Financial Innovation and Technology for the 21st Century Act
Floor Speech
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Ms. WATERS. Mr. Chair, I yield myself such time as I may consume.
Mr. Chair, I rise in strong opposition to H.R. 4763, which I am calling the not fit for purpose act.
This bill would deregulate a substantial portion of the crypto industry, taking them out of the purview of the Securities and Exchange Commission, or SEC. It would allow them to operate either under a lighter touch regulatory regime under the Commodity Futures Trading Commission or in what I have called a regulatory no-man's-land, with no primary regulator and virtually no regulations. For crypto that would remain under the SEC's purview, this bill still provides major exemptions from critical securities laws.
If this wasn't bad enough, this bill is not just about crypto. Language was added to the bill after it was marked up by the committees of jurisdiction that would allow even some traditional securities to also exist in this regulatory no-man's-land.
Specifically, I am referring to title II of the bill that defines the term ``investment contract asset.'' Assets that fall under this definition are explicitly deemed not to be securities and, therefore, not under the SEC's purview, but the bill doesn't provide an alternative legal framework for these assets.
This represents an extreme MAGA, libertarian approach where companies can operate without regulatory scrutiny, and consumers and investors are on their own in detecting and avoiding fraudulent schemes.
While Republican defenders of this bill have argued that this definition of investment contract asset is limited to digital assets under the bill, this is disputed by legal experts and SEC Chair Gary Gensler himself, who confirmed in a recent statement regarding this bill that it would have a broader impact on traditional securities.
Interestingly, I didn't hear any arguments from the Republicans at the Rules Committee hearing disputing that this would, in fact, be a regulatory no-man's-land, even if they insist it is just for crypto.
Even for crypto that would be transferred over to the CFTC, I have serious concerns about the loss of protections for consumers and investors. The CFTC is generally designed to deal with sophisticated institutional investors and traders. It doesn't have the same kind of protections that the SEC has for retail investors and consumers.
Under all three avenues provided for crypto under this bill: The CFTC's lighter touch regulatory regime, SEC's weaker regulatory regime for restricted digital assets, or the regulatory no-man's-land, these are just a few examples of protections that would be stripped away: the right of an investor to sue, gone; protections against conflicts of interest, gone; the right to critical disclosures that help investors make informed choices, gone; and enforcement by States against fraud; and enforcement by the SEC for all of the above protections, including antifraud.
H.R. 4763 would also upend more than 170 enforcement cases the SEC has brought related to crypto violations. These actions have been brought by both Democratic and Republican administrations to protect investors against crypto bad actors.
The SEC is the Federal agency on the front lines of enforcing our existing securities laws on crypto firms that have willfully chosen to ignore the law and defrauded consumers out of billions of dollars with these get-rich-quick schemes. Giving this industry a free pass to avoid most all regulations cannot be the answer to the serious concerns that Members have raised about crypto fraud.
I have seen many efforts by Republicans, acting at the behest of the industry to pass deregulatory regulation, but this is perhaps the worst, most harmful proposal I have seen in a long time. This bill would deregulate crypto and certain traditional securities to the extent that I and other experts have expressed serious concerns about this bill causing a potential market crash and recession.
I am also reminded of how, over the warnings of regulators, Congress moved to deregulate the over-the-counter derivatives. Remember the derivatives market back in 2000? The resulting financial crisis triggered the implosion of financial institutions, a wave of foreclosures, and trillions of dollars in lost wealth.
Mr. Chair, I urge my colleagues not to forget. They should not repeat history with this bill.
The Biden administration has released a Statement of Administration Policy opposing this bill. The bill is also opposed by a long list of investors and consumer advocates, State securities administrators concerned about State preemption, labor organizations worried about the retirement funds of their members, environmental groups concerned about the undisclosed risk of crypto mining, civic organizations worried about the undue influence of the financial and crypto industry over Congress' actions, academics, legal experts, and technologists.
Mr. Chair, I urge my colleagues to stand up and to not be afraid of Big Crypto, to stand up for everyday investors and consumers.
Mr. Chair, I urge my colleagues to vote ``no'' on this bill, and I reserve the balance of my time.
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Ms. WATERS. Mr. Chairman, I yield 3 minutes to the gentleman from Massachusetts (Mr. Lynch), who is also the ranking member of the Subcommittee on Digital Assets, Financial Technology and Inclusion.
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Ms. WATERS. Mr. Chairman, I yield 4 minutes to the gentleman from Illinois (Mr. Casten).
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Ms. WATERS. Mr. Chair, I yield an additional 30 seconds to the gentleman from Illinois.
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Ms. WATERS. Mr. Chair, I yield myself such time as I may consume.
It is no mystery why the crypto industry prefers to be regulated by the CFTC rather than the SEC. Let's start with the substantial differences in funding and staff for the CFTC compared to SEC.
In 2023, the CFTC employed roughly 680 full-time employees with an annual budget of $365 million. Wow. The Securities and Exchange Commission, the SEC, employed over 4,500 employees and had a budget of over $2 billion.
Even with the limited funding provided to the CFTC under this bill, which is capped at $40 million and set to expire after 4 years, the CFTC's funding would be only one-fifth of the SEC's budget. Mr. Chair, $40 billion is not sufficient to oversee more than 16,000 cryptocurrencies.
Let's not forget that the same Republicans who are bringing this bill to the floor are the same ones who proposed cutting CFTC's budget last year. Moreover, the CFTC is designed to deal mostly with sophisticated institutional investors and traders rather than retail investors and consumers. Therefore, the CFTC does not have the same level of protections for retail investors and consumers.
Mr. Chair, I would simply say that we should look at this example. The CFTC has no mandate like the SEC that requires entities to act in the best interests of the investors or to put their clients' interests first. This is just another reason why I am very concerned about the light-touch regulatory regime under the CFTC.
Mr. Chair, I yield 5 minutes to the gentleman from California (Mr. Sherman), who is also the ranking member of the Subcommittee on Capital Markets.
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Ms. WATERS. Mr. Chair, I yield an additional 30 seconds to the gentleman from California.
