The Congressional Keynote: Sens. Lummis, Gillibrand Discuss Crypto Regulation

There's an elephant in the room here and I think we probably have to talk about it. Um We were really very pleased to have a certain, um, member of the House on our program until just uh last night. And we all understand why he couldn't be here. Um, because, you know, he's currently landed one of the most difficult jobs in the world. Um, and it, it, it is in a state of chaos, uh, the House. And so II, I just, I, I'd like you to as, as, you know, both of you spent quite some time in this town on the hill, just first of all, just give us some perspective, like, what's it like at the moment to have this vacuum in this very important legislative body alongside you guys in the Senate? So, I don't know. Um, either one of you would like to just give me a shot and then we can sort of lead in from that perhaps into a conversation about what this means for the process of uh legislating for crypto. Well, thank you. The, the Senate is actually functioning pretty much as usual. Uh We're doing votes on, uh, nominations uh to Senate confirmed positions. Uh We're still having hearings. We're still working behind the scenes on legislation, but we can't move major pieces of legislation until the house uh restructures itself. Now, we had been working very closely with Patrick mckenry, who is the element of the elephant in the room to which you're uh referring um on trying to get the stablecoin component of our bill moving forward. We were working with Janet Yellen, we were working with the Fed, we were working with Treasury and um so when the house fell into disarray, uh those conversations had to be put on ice. Um So, and that's been frustrating for both of us because we very much want to see these components of our bill of the Lummus Gillibrand bill continue to move forward. We did get the illicit finance component of our bill uh into the National Defense Authorization Act in the Senate. Uh working with uh two people who are uh much more reticent about uh digital assets. Uh So we work with them, try to come up with something that would uh assuage those who continue to say that digital assets are major players in the world of illicit finance. So that being addressed this week, uh If we move on to some of the instructions to the confess on NDA A uh instructions to our conferences in the Senate to say we, the, the Senate wants to put its stamp of approval that we want the illicit finance component of what passed the Senate in the conference committee's discussions uh and the final product that comes on NDA A. So behind the scenes, things are continuing to work to the best of our ability. But once Patrick mchenry is able to shed himself of this distraction that is dominating his every second, hopefully we can return to uh moving uh component by component uh of the, the bill that uh Senator Gillibrand and I have worked so hard on forward Senator Gillibrand II. I wanted maybe a little later, we can dig into this um amendment that was put into the, the Defense Act. Um And, and the fact that you brought along senators uh Warren and, and Marshall who, as you point out Senator LAMAs very much on the oppositional side of this. But, and I think it speaks a little bit to what people are looking for here. Is this the spirit of legislating of, you know, finding bipartisan solutions, but just, just broadly, I mean, a lot of discussion here uh this morning was also about court decisions we've seen and it seems very clear to, to many people right now, you will see the price of Bitcoin that the, the victory that the industry has had in some of these cases against the SEC is now forcing it to move, which is just another reminder that the one branch of government that seems to actually be making things happen right now is, is the judicial one when what really people want is for their elected representatives to give some sort of framework to this. So I suppose what I really want to go with this is like you guys are, you know, you're working hard, you self represents a bipartisan solution here. Uh You've worked with, with senators uh Warren and Marshall to do so, but the broader problem of, of dysfunction is not just this bill, it's this bigger issue of how, you know, the Hill itself brings itself together because how can anything get passed, let alone crypto. Well, I think that's the narrative. I don't think it's accurate. Um We do a lot of bipartisan legislating all the time. The defense bill passed the Senate. Uh We're waiting for the house to conference those two pieces from the house and the Senate, but they have to have a speaker to do that, but we will pass the defense bill this year. Uh We will also pass a, a farm bill this year or actually next year. But this congress um which are huge pieces of legislation governing huge parts of the economy. We had a markup in the AG committee on CFTC regulatory frameworks for digital assets that are deemed to be commodities. And while that bill had some challenges on the uh D I side, it was a pretty good bill, it was a pretty good place to start. Um And so there's no reason why we can't continue to do our jobs in the Senate and the House to govern. Um The Senate is extremely bipartisan. Last Congress, we passed a huge infrastructure bill that's gonna fund almost a trillion dollars of huge projects of national significance across the country