Fintech

Sen. Lummis: The crypto industry can be its own worst enemy

Squabbles over issues like a self-regulatory organization for digital assets businesses could undermine a bill Washington seems to be lining up behind.

Cynthia Lummis

Sen. Cynthia Lummis acknowledged a key point got downplayed in her new crypto regulation bill.

Photo: Office of Sen. Cynthia Lummis

Sen. Cynthia Lummis emerged as a leading voice on crypto regulation with the introduction of a bipartisan bill for sweeping regulation of a fast-growing industry.

But she acknowledges that a key point got downplayed when the bill, which she co-authored with Sen. Kirsten Gillibrand, was introduced about three weeks ago: Yes, the CFTC will play an important role in regulating crypto — but so will the SEC.

“Here's the problem, and it's something I probably helped to create,” she said. The cryptocurrencies with the largest market value — bitcoin and ether — are definitely commodities that will be regulated by the CFTC.

“But there are a number of very small cryptocurrencies that are going to probably be at the Securities and Exchange Commission,” she added. “These are assets that need disclosure, where the public needs consumer protection because some of these are just fraudulent.”

Lummis, who is one of the few members of Congress to own crypto, elaborated on what the bill hopes to accomplish in an interview with Protocol. She also discussed her biggest worries about the legislation, including infighting within the crypto industry where companies are “kind of butting heads” as they try “to be the big dog in shaping and influencing the legislation.”

This interview was edited for clarity and brevity.

Can you talk about the very first conversation you had with Sen. Gillibrand about working on a bill for digital assets?

I've been working on this piece of legislation for quite some [time]. We identified several wonderful Democrat senators who are very interested in this topic, but some of them have a full portfolio of legislative priorities already. So I couldn't have been more delighted when Sen. Gillibrand approached me in the Capitol building.

She is a member of the Senate Agriculture Committee, which has oversight jurisdiction over the Commodity Futures Trading Commission. When that committee held a hearing and began to understand the significant role that the CFTC would be playing in the regulatory regime on digital assets, she took a really deep dive into this subject.

She is a 12-year securities lawyer in private practice in New York. So this is a subject area with which she was very familiar. It was natural for her, and she’s turned out to be just the best possible partner I could ever imagine.

What were the areas where you disagreed?

It did take some negotiations with Sen. Gillibrand and her team over details. But the major structural framework was something that we found agreement on: the fact that we wanted to take the very regulatory framework that applies to traditional assets and lay the digital asset framework on top of it, leaving jurisdiction with the CFTC, the SEC in the case of securities and in some cases, the Office of the Comptroller of the Currency.

We were in agreement about the basic structure. The little things that came up after that were really pretty easy to resolve.

We found less friction between us than we found among some of the trade organizations that represent different aspects of the digital asset industry. They were kind of butting heads, and so we had to try to referee their efforts to be the big dog in shaping and influencing the legislation.

Can you give an example, Senator?

We had to leave some issues out of the bill because some groups were saying, “If you put that in, we will oppose the bill.” Other groups were saying, “If you don't put that in, we will oppose the bill.”

So for now, we left some things out. But I think you will see them as standalone bills later in the process as people begin to understand the utility of adding some of those provisions back in. You know, this is a big process that we're engaged in.

What were some of the elements that were left out because it would create more disunity?

Well, if I tell you, it almost explains who these groups are. And I know that sounds like a chicken’s answer. But we're trying to pull these groups together at the same time that we pulled Democrats and Republicans together. So I don't want to explain what's on the cutting-room floor for now because you're apt to see it again.

There was a perception when the bill was announced in early June that you want the CFTC to take the lead in regulating crypto. But you and Sen. Gillibrand have been pushing back on that view.

Here's the problem, and it's something I probably helped to create. Probably the largest market cap within the digital asset world is going to be at the CFTC.

But there are a number of very small cryptocurrencies that are going to probably be at the Securities and Exchange Commission. These are assets that need disclosure, where the public needs consumer protection because some of these are just fraudulent.

We need to make sure that for those legitimate digital assets like bitcoin, which is, in so many ways, the hardest money that's ever been created in the history of the world, that their credibility isn't tarnished by digital assets that were fraudulently created with nefarious intent.

