Forbes Interview with U.S. Congressman: The SEC under Gensler's Leadership Has a Disappointing Attitude Towards Digital Assets

Written by: Steven Ehrlich, Forbes

Compiled by: Luffy, Foresight News

Congressman French Hill (R-Ark) is the vice chairman of the House Financial Services Committee and the chairman of the inaugural House Financial Services Digital Assets, Financial Inclusion, and Technology Subcommittee. He has held multiple hearings on issues such as stablecoins and the broader crypto market. He is also one of the sponsors of the recently introduced "FIT for the 21st Century Act," along with Congressman Dusty Johnson (R-S.D.) and Congressman Glenn G.T. Thompson (R-Pa.).

In this interview, we discussed various issues, including: the legislative environment for cryptocurrencies, his views on the Ripple case ruling, how his team is working with the SEC to draft new legislation, and central bank digital currencies (CBDCs) and tokenized securities.

Forbes: How do you view the current legislative environment for cryptocurrencies?

French Hill: The legislative environment for cryptocurrencies is clearly better than it was two or three years ago. In the House, we have now passed the first comprehensive regulatory framework for digital assets, and we have also passed the first prudent and effective stablecoin proposal in history. We believe this addresses significant regulatory gaps.

Forbes: Are there major differences between the House and the Senate?

French Hill: The Senate has a greater interest in cryptocurrencies, primarily led by two senators, Senator Lummis (R-WY) from Wyoming and Senator Gillibrand (D-NY) from New York. I believe our bill has advantages over their approach to stablecoins and regulatory frameworks. However, we have reached a collaborative agreement with them, and since we have successfully passed bipartisan legislation regarding the framework and stablecoin legislation, we look forward to working with them in the coming days. In the Senate, we also have to consider the Banking Committee and the House Agriculture Committee. Therefore, one of the key strategic differences in how we handle this issue is that the House Agriculture Committee, under Glenn Thompson's leadership, and the House Financial Services Committee, under Patrick McHenry's leadership, have decided to work together, integrating resources and member participation. Many of our meetings are joint sessions, and we also hold joint hearings.

Forbes: What is the origin of the "FIT for the 21st Century Act"?

French Hill: We are aware of the regulatory challenges. One of the core challenges revolves around the Howey test and the question of what constitutes a security and what does not. If something is related or unrelated to an investment contract, what are the surrounding circumstances? So this is a core part. Secondly, a few years ago, during the Trump administration, former SEC Chairman Clayton made comments about initial coin offerings. This is a way for blockchain projects to raise funds through tokens. We know this is an issue that must be addressed, which is related to the Howey test but also different. Finally, how do we maintain transparency in these digital asset transactions, and what are the related requirements and rules? When you consider trading, you have to think about custody, reporting, and whether these brokers should be licensed. We want to answer all these questions in a regulatory framework bill that is fit for purpose. Therefore, we have proposed addressing the core challenges seen from court cases and enforcement regulations. We also encountered some commodity-related issues, such as the lack of spot market regulations to authorize the spot market, but we have Bitcoin futures. However, the Commodity Futures Trading Commission (CFTC) believes they need to make statutory fixes for this. And there is no real investor protection framework within the CFTC, but we know that is important.

Forbes: What do you think is the biggest difference between your bill and the Senate bill?

French Hill: I have been focused on addressing the issues in our bill. But my philosophy is that to build consensus, we should build on the existing framework of the SEC. So if you look at how we shift from focusing on fundraising to decentralization, I explain that there are checks and balances throughout the process from Reg-A private placements to IPOs.

Forbes: When new legislation is needed for better guidance and better rules, what is the litmus test?