that money is gonna flow for 10 years. We passed the uh semiconductor manufacturing bill that's gonna en enhance investments in A I in quantum in supercomputing and semiconductor manufacturing. We passed a bipartisan bill on gun trafficking and mental health to deal with public safety issues and the challenges post COVID and those were just the bipartisan bills. Um Dems did a few dem only things because we had the House and the Senate at the time, but this is meaning meaningful governing. So crypto has just had its own challenges. It's not a mainstream issue yet. It's not something most members of Congress Congress have ideas about or opinions about. There's not a high degree of knowledge base in most senate offices or most house offices, but you do have some, some very significant leaders. I think Chairman mchenry is very, very committed as is uh ranking member waters on doing something soon on something. Now. There, there bipartisan negotiations, I can't tell you what they're gonna do. Um But their bipartisan negotiations did fall through. Um And I think it was because the administration did not want to um weigh in significantly, but it doesn't mean it can't get reupped again. I think there's a huge potential for a bipartisan stablecoin bill in both the House and Senate. I think that is a measurable doable goal for both chambers to have. Um, obviously Senator Lumus and I would also like to address market structure. Our bill is much more ambitious than even any House bill. Uh We wanna do the entire framework for Cryptocurrency and Blockchain because we have that level of experience. Um Cynthia sits on the banking committee. She's been there for a while. She knows what she's doing. I was a securities lawyer for 15 years. I've been on the AG committee for 15 years. I've been on the Intel committee for the last few years. So between the three of us, we have three of the committees of jurisdiction for this legislation. The only one we don't have is finance. Um but Ron Wyden is very red in, he's very knowledgeable and he's very interested. So it's not impossible to do the work. The thing that's challenging us right now is the narrative. It's the narrative that nothing gets done in Washington, which is false. It's the narrative that crypto is no good. It's only for terrorism financing, which is f false. And so the narrative is important and you as industry participants can have a role in shaping that narrative uh by writing op EDS by writing um thoughtful pieces by asking for meetings with Senate and House offices, by uh informing um mainstream financial services about use cases and what works and what doesn't work and why. But there's so much misinformation about everything from FTX to Hamas. And I think it is incumbent upon people who are knowledgeable to spread truth and to make sure people understand what they're actually talking about. So I, I think you're gonna uh answer in the negative of this question based on what you just said, but I still think I just wanted to address it. And that is this perception that I think largely because of the FTX situation. Um And, and all of the angst that was associated with that, that crypto did become at least more politicized than it used to be. It used to be perceived to be something of a bipartisan issue that now all of a sudden, you know, the administration had essentially overridden its own executive order and, and had sort of turned negative on it and that there was a lot of people including Senator Warren who became virulently anti crypto and that this seemed like it was a Democrat versus Republican thing. Uh Is that again just a AAA zero negative or, you know, d do you feel as if there really is a bit of a divide that needs to be resolved in terms of the, the parties? I do not think there's a partisan divide. Um There's many Democrats who actually understand the industry and understand financial services and understand the many use cases. And we are very eager to create regulatory frameworks because at the end of the day, if we don't regulate the United States, the industry is gonna go abroad entirely abroad. And so all of that economic engine for places like Wyoming and New York will be depleted, it will be a huge missed opportunity for um democratization, finance for um many really robust uses for Blockchain and all that innovation will go abroad and we will use lose our market. Um Our, our piece of the market that should remain in the United States. Um It's just again, knowledge base. I don't think the knowledge base is high on most members and I don't think it's higher on Republican side than democratic side. I think there's a handful of people who are actually interested in this industry, but this has been a challenge for tech for a long time. And I think part of the challenge is, is you're just not used to working with Congress and you really need to because if you don't, you won't be heard, your voices will be drowned out. You will be, unfortunately, you won't get, you won't have progress. So being engaged is perhaps one of the most important things you need to be. And it's not natural for a lot of constituencies um from Silicon Valley. Um even from, you know, New York financial services and legal communities, they tend to be a polit. Um And so being much more engaged to talk to your me, your members of Congress is really important because they're, they're not gonna understand