Witnesses Warn of Crypto Exodus Without Swift Passage of CLARITY Act

The newly introduced CLARITY Act would help define and give shape to the digital asset ecosystem, while creating a market structure that protects stakeholders, crypto industry participants and observers told U.S. lawmakers Wednesday (June 4).  

But one witness, in his testimony, said that the legislation does not address key issues tied to blockchain, stablecoins and the crypto industry.

The hearing before the House Financial Services Committee was titled “American Innovation and the Future of Digital Assets: From Blueprint to a Functional Framework.”

House Financial Services Committee Chairman French Hill, R-Ark., said in his opening remarks, “Digital assets and blockchain technology are driving the next evolution of the internet” but as there is no extant framework, “The SEC [Securities and Exchange Commission] and CFTC [Commodities Futures Trading Commission] do not have clear jurisdictional boundaries over digital assets, leaving investors and entrepreneurs in a state of uncertainty.” 

Some firms have left the U.S., he said, having had to deal with what he termed the SEC “regulation by enforcement” approach. The bill, he said, paves the way for digital commodity projects to raise capital.

As reported last week, Hill and co-sponsoring lawmakers introduced the bill, which mandates that developers and customer-facing digital asset firms provide relevant disclosures to customers, and by requiring the digital asset firms to segregate customer funds from their own funds. The firms would trade digital commodities through intermediaries and exchanges overseen by the CFTC.

On Wednesday, in his remarks before the committee, Elad Roisman, partner at Cravath, Swaine & Moore, said that the U.S. digital asset ecosystem and markets “are still developing” use cases tied to stablecoins, payment systems and tokens. His testimony noted, “The primary challenge in regulating digital assets is the reality that the existing federal securities statutory and regulatory framework does not, in many cases, squarely address whether the many types of digital assets — with varying characteristics — should be covered.”  

The CLARITY Act, he added, sets up “jurisdictional boundaries” between the SEC and the CFTC, and would ensure that digital commodities and payment stablecoins are not defined as securities. The stablecoins would be those pegged to fiat. 

He recommended that there should be consideration that the SEC and CFTC seek input from other governmental bodies such as the Department of Treasury and Department of Commerce.

Separately, testimony from Vivek Raman, CEO of Etherealize, said that firms building legitimate blockchain projects “have been operating in a fog — uncertain whether their token might suddenly be deemed a security, or whether the platform they rely on could be treated as an unregistered exchange, all amid a lack of clear regulatory guidance.”

He said, “Tokenized assets (like Blackrock’s BUIDL fund), stablecoins and financial applications are already flourishing on ethereum, and a comprehensive federal framework will usher the next wave of institutional growth in the United States.”  Stablecoins, in particular, are being used for cross-border remittances and broaden financial inclusion, he contended.

The remarks from Rostin Behnam, Distinguished Fellow, Psaros Center for Financial Markets & Policy McDonough School of Business at Georgetown University, said the regulatory framework should also help ensure adequate funding, as the CTFC is not (yet) funded to oversee a digital asset cash market. 

“I would strongly encourage the Congress, as it would in any instance where it increases agency mandates, to consider a permanent fee-for-service model, similar to the SEC model … adding that any legislative package should require registrants to provide information regarding a non-security token’s structure, purpose, market-based characteristics, and general risks to ensure investors have access to material information,” he told lawmakers.

Katherine Minarik, chief legal officer, Uniswap Labs, said that the absence of a framework has meant that regulators have taken contrary positions with one another about the industry and how the law applies to participants.

During questioning from Rep. Tom Emmer, R-Minn., and as an example of current lack of guidelines, Minarik offered that “the risk today is the uncertainty that comes from a regulator deciding to advance an enforcement action, an argument that the money transmission regime applies to software developers who are noncustodial. We see that as an act of risk today which means that all software developers are under threat.”

One panelist before the committee raised some concerns about the legislation.

Timothy Massad, research fellow and director, Digital Assets Policy Project, Mossavar-Rahmani Center for Business and Government at the Kennedy School of Government at Harvard, said “The CLARITY Act seems to start with the technology and ask, ‘What do we need to do to make it easier for people to invest in this technology?’

“The strength of our securities and derivatives laws lies in the fact that we have traditionally focused on regulatory goals, and provided regulators with the flexibility to respond to changing conditions, including evolutions in technology, in order to achieve those goals” he said.

He said, “With over 200 pages of detailed, complicated provisions, the implications of which are difficult to assess” and may “guarantee its own obsolescence, because the technology will evolve and the particulars of provisions will become outdated or not relevant.” The creation of a Self-Regulatory Organization, he said, could conceivably create standards for governance, transparency and recordkeeping.

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