Overview of Views on the Crypto Hearing: U.S. Regulators Emphasize for the First Time that Web 3.0 is the Future

Author: Hao Fangzhou

On December 8 at 23:00 Beijing time, the House Committee on Financial Services held a hearing titled "The Future of Digital Assets and Finance: Understanding the Challenges and Benefits of U.S. Financial Innovation" on Capitol Hill.

The meeting was chaired by Committee Chair Waters and Ranking Member McHenry, with over 50 members of the House Financial Services Committee in attendance, providing them the opportunity to express their views on crypto regulation.

Representatives from crypto companies attending the hearing included: Circle co-founder and CEO Jeremy Allaire, FTX founder and CEO Samuel Bankman-Fried (SBF), Bitfury Group CEO Brian P. Brooks, Paxos co-founder and CEO Charles Cascarilla (via video), Stellar CEO Denelle Dixon, and Coinbase Inc. CEO and Coinbase Global Inc. CFO Alesia Jeanne Haa.

The focus of this hearing was on issues such as investor protection in crypto and market integrity. As noted in the memorandum, "The crypto market lacks an overall and centralized regulatory framework, making investments in the digital asset space vulnerable to fraud, manipulation, and abuse. At the same time, the memorandum acknowledges that "many exchanges and stablecoin issuers have obtained state money transmission licenses or trust charters, such as Paxos, which has received a conditional trust charter from the Office of the Comptroller of the Currency through federal banking regulators."

The testimony documents from representatives prior to the meeting and the hearing memorandum can be found at: https://docs.house.gov/Committee/Calendar/ByEvent.aspx?EventID=114305

The 4.5-hour hearing was live-streamed on YouTube (available for replay): https://www.youtube.com/watch?v=4oOTvtupND8

The basic structure of the hearing was as follows: introduction of background and participating members by the committee chair and ranking member → each crypto company representative took turns for a 5-minute self-introduction and overview of their views → open questioning.

Due to the diverse backgrounds of the crypto representatives spanning exchanges, mining, stablecoin issuers, and more, the topics discussed were somewhat scattered: the global status of the U.S. dollar, the environmental impact of mining, anti-money laundering, fraud prevention, the security of crypto asset storage and custody, asset volatility risks, corporate transparency, Web3, Paxos and Meta (Facebook)'s stablecoin collaboration… The core stance of the crypto representatives emphasized the role of crypto products and services in financial innovation, highlighted their proactive embrace of regulation, and suggested improvements to existing policies to legislators, while committee members expressed their concerns and doubts about various risks in the crypto market. Both sides maintained a moderate and reasoned attitude (compared to two years ago), with most questions receiving positive responses, and the consensus was that the crypto world needs proper and effective regulation.

The committee will also hold a separate hearing next Tuesday (December 14) on the topic of "Stablecoins: How They Work, How They Are Used, and What Their Risks Are," with attendees including Alexis Goldstein, Financial Policy Manager at the antitrust nonprofit Open Markets Institute, and Hilary J. Allen, Professor at American University's Washington College of Law: https://www.banking.senate.gov/hearings/stablecoins-how-do-they-work-how-are-they-used-and-what-are-their-risks* (Interestingly, neither Tether's representatives will be present at either hearing…)

Below are some important statements from various representatives selected by Odaily Planet Daily.

Circle co-founder and CEO Jeremy Allaire

In response to Congressman Stephen Lynch's mention of "the non-custodial wallet rule proposed by FinCEN at the end of the Trump administration, and how it differs from transactions involving MoneyGram or Western Union," he stated, "Self-custody means that the wallet developer cannot participate in any transactions. What we really need is a way to provide digital identity verification."

In response to Congresswoman Alexandria Ocasio-Cortez's question, "If the cryptocurrency industry lost the ability to use stablecoins as a bridge to transact in dollars tomorrow, would that lead to a significant shift? It seems it wouldn't be able to operate as it does now, right?" he elaborated on the role of stablecoins in the digital asset ecosystem. "Stablecoins are faster than traditional banking systems, which gives them an advantage, and I think that is essential."

