'We're Not Going To Be Rolled': Klobuchar Rips CLARITY Act Over Alleged Conflicts Of Interest Issues

5 months ago

During a Senate Agriculture Committee hearing in July, Sen. Amy Klobuchar (D-MN) spoke about cryptocurrency regulations.

Transcript

00:00Thank you. Senator Klobuchar. Thank you very much, Mr. Chairman. I just have a few

00:04questions as promised at the end and I hope that the world watching here sees

00:10that we're not going to be rolled here on this bill, on the Clarity Act, and that

00:16you have a lot of members who want to see a piece of legislation that truly

00:25protects consumers, people who have worked with the industry in the past on

00:29our side that are interested in working on this but really want to see some

00:34serious changes and are concerned both about the conflicts issue, are concerned

00:39as Senator Booker, I'm going to ask my first question on this, about the funding

00:42issue of how the CFTC should do this and are certainly concerned about the

00:49consumer welfare and what safeguards should be in place and there's not loopholes

00:53that could, you know, drive a truck through here. So that's kind of where it's not

00:59consensus. We have members with different views on this but I do think that people

01:04should take home from this that we are going to want to see some major changes.

01:10So, Mr. Benham, you previously called for additional funding and staff for the CFTC

01:16to write rules for and oversee these markets. How important is it that Congress

01:22provide for durable, sufficient funding when it comes to these brand new markets? And I, and I think, just to

01:28combine my questions then with you, Mr. Lutton, one of the concerns is we've got

01:33derivative markets, we've got an economy that is on a roller coaster right now

01:38because of tariffs and other things. We don't want to disadvantage existing markets

01:44and market participants in how we do this. So it's a little bit the same question, but

01:47Senator, very quickly, thank you for the question. Short answer, it is an absolute priority. If you, if you

01:53authorize a regulatory program but don't have the funding, it is, it's just, there's no teeth there.

01:58I did a number of estimates internally when I was chair. We came up with about $130 million

02:03over the first few years to staff up both on the tech side and the personnel side. And to your last point,

02:09and I think this should resonate with everyone on the panel and on the committee, I cannot tell you how much

02:14personnel time was taken in the last few years of my chairmanship on crypto related matters. And I

02:20don't mean that in a negative way, but it's zero sum. When you have those people working on crypto

02:25matters which are novel, unique, and don't have legal precedent, it leaves them away from traditional

02:31markets, which I think we all agree are the core of what the CFTC does and the core of what this

02:36committee cares about on the ag side, the energy side, the metals, and financials.

02:40Okay, thanks. And then Mr. Lucan. And the question is around the funding and

02:45impact. It's pretty much funding because what's going to happen if resources are pulled too thin

02:50because of this major, major challenge coming in. Sure. In a good and bad way, but something that

02:58was going to have to be accomplished. And then you have these other things going on

03:01that you've always done. Right. They have always done at the CFTC. Right. Now I think the agency

03:07certainly deserves full funding, and especially if they're taking on the new responsibility of

03:11digital commodities, they're going to need more funding to make sure that they can administer

03:17the act. You know, that's something that has traditionally been through an appropriations

03:21process. I think the Clarity Act gives the ability a transitional fee that happens for four

03:26years. That to me makes some sense. I think once you start, if you start to put in a permanent

03:32tax on the industry, the concern is that you may start to impact hedgers, the people who are trying

03:39to utilize the markets and taxing them, instead of appropriating that through the appropriations

03:44process. So I do have concerns with putting in a transaction tax permanently. I think it's

03:51better suited through the appropriations process.

03:53Mr. Kim, I'm just only smiling. I'm not going to get into the recisions and what this means to

04:01many of us when we look at that process, what's before us now, and if we can ever trust it. Mr. Kim,

04:08so Senator Marshall was talking about the need to make sure we protect against terrorist use of

04:17these commodities. I thought that was a good line of questioning. And I just have one thing to add.

04:21Are digital commodity market participants technologically capable of complying with these

04:29financial laws? Should Congress tailor the laws in any ways to account for unique features of these

04:34markets or this technology?

04:38Thank you, Senator. I think the U.S. already has a robust AML CFT program through FinCEN, as I mentioned

04:44earlier. That said, I believe it's appropriate for the CFTC to be the regulator for digital commodities.

04:49And once that framework is established, Senator, I think there could be additional protections as

04:54need be. But what's been missing, as I mentioned, is that regulatory gap right now where the CFTC does

04:59not have asset story authority to take a look at centralized intermediaries. And my testimony has

05:04been about the need to address that gap to ensure U.S. leadership, Senator.

05:08So, well, some mention it's been made of the collapse of firms like MF Global and FTX.

05:13And it truly revealed how customer assets can evaporate when we don't have the adequate safeguards.

05:22In both cases, customer funds were commingled and ultimately lost in cascading failures that shook

05:28public confidence in financial markets.

