Scott, Thompson spar over digital assets proposal

Rostin Behnam
The Hagstrom Report
At a hearing on digital assets regulation, Rep. David Scott, D-Ga., said Tuesday that the draft discussion of a new regulatory regime is not acceptable and was not developed with Democratic input, but House Agriculture Committee Chairman Glenn “GT” Thompson, R-Pa., said that he intends to work with Democrats on a final bill.
The House Agriculture Committee and the House Financial Services Committee released a draft discussion that discusses roles for the Commodity Futures Trading Commission and the Securities and Exchange Commission.
In his statement, Scott said, “Unfortunately, negotiation of this proposal has been limited to Republicans on the Financial Services and Agriculture committees.
“This proposal doesn’t seem to be in response to the wants and needs of the CFTC. Instead, the proposal establishes a number of complex and untested processes, raising questions as to whether the provision will meet the stated goal of the industry to establish clear regulatory and registration guidelines.
“One example of this is the provisional registration process which would be in place while the CFTC and SEC undergo a very resource-intensive joint rulemaking process.
“Any time you must shift longstanding regulatory processes and practices, there is a chance that something will fall through the cracks. And the fact the bill provides no additional staffing or funding resources makes that even more likely,” Scott said.
Thompson said, “The discussion draft intends to provide certainty, fill regulatory gaps, and bolster innovation.
“But — and I cannot reiterate this enough — this is a draft, and we plan to improve it through further vigorous debate, stakeholder feedback, and technical assistance.
“It is our intention to work with our Democratic colleagues on this proposal and continue this committee’s longstanding tradition of working in a bipartisan manner.
“It is our hope that we will have a bipartisan, joint committee legislative proposal.”
Thompson also noted that the SEC earlier Tuesday had “filed a complaint against one of our witnesses, Coinbase.”
“While I will not and cannot speak to any of the specific allegations against the company, I do want to note that this action is exactly why we are holding our hearing today,” Thompson added.
In his opening statement, Commodity Futures Trading Commission Chairman Rostin Behnam pointed out that last year the Financial Stability Oversight Council unanimously issued a landmark report on the financial stability risks presented by the digital asset market and called on Congress to enact legislation “to fill the clear regulatory gap over the spot market for digital assets that are not securities.”
During the question and answer session, Behnam said the core issue is “we don’t have authority over digital commodity tokens.”
In the opening statement, Behnam also said, “The bankruptcy of several large digital asset platforms erased billions of dollars in customer funds. Multiple large market participants allegedly engaged in manipulative and abusive trading activity, including through opaque arrangements with affiliated trading platforms, undermining confidence in these nascent markets. Cybersecurity vulnerabilities continue to be exploited in weekly hacks, resulting in billions of dollars in lost funds.
“Simply put, we know how this story ends. Leaving billions of dollars of customer funds and investments in largely unregulated entities is a recipe for disaster.”
But Behnam also said that the congressional action to give the CFTC authority over previously unregulated swaps markets had avoided a repeat of the 2008 financial crisis and that he is “encouraged by the continued interest of both parties in Congress and the administration to address the regulatory gap over digital commodities and generally support legislative efforts by this committee to provide the CFTC with additional authority to do just that. That said, it is critically important that any new legislation considered by the Congress does not undermine existing laws. Most notably, where securities laws apply, the Securities and Exchange Commission should use its robust authorities to protect customers and address information gaps between securities issuers and investors in the market.”
Scott focused his questions on the need for additional funding if the CFTC gets this authority.
Behnam told Scott that without funding the authority would be “ineffective.” He said that with additional funding, the joint rulemaking process with the SEC would take one to two years and without additional funding three to four years.
In response to questions from Rep. Austin Scott, R-Ga., Behnam said the CFTC would need an additional $120 million over three years to implement a law with new authority. He said the current CFTC budget is $365 million and the request for fiscal year 2024 is $411 million.
Scott told Behnam that he has “a tremendous amount of faith in your leadership.”
In response to a question from Rep. Jim Costa, D-Calif., Behnam said that the lessons from the FTX collapse were that 130 entities had to file for bankruptcy and that the CFTC could not have foreseen the problem because it does not have authority over digital commodity tokens.
The CFTC has brought 82 cases over digital assets, but they are all from complaints filed with the CFTC under “a very small authority” that allows the agency to act on complaints.
Costa said he believes “there is an opportunity for a bipartisan framework” to regulate digital assets.
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