Casey Wagner

Lawmakers from both sides of the aisle on Wednesday expressed frustration with the US Securities and Exchange Commission’s current approach to digital assets.&nbsp;



The House Financial Services Committee Digital Assets Subcommittee on Financial Technology and Inclusion convened Wednesday to discuss how crypto market participants are navigating the current regulatory landscape —&nbsp;and what additional clarity is needed.&nbsp;



The <a href="https://www.youtube.com/live/bXxufU9EYX4">hearing</a>, entitled “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets,” featured legal experts and market participants as witnesses, including Robinhood Markets Chief Legal Officer Dan Gallagher and Teddy Fusaro, the president of Bitwise Asset Management.&nbsp;&nbsp;



Committee members were largely interested in discussing how the SEC defines “crypto asset securities,” a term that the agency made up, one Democratic representative claims.



“Did the SEC invent the term out of thin air?” Rep. Ritchie Torres, D-N.Y., asked, somewhat rhetorically, when questioning Gallagher.&nbsp;



Read more: <a href="https://blockworks.co/news/rep-torres-sec-reconsider-regulation-by-enforcement">Rep. Torres asks SEC to reconsider ‘crusade against crypto’ in wake of Ripple</a>



Robinhood, Gallagher said, attempted to follow SEC Chair Gary Gensler’s instructions to “come in and register,” but found that the current structure for the special purpose broker dealer license the exchange sought was incompatible with digital assets.&nbsp;



“We recommended modifications that would make it work, and we were submitting to full regulation by the Commission,” <a href="https://www.youtube.com/live/bXxufU9EYX4">Gallagher</a> testified on Wednesday. “It was a fruitful process. It was very cordial with the SEC staff until about early 2023, when we got a very perfunctory note from the Chairman&#8217;s office telling us that there&#8217;s no reason to talk anymore.”&nbsp;



The SEC’s refusal to adjust its framework is not consistent with securities laws, Subcommittee Chair French Hill, R-Ark., asserted. In federal court, the SEC continues to have “legal face plants,” when trying to defend their stance that virtually all cryptocurrencies are securities, he added.&nbsp;



Not all Committee members feel the same, though, and despite some bipartisan cooperation, Wednesday’s hearing also highlighted <a href="https://blockworks.co/news/maxine-waters-cbdc-bill-anti-innovation-republicans">party disputes</a> that have existed around digital assets for years.&nbsp;



Why would the vast majority of companies who have faced enforcement actions from the SEC since 2021 have opted to settle and pay a collective $5.5 billion in penalties if they hadn’t done anything wrong, Rep. Maxine Waters, D-Cali., asked the witnesses.&nbsp;



Read more: <a href="https://blockworks.co/news/fincen-hearing-crypto-illegal-financing">House hearing on FinCEN oversight turns into crypto debate</a>



Lee Reiners, a lecturing fellow at Duke University, responded by saying that he feels the SEC — under both former Chair Jay Clayton and current Chair Gensler — has overwhelmingly been in the right when bringing various enforcement actions against crypto players.&nbsp;



There has been “one notable partial loss,” Reiners said, when <a href="https://blockworks.co/news/judge-rules-ripple-xrp-not-security">Ripple partially won against the SEC</a> in 2023, but even this ruling has since been “repudiated by several other federal judges in that same federal district court.”&nbsp;



Rep. Sean Casten, D-IL, later expressed concern with how current legislative proposals do not sufficiently protect the investing public from fraud, as exemplified, he said, by the recently-announced World Liberty Financial project, which the Trump family has been promoting. 



The World Liberty team said they <a href="https://blockworks.co/news/on-the-margin-newsletter-trump-family-defi-venture">would retain control of 20% of the token supply</a>, which, based on the Financial Innovation and Technology for the 21st Century Act — passed in the House in May — would mean the project is “decentralized and not subject to regulation,” Casten said.