In response to Congressman Sean Casten's question about whether he supports the recommendations in the President's Working Group report on stablecoins, he said, "I support many of the recommendations, but it cannot be generalized. I believe there are many challenges in the report. The first question is what form the federal charter for stablecoin issuers will take, and there are other details that need clarification."

FTX founder and CEO Samuel Bankman-Fried (SBF)

In response to Congressman Tom Emmer's question about "what protections FTX provides for its users," he expressed confusion over the SEC allowing Bitcoin futures ETFs but not spot ETFs.

"I believe that the role of cryptocurrency in providing financial services to the unbanked or underbanked individuals presents a non-intermediated goal. Traditional cross-border remittances are slow and costly, while cryptocurrencies can bring those who have not received sufficient banking services into the financial system, providing faster, cheaper, and more equitable transfer methods."

Bitfury Group CEO Brian P. Brooks

In response to Congressman Bryan Steil, he stated, "Minimum balance requirements, monthly account maintenance fees, and similar requirements are the reasons for insufficient personal bank deposits, while stablecoin issuers do not have these requirements."

In response to Congressman Ted Budd's concerns about the "nanny state" imposing too many rules on cryptocurrencies, he said, "What is unique about the U.S. is that the regulatory system for banks is decentralized. I suggest that the U.S. utilize existing regulatory agencies to apply current rules to cryptocurrencies rather than having a single regulatory agency oversee the entire industry."

In response to Congressman Barry Loudermilk's comments on data collection practices and inquiries about whether blockchain can enhance data protection, he stated, "Blockchain provides transparency. In past cybersecurity incidents, such as Target or Equifax, people did not understand the full extent of the attack until weeks or months later. If a similar situation occurs, blockchain can provide transparency."

He used the Motion Picture Association's film rating system to explain the Crypto Rating Council: some digital assets are rated "R," while others are rated "PG."

In response to Congressman Patrick McHenry's question about Web 3, he said, "Web 1 was about websites publishing content, Web 2 is about users publishing content."

Paxos co-founder and CEO Charles Cascarilla

In response to Congresswoman Nydia Velazquez's inquiry about stablecoins, he stated that both Circle CEO Jeremy Allaire and Paxos CEO Chad Cascarilla would support federal mandatory reporting requirements, and both expressed their support.

Stellar CEO Denelle Dixon

In response to Congresswoman Rashida Tlaib's statement that "Bitcoin mining consumes more energy than Argentina, Apple, Facebook, and Microsoft combined," she pointed out that the energy consumed by the cryptocurrency industry is enough to power a small country, and that there are different types of consensus mechanisms in cryptocurrencies that use less energy or may be more environmentally friendly. She cited Marathon Digital's power plant in Montana and Greenidge Generation's power plant in New York as examples of how former coal-fired power plants have been repurposed for crypto use. "We all need to focus on reducing energy usage."

In response to Congressman Al Lawson's inquiry about the broker provisions in the bipartisan infrastructure bill, she noted, "Some entities may lack the necessary information to comply with regulations, even if they are classified as brokers."

Coinbase Inc. CEO and Coinbase Global Inc. CFO Alesia Jeanne Haa

In response to Congressman Bryan Steil's question about why it cannot offer the now-closed lending product, she stated that Coinbase has not received further clarification from the SEC.

In response to Congressman David Kustoff's inquiry about the securities framework, particularly what the SEC has provided in terms of clarification, she said, "The SEC has not provided a clear definition but has indicated that Howey and Reves can serve as analytical frameworks for evaluating crypto startups."

In response to Congressman Pete Sessions' question about "how cryptocurrency exchanges identify fraud and mitigate risks," she stated, "Coinbase conducts assessments from both technical and risk perspectives before listing crypto assets."

In response to Congresswoman Carolyn Maloney's inquiry regarding "a cyberattack earlier this year that resulted in a hot wallet losing funds," she noted, "At that time, not much money was at risk, and Coinbase compensated the affected customers."

In response to the question about "Coinbase holding 12% of the world's cryptocurrency, whether the protections from trading platforms are unique to Coinbase or provided by all platforms," she stated, "This is unique to Coinbase."

