Democrats on the House Financial Services Committee held their own hearing Friday to discuss a pending crypto market structure bill, during which witnesses laid out concerns about the legislation’s potentially wide-reaching implications for American securities markets.
Whereas most hearings about the bill have thus far been convened by the committee’s Republican majority, which introduced it, today’s “minority day” convening offered Democrats the rare opportunity to focus attention on perceived flaws in the legislation.
The CLARITY Act would, for the first time, create a legal framework in the United States for issuing and trading most crypto assets. It would do so in part by explicitly exempting most crypto assets from the SEC’s oversight.
On Friday, Democrat-picked witnesses expressed concerns about the potential knock-on effects of such a strategy.
“This bill's regulatory gaps will not be quarantined to crypto,” one witness, Amanda Fischer, Policy Director at Better Markets, said during testimony before the committee.
Fischer said that by carving crypto out of U.S. securities laws that have existed since the 1930s, the CLARITY Act would incentivize traditional financial institutions to “shoehorn” routine functions like capital raising onto blockchain networks as a means of dodging regulation and lowering costs.
The policy expert, who previously served as chief of staff to Biden-era SEC chair Gary Gensler, pointed to comments made by Robinhood CEO Vlad Tenev over the last year that running a crypto business is “an order of magnitude” less expensive than operating a traditional securities brokerage. Robinhood has signaled interest in moving much of its core business onto blockchain networks by tokenizing assets.
“He doesn't have to pay for customer protection, SEC exams, or SIPC insurance,” Fischer said, referencing the Securities Investor Protection Corporation, a federally mandated program for insuring customer deposits at securities brokerages in the case of a firm’s failure. “Of course it’s cheaper.”
Another concern raised by the panel Friday focused on the CLARITY Act’s two-tiered system for categorizing crypto assets. Most crypto tokens would be automatically considered “digital commodities” under the bill, and thus exempt from SEC regulation. But token issuers wishing to engage in activity more closely resembling a traditional securities offering, such as institutional token sales to the public, have the option to register as “mature blockchain systems” with the SEC, a yearslong process with more stringent requirements.
Fischer argued that few if any token issuers will ever engage with that more rigorous process, given that the CLARITY Act, in her opinion, already offers so many loopholes a token issuer could take advantage of instead of conceding that their offering represents an investment contract.
“Crypto issuers will claim they’re DeFi; claim that they're not offering investment contracts; claim that they're collectibles or meme coins; claim that they’re airdrops, or claim that they're subject to the [bill’s] grandfathering provision,” she said.
That position appeared to garner sympathy not just from industry-skeptical Democrats, but also from key pro-crypto party members—including Rep. Sam Liccardo (D-CA), who expressed worry about the CLARITY Act’s hands-off approach to certain crypto markets, particularly decentralized finance (DeFi). The bill, by the insistence of the crypto industry and House Republicans, explicitly carves out DeFi activity from its novel regulatory framework.
“[DeFi activity] is increasing rapidly, and I'm guessing it's going to be the majority of transactions very soon,” Liccardo said. “I'm concerned about this bill and essentially launching a global naval strategy, and putting all your ships on Lake Superior when you know there's an ocean out there that you're not covering.”
Though numerous substantive issues related to the bill were discussed during Friday’s hearing, Democratic leaders like Financial Services Committee Ranking Member Maxine Waters (D-CA) focused their critiques mainly on the refusal of Republicans to include language in the legislation that would bar President Donald Trump from engaging in his numerous, lucrative crypto ventures while in office.
Republican leadership on the committee, meanwhile, focused their rebuttals Friday more on these Trump-focused arguments than on issues raised about the existing text of the CLARITY Act.
“Is this really a substantive conversation about the legislation at hand, or has this just evolved into another partisan exercise?” Rep. Mike Flood (R-NE), chair of the Financial Services Subcommittee on Housing and Insurance, asked at one point during the proceedings.
Edited by Andrew Hayward
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