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Ms. WATERS. Mr. Chair, I yield 4 minutes to the gentleman from Illinois (Mr. Foster), who is the ranking member of the Subcommittee on Financial Institutions and Monetary Policy.
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Ms. WATERS. Mr. Chair, I continue to reserve the balance of my time.
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Ms. WATERS. Mr. Chair, I include in the Record the following statements:
The Statement of Administration Policy from the Biden administration opposing this bill;
The statement from SEC Chair Gensler raising serious concerns about this bill;
A letter from the Treasury Department to me, dated July 20, 2023, expressing serious concerns about this bill;
A letter from the North American Securities Administrators Association opposing this bill; and
A letter from 48 stakeholders opposing this bill. Statement of Administration Policy
H.R. 4763--Financial Innovation and Technology for the 21st Century Act--Rep. Thompson, R-PA, and 11 cosponsors
The Administration opposes passage of H.R. 4763, which would affect the regulatory structure for digital assets in the United States. The Administration is eager to work with Congress to ensure a comprehensive and balanced regulatory framework for digital assets, building on existing authorities, which will promote the responsible development of digital assets and payment innovation and help reinforce United States leadership in the global financial system. H.R. 4763 in its current form lacks sufficient protections for consumers and investors who engage in certain digital asset transactions. The Administration looks forward to continued collaboration with Congress on developing legislation for digital assets that includes adequate guardrails for consumers and investors while creating the conditions needed for innovation, and further time will be needed for such collaboration. ____ May 22, 2024. Statement on the Financial Innovation and Technology for the 21st Century Act
(By Gary Gensler, Chair, Securities and Exchange Commission) Introduction
For 90 years, the federal securities laws have played a crucial role in protecting the public. These critical protections were created in the wake of the Great Depression after many Americans suffered the consequences of inadequately regulated capital markets. We saw sky-high unemployment, bread lines, and shantytowns springing up due to mass foreclosures.
Back then, the rules didn't exist. That's why President Roosevelt and Congress created the SEC and the laws it administers.
At their core is the critical concept of registering securities that will be offered to the public and registering the intermediaries that facilitate the exchange of those securities. For securities, registration means that issuers provide robust disclosures and are liable if their material statements are untruthful. For intermediaries, registration brings with it rulebooks that prevent fraud and manipulation, safeguards against conflicts of interest, proper disclosures, segregation of customer assets, oversight by a self- regulatory organization, and routine inspection by the SEC.
Today, these rules do exist.
Many market participants in the crypto industry, however, have shown their unwillingness to comply with applicable laws and regulations for more than a decade, variously arguing that the laws do not apply to them or that a new set of rules should be created and retroactively applied to them to excuse their past conduct. Widespread noncompliance has resulted in widespread fraud, bankruptcies, failures, and misconduct. As a result of criminal charges and convictions, some of the best-known leaders in the crypto industry are now in prison, awaiting sentencing, or subject to extradition back to the United States.
The SEC, during both Republican and Democratic Administrations, has allocated enforcement resources to holding crypto market participants accountable. Courts have time and again agreed with the SEC, ruling that the securities laws apply when crypto assets or crypto-related investment schemes are offered or sold as investment contracts. The Financial Innovation and Technology for the 21st Century Act
The Financial Innovation and Technology for the 21st Century Act (``FIT21'') would create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk.
First, the bill would remove investment contracts that are recorded on a blockchain from the statutory definition of securities and the time-tested protections of much of the federal securities laws.
Further, by removing this set of investment contracts from the statutory list of securities, the bill implies what courts have repeatedly ruled--but what crypto market participants have attempted to deny--that many crypto assets are being offered and sold as securities under existing law.
Second, the bill allows issuers of crypto investment contracts to self-certify that their products are a ``decentralized'' system and then be deemed a special class of ``digital commodities'' and thus not subject to SEC oversight. Whether something is a ``digital commodity'' would be subject to self-certification by ``any person'' that files a certification. The SEC would only have 60 days to review and challenge the certification that a product is a digital commodity. Those that the SEC successfully challenges would be re-classified as restricted digital assets and subject to the bill's lighter-touch SEC oversight regime that excludes many core protections. There are more than 16,000 crypto assets that currently exist. Given limits on staff resources, and no new resources provided by the bill, it is implausible that the SEC could review and challenge more than a fraction of those assets. The result could be that the vast majority of the market might avoid even limited SEC oversight envisioned by the bill for crypto asset securities.
Third, the bin's regulatory structure abandons the Supreme Court's long-standing Howey test that considers the economic realities of an investment to determine whether it is subject to the securities laws. Instead, the bill makes that determination based on labels and the accounting ledger used to record transactions. It is akin to determining the level of investor protection based on whether a transaction is recorded in a notebook or a software database. But it's the economic realities that should determine whether an asset is subject to the federal securities laws, not the type of recordkeeping ledger. The bill's result would be weaker investor protection than currently exists for those assets that meet the Howey test.
Fourth, for those crypto investment contracts that would still fall under the SEC's remit the bill seeks to replace Roosevelt's investor protection framework with fewer protections than investors are afforded in every other type of investment. Doing so increases risk to the American public.
Fifth, the bill specifically excludes crypto asset trading systems from the definition of an exchange and thus removes, for investors on crypto asset trading platforms, the protections that benefit investors on registered exchanges. These crypto trading platforms would be able to legally comingle their functions in a way that fosters conflicts of interest, may allow trading against their customers, and reduces custody protections for their customers.
Sixth, the legislation creates an exemption from regulation under this Act for any entity or organization that falls under a broadly defined category called ``Decentralized Finance.'' Any number of firms would qualify for the exemption, regardless of potential conflicts of interest. This would include firms that intermediate crypto securities transactions.
Finally, the bill could be read to functionally eliminate the current Regulation A and Regulation D offering restrictions for crypto securities by creating a new exempt offering framework. Non-accredited investors would be allowed to purchase crypto assets worth up to 10 percent of their net worth or annual income before the issuer would be required to provide any disclosure. That's a lot of risk for ordinary investors to take on without disclosure. Risks to the Broader Capital Markets
The self-certification process contemplated by the bill risks investor protection not just in the crypto space; it could undermine the broader $100 trillion capital markets by providing a path for those trying to escape robust disclosures, prohibitions preventing the loss and theft of customer funds, enforcement by the SEC, and private rights of action for investors in the federal courts. It could encourage non-compliant entities to try to choose what regulatory regimes they wish to be subjected to--not based on economic realities, but potentially based on a label.