your issues if you don't spend time with them. So let's get into some of the weeds then. I mean, you know, you want to talk about the market structure, the model that, that you've come up with here, you know, one of the, the, the bigger challenges and I think we also see it in the, the, you know mchenry uh um Thompson House Bill as well is where is the line between the CFTC and the EC? Looks like both of you are favoring the FCFTC as really the Uber regulator in this. But there is at least this perception of ambiguity about where in fact, if there is still discretion of the SEC, it could step in and override and say, you know what, this is how he, this passes the Howie test. This is a security. How are you guys resolving that? What are you, what are you bringing clarity to the distinction in terms of the jurisdictional divide? Well as, as we have watched the litigation occur at the SEC, uh it, it was our perception that um the SEC was trying to basically expand the definition of the Howie Test uh that had been used in over 200 court of appeals cases uh in the United States. So we went through and tried to find what is the state of the definition of the Howie test today? The test that basically determines what is a security and we think we've captured it in our bill. Uh And as we see the litigation, the ripple case, the um uh coin desk case uh or Coinbase. Excuse me, Coinbase, excuse me, excuse me. Is there anything Kevin? We, are we clean on this? Yes, we are good. Sorry. Uh Coinbase. Um It's usually the other way around. People mistake us for Coinbase. And so I'm actually very pleased that you uh you made that mistake. So it's been instructive really. It's helped us, I think, find uh uh some clear markers between uh what is a commodity? What is the security and uh defining ancillary asset in a way which is the intermediary asset, something that doesn't have the imprimatur of a securities contract. Uh So, um it, it's all this litigation and uncertainty has sharpened uh our bill, I believe. Uh and so as we finally uh uh move in hopefully next year into the real nitty gritty of regulatory frameworks. What is the commodity? What is the security? Who has jurisdiction where, what is an ancillary asset who is going to help uh make what we call in the cattle industry, a gate cut between commodity security or a more appropriate form of regulation uh that we're ready. We've got the right bill, the right definitions with the right input. And I think that there's gonna be some impetus for us to move forward on that because um early next year, there's a lot of speculation that uh the more traditional uh financial industry uh is going to be seeking uh Bitcoin ETF S and as their, as mainstream finance moves into this space, I think that uh people in Congress are gonna see that we can't have our head in the sand anymore. It's time to get after it, it's time to regulate. We want to move in this space, we want to do the appropriate thing. And, and when you talk about like a comprehensive framework, um we're talking not just about the SEC and the CFTC because it truly is an alphabet soup of agencies that have interesting this just this morning listening to some of the discussions, there was talk about the I RSS demands in terms of, you know, uh income tax reporting with regards to uh transactions. And of course, how does that fit with, with thinking about a payments vehicle that, you know, crypto is seen to be and staple coins come into that? And then you've got, uh, you know, fincen just, just weighing in uh very recently on, on, on mixes and, and, and the sort of, you know, requirements that are associated with that. And I believe you have some views on that that you might want to share with us, Senator Gillibrand. Like how do we, how given all of these different interests, you know, you've, you've gone through this big bold vision of bringing it under one tent. Um First of all, give us the logic of why you took that approach. And then, and then secondly, I think, you know, how do you make sure that there is some, some order across all of that when, when there are so many competing interests? So, uh if you were gonna create something that you thought was the best approach, you'd probably create something brand new. You'd create a new agency to regulate all digital assets and cryptocurrencies and the internet and all things digital, but that's not how Congress works. We're, we're a much more incremental organization to be honest. So what Cynthia and I decided to do was let's look at current regulatory frameworks and see where it fits and where it doesn't. So where it fits is you look at a digital asset and you say, what are the, what are, what are the characteristics of this asset? Is it something that's being offered to raise money that's being managed by a centralized company to raise money for that company? Well, that sounds a lot like a stock that's de definitely a security. So that's a digital security if it's fully decentralized and they're all the same and there's nothing to be made better by a centralized company that's pretty much the definition of a commodity. So it's gonna be a commodity. So, Bitcoin is a commodity and a bunch of cryptocurrencies are most likely securities. Um But there might be something that is a blended asset that has lots of characteristics and you're not really sure because it doesn't look like either