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Rep. Torres: SEC invented ‘crypto asset security’ out of thin air

US Securities and Exchange Commission Chair Gary Gensler is facing tough questions from Washington, with both sides of the aisle joining in.&nbsp;



A bipartisan group of representatives wants Gensler to answer for his agency’s failure to approve a spot bitcoin ETF, even after courts sided with Grayscale, one of several issuers trying to launch the product.&nbsp;



Reps. Tom Emmer, R-Minn., Ritchie Torres, D-N.Y., Wiley Nickel, D-N.C., and Mike Flood, R-Neb., penned the <a href="https://flood.house.gov/sites/evo-subsites/flood.house.gov/files/evo-media-document/sec-bitcoin-spot-etf-letter-signature-check.pdf">letter</a> Tuesday, a day before Gensler appeared before the House Financial Services Committee for his oversight hearing.&nbsp;



“During your time at the SEC, you have consistently stated that digital asset firms should ‘come in and register’ with the SEC,” the Reps. wrote in the letter. “Market participants have relied on your statements and have filed applications for a regulated spot bitcoin ETP. Following the Court of Appeals’ decision, there is no reason to continue to deny such applications under inconsistent and discriminatory standards.”&nbsp;



Tuesday’s letter is not the first time congressional leaders have taken it upon themselves to question the agency.&nbsp;



Weeks before teaming up with Nickel and their Republican colleagues, Torres wrote his own open letter to Gensler, criticizing the agency’s “regulation by enforcement” tactics.&nbsp;



“In light of the SDNY’s landmark decision in the Ripple case,<a href="https://twitter.com/SECGov"> </a>[Gensler] must reassess its reckless regulatory assault on the crypto industry,” Torres wrote on X, formerly Twitter, along with the letter.&nbsp;



In June, Republican crypto advocates Reps. Warren Davidson and Tom Emmer <a href="https://blockworks.co/news/republicans-oust-gensler-bill">introduced a bill to remove Gensler as the SEC’s head</a>.&nbsp;&nbsp;



“U.S. capital markets must be protected from a tyrannical Chairman, including the current one,” Davidson <a href="https://twitter.com/WarrenDavidson/status/1668305460368121857">wrote</a> on X, formerly Twitter, after the bill was unveiled. “I’m introducing legislation to fix the ongoing abuse of power and ensure protection that is in the best interest of the market for years to come.”&nbsp;



How the SEC engages with crypto-related issues has been a topic of discussion between lawmakers, on both sides of the political spectrum, and federal agencies for years.&nbsp;



In 2021, Sen. Elizabeth Warren, D-Mass., sent a <a href="https://www.warren.senate.gov/imo/media/doc/Draft%20SEC%20Crypto%20Exchange%20Letter%2007.7.2021%20clean.pdf">letter</a> to Gensler asking if Congress needed to step in to help the SEC obtain more authority over crypto markets. In his <a href="https://www.warren.senate.gov/imo/media/doc/gensler_response_to_warren_-_cryptocurrency_exchanges.pdf">response</a>, Gensler said he was willing to work with Congress as “we need additional authorities to prevent transactions, products, and platforms from falling between regulatory cracks.”&nbsp;



Warren has maintained a predominantly anti-crypto stance, especially in her role on the Senate Banking Committee. Teaming up with Republican Roger Marshall, a junior senator from Kansas, she co-sponsored the Digital Asset Anti-Money Laundering Act of 2023. Some industry advocates say this legislation could effectively kill crypto in the US.