Some people are so new to this industry that they don't realize there are over 15,000 cryptocurrencies, most of which are probably going to be regulated at the SEC. But in terms of market share, you've got two cryptocurrencies that are around 60% of market share: bitcoin and ether. So the bigger ones are more apt to be at the CFTC. Certainly bitcoin will be at the CFTC.

You introduced this bill at a time when the crypto market crash was becoming more pronounced, highlighted by the Terra-luna collapse. How did that affect your thinking about crypto and this bill?

Well, I think it helped to illustrate the need for this bill. When you have, for example, a digital asset that is an algorithmic stablecoin that is not backed by anything, it's important that we show that in our bill that type of stablecoin could not exist.

The stablecoins that we authorize would be those that are either issued by a financial institution insured by the FDIC or are 100% hard asset-backed. We want to make sure that when people are dealing with a stablecoin, especially a dollar-denominated or fiat-backed stablecoin, that it is stable. I mean, that's the whole point of calling it a stablecoin.

There’s the view stablecoins will likely be covered in separate legislation, especially given the push for a U.S. digital dollar to be issued by the Federal Reserve.

I am of the opinion that the direct-to-consumer product will actually be stablecoins. Within the central banks, there could be a CBDC, but it would remain behind the scenes within the wholesale entities, the Federal Reserve, its 12 regional banks and the Bank for International Settlements and central banks around the world. That's how they could transmit money among themselves.

But in the U.S., I believe that the direct-to-consumer product will be stablecoins. So the bill authorizes a study of CBDCs, and specifically with an eye towards the digital yuan and analyzing the differences that it presents and the way that it is used in China to what we might want to have here.

I think it's helpful to have that information. The digital yuan is direct-to-consumer. It's also a means of surveillance. We don't want a CBDC that is dollar-denominated that could be used as a means of surveillance.

We don't want the federal government using a CBDC to cut out financial institutions that are in business to evaluate credit-worthiness. So this is not a way to cut out banks. This is not a way to cut out custodial institutions that custody digital assets. A CBDC should be kept within the central banks.

The crash is bringing back a lot of memories of the financial crisis 14 years ago. How will this impact the deliberations in terms of convincing fellow senators to support this initiative?

Certainly news about digital assets imploding is something that makes people fully aware in Congress that it's time for some regulation. We’re trying to point out as digital assets fail where our piece of legislation would have either prevented that failure because that asset would have been unable to exist under our regulatory regime without sufficient backing, or where we can fix the bill to address the kinds of problems that arise when a digital asset implodes.

A year ago, nobody was talking about digital assets in Congress, maybe except for me. When it came to the forefront was when the infrastructure bill had a definition of broker that really misidentified the roles of miners and validators and just really fundamentally misunderstood what information they have access to. That’s what started bringing members of Congress together to begin to address some of these issues.

There is also the perception that the crypto industry prefers the CFTC as the main regulator and would even want to sideline the SEC. How do you view that perception?

I actually think it's better to have both involved. Under our bill, the CFTC has spot market and futures jurisdiction for those digital assets that are commodities. If you apply the Howey Test [and] they come out on the commodity side, they’ll be at the CFTC. That is the majority of the market cap of digital assets.

But there are thousands of cryptocurrencies that, under the Howey Test, are securities. They just are. The SEC is really good at disclosure and consumer protection. We want people to know under disclosures which assets used for what purpose are legitimate and which ones are fraudulent.

SEC Chair Gary Gensler has been harshly criticized for the way he has approached digital assets. What is your own evaluation of his performance?

One thing I've heard from the industry is they just can't stand regulation by enforcement action. And understandably so. If you're trying to do business, you're trying to guess what the regulatory framework might look like, and all of a sudden you're slapped with an enforcement action, that's no way to do business. So I totally get it. I understand the frustration.

But I also understand that Gary Gensler really does have a deep knowledge of digital assets. He's very knowledgeable. So it's my opinion that he is attempting to regulate from a knowledgeable perspective and not out of a lack of understanding of these assets.

