digital Assets, Financial Technology and Inclusion Chair Congressman Hill and Ranking Member Congressman Lynch and the Subcommittee on Commodity Markets, Digital Assets, and Rural Development of the Committee on Agriculture will hold a joint hearing entitled, “The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital Asset Markets." ___________________________________ Witnesses for this one-panel hearing will be: • Mr. Andrew Durgee, Head of Republic Crypto, Republic • Mr. Matthew Kulkin, Partner and Chair, Futures and Derivatives Practice, Wilmer Cutler Pickering Hale and Dorr LLP and former Director of the CFTC’s Division of Swap Dealer and Intermediary Oversight • Mr. Marco Santori, Chief Legal Officer, Kraken Digital Asset Exchange • Mr. Daniel Schoenberger, Chief Legal Officer, Web3 Foundation • Mr. Timothy Massad, Research Fellow, Harvard Kennedy School MossavarRahmani Center for Business and Government and Director, M-RCBG Digital Assets Policy Project ___________________________________ Background Under the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act), the SEC has full authority over the offer, sale, and the trading of securities, including investment contracts, and the derivatives trading of securities. Under the federal securities laws, every offer and sale of securities must be either registered with the SEC or conducted under an exemption. The Commodity Exchange Act (CEA) and the CFTC regulations promulgated thereunder provide a comprehensive regulatory regime for the trading of commodity derivatives (e.g., buying or selling futures contracts on corn, cattle, or oil). Under the CEA, the CFTC also has “after-the-fact” enforcement jurisdiction over fraud and manipulation in the “spot” or cash commodity markets (e.g., buying or selling bushels of corn, heads of cattle, or barrels of oil). The CFTC has no power to impose registration and regulatory requirements on participants in the cash or spot commodity markets. Currently, there is no comprehensive federal regulatory regime for the spot trading of commodities. Determining whether a digital asset is offered as part of an investment contract (i.e., meeting the definition of a security) or falling under the definition of commodity in the CEA has proven difficult in the United States. Until there is a consistent, clear framework in place, market participants, consumers, and investors will continue to seek regulatory clarity given the requirements that stem from the classification of a particular digital asset. 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.3 Under Howey and the case law that followed, an arrangement qualifies 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 of digital assets may cause it not to meet the Howey test. Generally, the SEC and CFTC have attempted to resolve the legal question of whether a digital asset is a security or a commodity through enforcement actions. However, the agencies have not always agreed on which digital assets are considered securities and which digital assets are considered commodities. For example, last month, the CFTC brought an enforcement action against the trading platform Binance, asserting Binance’s BUSD stablecoin is a commodity. Separately, the SEC asserts the same stablecoin is a security in its investigation of another digital asset firm. Furthermore, in its complaint, the CFTC refers to bitcoin, ether, and litecoin as commodities. In contrast, Chair Gensler has stated that he considers all digital assets other than bitcoin to be securities. These conflicting positions demonstrate the necessity and urgency of congressional action. Jurisdiction of the Commodities Future and Trading Commission (CFTC) The CFTC is the primary market regulator for derivatives in the... Hearing page: https://democrats-financialservices.house.gov/events/eventsingle.aspx?EventID=410399