During a House Financial Services Committee hearing prior to the congressional recess, Rep. Zach Nunn (R-IA) spoke about federal regulation of digital assets.
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00:00The gentleman yields back. The gentleman from Iowa, Mr. Nunn, who's also the vice chair of the subcommittee on national security, illicit finance, and institution is now recognized for five minutes.
00:11Well, thank you, Chairman Stile. I believe not only is this an important hearing to hold, but to evaluate where we're going in the future.
00:18We all know over the last decade, the innovators have built a powerful decentralized network that are transforming how our country operates.
00:25Digital assets are going to open the door to endless possibilities for anyone in both the financial and, candidly, the non-financial services and provide possibilities for economic growth domestically produced right here in the U.S.
00:38I am proud that last week Chairman Stile led meaningful steps towards clarity by passing the STABLE Act.
00:45Today, we turn our focus to the broader digital asset market.
00:48As a member of both the House Ag Committee and the Financial Services Committees, I've had the privilege of working with both the CFTC and the SEC for the last two years.
00:56In my home state of Iowa, we know rural commodities very well.
00:59Corn, soybean, hogs. The CFTC does a great job at these things.
01:03Equally, in downtown Des Moines, we have our banking industry that knows very well stocks, bonds, and things that the SEC does very well in.
01:09Unfortunately, we've had an SEC chairman for the last four years that believes everything, maybe other than Bitcoin, should be traded like an SEC stock or commodity, or a stock.
01:22Something that is a vast overreach of regulatory power by the SEC and actually stifles innovation.
01:29So last Congress, we passed a bill to provide a clear jurisdictional guidance for both the SEC and the CFTC.
01:34I'd like to begin today with you, Ms. Smith.
01:38Can you explain how the SEC currently determines what qualifies as a security and some of the challenges to this approach,
01:46and how we could maybe clarify that through legislation starting with this committee?
01:51So today, since 2017, the SEC has been using the digital assets test as defined in Howie to define when a digital assets transaction is a securities transaction.
02:02That test from a 1946 case is a three-part test, and one of the issues with using that test is that market participants have found it difficult to apply.
02:13In 2019, the SEC issued guidance providing some direction as to how to apply that test to digital asset transactions,
02:22but nonetheless, market participants have still found it challenging to apply.
02:26The second issue with using that test is that Howie applies to primary market transactions, meaning a transaction between an issuer and an investor,
02:36is it does not apply to secondary market transactions, transactions between two different investors,
02:41and that is the bulk of the transactions that occur on crypto platforms today.
02:46Thank you, Ms. Smith.
02:46That's a good 101 on this.
02:48And what we saw last time using this Howie test is that good innovators in this space came to the SEC with their ideas, with their recommendations,
02:55and their SEC chairman went into good faith meetings and used that information to aggressively, I would say, go after innovators in this space.
03:05Mr. Serra, you were at one of these meetings.
03:08Could you talk to us about how your experience went trying to share information with the federal government?
03:12I'm sorry, but I'm not going to comment on any specific meetings or any advice that I gave to my clients.
03:20Would you say that the government was helpful to providing clarity to you,
03:24or did they use information that you may have provided to further make it difficult for you?
03:29So I'm not specifically clear about what meeting you're referring to.
03:32I can speak in general terms and say that it's been a frustrating experience for entrepreneurs
03:40that have tried in good faith to comply with the laws and have found that it's not really a viable option.
03:47Mr. Ware, I'm going to turn to you then.
03:49When we talk about American innovation in this space,
03:53are we ceding this opportunity to other nations, other innovators offshore,
03:57because the federal government has made it difficult for those domestically to be competitive?
04:01Mr. Thank you for your question.
04:04Yeah, one of the big issues is without clarity.
04:07It's clear that a digital asset is not a security without something more,
04:13you know, on the day that it's created.
04:16You can wrap it in a security, potentially.
04:18You can wrap it in promises that cause others to rely on those promises
04:22and expect profits based on the efforts of others.
04:25But absent that, it's not a security.
04:27Now, the issue is, it is, again, not a security at the outset,
04:32but innovators look to backstop their actions by, like, relying on Reg S, for example.
04:39And Reg S causes innovation to move offshore.
04:43It causes these tokens to be pushed offshore.
04:46That causes the protocols and the use of the protocols offshore.
04:49So innovation plus the use of this technology is all being pushed offshore.
04:55And that's one reason why of many.
04:57So, Ms. Smith, I want to use the last seconds here.
04:59The CFTC maybe has a different approach.
05:01You opened up with how we do it on the SEC side.
05:03How has the CFTC looked at approaching regulating commodities like Bitcoin or Ether?
05:08So, the CFTC has jurisdiction over the futures and derivatives market.
05:15It does not have jurisdiction over the spot market.
05:17And so, they don't have the ability today to make rules or regulations for that market.
05:22Thank you, Mr. Chair.
05:23We need to fix and close that gap.
05:25I yield the remainder of my time.
05:26The gentleman yields back.