What if perpetrators of pump and dump schemes and penny stock pushers contend that they're outside of the securities laws by labeling themselves as crypto investment contracts or self-certifying that they are decentralized systems? The SEC would only have 60 days to contest their self-certification. Conclusion
History has shown for 90 years that robust securities regulation both creates trust in markets and fosters innovation. There are countless examples of American companies across many industries that have made world- changing innovations while also registering their securities. It is through the securities laws that we get full, fair, and truthful disclosure that arms investors with the information they need to make investment decisions and enables regulators to guard against the types of fraud we've seen in the crypto field.
The crypto industry's record of failures, frauds, and bankruptcies is not because we don't have rules or because the rules are unclear. It's because many players in the crypto industry don't play by the rules. We should make the policy choice to protect the investing public over facilitating business models of noncompliant firms. ____ Department of the Treasury, Washington, DC, July 20, 2023. Hon. Maxine Waters, Ranking Member, Committee on Financial Services, House of Representatives, Washington, DC.
Dear Representative Waters: Thank you for your June 23, 2023, letter requesting feedback on a legislative proposal to revise the market structure for digital assets.
As you know, in response to President Biden's March 9, 2022, Executive Order 14067 on Ensuring Responsible Development of Digital Assets, the U.S. Department of the Treasury (``Treasury'') prepared reports covering a range of topics related to digital assets, including current use cases of digital assets and their effects on consumers, investors, and businesses. In addition, the Financial Stability Oversight Council (''FSOC'') published a report on the potential financial stability risks posed by digital assets. Events that have occurred since publishing these reports-- including the failures of large crypto firms, runs on stablecoins, and losses to investors and consumers--have confirmed and reinforced many of the risks and concerns identified in the reports.
These events have also reinforced the reports' recommendations for how to address these risks. First, the existing market regulatory framework is designed to address many of the risks posed by digital assets. For example, the protections and principles of the existing framework-- including governance and risk management standards, and protections against commingling of customer assets--are directly responsive to the failures of large crypto platforms. Accordingly, where existing requirements apply, they must be enforced rigorously so that the same protections and principles that apply in markets for other financial assets apply in markets for digital assets.
At the same time, the FSOC report also identified discrete gaps in existing regulatory authority and recommended that Congress expand regulators' authorities to address these gaps. First, the FSOC recommended that Congress provide authority over the spot market for non-security digital assets. Today, these markets are subject to limited direct federal regulation and, as a result, are not subject to the same protections that are designed to ensure orderly trading, prevent conflicts of interest, and protect investors. Second, the FSOC recommended that Congress ensure that regulators have visibility into the activities of affiliates and subsidiaries of federally regulated intermediaries. Today, digital asset platforms may have affiliates or subsidiaries operating under different regulatory frameworks, and no single regulator may have visibility into the risks across the entire business. Finally, and as we have discussed previously, FSOC recommended establishing a regulatory framework for stablecoins.
In developing these recommendations and when considering legislative proposals, we are guided by our and the FSOC's prior work on digital assets. More specifically,
Existing authorities should be preserved. As discussed above, the existing market regulatory framework is designed to address many of the risks of digital assets. Exceptions and limitations to the existing framework--whether on a provisional or ongoing basis--would leave investors without critical protections and undermine market integrity. For example, provisional or temporary exemptions should not exclude core protections that are critical to an effective market regulatory regime, such as requirements that ensure orderly trading and to protect against conflicts of interest. Immunizing issuers and platforms from enforcement of prior violations prevents redress of harms done to investors and undermines market integrity. On an ongoing basis, limiting market regulators ability and discretion to act would undermine their ability to provide clarity to market participants.
Same risk, same activity, same regulatory outcome. Activities that bear the same risks should be subject to the same regulatory outcome. To that end, when creating new regulatory categories--e.g., new pathways to access capital markets, or distinguishing a type of trading platforms-- policymakers must consider carefully how existing products or services may be affected, either disadvantaged relative to the new category or migrating to take advantage of more favorable treatment. Technological differences may be relevant to regulatory treatment, but only insofar as these distinctions inform the conduct of the activity and how risks manifest. The process for accessing capital markets, along with the conduct of secondary market activity within those markets, should reflect the underlying risks, not the technology used. Fraud, misstatements, and other misconduct in digital asset markets do not suggest that the underlying technology is associated with a reduction in or change to the underlying risks for investors. Moreover, regulatory distinctions based on technology alone are prone to arbitrage or obsolescence, in part because they do not always appropriately reflect the underlying risks. Finally, regulatory arbitrage also may have a wide range of financial stability and other risks if activities that bear the same risks are subject to different rules or if firms can operate in a manner that prevents regulators from assessing the totality of the organization's risks. Today, the operations and organizational structures of digital asset trading platforms may result in having different regulatory regimes for different affiliates or subsidiaries, such that no single regulator has a view into operations of the whole. By adding new regulatory distinctions without appropriately addressing the underlying risks of the activity or conduct, the proposal could amplify these risks.
Robust regulation of spot markets. Investors in non- security digital asset spot markets, which includes many retail investors, should have the same basic protections as are present in other trading markets. Accordingly, and consistent with the principles above, regulatory authority should cover a range of subjects, including conflicts of interest, abusive trading practices, margin, trade reporting, governance, capital, recordkeeping, governance, custody, and settlement. Regulatory authority should be accompanied by resources sufficient to ensure that implementation is effective.
We appreciate your leadership on these issues and share your concerns that many digital assets present significant risks to consumers, investors, and businesses, and have the potential to pose significant risks to the broader financial system. We also appreciate your engagement with Treasury on these issues, and we look forward to working with you and your staff in the future. If you have any further questions, please do not hesitate to contact the Office of Legislative Affairs. Sincerely, Jonathan Davidson. North American Securities Administrators Association, Inc., May 21, 2024. Re Vote NO on H.R. 4763, the Financial Innovation and Technology Act for the 21st Century Act, As Amended Hon. Mike Johnson, Speaker, House of Representatives, Washington, DC. Hon. Hakeem Jeffries, Democratic Leader, House of Representatives, Washington, DC.
