What to expect at Wednesday's hearing on crypto before Congress

The crypto industry is eagerly anticipating a veritable summit convened to testify before Congress tomorrow. Here’s what to keep an eye out for.

The House Financial Services Committee, or FSC, has convened industry representatives many times in the past. In a move that recalls hearings with the CEOs of major tech firms last year over monopolistic practices, they are bringing together six leaders of crypto-focused firms tomorrow. 

Since it resembles those hearings, some may sound the alarm on an impending crackdown. But while there are definite party lines in play, Committee Chairwoman Maxine Waters has joined with a broader shift to at least treating crypto as worthy of a place in the U.S. financial ecosystem. 

“There’s just a tremendous interest at the member level that we just haven’t seen before,” said Kristin Smith, the executive director of the Blockchain Association, which frequently briefs members on crypto. 

While the attitude of Congress in general and the FSC in particular has accepted that crypto is here to stay, there are major hotspots of concern. The FSC memorandum for tomorrow’s hearing emphasized market oversight and volatility, decentralized finance, and the environmental impact of mining as areas to address.

It is, however, stablecoins that will take center stage.

Stablecoins front and center

The subject has captured legislators’ collective attention, especially since the President’s Working Group released its report on stablecoins at the beginning of November. That report calls for direct congressional action on a new regulatory regime that would limit stablecoin issuance to insured depository institutions — basically, banks. Members will likely push Paxos’ Chad Cascarilla and Circle’s Jeremy Allaire on what that would look like. 

The elephant in the room on that conversation will most certainly be Tether, which has the largest market cap of any issuer but is notoriously opaque. A sitting senator recently had issues getting in touch with the firm’s elusive executives in letters asking stablecoin issuers to report on their processes. 

There have similarly been rumors of a Senate hearing on stablecoins coming later this month or early next year. 

Regulating exchanges

The FSC is also set to focus on the absence of a regulatory regime for spot markets like Coinbase and FTX, both of which will have representatives speaking at the hearing. Indeed, both of them, alongside Binance, have recently put out proposals they have called comprehensive regulatory frameworks. 

Brian Brooks, the current CEO of Bitfury and former CEO of Binance’s US wing, will in all probability be called upon to speak on behalf of his former firm’s global activities. 

Coinbase’s proposal was particularly aggressive, calling for the creation of a whole new regulator with sole domain over digital assets. The firm has maintained that it wants this discussion to be at the very least a starting point. 

While FTX’s proposal was more modest, it has also asked for harmonized regulation of digital assets, which would depend more on existing regulators but would put more forms of digital asset trading under one roof. 

This has been an area of contention between the Securities and Exchange Commission, which maintains such regimes for equities trading, and the Commodity Futures Trading Commission, which does so for futures markets, including Bitcoin. 

Gary Gensler, who chairs the SEC, has been pushing to consider all centralized crypto exchanges to be securities exchanges. Rostin Behnam, his equivalent at the CFTC, seems to prefer a shift to add crypto assets to his agency’s mandate, as Congress added swaps via Dodd-Frank. 

Among the firms represented, Coinbase has faced particular scrutiny from U.S. lawmakers. This is both because it is the first crypto exchange to be publicly traded, and because its global CEO, Brian Armstrong, is notoriously untactful. This may explain why global CFO Alesia Haas will be appearing instead. 

The environment and DeFi?

The energy use and emissions of proof-of-work mining, especially that which underpins the Bitcoin network, are a perennial concern among environmentalists and lawmakers most concerned with the environment. Those concerns have accelerated in the past year, as the U.S. has overtaken China as the largest source of BTC hash rate in the world. 

As with many environmental issues, there are fairly established party lines at play. Just last week, Senator Elizabeth Warren (D-MA) spotlit one mining operation in upstate New York that has been at the center of a local argument. Meanwhile, Ted Cruz (R-TX) is publicly praising what bitcoin mining can do for power grids. 

While the FSC will certainly be paying lip service to mining concerns, there’s been almost no legislation on the table to do anything to miners at the federal level. 

As for DeFi, legislators are still coming to terms with foundational concepts. Part of the reason that stablecoins and centralized crypto exchanges are so front and center is that they involve clear third parties that function in ways analogous to the traditional financial system. In the search for similar third parties, many regulatory approaches to DeFi preface by calling it “so-called decentralized.”