French Hill: As a general statement, I believe many of the challenges we see in the digital asset ecosystem can be effectively addressed under the existing authority of the SEC through exemption relief or proposed rulemaking. However, this commission and its chairman have shown no interest in that. Therefore, my judgment is that we should take a legal approach to address this issue through prescriptive language in the law, guiding them on how to engage in joint rulemaking. But the regulation allows us to mix these responsibilities between securities and commodities, and without congressional direction for the CFTC and the SEC to work together, it will be extremely difficult. For example, we provide the ability for brokers or exchanges to obtain dual licensing from both the SEC and the CFTC. CFTC Chairman Behnam and his team can absolutely collaborate with SEC Chairman Gensler and his team in an integrated manner. But in some ways, I think our direct approach through statutory means is more compelling and perhaps more helpful.

Forbes: We have previously discussed that while commodities have been traded in regulated markets for centuries, the CFTC does not have a specific spot market regulatory body. Can cryptocurrencies as commodities fill this gap?

French Hill: I think the interest in Bitcoin continues. People generally view it as completely decentralized and not a security. We already have derivatives regulatory bodies, but there is no spot market. Clearly, this is what the market needs. However, the CFTC cannot really achieve this. That is why I think the timing is right. It also allows us to take a comprehensive approach through our regulations, which essentially defines how to prove you are decentralized, and I think this will become easier over time. I believe as people bring in clearly decentralized projects, this puzzle will be solved. It is not clear today.

Forbes: What does decentralization mean to you?

French Hill: Decentralization means that the blockchain and its functions are operating in a way that is clearly similar to self-driving or self-actualizing, and there is evidence that insiders and stakeholders do not own more than 20% of the tokens. So this is a functional test, a software test, and essentially can be seen as an ownership test.

Forbes: There have been reports that the SEC is slow to provide feedback on this bill and some others. How do you evaluate the collaboration with the SEC on this bill?

French Hill: When we began to conceptualize this bill before actually drafting it, I did not think the SEC would be particularly helpful. However, when we put the text on paper and started to flesh out the framework (definitions, powers, and direction), the SEC could provide verbal and technical assistance to our drafters.

Forbes: When this collaboration happens, Gensler's team will be involved. You have expressed your feelings about Gensler's involvement in this issue clearly. But do you have anything more specific to say about his involvement with this bill?

French Hill: My views have been clearly expressed. During his two years as chairman, the SEC's attitude towards digital assets has been disappointing. There are a million creditors in the FTX case, but last year I saw no evidence that the SEC took any action against FTX before its collapse. Our oversight committee is very eager to obtain all emails, messages, and meeting records related to FTX from anyone who collaborated with the SEC. While they condemned Kim Kardashian for promoting cryptocurrencies, they have actually never protected American investors. Some find it unbelievable that the SEC approved the S-1 and allowed Coinbase to go public, but then they claim that Coinbase is not operating fairly.

Forbes: What is your assessment of what the executive branch is doing and the role they are playing?

French Hill: As a general statement, I want to commend the Treasury Department under Yellen's leadership and her team for their very constructive collaboration with House Republicans and House Democrats on stablecoin legislation and regulatory framework legislation. I believe they see it as very important for Congress to take action to achieve the goals of the President's Digital Asset Working Group.

Forbes: I want to understand why the hearings in the House Financial Services Committee are more lively than those in the Agriculture Committee?

French Hill: Of course, the House Financial Services Committee has oversight over the SEC, and the SEC currently has a Democratic chairman. The Democrats on the House Financial Services Committee are very supportive of Chairman Gensler's stance against amending the law. He believes he has all the regulatory and legal authority needed to manage and answer every question related to cryptocurrencies. I disagree; I think that is a mistaken position. But many in the Democratic camp seem to agree with his viewpoint, so I think that is the core of the divide. During the House Agriculture Committee hearing, CFTC Chairman Behnam seemed to welcome more authoritative and creative approaches to clarify his regulatory market, which he believes benefits the futures market, derivatives market, and the potential of this new digital commodity to its market. So I think this may be the nature of oversight, with the two committees pushing different dialogues.

Forbes: Let's briefly talk about the ruling in the Ripple case. What was your initial impression?