The <a href="https://www.warren.senate.gov/imo/media/doc/Digital%20Asset%20Anti-Money%20Laundering%20Act%20of%202023.pdf">bill</a> tasks the SEC and Treasury to create a “risk-focused examination and review process” for crypto securities.&nbsp;



<h2 class="wp-block-heading">What’s next&nbsp;</h2>



Gensler, who was President Biden’s pick to lead the <a href="https://blockworks.co/tag/sec">SEC</a>, is currently serving a five-year term set to end in June 2026, but some speculate the anti-crypto agency head could be ousted sooner.&nbsp;



If the White House goes red in 2024, Gensler will almost certainly be looking for a new gig. Former President Donald Trump, who currently leads in the Republican primary polls, already faced legal action from the agency earlier this year when his SPAC partner opted to settle with the SEC for $18 million over alleged securities violations.&nbsp;



Fellow Republican candidate Vivek Ramaswamy, currently ranking third in the polls, has expressed disdain for Gensler – and almost every other agency head in the US – <a href="https://blockworks.co/news/ramaswamy-pledges-crypto-policy">arguing that unelected officials have no place holding this much power</a>. Ramaswamy vowed to cut the federal government by 75% during an appearance at the Mainnet conference in New York earlier this month.&nbsp;



Coinbase CEO Brian Armstrong said in a recent <a href="https://finance.yahoo.com/video/coinbase-ceo-companys-next-steps-172157616.html">interview</a> that Gensler could be out in 2025 if a Republican wins the White House in 2024, and he’s keeping an eye on how current candidates engage with crypto.&nbsp;



“[Presidential candidates] see it as an opportunity to challenge — the policies of the current administration has had in downstream effects with the regulators, that they view as not in line with what the American people want,” Armstrong said at the Goldman Sachs Communacopia and Technology Conference earlier this month. “This could become a hot topic in the presidential race in 2024.”

The anti-Gensler movement is picking up steam on both sides of the aisle

Days after accusing the SEC of being an “overzealous traffic cop,” Representative Ritchie Torres, D-N.Y., has penned his second letter to the regulator calling for an overhaul of crypto regulation. This time, his focus is on Ripple and its recent summary judgment win.&nbsp;



In the letter, addressed to SEC Chair <a href="https://blockworks.co/tag/gary-gensler">Gary Gensler</a> and dated Tuesday, Rep. Torres says he is “writing to inquire if the SEC intends to come to terms with the folly of the Commission’s crusade against crypto assets in light of the latest decision by Judge Analisa Torres of the Southern District of New York.&#8221;



“Needless to say, regulation by enforcement had a dreadful day in court,” he added, referring to Judge Torres’ ruling that programmatic sales of <a href="https://blockworks.co/price/xrp">XRP</a> do not constitute securities sales.&nbsp;



The <a href="https://blockworks.co/news/judge-rules-ripple-xrp-not-security">partial summary judgment in the SEC’s case against Ripple came last week</a>. Judge Torres sided in part with the SEC, declaring Ripple’s institutional sales of XRP were securities, but the win for Ripple in the matter of programmatic sales was a big blow to the SEC’s case.&nbsp;



Industry members say the ruling not only undermines Ripple&#8217;s charges, but it also challenges the regulatory agency&#8217;s philosophy under Gensler.



“The ruling reinforces that regulatory agencies are not the judge, jury, and executioner when it comes to digital assets,” Ryón Nixon, founding partner of Horizons Law, <a href="https://blockworks.co/news/where-ripple-sec-case-goes-next">told Blockworks</a>. “That said, it’s only a first step. Appeals will almost certainly follow, and even this ruling doesn’t address many other important issues.”&nbsp;



Rep. Torres appears to agree. In his Tuesday letter to Gensler, he calls the SEC’s application of the Howey test, known as the legal gold standard in determining whether an asset is a security, is “sloppy.” The representative urges the SEC to reconsider the use of the Howey test, as the summary judgment points out that it places too much emphasis on needing to “prove the presence of an ‘investment contract.’”&nbsp;&nbsp;



“The latest court decision establishes a clear rule that should bear the name of Judge Torres, who has brought long overdue legal clarity to the chaos of crypto regulation,” Rep. Torres wrote. “The Torres Doctrine, as I call it, holds that crypto assets are not securities in themselves but can be sold as part of investment contracts, which do qualify as securities under the Howey Test.”&nbsp;



Rep. Torres sent his previous letter to the SEC just five days ago, <a href="https://blockworks.co/news/ritchie-torres-prometheum-letter">in which he accused Gensler and his team of “politicizing” the registration process</a> by approving crypto exchange Prometheum for a special purpose broker dealer license — a privilege the commission has granted to no other exchange.