Dear Speaker Johnson and Democratic Leader Jeffries: On behalf of the North American Securities Administrators Association, Inc. (``NASAA''), I write to express strong opposition to H.R. 4763, the Financial Innovation and Technology for the 21st Century Act, as amended (``H.R. 4763''). In short, H.R. 4763 would create a bespoke, light- touch regime under federal securities and commodities laws to benefit market participants that elect to use blockchain and other distributed ledger technologies (``DLTs'') to raise capital, manage risk, and trade products. As explained below, over time, this bill could upend decades of industry, judicial, legislative, and regulatory work to build capital markets that are the gold standard. Near-term, the bill would nullify or otherwise severely complicate the ability of securities regulators to fulfill their missions.
To begin, H.R. 4763 would supplant long-standing and critical components of securities laws through the introduction of new defined terms into our federal market frameworks for products such as ``digital assets,'' ``investment contract assets,'' and ``digital commodities.'' Indeed, the point of entry to access this regime would be the definition of a ``digital asset.'' The bill would define such products as any fungible digital representation of value that (i) can be exclusively possessed and transferred, person to person, without necessary reliance on an intermediary, (ii) is recorded on a cryptographically secured public distributed ledger, and (iii) is not a product enumerated in H.R. 4763, which in short is a list of selected products treated as securities and commodities under federal law. With respect to ``digital assets'' that run on a DLT that is certified as ``decentralized,'' meaning no one person or entity had ``unilateral authority'' during the lookback period to control the operation of or access to the system, H.R. 4763 would treat them as ``digital commodities.'' This designation would place them and associated intermediaries under the Commodity Futures Trading Commission (``CFTC''). By contrast, for those ``digital assets'' that run on a DLT that is not ``decentralized'' enough to qualify as a ``digital commodity,'' H.R. 4763 would treat them as ``digital assets,'' ``restricted digital assets'' or ``securities,'' depending on the facts. This designation would place or keep them and associated intermediaries under the Securities and Exchange Commission (``SEC''). Alarmingly, H.R. 4763 would define ``investment contract assets'' by carrying over the ``digital assets'' definition and then essentially carving the product out of federal securities laws, thereby creating a new gap, specifically the investment contracts assets gap with no federal market regulator in charge.
Staying on the bill's impact on the SEC's regulation of ``digital assets,'' the legislation would establish a new minimally transparent market for transactions ``involving the offer or sale of units of a digital asset'' that meet specified criteria. In short, H.R. 4763 would create an exemptive pathway for raising capital under the Securities Act of 1933 (``1933 Act''). Issuers relying on the exemption could raise as much as $75 million within a 12-month period with certain limits on sales to non-accredited investors.
Importantly, while H.R. 4763 would prevent state governments from requiring issuers to register their digital asset offerings with the states, the legislation would preserve the ability of states to investigate and if appropriate bring enforcement actions for fraud and require notice filings and associated fees. Anti-fraud authority and notice filings are important tools that mirror existing state authority for certain other federal ``covered securities.'' However, they are insufficient regulatory tools when it comes to authority meant to stop potential harm before it is inflicted on retail investors. Unfortunately, fraud tied to the offer and sale of digital asset securities has been and continues to be a top investor threat.
Further, H.R. 4763 would introduce several new defined terms under federal securities law for intermediaries associated with ``digital assets'' such as a new category called a ``digital asset broker.'' Creating such bespoke new categories, particularly when they would or could be redundant of existing categories such as broker-dealer agents, would add complexity and costs to our federal market frameworks, with no net-benefit for investors. Indeed, years after the adoption of SEC Regulation Best Interest and Form CRS, many investors still struggle to distinguish between broker-dealer agents and investment adviser representatives. Injecting new, largely redundant digital asset intermediaries would only create more confusion and more conflicts for retail investors.
Undoubtedly, the deregulatory nature of this bill would prompt so-called traditional market participants to explore the use of DLTs if only to access a regime that has less transparency and less robust standards than the present one. We have seen time-and-again that market behaviors shift to more opaque areas of the markets, a move observable most recently in the now widespread use of the SEC Regulation D, Rule 506(b) exemption in lieu of public offerings. In addition to further reducing transparency in our markets, such a shift would create new competition concerns, particularly for small market participants who generally cannot afford to use the latest technology.
In sum, we believe this legislation began as a well- intentioned effort to fill what was described initially as a potential regulatory gap for so-called virtual currencies. Fast forward to today, the legislation that has emerged in the form of H.R. 4763 introduces anti-competitive, overly complicated, costly, and unwarranted changes to the laws that have protected investors and promoted robust capital markets for decades.
Should you have any questions, please do not hesitate to contact me or Kristen Hutchens, NASAA's Director of Policy and Government Affairs, and Policy Counsel. Respectfully, Joseph Brady, NASAA Executive Director. ____ May 20, 2024. Hon. Mike Johnson, Speaker of the House, House of Representatives, Washington, DC. Hon. Hakeem Jeffries, Minority Leader, House of Representatives, Washington, DC.
Dear Speaker Johnson and Minority Leader Jeffries, We, the undersigned organizations and individuals, write to you today to express our opposition to H.R. 4763, the Financial Innovation and Technology for the 21st Century Act (The ``FIT'' Act). We urge you and Members of Congress to vote against this bill when it comes to floor this week. Many signatories of this letter also wrote to the House Financial Services and Agriculture Committees last year expressing their opposition to this bill when it was marked up in Committee. We see little in the new version of this bill (despite format and cosmetic changes) to assuage our concerns.