French Hill: Confusion. I think it did not clarify the Howey test, consumer protection, and the role of insiders and cryptocurrencies at all. I think this is another example of why we need legislation here. I would say that when institutional investors are treated differently from retail investors, it is essentially contrary to the purpose of investor protection. Then insiders can freely sell their positions into the market without any additional scrutiny.

Forbes: What impact does this have on your bill?

French Hill: We are very clear about the role of stakeholders, foundations, or insiders in raising funds for digital asset projects in a startup environment and moving towards decentralization, as well as the protection of airdrop token participants or non-insider token purchasers (with investment contracts). This is no different from how we protect this in Reg D, private placements, or emerging growth companies. I think this is clearly a flaw in Ripple. Then we are also clear about how to obtain liquidity before decentralization occurs; then when decentralization happens, we have a holding period, just like the 12-month lock-up period in an IPO, during which they can have free liquidity. We are trying to treat institutional and ordinary retail investors logically, providing some protection and transparency, and I think the XRP case shows that this will help. Even if you claim this is not an investment contract, that is just empty talk.

Forbes: What is your view on all the important parts of cryptocurrency legislation?

French Hill: I think this shows that members of Congress recognize that Web3 innovation, blockchain innovation, and the earliest stages of innovation are happening; institutional investors and consumers have demand. If we do not promote this framework, you will see this activity shift overseas. The UK and the EU, two developed markets, have taken proactive steps to attract businesses.

Forbes: What are your views on the launch of CBDCs and FedNow payment services?

French Hill: The arrival of FedNow is still a long way off. The Federal Reserve is asking the private sector to create real-time payment systems, and they have done so. Then the Federal Reserve says, we will also create one, which is something they have been doing since the 1960s, whether in the ACH space or wire transfer space. FedNow will play a positive role, especially in the commercial sector. I think consumers already believe they have it, but they do not; they think they have it through Venmo, Visa Direct, and Mastercard services. My question is: will you ultimately keep the lines or ACH systems open 24/7? How do you plan to staff this? In fact, we will hold a hearing on this matter in a few weeks. FedNow is not related to CBDCs, and I do not support retail CBDCs. I believe developed markets like the United States do not need it. That is why I think dollar-based stablecoins and the surrounding private sector will promote innovation to determine interest in this payment technology.

Forbes: Some of your colleagues are going further, trying to outright ban CBDCs. What is your view?

French Hill: I believe that CBDCs should not be launched without the first law from Congress. The reason people demonize this concept is that they fear it or do not understand how it works. Therefore, I think the best way to address this issue is to say, "Listen, let Congress authorize its creation, and then people will have confidence that their Fourth Amendment protections will be in place and that the technology will be applied." But it is still too early, and I have not seen a particularly effective CBDC project anywhere in the world.

Forbes: Do you think stablecoin issuers will pay interest? If so, would that definitely be a security?

French Hill: I think if it is tokenized cash rather than a money market fund, then the answer to your question is no; they will not pay interest. But we need to see how things develop.

Forbes: What do major banks and traditional financial institutions think about cryptocurrency legislation?

French Hill: Large financial institutions are currently trying blockchain and conducting tokenized payments within their networks. They have a strong interest in cryptocurrency custody. But some industry insiders do not want any non-bank entities to issue stablecoins.

Forbes: What are your views on tokenized securities?

French Hill: Our legislation does not involve the tokenization of securities stocks or bonds. In fact, our specific definition of digital assets does not include that. It does not cover commercial loans, mortgage-backed securities, fixed income, and stocks. But we are very interested in pursuing another piece of legislation where you can establish a framework for tokenizing existing assets. We may hold hearings on this.

Forbes: Is there anything else you would like to share?

French Hill: I am very pleased with the voting results and the deep engagement of the bipartisan approach. People in New York, Philadelphia, and Little Rock do not know about the collaboration between the two committees. I think this will help us find people in the Senate who are willing to join and help us, even if they do not know it yet because they have not been involved. You will find other members wanting to work on this from a financial and commodity perspective. I think that is great. I believe the message Congress is conveying is that people are leaving the U.S. because of Gensler's actions. That is why you see more audiences here.