French Hill Calls Out Securities And Exchange Commission’s ‘Inconsistent’ Digital Assets Terminology

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During a House Financial Services Committee hearing prior to the congressional recess, Rep. French Hill (R-AR) spoke about the U.S. Securities and Exchange Commission’s terminology to classify digital assets.

Transcript

00:00Gentleman yields back. The gentleman from Arkansas, the chairman of the full

00:03committee, Mr. Hill, is recognized for five minutes for questions. Thank you

00:08chairman, appreciate that. I want to say to my friend from Massachusetts that if

00:12we want to make sure that both stable coins and digital assets are well

00:17regulated, well overseen, subject to the full force of both state and federal law

00:25enforcement and supervision that we need to come together and pass our stable

00:29coin legislation as well as the revised version of a market structure bill that

00:36we're setting out on today with this good hearing. Appreciate both Mr. Lynch and

00:41Mr. Stiles work and I would also say as it relates to meme coins, this is not some

00:46breaking news thing, the decision to say that meme coins, which don't have any

00:50utility and are just deemed collectibles by some, was Gary Gensler and the Gary

00:57Gensler SEC approved that meme coins were not securities at the same time that

01:04Gary Gensler and the former SEC were not overseeing in any way shape or form how to

01:10protect Americans from FTX's offshore mischief. So the key thing about this is

01:18that we're trying to get this right on a bipartisan basis, bicameral basis here on

01:22the hill to have both a dollar back stable coin legislation and a market

01:29structure legislation. I thank both my ranking member and chair for their work

01:34on this. One thing that we're exploring today is the SEC's terminology around

01:40digital assets that's been so inconsistent, particularly over under chairman Gensler.

01:45Just to illustrate the point, the SEC has used the word crypto tokens, crypto security

01:52tokens, crypto assets, crypto asset securities, digital asset securities, and digital asset

01:58securities that are investment contracts. This past February, SEC Commissioner Peirce

02:04outlined a potential taxonomy to clear up some of this confusion for the past four years.

02:10Her ideas were broken into four buckets. First, crypto assets that are just securities because

02:18they have the intrinsic characteristics of a security. Secondly, crypto assets that are offered

02:25and sold as part of an investment contract, even though the crypto asset itself isn't a security.

02:32Thirdly, tokenized securities. And finally, the fourth category she outlined were all other crypto assets,

02:40which are not securities and not transacted pursuant to a securities transaction. So this second and fourth

02:49category is at the heart of where the subcommittee worked all of last Congress on FIT 21. And Ms. Smith,

02:56can you describe the distinctions between these categories to help the committee in its work?

03:02Sure. So the first category, sorry, so would you like clarification on the second and fourth or all?

03:11Yeah, well, start with the second and fourth on the work that we're doing, but you can comment on the balance.

03:16Yeah. So the second category is for an asset that's offered and sold in an investment contract,

03:22that's not a security itself. There's been a lot of work because that's where most clarity is needed.

03:27Since 2017, the SEC has been applying the Howie test, which is a three-part test to determine whether or not a digital asset is a security.

03:37And because the actual asset is not a security, it's still in a securities transaction. There have been lots of questions

03:43under which it becomes a securities transaction. A lot of work has been in that particular area

03:49because that's where questions arise. The last category, all other crypto assets, they would include assets such as Bitcoin,

03:57an asset that's uncontroversially not a security. There's been a lot of work in that area because there's no federal regulatory authority

04:05that has authority over that particular market. So there's been questions about who should have that regulatory authority.

04:11So that's the work that Congress has done on where those tokens should be treated as under the purview of the SEC or the CFTC.

04:19Is that what we were trying to work on?

04:22That's correct, sir.

04:23And so Bitcoin is not a security. So you view it would be if it's in its, we're trying to have a spot market for Bitcoin

04:32that would be under the CFTC's regulatory authority. Is that right?

04:36So that's the open question. Open question, yeah. That's the, that's sort of the direction that we took

04:41with the House Agriculture Committee in the last Congress and this will be a key question for Chairman Stahl

04:46as we go forward. Mr. Ware at Polygon Labs is leveraging its use case database to showcase real world applications

04:59of its technology. Can you highlight an example for us and then maybe you could submit some more for the record?

05:05Thank you for your question.

05:08Yeah. So one example would be a Pravado ID, which provides an opportunity for a person to work with the issuer of identification

05:19or, or an organization that certifies information such as maybe like a graduate school. That organization uses an API link to

05:28essentially like transact for that person's wallet through zero-knowledge proofs and show essentially and verify that that thing exists.

05:40My age is X, my birth date is Y.

05:42Give us some examples so that we can show the utility in the use of blockchain and I yield back to the Chairman.

05:47The gentleman yields back.

05:48The gentleman yields back.

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