Consumers have lost trillions due to the 2022-2023 crypto collapse, in addition to the billions lost directly to widespread scams, fraud and theft found throughout the industry. Public opinion has largely soured on these speculative investments. Venture capital funding, which pumped crypto hype for years, often for their own firms' benefit, plummeted during the crash, migrating to the next shiny object of discussion--AI. Most of the industry's wounds are self-inflicted, and are a result of either failure to adhere to the most basic financial management principles, rampant fraud, or both. Even now, after the prosecutions of Sam Bankman-Fried, Changpeng Zhao, and other seminal crypto players, many industry players large and small are still facing civil and criminal enforcement actions at the state, national and international level, as well as class-action lawsuits from defrauded customers. After 15 years, crypto still struggles to demonstrate viable use cases outside of speculative investment. While other tech has proven its usefulness many times over, crypto's big moment is always just over the horizon. The industry has superficially recovered this year, in part due to controversial approval of spot BTC ETPs by the Securities Exchange Commission. Yet, the scams, hacks, theft, instability, reckless promotional activities, and regulatory evasion that were present during the last crypto bull market remain endemic in the industry today.
In the midst of this new bubble, a concentrated lobbying effort by the crypto industry, backed primarily by wealthy venture capital investors seeking short-term returns on risky investments, has moved lawmakers to advance this proposal with potentially radical implications that would, in the name of ``crypto innovation'' and so-called ``regulatory clarity,'' complicate and weaken consumer and investor protections for both traditional and crypto investors. It would also broadly reshape financial regulatory agencies' jurisdictions and weaken regulatory oversight of financial products and services writ large. All this could result in real harm to consumers and investors, whether they invest in crypto or not.
We have numerous concerns about the bill; we discuss a set of crucial problems below.
A potential backdoor path to undermine the Howey Test. For decades, the Howey Test--a legal framework outlined by a Supreme Court ruling that is used to determine whether certain transactions qualify as investment contracts, and thus must adhere to robust investor safeguards--has a been a vetted and reliable formula used by the courts and regulators to determine whether certain investment activities, assets and actors should subject to investor protection standards under securities law. The crypto industry's efforts to contest the notion that crypto assets aren't securities under Howey have had a rocky trajectory--a few wins, many more losses and settlements in court. As described further below, much of this bill seeks to circumvent these standards, in part by creating a fast-track, rubber stamp process to designate crypto assets as ``commodities,'' thus narrowing application of securities regulation to those assets and related actors.
But, leaving nothing to chance, Title II of the FIT Act also declares that, if enacted, all ``investment contracts assets''--which are defined in the bill as digital assets-- are not securities, full stop. This would likely not only undermine application of the Howey Test to crypto assets and activities writ large (even when evidently appropriate) but would also invite non-crypto actors to use this new terminology to evade coverage of the Howey Test for their investment products and activities as well. Instead of applying the principles of ``same activities, same risks, same rules'' which helps create consistent regulatory standards, this bill seeks to re-write large swathes of securities law to create special exceptions and lighter regulations for crypto. And it does so in ways that are likely to undermine consistent regulation and investor protection more broadly. That means even investors who never touch crypto may be harmed by this bill if enacted.
A blueprint for unregistered stock offerings. This bill creates a blueprint for crypto asset issuers to effectively issue ``unregistered stock,'' by enacting a static decentralized system definition that would allow crypto asset issuers and traders to qualify as decentralized when certain conditions are met, and therefore be exempt from most meaningful securities regulatory oversight. This approach effectively codifies existing crypto business models that are all too often used to exploit retail investors for the benefit of a smaller group of initial investors.
A roadmap for traditional financial firms to use ``decentralized networks'' to evade more rigorous oversight. Not only could the decentralization framework named above allow crypto firms to largely continue with dangerous business practices as usual; it could also enable traditional financial firms to evade more robust regulatory oversight by claiming their products and platforms meet this decentralization rubric (e.g. ``slap a blockchain on it''), and thus are exempt from conventional regulatory requirements for securities issuers and actors. This would create huge potential risks for consumers, investors, and markets due to less rigorous oversight than they would otherwise see with traditional regulatory approaches.
A rubber-stamp certification scheme for crypto ``commodities.'' The bill's self-certification process for crypto industry actors makes it very easy for anyone to declare they fall under CFTC jurisdiction (as crypto commodity issuers, brokers, etc.) The SEC is given nominal authority to intervene in these certifications, but the bill sets a 60-day time limit for such interventions, requires the agency to do extensive legal analysis, and allows the CFTC to intervene and applicants to file appeals. This process and unreasonable timeline stacks the deck against the appropriate securities regulation of crypto assets that should fall under the SEC's jurisdiction, and all but guarantees many asset issuers and traders will flood the system seeking registration under the CFTC. This also flies in the face of arguments that this bill is intended to address a targeted gap in crypto spot market regulation, when it's clear the scope of assets and actors that can and would likely seek registration with the CFTC is far greater.
A vague mandate for CFTC that lacks clarity or sufficient investor and consumer protections. The bill grants the CFTC new regulatory authority over crypto commodities and crypto commodity traders, but the language regarding consumer and investor protection provisions in the bill is vague, narrowly cast, or left up to rulemakings, and not fully commensurate with investor protection provisions found in the securities regulatory framework. If and when the agency sought to further define these elements--especially if they were to do so in a robust way--they would likely face significant litigation from crypto and non-crypto entities alike, as the bill's proposals are not fully supported by or consistent with its current statutory mandate, which is largely focused on anti-fraud and market manipulation measures meant to address activity by large, sophisticated trading firms, not retail crypto investors buying crypto from their phone on an app.
The legal wrangling that would likely ensue could take years, if not decades, to resolve--leaving crypto investors without adequate regulatory protections in the interim. Lastly, it's possible the regulatory authority given to the CFTC under this bill could undermine the authority of agencies such as the CFPB to regulate and oversee crypto consumer financial products and services as well. All told, instead of the so-called ``regulatory clarity'' the crypto industry claims it needs to be compliant with basic investor protection safeguards, this bill is more likely to introduce regulatory chaos for crypto and non-crypto actors alike.
Weaker regulatory requirements for many crypto securities. The bill's regulatory provisions for those crypto assets that are deemed `securities' allow for major exemptions for crypto asset issuers whose sales are under $75 million a year--a threshold that would exclude thousands of tokens currently on the market. This exemption would allow crypto securities issuers to issue what amount to private offerings to the broader investor public, without adequate regulatory oversight. Numerous crypto scams and pump and dump schemes have fleeced crypto consumers with sales volumes of far less.