05:31I'll start with you, Mr. Benham. What mechanisms would best guarantee that these assets are

05:37safe, even if prices of collateralized digital assets collapse? And how should Congress address

05:45these practices where firms reuse customer assets for their own purposes?

05:51Thanks, Senator. Just very briefly, it really goes to the core principles and the rules that

05:56the CFTC applies in regulated institutions. MF Global was unique in the sense that it was a regulated

06:02entity and those funds were commingled outside of in violation of the segregation rules.

06:08Some changes were made afterwards, but segregation rules, I think everyone would agree with on this

06:12panel are sacrosanct to the CFTC, making sure customer money is protected and prioritized among house

06:19money and other customer money. And I think if you replicate what rules around customer seg are used for

06:24traditional CFTC markets in the digital asset market, we will be able to accomplish our goals

06:28around protecting customer money and digital assets.

06:32Okay, thanks. Another question. We know that DeFi, the decentralized finance, raises novel

06:40regulatory challenges. So how should Congress approach decentralized finance platforms in regulatory

06:47frameworks?

06:48Thanks, Senator. We had, at the CFTC when I was chair, we had a couple enforcement actions against

06:53DeFi protocols. And I do think there should be and needs to be a unique look at how DeFi

07:01platforms function relative to centralized platforms. But I am a firm believer that there needs to be

07:08some mechanism of regulation and oversight. DeFi platforms cannot live in a regulatory vacuum.

07:14There has to be some intersection with a regulator and a decentralized platform in order to have

07:20effective regulation. Otherwise, there will be a race to the bottom, essentially a race to DeFi to circumvent

07:25regulations.

07:27Mr. Sexton, does the Clarity Act's DeFi exception, the exemption that's in there concern you at all? Is it too broad?

07:36Senator, thank you. I know that there are concerns expressed about the DeFi exception in the Clarity Act.

07:43I believe that Congress should give some instruction to the CFTC as to how to deal with these platforms going

07:53forward in legislation. And also, I think that the CFTC and the SEC should carefully examine together DeFi protocols

08:03and determine, as Chair Benham just indicated, how best to look at these protocols in the future

08:14and possibly come up with some type of regulatory oversight over them.

08:20Okay. Do you want to add anything, Mr. Messick?

08:25I think the DeFi exemption that's in the Clarity Act is one of its worst features.

08:31I think the first thing is, we have to define what we mean. People use the term DeFi.

08:37It's not just an autonomous protocol. They're typically talking about, you know,

08:43situations where you have a business that's actually the front end of that or managing that.

08:48So there's lots of touch points for regulation. DeFi should not get a regulatory pass.

08:54And we may need different rules, but it needs, we need to achieve the same regulatory objectives.

09:01One simple way to think about this is if we had a, if we had a protocol that was for the treasury market,

09:06and that suddenly became the main way treasuries were traded, we wouldn't say, oh, well, we don't need to regulate it.

09:13We don't need to worry about it. So I think the key things are, define what we mean,

09:19look at the touch points for regulation, because there are typically centralized actors acting in that space,

09:26and develop different rules if we need them, but achieve the same regulatory objectives.

09:31Okay. Mr. Benham, the collapse, again, of offshore exchanges underscored how quickly gaps in the

09:39international monetary regulatory frameworks can put U.S. customers at risk with trading activity flowing

09:47across borders, outside the reach of domestic agencies. The challenge, in addition to the other

09:52ones we laid out here, becomes ensuring robust protections for customer funds that are in this

09:57truly international market. How can the U.S. ensure that customer funds are protected in a global

10:04market where trading often occurs on offshore exchanges beyond U.S. oversight? Thanks, Senator.

10:10You know, we have been a bit behind other regulators across the globe, and I think that's created

10:16arbitrage opportunities. Also, these international platforms who don't feel like they have a path to

10:21registration in the U.S. for a variety of reasons are circumventing essentially what are called VPNs,

10:27or virtual private networks, to get access to U.S. customers. I firmly believe that as the

10:32committee moves forward and the Congress moves forward with a market structure bill, if drafted

10:36correctly and comprehensively, this will bring the market within the regulatory fold, and that will

10:42provide the customers that you're talking about the protections that they deserve, and that we need to

10:47have on a sort of outcomes basis, as Chairman Massett said. So regulation, as we take steps, will resolve these

10:54issues in part, and hopefully comprehensively with other global regulators.

10:58Okay, thank you. I'm going to have to go to something else. I see Senator Warnock is here.

11:03I want to thank you, Mr. Chairman, for having this

11:05sort of bipartisan hearing, and so everyone

11:09could listen to the witnesses' ideas, and we look forward

11:14to working with you and with the rest of the committee going forward.

11:18So thank you very much, and consider my last comments my closing.

'We're Not Going To Be Rolled': Klobuchar Rips CLARITY Act Over Alleged Conflicts Of Interest Issues

Category

Transcript

Be the first to comment

Recommended