Top executives from major U.S.-based digital asset firms appeared before Congress on Wednesday, December 8, 2021, in what was arguably the most anticipated day for crypto in D.C. to date. Congressional hearings are the principal formal method that Congress uses to collect and analyze information in the early stages of legislative policymaking.
Six firms across all sectors — Bitfury (mining), Circle (stablecoin issuer), Coinbase (exchange), FTX (exchange), Paxos (exchange and stablecoin issuer) and Stellar Lumens (protocol) — testified before the U.S. House Financial Services Committee (HFSC), a committee within the House that oversees the nation’s financial sectors, including banking, commodities and securities.
The witnesses began with prepared oral remarks that focused on the growing importance of crypto and Web3. They emphasized the importance of ensuring the U.S. doesn’t fall behind other nations, and the collective desire for thoughtful regulation — advocating for the promotion of innovation while remaining committed to investor protection.
The hearing was a meaningful demonstration of our democratic process. The number of informed and thoughtful questions highlight Congress’s commitment to listening and learning about the crypto industry. Rather than focusing on over-exaggerated risks, such as money laundering, hacks, ransomware and tax evasion, our policymakers instead acknowledged the benefits of Web3, including its ability to democratize finance and the internet; its open, transparent and secure technology; and how the U.S. can remain at the forefront of crypto innovation.
We don’t need knee-jerk reactions by lawmakers to regulate out of fear of the unknown rather than seeking to understand…That fear of the unknown and the move to regulate before understanding will only stifle American ingenuity and put us at a competitive disadvantage.
– Rep. Patrick McHenry (R-NC)
Notably, HFSC Chairwoman, Maxine Waters (D-CA) — a known critic of digital currencies, especially during the Libra/Facebook hearings — acknowledged the growing acceptance of the technology with sensible caution:
Americans are increasingly making financial decisions using digital assets every day… Currently, cryptocurrency markets have no overarching or centralized regulatory framework, leaving investments in the digital assets space vulnerable to fraud, manipulation, and abuse.
– Rep. Maxine Waters (D-CA)
All panelists agreed that a regulatory framework is desirable in order for the digital asset industry to continue experiencing growth — provided these regulations are technology-neutral and considerate of the unique and diverse use cases across Web3, such as payments, DeFi, computing and entertainment.
Treating crypto as a single unitary activity whose main feature is a need for financial regulation would be like treating the original internet in the 1990s as primarily a tax policy issue. We didn’t do that then.
– Brian Brooks (CEO, Bitfury)
This hearing was also the first time market participants had an opportunity to publicly highlight the protections they’ve put in place at their own firms: trade surveillance, transaction monitoring, risk engines, and KYC policies — the guardrails to prevent against various types of “fraud and manipulation” that regulators have historically cited as cause for concern. The arguments outlined demonstrate that crypto market participants do, in fact, have the necessary investor protections that exist in other regulated asset classes, especially as regulators consider matters, such as approval of spot-based Bitcoin ETFs.
The SEC has approved several Bitcoin futures ETFs that get 100% of their price discovery from U.S. crypto spot markets. So I guess I’m left incredibly confused by how the SEC’s concern over spot market vulnerability applies to Bitcoin spot ETFs when it doesn’t apply to Bitcoin futures ETFs…Chair Gensler’s justification for not allowing Bitcoin spot ETFs to trade is his belief that Bitcoin spot markets are vulnerable to fraud and manipulation.
– Rep Tom Emmer (R-MN)
At Grayscale, we are 100% committed to advocating for a Bitcoin Spot ETF in the United States. It’s why our attorneys at Davis Polk submitted a letter to the SEC last week, arguing that approval of Bitcoin futures-based ETFs, but not Bitcoin spot-based ETFs, like GBTC, is “arbitrary and capricious,” and therefore a potential violation of the Administrative Procedure Act (APA). We elaborated on that line of reasoning in our A New Argument for a Bitcoin ETF.
Overall, consensus in Washington D.C. is that the hearing was the most positive and constructive bi-partisan engagement around the crypto ecosystem from the U.S. government to date.
This reception is a testament to years of commitment, dedication, and behind-the-scenes work from industry and advocacy groups, like the Blockchain Association, ADAM, and Coin Center. At Grayscale, we are proud to support these organizations, and applaud Congress for their willingness to engage and seek guidance from these industry experts in an effort to craft good public policy.
There is, however, still a lot of work to be done. While we commend Members of the House Financial Services Committee for their progress and level of education, we remain committed to working for the wider acceptance and greater clarity of crypto and Web3 as a whole from U.S. regulators. At Grayscale, we continue to believe the U.S. should stop regulating by enforcement, and instead adopt a ‘do no harm’ approach akin to that of the Internet era, which we described in our Thoughts on DeFi Policymaking and Regulation.
Until then, representatives from across the crypto ecosystem will continue to engage and educate. We see another opportunity for progress as soon as next week, when various stablecoin issuers will appear before the Senate Banking Committee.