An expansive temporary safe harbor that tacitly rewards non-compliance. Finally, this bill, via a ``notice of intent to file'' provision, creates an expansive safe harbor for crypto platforms and crypto asset issuers, whereby firms can offer nominal information about their business regulators and ``provisionally'' register with the SEC or CFTC while these agencies enact more formal rules. By giving such safe harbor (which given rulemaking timelines, could potentially last for years) crypto firms currently out of compliance with existing financial regulatory laws would be sheltered from current or future legal action, and would be free to continue with business as usual. We fear this would give such firms a patina of legitimacy which could draw unwary consumers back to crypto, exposing them to more risk and harm.
A lack of action to protect the right to private action for consumers and investors. The recent collapse or bankruptcy of multiple crypto firms--Terraform Labs, 3AC, Voyager Digital, Celsius Network, BlockFI, Genesis Global Capital, Gemini Trust, FTX, and many others--has illustrated how important it is to preserve investor rights that provide to access US courts, help hold bad actors accountable and enable investors to recover their losses. Yet, this bill fails to create such protections within this framework, does nothing to preserve existing investor rights and does not include a savings clause to retain these rights under state law as well. The bill also fails to address the widespread use by crypto firms of forced arbitration clauses and other onerous limitations on consumers' and investors' rights.
All told, we believe this bill as written introduces a policy ``cure'' that would be far worse than the disease and create significant harm within and far beyond the crypto industry. Regulators already have extensive existing powers to regulate this industry, the same way other financial products and services are regulated. Those regulatory gaps that may exist require a targeted, narrow, and measured approach, but this bill is sweeping and broad in scope, and should it become law it would profoundly undermine the SEC's ability to support orderly markets and protect investors from harm.
Instead of pursuing this ill-advised proposal, the best immediate step Congress could take to protect consumers who choose to participate in crypto markets would be to support regulators' ongoing efforts to enforce existing regulatory standards that apply to crypto actors, assets and activities--the very basic elements of securities, banking and consumer finance regulation which provide the foundation for consumer and investor protections in the financial regulatory realm.
Thank you. Signed, organizations
American Federation of State, County and Municipal Employees (AFSCME); American Association for Justice; American Economic Liberties Project; AFL-CIO; Americans for Financial Reform; Center for American Progress; Center for Economic Integrity: Center for Responsible Lending; Clean Energy Action; Communication Workers of America; Consumer Federation of America; Consumer Federation of California; Consumer Reports; DC Consumer Rights Coalition; Demand Progress; Democracy for America Advocacy Fund; Economic Action Maryland; Empower Our Future.
Food and Water Watch; Groundwork Data; ISAIAH (MN); Institute for Agriculture and Trade Policy; Maine People's Alliance; National Community Reinvestment Coalition; National Consumer Law Center, on behalf of its low-income clients; P Street; Public Citizen; RAISE Texas; Revolving Door Project; Rise Economy; US PIRG; Take On Wall Street; Texas Appleseed; THIS! Is What We Did; Virginia Poverty Law Center; Woodstock Institute; 20/20 Vision; 350Hawaii. Individuals (titles and institutions provided for identification purposes only and do not constitute institutional endorsements)
Anat Admati, George G.C. Parker Professor of Finance and Economics, Graduate School of Business, Stanford University
Hilary J. Allen, Professor of Law, Associate Dean for Scholarship, American University Washington College of Law
Raul Carrillo, Academic Fellow, Columbia Law School
Brian Flick, Ohio State Chair, National Association of Consumer Advocates
Richard W. Painter, S. Walter Richey Professor of Corporate Law, University of Minnesota Law School
Todd Phillips, Assistant Professor of Legal Studies, Robinson College of Business, Georgia State University
Lee Reiners, Lecturing Fellow, Duke Financial Economics Center and Duke Law
Jennifer Taub, Professor of Law, Wayne State University Law School (Fall 2024)
Urska Velikonja, Associate Dean For Academic Affairs, Professor of Law and Anne Fleming Research Professor, Georgetown Law School
Arthur E. Wilmarth, Jr., Professor Emeritus of Law, George Washington University Law School
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Ms. WATERS. Mr. Chair, I also include an excerpt from Coinbase's Form S-1 filing acknowledging the risk that Coinbase could be found to be illegally acting outside of securities laws, excerpts from the SEC's complaint against Coinbase alleging that Coinbase was illegally acting outside of securities laws; and a summary of, and key excerpt from, the decision in the case of SEC v. Coinbase, finding that Coinbase was indeed acting illegally by failing to comply with existing laws. SEC v. Coinbase Excerpt from Coinbase S-1 Filing on ``Risk Factors''
As indicated in the above complaint, in its Form S-1 filing with the SEC Coinbase acknowledged the risks that the crypto assets it makes available on its platform could be deemed securities, and therefore Coinbase could be found to be engaging in unregistered brokerage, exchange, and/or clearing-agency activity:
``A particular crypto asset's status as a ``security'' in any relevant jurisdiction is subject to a high degree of uncertainty and if we are unable to properly characterize a crypto asset, we may be subject to regulatory scrutiny, investigations, fines, and other penalties, which may adversely affect our business, operating results, and financial condition. The SEC and its staff have taken the position that certain crypto assets fall within the definition of a ``security'' under the U.S. federal securities laws. The legal test for determining whether any given crypto asset is a security is a highly complex, fact- driven analysis that evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance or confirmation on the status of any particular crypto asset as a security. Furthermore, the SEC's views in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff . . . With respect to all other crypto assets, there is currently no certainty under the applicable legal test that such assets are not securities, notwithstanding the conclusions we may draw based on our risk-based assessment regarding the likelihood that a particular crypto asset could be deemed a ``security'' under applicable laws.
