WASHINGTON, D.C. – U.S. Representative Ritchie Torres (NY-15), as a member of the House Financial Services Committee, today participated in a hearing of the Subcommittee on Digital Assets, Financial Technology and Inclusion entitled “Identifying the Regulatory Gaps in the Digital Asset Market Structure”.
Testimony was provided by five witnesses: Hilary Allen, Professor of Law, American University Washington College of Law, Marta Belcher, President and Chair, Filecoin Foundation, Daniel Gorfine, CEO, Gattaca Horizons, LLC, Joshua Rivera, General Counsel, Blockchain Capital, and Zachary Zweihorn, Partner, Davis Polk & Wardwell, LLP. 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. If the United States continues driving crypto offshore, there will be more offshore companies. More companies in the offshore deregulated mold of FTX, and so it seems to me it would be in the interest of consumer and investor protection to bring crypto into a workable but rigorous regulatory regime here into the United States. FTX fraud has no greater friend than the status quo, no greater friend than congressional inertia. New York State has shown that it is possible to create a rigorous regulatory regime for crypto without causing the apocalypse for nine decades of securities law. So, there’s the question of whether Congress should create a new regulatory framework for crypto as New York State has successfully done, or whether Congress should seek to fit crypto within the existing federal framework for regulating financial assets which strikes me as the more probable outcome. If Congress elects to adapt the existing framework rather than create an entirely new one, the question then becomes which digital assets qualify as securities and which qualify as commodities or something else. But if an asset qualifies as a security, then there’s the question of registration, and that’s where the question of blockchain technology has run into a buzzsaw. Even if Congress were to pass a law that provides perfect regulatory clarity as to which assets are securities, none of it matters if there’s no workable path to registration and compliance. And under the status quo, SEC registration is a little more than a mirage for blockchain businesses. The number of blockchain businesses that have found a workable path to registration is close to zero. One observer put it cogently quote, “the SEC has created a world where project founders are required to register as icecream while making freezers illegal.” So my question to Mr. Zweihorn, how can Congress best tailor registration to accommodate blockchain technology without compromising investor protection?
MR. ZACHARY ZWEIHORN, Partner, Davis Polk & Wardwell, LLP: Thank you, Congressman Torres. I think that’s a very good way of thinking about it. My clients certainly, and nobody I know that’s, you know, respectable in the blockchain space believes that it should be unregulated, that we need fewer regulations. They want a system that sort of gives them a cut out. I think they want tailored regulations. As I spend my testimony, there are a lot of SEC rules, and part of the federal securities laws that are some sort of a round peg in a square hole when it comes to digital assets, because they’re just different. And if you compare the white papers that came out during the ICO boom and compare them to a prospectus, they’re obviously a lot shorter, there’s a lot less information, but there’s also a lot of information that is not in SEC perspectives, because digital asset purchasers have interest in other topics. That are not ones that the SEC in its forms have asked about.
REP. TORRES: As I understand, Mr. Gensler himself has said that the SEC has tailored disclosure requirements to accommodate the particularities of industry. So, there’s nothing unprecedented about the notion of tailoring. Yep, go ahead.
MR. ZWEIHORN: Yes, that’s correct. The SEC has adopted particularized disclosure regimes for certain assets. They’ve not done so at the moment for digital asset securities.
REP. TORRES: The SEC statutorily is designed to be a merit neutral regulator. But it hardly requires a suspension of disbelief to imagine a regulator who has a personal or ideological antipathy for crypto, and therefore seeks to regulate the industry out of existence. But even if you’re a critic of crypto, the fact remains that regulatory sabotage of crypto is the antithesis of merit neutral regulation. Which is the kind of regulation that Congress contemplated for the SEC. So, how can Congress ensure that the SEC is in fact a merit neutral regulator and how do you prevent the use of the registration process to punish or sabotage the industry that has fallen out of political favor.
MR. ZWEIHORN: Thank you. I didn’t want to impute the motives of anybody at the SEC. They’re hard working and good meaning, and I think are acting in good faith, but they are subject to securities laws. Congress has mandated that they apply the securities laws as Congress has written them. Their incentive is to make sure that the securities laws are followed; at least as they interpret them. If Congress wanted to make it more likely there’ll be a workable path. Congress would meet the mandates, the SEC adopted something that is actually functional and possible for market to comply with.
REP. TORRES: A distinction has been drawn between regulating financial activity and regulating the technology that underlies the activity. Some people call it regulating application versus regulating protocols. When crafting a regulatory framework. How should we think about that distinction with financial regulators limited to their core competency of regulating financial activity rather than the underlining technology?
MR. ZWEIHORN: Of course, you know, the one challenge with digital assets as I think Mr. Gorfine said earlier, is that you can have a car title, you can have a home title, an NFT, or a security, or a commodity and they’re all digital assets of some sort or another. And I think in this country do regulate different items and different assets differently depending on what the risks are, because the risks of buying a house are different than the risks of buying a security. So, there would need to be a way to differentiate in terms of whether this asset is an investment product.