one. Well, we created an authority to assess these ancillary assets. If it's something that's neither a, a digital security or a digital commodity, it's an ancillary asset which is just a frame of reference to say we're gonna look at it and this, this authority is going to be staffed by uh people from the SEC, the CFTC, the OCC, um, and different federal agencies so that you have the most knowledgeable people making these judgments. The entire industry is gonna have IRS regulations. Ron Wyden and his staff largely wrote those regulations already. So we put those into our bill. If you're a Stablecoin because of the collapses, you have to be 100% fiat backed. We would go so far as to suggest it could be US dollar backed if it's a US state based stablecoin. Um But our bill is not agnostic on that. Um And it's regulated, we have it regulated by the OCC. The House, has it regulated by Treasury again, either is fine. Um These are just ideas about how to look at this industry. And so most likely we did answer most of the questions. We don't have that many answers on defi to be honest, but we did a few, um, we have uh parameters for a cybersecurity so that we have back end regulated for safety and soundness and any problem that the industry raised. We tried to come up with a solution or a framework to decide how to decide and that can be broken up into four committees of jurisdiction. So you could have hearings in ag in banking, in finance and in intelligence. We're urging the chairman of those four committees to start doing those kinds of hearings. So far, we've only succeeded in ag having their hearing, but um, there's enough work there to be done in little pieces or big pieces jurisdictions have been given to Wyn in finance. So if somebody wanted to actually mark up our whole bill, he would have to do it. We've urged him to do it. I don't know if it's on his agenda or not. But um again, Congress needs to act. We, we cannot have the sec um regulating by enforcement. It doesn't work. The courts have said so. And so it's important that Congress do its job. And if you don't mind this, this fincen announcement, you know, recently, essentially saying that mixes are bad and naming a number of mixes there. Yeah, so we put all that in the NDA A. So we put all the terror anti-terrorism financing, anti illicit financing. We direct um treasury to establish examination standards for crypto assets. Um We also make sure that they conduct a study on how to combat anonymous crypto asset transactions, uh like asset mixers and tumblers and including uh providing date of their use level of their use, legislative and regulatory approaches employed by the other jurisdictions and recommendations for Congress. So that's basically what's in the NDA A, the ND A is likely to pass this year, uh or early next year and it is uh likely to stay in, um, the, these provisions. We've also done in a, a stand alone bill um with a couple other senators and so we could also just vote on it as a one off if we need to. I mean, and, and you're confident that it's not too heavy handed. I mean, this is, you know, there's a, there's a lot of, you know, privacy expectations that get built into the crypto digital asset ecosystem, notwithstanding the need obviously to comply with laws. Um, a and there's often fear that this sort of, you know, heavy handed position may well, you know, basically make illegal, the very act of open source software. So, I mean, how, how are you, how do you feel your approach to this is addressing those, you know, quite real concerns from the development. We excluded those provisions, those provisions are not applicable. They can't, you can't, you wanna address that Cynthia? Um It, they don't work and, and they would actually prohibit the entire class of cryptocurrencies. It would just, it'd be absurdity. It's, it doesn't make sense. And so the provisions that did make sense that actually are workable are in the defense bill and they're also in a stand alone bill with Senator Budd, um, that we could have an up or down vote on as well. So we took the parts that actually can be applied effectively and we put them in the defense bill. The parts of, of other ideas that are out there on, um, applying banking laws to software developers is just inappropriate and unworkable. Ok. And that just would be a state of being, it's not something that the, the legislation itself would essentially exclude and make impossible. I mean, could fincen still step in and make these pronouncements? I, I don't know the answer to that. II, I don't know what fincen would want to do on its own. Um So I, I don't know, I don't know what they, what they're, what they're going with. The first thing we have some uncertainty about. That's ok. So, um you, you think both of you mentioned, you know, the international climate and of course, we've got, you know, uh Europe move forward with, with Mica, we've got um you know, progress happening in Hong Kong even Japan has got legislation in Singapore, Dubai, the UK. Uh we've got a panel coming up where Bermuda is involved in this, uh you know, moving forward on a lot of legislation, how is that international environment affecting, you know, the work that's happening in Washington? And are there lessons that uh you, you think should be taken from these other jurisdictions? Well, I think it has uh elevated the sense of urgency for the United States