In Tuesday&#8217;s letter, Rep. Torres asks the SEC to reconsider their current approach and prioritize giving the agency the clarity and fair notice he says it deserves.&nbsp;



“I look forward to finding out how the SEC will reassess its regulatory assault on crypto assets in light of the Torres Doctrine,” Rep. Torres concludes the letter.



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Rep. Torres asks SEC to reconsider ‘crusade against crypto’ in wake of Ripple

Representative Ritchie Torres, D-N.Y., has asked the SEC to open an investigation into how and why crypto exchange Prometheum was able to receive a first-of-its-kind special purpose broker-dealer (SPBD) license.&nbsp;



In a letter addressed to SEC Inspector General Deborah Jeffrey, Torres asked the agency to look into the “unusual backroom deal” that resulted in Prometheum being granted a privilege no other crypto exchange has yet to secure.&nbsp;



“Prometheum appears to be nothing more than a Potemkin platform, operating as a timely talking point for crypto critics rather than a true trading platform for crypto customers,” Torres wrote in the letter. “The dubious decision to license a deceptive digital assets platform reflects the latest attempt by Chair Gary Gensler to politicize the registration process to an extent seldom seen in the SEC’s history.”&nbsp;



By approving Prometheum’s SPBD license, the SEC is once again acting arbitrarily with its approach to crypto regulation, Torres argued.&nbsp;



“[The SEC] is acting like an overzealous traffic cop arbitrarily ticketing drivers while keeping the speed limit a secret,” Torres wrote in a <a href="https://twitter.com/RepRitchie/status/1679534903661301761?s=20">tweet</a> Thursday. “It prefers to communicate by enforcement rather than by rules or guidance. But that&#8217;s no way to regulate digital assets.”&nbsp;



The letter comes one day after crypto advocacy firm <a href="https://blockworks.co/news/prometheum-sec-broker-dealer-investigation">Blockchain Association sent a similar letter to Jeffrey in regards to Prometheum</a>. The Blockchain Association alleges that Prometheum received a deal from the SEC in exchange for shifting the tone of their public dialogue about the agency from negative to positive.&nbsp;



“We are concerned that Chair Gensler is using Prometheum and the SPBD licensure process as a means to thwart congressional efforts toward legislation by continuing to spread the false narrative that the law is already clear with regard to digital asset securities,” the Blockchain Association’s letter added.&nbsp;



Torres’ criticism of the SEC and its SPBD approval process also comes alongside <a href="https://blockworks.co/news/republicans-ask-doj-sec-investigate-prometheum">public outrage from his Republican colleagues</a>.&nbsp;



On Monday, six Republican senators sent a letter to the Department of Justice and the SEC, asking the agencies to look into Prometheum’s alleged ties with China. The group also claims that Aaron Kaplan, CEO of Prometheum, may have violated securities laws and provided false testimony when he appeared before lawmakers on the Hill last month.&nbsp;



“An independent review of the SEC’s haphazard and heavy-handed approach to digital assets is urgently needed,” Torres added in the letter.



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SEC like ‘overzealous traffic cop’: Torres calls for Prometheum probe

A draft of the long-awaited bipartisan stablecoin legislation Congress members have been promising hit the wire last week, but top Democrats say the bill is nothing like what was discussed.&nbsp;



House Representatives <a href="https://blockworks.co/news/house-grapples-with-stablecoins">met last week to discuss stablecoins</a> and hear from expert witnesses about their role, safety and stability. The current <a href="https://docs.house.gov/meetings/BA/BA21/20230419/115753/BILLS-118pih-Toproviderequirementsforpaymentstablecoinissuersresearchonadigitaldollarandforotherpurposes.pdf" target="_blank" rel="noreferrer noopener">draft bill</a> was released by Republicans on the Subcommittee on Digital Assets ahead of the hearing. 