The classification of a crypto asset as a security under applicable law has wide-ranging implications for the regulatory obligations that flow from the offer, sale, trading, and clearing of such assets. Persons that effect transactions in crypto assets that are securities in the United States may be subject to registration with the SEC as a ``broker'' or ``dealer.'' Platforms that bring together purchasers and sellers to trade crypto assets that are securities in the United States are generally subject to registration as national securities exchanges, or must qualify for an exemption, such as by being operated by a registered broker-dealer as an alternative trading system, or ATS, in compliance with rules for ATSs. Persons facilitating clearing and settlement of securities may be subject to registration with the SEC as a clearing agency.
Summary and excerpt from opinion of the judge from the US District Court for the Southern District of New York, denying Coinbase's Motion to Dismiss in the case of SEC v. Coinbase
In March 2024, U.S. District Court Judge Katherine Polk Failla of the Southern District of New York made a preliminary ruling in the Coinbase case, holding that because at least some crypto trades on the Coinbase platform met the longstanding definition of an investment contract, the SEC can move ahead with claims that Coinbase improperly operated as a securities exchange, broker and clearing agency. She also said the SEC adequately alleged that Coinbase sold unregistered securities through its staking program. In an 84-page opinion, the judge asserted, among other things, that ``the `crypto' nomenclature may be of recent vintage, but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years.'' excerpts from the sec's complaint filed against coinbase in june 2023
``In September 2019, Coinbase released a framework for analyzing crypto assets that assigned to the crypto asset a score ranging from 1 to 5, with a score of 1 indicating that an ``asset has few or no characteristics consistent with treatment as an investment contract,'' and a score of 5 meaning that an ``asset has many characteristics strongly consistent with treatment as a security.'' Meanwhile, between 2019 and 2020, Coinbase more than doubled the number of crypto assets available for trading on its platform, and it more than doubled that number again in 2021. During this period, Coinbase made available on its platform crypto assets with high ``risk'' scores under the CRC framework it had adopted. In other words, to realize exponential growth of the Coinbase Platform and boost its own trading profits, Coinbase made the strategic business decision to add crypto assets to the Coinbase Platform even where it recognized the crypto assets had the characteristics of securities.''
Coinbase generates most of its revenue from transaction fees collected on crypto asset trades made through the Coinbase Platform, Prime, and Wallet. Fox example, in 2021, Coinbase generated $6.8 billion in ``transaction revenue,'' out of a total net revenue of $7.4 billion. Likewise, in 2022, Coinbase generated over $2.2 billion in transaction revenue out of a total net revenue of $3.1 billion.
``Coinbase also worked closely with issuers of crypto assets who sought to have their crypto assets listed on Coinbase. Coinbase's ``Listings Team'' engaged in a dialogue with issuers focused on identifying potential ``roadblocks'' under Howey. For example, on one occasion, Coinbase identified ``problematic statements'' by an issuer that described its crypto asset ``with language traditionally associated with securities,'' ``implying that the asset is an investment or way to earn profit,'' ``emphasizing the profitability of a project and/or the historic or potential appreciation of the value of the assets,'' and ``using terms referring to the assets that are commonly associated with securities such as `dividend,' `interest,' `investment' or `investors.' '' As ``possible mitigation,'' Coinbase suggested that the issuer ``remove any existing problematic statements, and refrain from making problematic statements in the future.'' Coinbase was thus aware of the risk that it could be making available for trading on the Coinbase Platform crypto assets that were being offered and sold as securities. Indeed, Coinbase touted to the investing public its familiarity with the relevant legal analysis governing the offer and sale of securities.
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Ms. WATERS. Mr. Chair, if the gentleman has no more speakers, I am prepared to close.
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Ms. WATERS. Mr. Chair, I yield myself the balance of my time.
Mr. Chair, as we have heard today, the entities that stand to benefit from this bill are not ordinary investors trying to build wealth but rather the crypto firms that have chosen not to register with the SEC or otherwise comply with the securities laws.
They have already made billions of dollars unlawfully issuing or facilitating the buying and selling of crypto securities, and Republicans are now proposing to reward these illegal activities by making these activities legal. This is truly preposterous.
Mr. Lynch, when he spoke, said this was one of the worst pieces of legislation he has experienced during his entire career. I understood why when I examined this bill and I saw that the Republicans created this new definition. This new definition is known as the investment contract assets.
We have talked about this, but even in the Rules Committee, while they were talking about how this bill was going to protect consumers, they did not debate us about this investment contract asset because they know that it created a void. It created a no-man's-land. This was created basically so that the crypto companies could be in a space without regulation, but it goes further than that.
It also covers traditional securities so they can be in a space without regulations.
It is not enough to say this is a bad bill. This is not only a bad bill, this is a bill where the crypto companies decided they didn't like the SEC, they do not want to be regulated, and they were going to come to the Congress of the United States. They were going to use their power, they were going to use their influence to change the rules of the game, and they were going to now go to where the commodities are regulated, and they are going to take the securities over there.
I explained to you that the CFTC is a small agency. I explained to you that they don't have a lot of money. I explained to you how much smaller they are than the SEC.
The SEC are the experts. They have been developing regulations for this country for 90 years. The SEC is 90 years old, and it is respected all over the world. We are the envy of the world because we have an SEC.
When I talk about this void that has been created, there is no way that the Members of this Congress can allow that to happen, to allow this no-man's-land to exist where the same crypto companies are now refusing to register, who are unlawful, that you are going to exonerate and then you are going to further give them the opportunity to operate without regulation.
This is unbelievable. How can this happen in the Congress of the United States in the House of Representatives where we are supposed to represent the people?
We have an SEC that is a cop on the block. We have an SEC that is expert in securities. The SEC goes into the courts, and they fight tough battles. These battles are long. These battles are hard because they are fought by the crypto companies. They don't give up because at least they have people who can begin to work on it. We try to give the SEC more money to do their work, but they are denied additional appropriations by the other side of the aisle.
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Ms. WATERS. Mr. Chair, I thank the gentleman from Texas for attempting this amendment. As a matter of fact, there have been any number of Members from this side of the aisle who have been attempting to amend this bill to try and make it better. While I have great respect for all of those attempts, if my friends had listened, if they had accepted, perhaps they could have made this a better bill. Unfortunately, at this point in time, no, with all the work that this gentleman has done, Mr. Casar and others, my friends will not accept any amendments. They are not going to accept his amendment. They don't think that the bill can be made better, and unfortunately, the bill is so bad, I don't think it can be made better either.
