The recent SEC lawsuits against Binance and Coinbase have raised concerns about the future of web3 in the United States. However, the House Financial Services hearing on “The Future of Digital Assets” provided insights into the potential future of digital assets in the country. During the hearing, witnesses discussed the need for regulation, the impact of the SEC lawsuits, and the importance of “sufficient decentralization.”
Proposed Directive on the Registration of Digital Assets as Securities
The hearing, chaired by Representative Mr. McHenry, opened with a statement that highlighted the importance of digital assets in the current tech landscape. According to him, digital assets are no longer new technology and are used all over the world. However, the US is at risk of falling behind global competitors if it does not take appropriate steps. He also mentioned a proposed directive on the registration of digital assets as securities, which would consider “sufficient decentralization” as a key factor in determining whether a digital asset is a security.
The hearing also contained testimony on the potential for a digital asset to lose its security label if it becomes sufficiently decentralized. However, some witnesses expressed concern that the current draft of the proposed bill could result in less protection for investors than what is currently provided.
Applying Existing Regulatory Frameworks to Digital Assets
One witness, Benjamin Kaplan, Co-CEO of Prometheum Capital, argued that the application of existing regulatory frameworks to digital assets is needed. According to him, the federal securities laws have been tried and tested for almost 90 years and can be applied to the digital asset space. Kaplan’s company is among the first to provide investors with a SEC-registered, full-service market ecosystem for digital asset securities. He argued that discussions on the need for more or less regulation are flawed and that the industry should follow established regulatory treaties.
Coy Garrison, a partner at legal firm Steptoe & Johnson, also argued in favor of the current draft of the bill, stating that it works and is needed to support innovation. He noted that there is no clear guidance on what “sufficient decentralization” means, leading to confusion in the industry and holding back innovation. There is also no case law to provide guidance on how to apply the Howey test to assets traded on secondary markets. Garrison requested a “more workable regulatory regime” that would provide guidance on how a security could become sufficiently decentralized and how to apply the guidance to the secondary market.
The CEO of Circle, Jeremy Allaire, argued strongly for digital asset regulation to prevent the US from falling behind China and devaluing the dollar. He called for safer crypto reserves than banks by limiting fractional reserve practices and limiting rights to FED services. He also called for stronger protections in the realm of digital custody, suggesting that all stablecoin issuers should be required to use registered “qualified custodians.”
The hearing also discussed the risk of exposure to China, with Representative Mr. Luetkemeyer expressing his strong concern that US companies are trading with Chinese companies in any form.
The House Financial Services hearing on “The Future of Digital Assets” provided insights into the potential future of digital assets in the US. Witnesses discussed the need for regulation, the impact of the SEC lawsuits, and the importance of “sufficient decentralization.” While some argued for the application of existing regulatory frameworks, others called for a more workable regulatory regime. Regardless, it is clear that the digital asset space is rapidly evolving and requires appropriate regulation to ensure its continued growth and success.
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