Good morning and happy Friday. This week, we cover crypto policy updates touching on market structure, CBDCs, and mining.
Top Points
CFTC Chair Behnam urged Congress to close the regulatory gap in the crypto commodity spot market and reaffirmed the CFTC's position that ETH is a commodity.
Fed Chair Jerome Powell told Senate Banking Committee members that the Fed would never issue a CBDC directly to individuals, only through banks, and would only do so with clear Congressional authorization.
The Energy Information Administration agreed to stop its "emergency" data collection from commercial crypto miners, destroy the data it had already collected, and will now follow the traditional notice and public comment process.
House Ag Holds CFTC Oversight Hearing
On Wednesday, the House Ag Committee held a CFTC oversight hearing with Chair Rostin Behnam. Committee members covered Basel III's downstream effects on farmers, AI, when CFTC employees will return to the office full time, and more.
As for crypto policy, here are the highlights.
Key Takeaways:
Chair Behnam supports granting the CFTC oversight and regulatory authority of the crypto commodity spot market.
He reaffirmed the CFTC's position that Ether is a commodity.
Addressing Regulatory Gaps / FIT 21
CFTC Chair Behnam stopped short of explicitly endorsing FIT 21 itself – but he did say he’s encouraged by what FIT 21 aspires to accomplish in terms of closing regulatory gaps. Citing the recent crypto market rally, he routinely emphasized that crypto is here to stay. So regardless of what one thinks about the merits of individual assets, he believes Congress and regulators should act to protect market participants.
For example, when Rep. John Duarte (R-CA) voiced concern that legislation would lend credibility to the market that it doesn't deserve, Chair Behnem insisted addressing gaps in the market is about protecting investors and customers, not endorsing or condemning the asset class.
According to Chair Behnam, digital asset cases accounted for 49% of the CFTC enforcement docket - a sign legislation is needed to protect market participants on the front end. He also emphasized the importance of ensuring the CFTC has adequate resources to implement and enforce FIT 21.
In response to a question from Rep. Nikki Budzinski (D-IL) about FIT 21's provisional registration framework, Chair Behnam estimated the CFTC should be able to finalize implementation rules within 12 months, if sufficiently funded.
Rep. Greg Casar (D-TX) questioned whether market structure legislation was premature, given the lack of consensus around what constitutes true "decentralization," a concept at the core of FIT 21's standard for determining when digital assets are securities or digital commodities. CFTC Chair Behnam said he appreciated this concern, but he still believes the time to close regulatory gaps is now.
Ether is a Commodity
Chair Behnam stood firm on the CFTC's position that Ether is a commodity.
Why? The chief reason Behnam pointed to was that futures contracts are traded on Ether (referencing the CEA's definition of commodity, which includes "all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.").
According to Chair Behnam, any SEC action suggesting that ETH is a security would raise market integrity and compliance issues, especially for CFTC-registered exchanges who have been listing ETH futures contracts for years.
Rep. Zach Nunn (R-IA) highlighted the confusion around ETH's legal status stemming from Prometheum - an SEC approved Special Purpose Broker Dealer. Prometheum recently announced it will custody ETH for clients. Chair Behnam flagged that this was merely an internal company decision - not an SEC declaration, adding that the CFTC and SEC staff are working together to ensure any actions taken on ETH's classification are deliberate.
U.S. Competitiveness
Rep. Nick Langworthy (R-NY) asked whether crypto firms are moving overseas due to the lack of regulatory clarity in the U.S. Behnam agreed there is ambiguity around how crypto businesses should operate in the U.S. This, combined with progress on crypto regulation in the EU, UK, Middle East, and Asia, has led entrepreneurs to move to foreign jurisdictions.
DeFi
House Ag Chairman Glenn Thompson (R-PA) and Rep. Kat Cammack (R-FL) asked about DeFi, how its different from centralized finance, and what the agency is doing in the space.
Chair Behnam said he supports a conduct-focused approach. So if a protocol is offering services in violation of the law (e.g., facilitating derivative trades without registering), the CFTC will step in – even if there is no centralized intermediary. He also said the agency is engaged with industry stakeholders to ensure agency rules reflect where the technology is. Rep. Cammack urged the Chair not to stamp out innovation through overregulation.
Fed Oversight Hearings - CBDC
Fed Chair Jerome Powell testified before House Financial Services and Senate Banking committees. At both hearings, committee members focused on inflation, interest rates, and housing, not crypto.
But CBDCs did come up in the Senate Banking hearing.
Senator Kevin Cramer (R-ND) asked Fed Powell to explain why his constituents shouldn't be worried about a CBDC.
Fed Chair Powell emphasized a CBDC is far off. He also stressed the U.S. would not propose a retail CBDC, like China, where the government could view individuals' financial transactions. Instead, if it all, the Fed would issue a CBDC through banks.
"We are nowhere near recommending, let alone adopting, a Central Bank Digital Currency in any form."
"The last thing we would want, the Federal Reserve would want, would be to have individual accounts for all Americans or any Americans for that matter."