We have him and staff at the SEC looking at our bill. They've looked at it before. We've gotten very constructive feedback from them. Now that we have filed it, we'll continue to ask for their feedback and everybody else's feedback. When I hear things like how much the industry dislikes regulation by enforcement action, you know, I tell Chair Gensler just so he knows what I'm hearing.

You introduced this bill at a time when there are really deep divisions in Congress. How confident are you that this is going to pass?

I think there's a chance yet that certain components of this bill might get hearings this calendar year. It would kind of surprise me if any part of this bill passes during this calendar year. I think we're probably looking at legislation next year.

But it's sitting out there where people can comment on it, make changes to it. And we'll continue to hope that that is the case.

There is legislation on stablecoins that has been drafted by Sen. Toomey. There's legislation within the Agriculture Committee on CFTC jurisdiction issues by the chair, and the ranking member of that committee. Sen. Gillibrand is on that committee. I'm on the Banking Committee, and we think that our different pieces of legislation are very blendable. They're very able to conform to each other easily. So there's a chance that one or the other of those could come forward this year. But I think it's a slight chance because, as you pointed out, we've been wrestling with issues that are unrelated to digital assets.

But the reason that I think that our bill will ultimately be the framework for legislation is it's comprehensive. It's bipartisan. It has been thoroughly vetted by the industry and the regulators already. They're familiar with it. They're talking about it as sort of the base vehicle.

What parts of the bill are likely to move forward sooner rather than later?

I think that the stablecoin part and the CFTC spot and futures jurisdiction parts are the easier ones to pass. As you pointed out, the industry itself is more comfortable with CFTC regulating than SEC regulating.

What is your biggest worry?

We've been spending a lot of time educating other members about digital assets. We really do have in the Congress people who are very sophisticated in their understanding now about digital assets, and we still have people who say, “Show me a bitcoin.”

That's a huge spectrum of knowledge and understanding and lack thereof. So we've been spending a lot of time educating our colleagues and their staff. We bring speakers in. We have dinners. We invite experts. We let them ask questions behind closed doors so you don't feel stupid, asking questions that you think would divulge your lack of understanding about this subject. We think we're making progress.

Here's the other thing that's been great about it. This is nonpartisan. This has never been partisan so far. And I don't think it will be. I think that both in the Senate and in the House where they're also working on legislation, you're seeing it be very bipartisan.

So we will probably even try to find friends in both parties who might be interested in picking up this bill in its entirety and filing it in that House so both bodies have the same base working document.

I suppose what I worry about the most is that the industry will start fighting within itself and will become its own worst enemy in trying to get something passed. For example, I think that there's some advantages to having a self-regulatory organization. Some groups don't like that idea. If that fight were to become very divisive within the industry, it would prevent us from being able to move the bill forward easily when the industry itself is lacking cohesion. So that's probably my biggest concern.

You’re referring to the proposal for a body like FINRA as a self-regulatory body for the crypto industry. But you're saying there are some in the industry who are not crazy about that idea.

Exactly right. And so while they're butting heads, it makes it hard for us to move forward on provisions like that.

It was reported that you owned five bitcoins as of 2013 and you reported having bitcoin worth between $50,000 and $100,000 in October. How have you been affected by the crypto market slump?

You know, I got so much grief for owning bitcoin that I put everything in a blind trust. So I don't know if I own five bitcoins anymore, because it's in the hands of a trustee. But if I do, good heavens, those five bitcoins would have fallen below $100,000 in value last week.

But as I've tried to explain, I'm a HODLer. I'm holding on to my bitcoin for as long as I can and I hope to be able to pass them to my grandsons because I just believe they're going to, in the long run, hold value and grow in value and I'm looking for a store of value. That is the reason I personally hold bitcoin.

It is only going to be one of the reasons people might want to have bitcoin. Some might want to use it as a means of exchange, and certainly the technologies are growing and becoming available to do that.

Do you know people who were affected by the slump who invested a lot and lost a lot?

Well, I think there were companies that were taking bitcoin as collateral and then lending it out. I don't know any of those people personally, but certainly they're out there. It's another cautionary tale about why this industry could benefit from light-touch regulation that hits that sweet spot we're looking for, which is “don't stifle innovation, keep innovation in America” but nevertheless provides adequate consumer protection for people who want to participate as owners of digital assets.

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