to address this. We are getting uh pleas from uh the eu uh to catch up uh to uh make our uh regulatory framework known. And so they can dovetail, we know that these uh as digital assets uh become more ubiquitous around the world that the importance of having frameworks that have some synergy around the world is extremely important and certainly the United States um sort of first among them. So uh we are getting um pleas from our colleagues overseas who are working on this uh for the United States to catch up. And there again, I think when you have voices with which the Congress is familiar uh coming out with a Bitcoin ETF, it will help a lot just with the comfort level that members of Congress have with this asset class when they know that um traditional finance is getting involved. And that's sad because all the innovation is coming from outside of traditional finance, traditional finance trashed digital assets when they first came out. And of course, now, uh they wanna uh be involved. Well, uh one might say um that they're late to the party. Indeed, they are. But when they come into the room where the party is happening, they bring a lot of people with them. So I do think that it's gonna be really important for some of the traditional finance uh notables uh to come into this space. Uh So finally, uh some of those people in the regulatory community at the fad, which has its head in the sand and um members of Congress who are more comfortable seeing, you know, the familiar faces walk in the room and start talking about exchange traded funds in, in Bitcoin and perhaps other digital assets. Later, we finally say, wow, this is, this is for real and it's time for us to incorporate it in to our regulatory and uh statutory frameworks. Senator Gillibrand. I mean, we're running a little short on time, but I'd really like to maybe get you to weigh on this issue because clearly, you know, a lot of these traditional finance institutions, uh you know, domiciled in, in your state. Um And, you know, there's a view that yes, this helps to bring energy and certainly capital and interest into this space. We've got tokenization and a whole lot of other innovations coming along. I think people are very supportive of that. But there's also a view that if these big institutions get to railroad their way in there and they set the terms and everything starts to look like a security because that's what, yeah, they kind of want to maintain their model and it just the, the sort of the ethos of crypto the, the sort of the, the open source development community, the, the people who are trying to find a way to get financial access for, you know, the developing world, etcetera, etcetera, get kind of blocked out of this. What are your thoughts on that? And how do we make sure that it maintains the open development spirit? That's part of what it's all about. I, I don't think that will happen from what I can see, um institutions that um traditional financial services institutions are really just interested in meeting the needs of their customers. And so if their customers want access to Cryptocurrency, they want to provide it. So it's really that simple. They're not the innovators, they're not the ones that are creating new technologies and new use cases. They just wanna be participants because their customers want to be participants. I mean, look at fidelity, they're, they're just we wanna offer something because our customers want it and why would you limit their abilities to have what they want in their portfolio of, of assets? It's, it's to them, it's like when I talk to them, it's like, I don't understand why we have to limit this. Like this is something that people can have eyes wide open, they know what they're investing in. They should have it as part of a complement of many types of investments. And so my instinct right now is that innovation will continue to thrive. The use cases are unlimited and the types of technologies that are um being amplified uh will only continue to grow. But the regulatory frameworks, the people that are involved in this industry they just wanna know they can participate in the US markets and they don't want to be investigated or um, prosecuted by regulators because they're not willing to regulate them because that's what's happening. I mean, people have, um, applications in, at the SEC for over a year and then the first time they hear from the SEC, it's an enforcement action. That's absurd. So that cannot continue to be the state of play for this industry. Um We have to do our jobs and, and provide the regulatory framework. We need to provide consumer protection. You know, Americans want to participate in this industry. But if there's no regulation here, well, then they have no market where they know they'll be protected. So if you care about consumers, you should be doing the work. And that's what I'm most frustrated about because if consumer protection is your number one thing, safety and soundness is your number two thing. Um illicit finance is your number three thing. Well, the best way to protect all those three things is create regulation that companies legitimate. Thoughtful companies can follow. I think you'll probably get agreement amongst a lot of people in this room. So uh listen, uh round of applause for Senators Kirsten Gillibrand and Cynthia LAMAs. Thank you so much for spending some time with us today.