Congress Members

Congressman Jake Auchincloss stated that implementing a "mandatory regulatory" mechanism is unfair to crypto companies that must navigate between different regulatory agencies, and he is willing to work with both Republicans and Democrats to address these concerns. He suggested that primary market regulators collaborate with private self-regulatory organizations to address issues such as custody requirements and stablecoin standards, which could be most meaningful for the market.

Congressman Josh Gottheimer inquired about the cybersecurity practices of exchanges and the PWG (President's Working Group on Financial Markets) report on stablecoin issuers becoming banks. SBF mentioned practices such as two-factor authentication and cooperation between exchanges and law enforcement. Gottheimer stated that he is drafting a bill to implement some of the PWG's recommendations but hopes to propose suggestions on the pros and cons of different implementation models.

Congressman Don Beyer (a non-committee member) issued a statement praising the hearing held by the Financial Services Committee today and mentioned his bill on cryptocurrency regulation. He stated, "My comprehensive digital asset legislation is a good starting point for these efforts. I look forward to continuing the dialogue with Chair Maxine Waters and other committee members on how Congress can incorporate digital assets into the regulatory framework, which has been an increasingly emphasized need by both the industry and regulators."

Congressman Brad Sherman pointed out, "Some mainstream forces in our society have spent hundreds of millions of dollars on cryptocurrency, and major banks are entering the cryptocurrency space. If you want to know where these forces are, Zuckerberg should have been at this hearing. Brian Armstrong (Coinbase CEO) sent his second-in-command. And Tether didn't even think about showing up." He warned regulators not to wait for legislation to begin regulating.

Congressman Bill Foster asked if any witnesses opposed "controlled anonymity" in digital currencies, which means that when illegal activities occur, regulators can eliminate the anonymity of criminal accounts for tracking. No witnesses opposed this question.

Congressman Patrick McHenry stated, "We need to discard the notion that cryptocurrencies are only used by criminals. Do you know what else is used for bad purposes? Cash."

Note: On October 5, Patrick McHenry introduced the 2021 Digital Token Clarity Act. This bill stems from a proposal that SEC Commissioner Hester Peirce has been advocating for some time. The bill would amend the 1933 Securities Act to establish a three-year safe harbor for token development teams to sell these tokens without fully registering as securities offerings, provided that the network becomes decentralized during that three-year period. Under the terms of the bill, token issuers must establish industry-specific disclosure requirements, including source code, development plans, and "information explaining the launch and supply process, including the number of tokens issued in the initial allocation, the total number of tokens to be created, the timeline for token release, and the total number of unissued tokens.)

Congressman Anthony Gonzalez expressed disagreement with Congressman Brad Sherman's assertion that "tech giants and large banks control the digital asset space," and then inquired how Web 3 would operate according to Brian Brooks.

a16z policy director Tomicah Tillemann stated, "This is the first time congressional members have used the platform of a full committee hearing to emphasize that Web 3 is the future of the internet. This is a historic turning point in the national discussion about decentralized technology. You also see committee members acknowledging that Web3 platforms have the potential to address many of the issues they care about, including remittances and financial inclusion. So far, the tone of all participants has been reasonable and constructive. Everything is going smoothly so far."

Nick Anthony, manager of the Cato Institute's Center for Monetary and Financial Alternatives, stated, "It is important to recognize that while House Financial Services Committee Chair Maxine Waters has called attention to the environmental costs of cryptocurrencies, she also acknowledges the benefits that the technology provides—something many critics overlook. This may be a subtle shift, but it could be the beginning of a long-needed change in the dialogue."

Todd Phillips, Director of Financial Regulation at the Center for American Progress, said that the Howey test is "very clear" in defining whether something is a security. "According to the Howey test, if something is a contract, transaction, or scheme where a person invests their money in a common enterprise and expects profits solely from the efforts of the promoter or a third party, then it is a security. So, if someone raises funds through issuing governance tokens for developing DeFi applications or similar products, that is issuing a security and should be regulated by the SEC. This test is clear and has been used for nearly 80 years; attempting to obfuscate this fact is malicious."

Matt Homer, former Executive Deputy Commissioner of the New York City Department of Financial Services, stated, "The testimony indicates that cryptocurrencies are already regulated. (We should now) focus on the gaps and create a level playing field."