Later, responding to a question from Senator Cynthia Lummis (R-WY), Chair Powell clarified that the Fed would not issue a CBDC without clear Congressional approval.
More Regulatory Ambiguity Under Securities Law
On Tuesday, Eleanor Terret of Fox Business reported another example of regulatory ambiguity in the crypto markets under existing securities laws. She explained:
"NEW: I recently reached out to the Securities Investor Protection Corporation (@sipc) regarding @PrometheumInc and discovered another reason why #crypto so badly needs legislation to figure out what its regulatory status is.
When the @SECGov and @FINRA approved @PrometheumInc to become a special purpose broker-dealer of digital asset securities, Prometheum automatically became a member of SIPC, which means their customers would, in theory, be protected through SIPC if the firm fails. Most US-registered broker dealers must become members of SIPC under the Securities Investor Protection Act (SIPA) of 1970.
The caveat: SIPC will NOT cover Prometheum’s so-called “digital asset securities” because they do not fall under SIPA’s definition of a security. SIPA says that in order to be considered a security, an asset must be registered with the SEC. No digital assets are currently registered with the SEC because there has not been legislation passed defining exactly what digital assets are."
SIPA & SIPC
As further background, the Securities Investor Protection Act of 1970 ("SIPA") established the Securities Investor Protection Corporation ("SIPC") as a federally mandated, non-profit, member-funded government corporation.
The SIPC's main purpose is to protect customers of registered securities brokers and dealers if their brokerage firm fails (similar to how the FDIC insures bank customers against deposit loss in the event of bank failures).
More specifically, SIPC oversees the liquidation of broker-dealers in financial distress, and will reimburse customers up to $500,000 for securities and cash held by a member firm. See SIPA § 9. In general, securities brokers and dealers registered pursuant to the Securities Exchange Act of 1934 must become members of the SIPC. See id. § 3(a)(2).
Importantly, the definition of security under the Securities Investor Protection Act provides, in relevant part:
"Except as specifically provided above, the term ‘‘security’’ does not include any currency, or any commodity or related contract or futures contract, or any warrant or right to subscribe to or purchase or sell any of the foregoing." See SIPA § 16(14) for full definition of security (emphasis added).
Prometheum’s website includes the following SIPC-related disclosure:
"Prometheum Capital LLC is a SIPC Member and provides trading of Digital Asset Securities. Some of these Digital Assets Securities may only be securities by virtue of being “investment contracts”. Digital asset securities may not be protected under SIPA, and in particular, that digital asset securities that are unregistered investment contracts are excluded from SIPA’s definition of securities. 15 U.S.C. § 78lll(14). Therefore there will be no SIPC protection for Digital Assets Securities held by ProCap that are Investment Contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933."
So what?
Terret concludes:
"So, they are members that are not really protected by SIPC, and even though the SEC and FINRA may consider “digital asset securities” to be securities, SIPC does not. Confused? Bottom line: Having a variety of government agencies with different views on the regulatory status of crypto could cause investor confusion and potentially be a problem."
Look Ahead
Hearings
Wednesday, March 13 - 9 AM - House Financial Services Subcommittee on Digital Assets, FinTech, and Inclusion Hearing
Background on CFPB's proposed rule on digital payments & concerns raised by Members, including the proposal's impact on digital assets here.
Quick Hits
Mining
In a court approved settlement, the EIA agreed to stop its "emergency" collection of data from miners and destroy any data collected to this point. The EIA will withdraw its previous notice in the Federal Register, and issue a new notice with a public comment period of 60 days from the date of publication.
"Today marks a very important victory at the intersection of #Bitcoin and American energy. We must continue to be vigilant to defend American innovation from bureaucratic overreach in whatever form it takes."
SEC
The SEC settled with Shape Shift over alleged dealer registration violations; Shape Shift will pay a $275,000 fine.
Order.
But note: Shape Shift continues to operate in the U.S., as the order applies to when it operated as a centralized platform, but it has since decentralized.
Commissioners Hester Peirce and Mark Uyeda dissented, offering a mock screenplay of crypto entrepreneurs engaging with the SEC. Check it out via Alexander Grieve of Paradigm's tweet here.
CFTC
CFTC advisory committee votes to advance digital assets taxonomy for agency review; aims to provide consistent terms for digital assets, stablecoins, and more.
Article by Sarah Wynn, the Block.
2024
"Crypto was a big winner in the Super Tuesday elections."
Article by Scott Nover, Fast Company.
Congress
Rep. Mike Flood (R-NE) shares thoughts on SAB 121, Member education, the importance of Congressional staff, the CFPB's digital wallet proposal, and outlook for the 119th Congress.
Interview with Blockchain Tipsheet.
Correction
Last week's newsletter reported the vote on the CRA resolution to rescind SAB 121 as 31-20. Per the official vote card, the correct tally was 31-19.
Thanks for reading,
GSL
Please note you can read this newsletter in its original format here.