Subcommittee Chair Rep. French Hill (R-Ark.) hailed the legislation as a bipartisan effort that began last fall.&nbsp;



But Democrats beg to differ. The draft “in no way recommends the final work on stablecoins by negotiations between the two of us,” Rep. Maxine Waters (D-Cali.) said, referring to unresolved conversations with Hill. Democrats will have to “start from scratch,” she added.&nbsp;



Hill responded by saying he welcomes collaboration on the bill and stablecoin framework.



As the hearing progressed, the party lines became more clear. Here is a rundown on where leaders stand when it comes to collaboration on stablecoin policy.&nbsp;



<h2 class="wp-block-heading">Where cross aisle agreement can be found&nbsp;</h2>



Several Subcommittee members brought up the collapse of <a href="https://blockworks.co/tag/terra" target="_blank" rel="noreferrer noopener">TerraUSD</a> and <a href="https://blockworks.co/tag/luna" target="_blank" rel="noreferrer noopener">Luna</a> and highlighted the need to protect investors and enforce strict reserve reporting requirements. 



Customer funds should also not be commingled, Republicans and Democrats agreed unequivocally.&nbsp;



There also seems to be some bipartisan agreement that US Dollar dominance should not be undermined, by a stablecoin or otherwise, although there is some disagreement about how stablecoins may impact USD.&nbsp;



House Republicans and Democrats may not agree on how to get there, but both sides of the aisle are calling for some sort of policy to make it through soon.&nbsp;



<h2 class="wp-block-heading">Where party lines remain strong&nbsp;</h2>



Some Democrats maintain the need for more guidelines around who can issue stablecoins.&nbsp;



&#8220;These programs are typically limited to banks who are heavily regulated and that is for good reason,&#8221; Rep. Stephen Lynch (D-Mass.) said. &#8220;It is the danger of allowing shadow banking products, particularly stablecoins, to issue deposits like products without FDIC insurance. So I strongly believe we need to separate crypto assets from our banking system, and this [draft] bill does just the opposite.&#8221;



Others in the party, like Rep. Ritchie Torres (D-NY), counter that stablecoin issuers are nothing like banks; if there are no lending services provided, there is no need to require issuers to be licensed banks.&nbsp;



Lawmakers also disagreed about privacy and KYC policies around stablecoins. Rep. Bill Foster (D-Illi.) suggested regulators would need access to each wallet owner’s identity in order to effectively oversee the industry.&nbsp;



Rep. Warren Davidson (R-Ohio) on the other hand, said private and permissionless blockchains are essential.&nbsp;



Congress members also had a difficult time getting on the same page about state versus federal policy. Rep. Torres said he would not be inclined to support any legislation that undermined New York’s current stablecoin regulatory policy.



<h2 class="wp-block-heading">What’s next</h2>



Bipartisan talks between current Chairman of the House Financial Services Committee Patrick McHenry (R-NC), and Rep. Waters began last year, but the two were unable to move their efforts out of committee.&nbsp;



Any bill will ultimately have to get through the Senate as well, and if Senate Banking Committee Chair Sherrod Brown (D-Ohio), doesn’t take interest, the legislation will likely die.&nbsp;



Crypto investment vehicles are “speculative products run by reckless companies — we know that’s true,” Sen. Brown said <a href="https://blockworks.co/news/senate-banking-hearing-on-crypto-crash">during a February hearing after the fallout of FTX</a>.&nbsp;&nbsp;



“It would require, certainly, a change in approach for the Banking Committee to move forward with markup,” Sen. Cynthia Lummis (R-Wyo.) said, <a href="https://blockworks.co/news/gillibrand-lummis-revamped-crypto-bill">during an appearance in DC to discuss her bipartisan crypto bill</a>.&nbsp;



Rep. Waters has not yet released her own draft or proposal for a new stablecoin bill to counter what Republicans unveiled last week. The draft bill has also not yet been introduced on the House floor.



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