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Ms. WATERS. Mr. Chair, I claim the time in opposition to the amendment, but I am not opposed to it.
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Ms. WATERS. Mr. Chair, while I do not oppose this amendment, I will emphasize that the broad deregulatory nature of the not fit for purpose act is such that it would severely weaken our capital markets and make us more vulnerable to bad actors, both domestic and foreign.
This amendment and the underlying bill do not protect consumers and investors. This amendment only requires a study on whether or not foreign adversaries are operating as digital asset registrants under the bill and collecting data on the U.S. consumer or investors.
We should not just be studying this issue; we should be legislating strong data privacy protections that apply all across the board.
Moreover, if TikTok was the inspiration for this bill, I will note that TikTok is not directly owned by the Chinese Government. The concern was that it was vulnerable to being unduly influenced by the Chinese Communist Party. If a China-based company was operating as a digital asset registrant under this bill, it would not fall within this study unless it was directly owned by the Chinese Communist Party. It would be easy for our adversaries to simply stand up proxy companies that appear to have no direct affiliation with them to evade the scrutiny of the study in the bill.
While I plan to support this amendment, I don't think it provides any meaningful safeguards on consumer privacy and it certainly does nothing to fix the underlying problems of the not fit for purpose act.
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Ms. WATERS. Mr. Chair, I yield myself such time as I may consume.
The bill's supporters have claimed that this bill is necessary to provide legal clarity as to when a digital asset is considered a security and when it is considered a commodity, but this bill is anything but clear. It is 253 pages of highly convoluted and poorly defined language.
At the Rules Committee hearing yesterday, the Republicans testifying on the panel in defense of the bill could not answer a simple question from a fellow Republican as to whether dogecoin would qualify as a security or a commodity under this bill.
They pointed to their five-part decentralization test in the bill, which is, again, anything but clear. The current test for determining whether something is a security is called the Howey Test. It has stood the test of time, with guidance from the SEC clarifying its application, in addition to decades of case law expounding on how it applies to a variety of different assets. Even the courts have agreed with SEC's interpretation of the Howey Test, classifying digital assets as securities in a strikingly consistent manner.
The five-part decentralization test in this bill has not been tested, and it would create a slew of new litigation trying to decipher how it applies. Instead of a study, we should remember the fact that Members of Congress and legal experts struggling to agree on basic facts about what this bill would do foreshadows the mountains of litigation that this bill would result in to figure that out.
This bill provides the opposite of legal clarity, as the bill supporters claim. Instead, it provides several more convoluted and untested definitions to replace the time-tested Howey Test in place today.
The only thing clear about this 253-page bill is that it results in the substantial deregulation of crypto, just as the crypto industry has asked for.
Mr. Chair, I yield to the gentleman from California (Mr. Sherman).
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Ms. WATERS. Mr. Chair, I yield back the balance of my time.
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Ms. WATERS. Mr. Chair, I demand a recorded vote.
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Ms. WATERS. Madam Chair, I claim the time in opposition.
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Ms. WATERS. Madam Chair, under H.R. 4763, crypto that is deemed to be a digital commodity would come under the CFTC's purview, which would include a new explicit authority for the CFTC to regulate crypto spot markets. However, this amendment would ensure that this new authority for the CFTC to regulate crypto spot markets does not include traditional commodity spot markets.
It is already bad enough that this bill would result in mass deregulation of crypto and even some traditional securities, too. This amendment takes the bill to the next level by trying to preemptively block the CFTC to oversee non-crypto spot markets.
The bill's supporters continue to insist that this bill is only about crypto, but it has serious implications for traditional securities. With this amendment, it would now appear to have serious implications for traditional commodities also.
It is wholly unclear why Republicans, who have placed so much faith in the CFTC to police the spot markets of digital commodities, think that this agency is unable to oversee the spot markets of everyday commodities they currently regulate, like oil, wheat, and livestock. Excessive speculation in spot markets of tangible commodities is a real problem that can harm working families' budgets.
For this reason, Democratic CFTC Commissioner Christy Goldsmith Romero has called on the CFTC to study excessive and harmful speculations in the commodities markets. Specifically, she has stated: ``The CFTC has an impressive surveillance program and an equally impressive cadre of commodity markets experts to rely upon as it seeks to understand these pressures of working families, farmers, and producers. We should use them more, and more publicly.'' I agree with her.
Madam Chair, I urge my colleagues to stand up for working families and farmers by leaving the CFTC's existing authority to protect them from speculation in the traditional securities market fully intact.
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Ms. WATERS. Madam Chair, at the Rules Committee hearing, Republicans revealed their true intentions with this bill. My friend, Mr. Norman, stated, regarding the investors who were defrauded by FTX:
I blame the investor. I mean, would I get on an airplane with two wheels missing and one wing? They should have done their homework.
Representative Austin Scott of Georgia on the Rules Committee doubled down on this kind of victim blaming, saying that he believed we should use a buyer-beware approach.
This is entirely offensive to consumers to simply say that they should have known better than to get defrauded. The very definition of fraud implies that the consumer could not have been expected to know or understand some facet of a contract.
I would venture to say that this bill is even worse than just a buyer-beware approach. This bill creates a facade of regulation that is designed to make ordinary investors and consumers think they are protected and that the investments are safe. In reality, this bill would facilitate and legitimize fraud rather than warning consumers to beware of the risk.
In addition to blaming millions of defrauded investors, Republicans continue to move forward with a bill that exempts the same crypto firms that were unlawfully issuing or facilitating crypto securities, giving them a get-out-of-jail-free card.
This is what Republicans love to do. They blame consumers and investors who have been defrauded while also advancing bills to protect those same firms that are ripping off consumers and investors.
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Ms. WATERS. Madam Chair, I yield the balance of my time to the gentleman from California (Mr. Sherman).
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Ms. WATERS. Madam Chair, I demand a recorded vote.
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Ms. WATERS. Madam Speaker, I demand a recorded vote.
A recorded vote was ordered.
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