On Tuesday, February 14, 2023, the Senate Banking Committee (SBC) held a hearing titled Why Financial System Safeguards are Needed for Digital Assets, its second in a series on last year’s crypto crash (the first was last December’s hearing titled Why the FTX Bubble Burst and the Harm to Consumers). The witnesses were Lee Reiners, Policy Director at the Duke Financial Economics Center; Yesha Yadav, Professor at Vanderbilt Law School; and Linda Jeng, General Counsel and Chief Regulatory Officer at the Crypto Council for Innovation.
Tuesday’s hearing was certainly a sign that SBC Chair Sherrod Brown (D-OH) is intent on enacting crypto legislation. In his opening statement, the senator made clear that he has a vision for crypto regulation that includes disclosures, prohibitions against conflicts of interest and self-dealing, customer protections, governance and risk management rules, provisions to address anti-money laundering and fraud; and government oversight.
But the rest of the hearing seemed to dispel belief that such legislation is feasible as the disagreements between Senators are enormous. GOP senators are uniformly interested in only instituting regulations that would allow the crypto industry to “innovate.” For example, freshman Senator Katie Britt (R-AL) expressed concern about overregulating the crypto industry. But Democrats appear all over the place (insert “Dems in Disarray” joke here). Some senators are interested in tackling the money laundering aspect of crypto, including Senator Elizabeth Warren (D-MA) who has introduced a bipartisan AML bill with Senator Roger Marshall (R-KS). Senator Chris Van Hollen (D-MD) is concerned about crypto entering the banking system. Senator Bob Menendez (D-NJ) asked if the US was falling behind on crypto policy.
In addition, there was no consensus about how to effectively regulate this industry. Republicans are clearly upset with SEC Chair Gary Gensler, with Ranking Member Tim Scott (R-SC) calling for SEC Chair Gensler to testify before the SBC and stating that “the SEC has failed to take any meaningful, preemptive action to ensure this type of catastrophic failure does not happen again.”
But ironically, Democratic witness Reiners appears dead-set on moving all of crypto regulation over to the SEC; he explicitly called for Congress to carve crypto assets out of the definition of “commodity” in the Commodity Exchange Act. (However, no members of the Committee seemed intrigued by that idea, and it would be dead on arrival in the committee with jurisdiction over that statute, the Agriculture Committee.)
The other Democratic witness, Yadav, proposed something different. She recommended that Congress create a self-regulatory organization for all crypto issuers and market participants, rather than fighting over whether these assets are securities or commodities. This argument has some basic appeal—SROs are common in securities and certainly all SBC members are familiar with FINRA—but no senators seemed intrigued by the idea and it is doubtful that a move to restrict the SEC’s authority over crypto tokens that are securities would fly with Gensler.
Finally, Jeng offered no significant recommendations for regulating crypto, other than to argue that the bankruptcy laws should be updated to ensure creditors of failed crypto firms are not mere unsecured creditors in bankruptcy.
Importantly, the topic that the House Financial Services Committee (HFSC) has been keen to address, stablecoins, was hardly mentioned. This isn’t particularly surprising, given that Brown has shown his desire to preserve the bank regulatory perimeter, but it shows that the two sides of capitol hill aren’t in alignment on the which topic initial legislative efforts should address first.
With this hearing complete, it is difficult to say that the needle has significantly moved on crypto following last year’s collapse. The partisan divide is as great as it ever has been, and while it is clear that Senator Brown has a vision for legislation, the hearing did not make clear what that vision is.