VIDEO and RUSH TRANSCRIPT: U.S. Rep. Ritchie Torres Participates in House Financial Services Committee Hearing on Future of Digital Assets

Jun 13, 2023

WASHINGTON, D.C. – U.S. Representative Ritchie Torres (NY-15), as a member of the House Financial Services Committee, today participated in a hearing about the future of digital assets and the need to provide regulatory clarity for the digital asset ecosystem.

Testimony was provided by: Mr. Aaron L. Kaplan, Founder and Co-CEO, Prometheum, Inc.; Mr. Jeremy Allaire, Chairman and CEO, Circle; Mr. Coy Garrison, Partner, Steptoe & Johnson, former Counsel to SEC Commissioner Hester M. Peirce; Mr. Emin Gün Sirer, Founder and CEO, Ava Labs; Mr. Thomas Sexton, III, President and CEO, National Futures Association.

Under the Securities Act of 1933 and the Securities Exchange Act of 1934, the U.S. Securities and Exchange Commission (SEC) has full authority over the offer, sale, and the trading of securities, including investment contracts, and the derivatives trading of securities. Under the federal securities laws, every offer and sale of securities must be either registered with the SEC or conducted under an exemption.

The Commodity Exchange Act (CEA) and the Commodity Futures Trading Commission (CFTC) regulations promulgated thereunder provide a comprehensive regulatory regime for the trading of commodity derivatives (e.g., buying or selling futures contracts on corn, cattle, or oil). Under the CEA, the CFTC also has “after-the-fact” enforcement jurisdiction over fraud and manipulation in the “spot” or cash commodity markets (e.g., buying or selling bushels of corn, heads of cattle, or barrels of oil). The CFTC has no power, however, to impose registration and regulatory requirements on participants in the cash or spot commodity markets.

Currently, there is no comprehensive federal regulatory regime for the spot trading of commodities. Determining whether a digital asset is offered as part of an investment contract (i.e., meeting the definition of a security) or falling under the definition of commodity in the CEA has proven difficult in the United States. Until there is a consistent, clear framework in place, market participants, consumers, and investors will continue to seek regulatory clarity given the requirements that stem from the classification of a particular digital asset. Additional relevant background can be found here.

VIDEO of Rep. Torres’s five minutes of questioning can be found here.

VIDEO of the full hearing can be found here.

A RUSH TRANSCRIPT of Rep. Torres’s remarks and questioning is below, as delivered:

REP. TORRES: Thank you, Mr. Chair. Before we get to the substantive question of what to do with crypto, we as a country have to answer a more fundamental question – who among us should get to decide the future of emerging technologies like crypto and blockchain? Should it be Chair Gary Gensler, an unelected bureaucrat who answers only to himself? Or should it be the United States Congress whose members are elected by and therefore accountable to the people? And, so, Mr. Allaire, do you believe as I do that an act of Congress would be the most democratic means by which to decide the future of digital assets?

MR. JEREMY ALLAIRE, Chairman and CEO, Circle: Thank you for the question, Congressman Torres. I do agree and, in fact, the Presidential Working Group specifically asked Congress to act urgently on this matter over a year and a half ago. So, I believe it’s critical Congress take all control here.

REP. TORRES: There are crypto companies like Circle that strive to be compliant with the law and then there are crypto companies that seem intent on willfully abiding the law. And yet, Mr. Gensler appears to see no difference at all between the two. He treats them all as one in the same. His enforcement has been indiscriminate in nature, which brings me to the lawsuit against Coinbase. Mr. Garrison, if the SEC sincerely thought that Coinbase was operating an unregistered securities exchange, then why on Earth would approve Coinbase as a public company? Or why would the SEC not at a minimum require Coinbase to disclose its status as an unregistered securities exchange as a material risk to the investing public? Do you see a contradiction between the SEC’s 2021 approval of Coinbase as a public company and the 2023 enforcement action against Coinbase?

MR. COY GARRISON, Partner, Steptoe & Johnson, former Counsel to SEC Commissioner Hester M. Peirce: I do see a contradiction. As part of the filing review process, taking a filing effective under the securities rules requires a public interest finding. Typically, a public interest finding – it’s a very loosely defined term – but you might argue that an act by the company that is inconsistent with securities laws what might not be in the public interest.

REP. TORRES: And I want to interject. The SEC made the following statement in the Coinbase lawsuit. It said, “Declaring effective a form S1 registration statement does not constitute an SEC staff opinion on or an endorsement of the legality of an issue of underlying business.” So, when it comes to S1 registration, the SEC is asserting that it has no opinion of whether an issuer is complying with the very laws the SEC is charged with enforcing. That strikes me as strange. You know, it’s almost as if, suppose the SEC would approve the mafia as a public company but then say we have no opinion of the underlying legality of the business. As a lay person, that just strikes me as absurd. So, am I missing something, or…?

MR. GARRISON: No, I think that’s where the public interest finding comes in. And I think perhaps the other side of that coin is…

REP. TORRES: No pun intended, correct?

MR. GARRISON: Yes, is that you don’t want the SEC to take responsibility for what is in any filing, which is what I think is getting at – some of that language is getting at as well.

REP. TORRES: In an interview with New York Magazine, Chair Gensler said that everything but bitcoin is a security. Of the more than 200 listings on the Coinbase exchange, the SEC lawsuit only identifies 13 as unregistered securities. 13 out of more than 200 seems to contradict the Gensler doctrine that everything but Bitcoin is a security. Do you see a contradiction there?

MR. GARRISON: Yes. It would be nice to have clearer insights into what tokens, what digital assets the SEC believes are securities instead of seeing them piecemeal through enforcement actions.

REP. TORRES: The digital market structure discussion drafts provides for a safe harbor. And I see the need for Safe Harbor that protects good faith crypto companies, from arbitrary and capricious enforcement actions. But what about bad faith crypto companies? How do we prevent bad faith crypto companies from exploiting the safe harbor to prevent legitimate enforcement actions?

MR. GARRISON: So, included in the market structure bill are the typical anti-fraud protections that exists in both the Securities and commodities laws. So, whether a digital asset is sold through the new SEC exemption, the SECs robust antifraud authority would also apply there, and on the CFTC side if a digital commodity was sold or manipulated in a fraudulent way, the anti-fraud provisions of the CEA would apply as well.

REP. TORRES: And that a quick question about the applicability of securities law to secondary market transactions. Has there ever been a single statute or a single rule or regulation or a single court case that expressly affirms that the Howey Test applies to secondary market transactions?


REP. TORRES: Are you sure?

MR. GARRISON: To the best of my knowledge, yes.

REP. TORRES: Are you positive? My time has expired.


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