Congressman French Hill Sees Urgency In Congress To Pass Crypto Legislation

Congressman French Hill (R-Ark) is vice chairman of the House Financial Services Committee and chairman of the inaugural House Financial Services Subcommittee on Digital Assets, Financial Inclusion and Technology, where he has held multiple hearings on issues such as stablecoins and overall crypto market structure. He’s also one of the sponsors for the recently-introduced Financial Innovation and Technology for the 21st Century Act (FIT for the 21st Century Act) alongside Congressman Dusty Johnson (R-S.D.) and Congressman Glenn G.T. Thompson (R-Pa.).

In this discussion we cover everything from the legislative environment in Congress to his thoughts on the recent judgment in the SEC’s ongoing lawsuit against Ripple, how his office cooperates with the SEC when it comes to crafting new bills, Central bank digital currencies (CBDCs) and tokenized securities.

Forbes: How would you characterize the legislative environment right now, when it comes to crypto?

French Hill: The legislative environment for crypto is distinctly better than it was two or three years ago. In the House of Representatives, we’ve now passed the first comprehensive regulatory framework for digital assets. And we’ve passed the first prudent and effective approach to stablecoins in history. We believe this closes significant regulatory gaps.

Forbes: Are there any main differences between the House and the Senate?

Hill: In the Senate, there’s been significant interest in crypto principally led by two senators, Senator Lummis of Wyoming (R-WY) and Senator Gillibrand (D-NY) in New York. Our bill, I believe, has some advantages over the approach that they’ve taken both on stablecoins and in the regulatory framework. But we have worked with them. And we look forward to working with them in coming days now that we’ve been successful in passing bipartisan legislation on both the framework piece and the stablecoin legislation. In the Senate, one also has to take into account both the Banking Committee and the House Agriculture Committee. We did that in tandem here. So one of the real important strategic differences in how we approach this is that the House Agriculture Committee under GT (Glenn) Thompson (R-PA) and the House Financial Services Committee under Patrick McHenry (R-NC), decided to do this jointly, with combined staff resources and combined member engagement. So many of our meetings were joint meetings, and we had a joint hearing. It was the first time that the two committees had a joint hearing. It was also the first time the staffs have worked together since the swap legislation after the 2008 financial crisis.

Forbes: What was the genesis of the FIT for 21st Century Act?

Hill: We know the regulatory challenges. And one of those central challenges has been the issue surrounding the Howey Test and what is a security and what is not a security. And what are even the circumstances around if something’s tied to an investment contract or not. So that was a core piece. Secondly, a few years ago during the Trump administration, former SEC chair Clayton’s pronouncements about initial coin offerings. This was raising money in and around a tokenized effort on a blockchain. We knew that was an area that had to be dealt with. It’s related to the Howey Test but different. Finally, how do we have transparency in trading these digital assets, and what are the requirements and rules of the road around that? When you think about trading, you have to think about custody, you have to think about reporting, you have to think about whether these brokers should be licensed to do this. We wanted to answer all those questions in our fit for purpose regulatory framework bill. So we came up with those core challenges that we’ve seen from court cases and regulation by enforcement. We also had some commodity related issues such as there’s no spot market statute to authorize spot markets and yet we had bitcoin futures. But the Commodity Futures Trading Commission (CFTC) believed they needed a statutory fix for that. And they don’t really have a prescriptive investor protection framework inside the CFTC. So we knew that was important.

Forbes: What would you say are the biggest differences between your bill and the Senate Bill?

Hill: I don’t think I’ll tackle that, because I’ve been so focused on trying to get our bill fixed. But my philosophy was, in order to build consensus, we ought to build off the existing framework we have at the SEC. So if you look at how we’ve transitioned from a focus on fundraising to decentralization, I tried to explain that is going from a Reg-A private placement all the way to an IPO, the same sort of check and balance through that process.

Forbes: What’s the litmus test for when new legislation is needed versus better guidance, better rules?

Hill: As a general statement, I think many of the challenges that we see in the digital asset ecosystem could have been effectively handled through either exemptive relief or by proposed rulemaking, under the SEC’s existing authority. But this commission and this chairman have shown no interest in that. Therefore, it was my judgment that we ought to pursue a statutory approach where we tackle this through directive language in the law that would direct them how to do joint rulemaking. But the statute allows us to blend these responsibilities between security and commodity, which would be tough without a direction from Congress to get the CFTC and the SEC to work in tandem. We offer, for example, the ability for a broker or an exchange to be dually licensed with the SEC and the CFTC. That’s an innovation. You would have had CFTC Chairman Behnam and his team absolutely in an integrated way working with SEC Chairman Gensler and his team. I’m not saying that’s far fetched. But in some ways, I think our direct approach that we’ve taken by statutory is compelling and perhaps more helpful.

Forbes: We’ve spoken before about how the CFTC did not have specific spot market regulatory authority even though commodities have traded in regulated markets around the world for centuries. Why was crypto the commodity that made it necessary to fix that gap?

Hill: I think that the interest in bitcoin continues. People generally consider it fully decentralized and not a security, and therefore it was a prime candidate. And you’ve got derivative interest there, but no spot market. Clearly, that would be something that the market is demanding. And yet it couldn’t be really delivered by the CFTC. And that, in turn, also helps other products that can be built around that, which can’t proceed. So that’s why I think the timing is right. It also allowed us to have a comprehensive approach through our statute that basically defines how to demonstrate you’re decentralized, which I think will prove easier with time. I think the mystery of this will be resolved as people bring projects that are obviously decentralized. That apparently is not clear today. If it was clear, then why are we having lawsuits with people making opposite claims?

Forbes: What does decentralized mean to you?

Hill: It means the blockchain and the code on the blockchain and the functionality of that is operating in a way where it’s clear that it’s self-driving or self-fulfilling, and that the certification is saying that insiders and related parties don’t have more than 20% of the tokens at one time. So it’s a functionality test. It’s a software test and it is essentially, you can say an ownership test.

Forbes: There’s been reporting that the SEC has been slow playing, providing feedback on this bill and some others. How would you gauge the cooperation or engage with the SEC on this bill?

Hill: When we began to craft concepts for the bill before we actually started drafting, I wouldn’t say they were particularly helpful. But as we got words to paper and began fleshing out that framework—the definitions, the powers and the direction—they came along and provided verbal and technical assistance to our drafters.

Forbes: When this sort of coordination happens, it goes through Gensler’s office. Your feelings on Gensler related to this issue are pretty well stated. But is there anything more specific that you can say about his engagement on this bill?

Hill: My views are well stated. The Commission’s approach to digital assets in the two years of his chairmanship is disappointing. We have a million creditors in the FTX case and yet I saw no evidence last year that the SEC did anything about FTX in the run up to its collapse. Our oversight committee would very much like to have all the emails, all the messages, all the records of all the meetings from anybody who worked with the SEC with anybody that is associated with FTX. And while they’re quick to condemn Kim Kardashian for promoting crypto, where are they actually protecting American investors? I think some people find it inexplicable that the SEC approved an S-1 and let Coinbase go public and yet they turn it around and allege Coinbase is not operating within a fair manner.

Forbes: What’s your assessment of what the executive branch is doing and the role they’re playing?

Hill: As a general statement, I want to compliment the Treasury Department under Secretary Lang and her team for working very constructively with House Republicans and House Democrats on both our stablecoin legislation and our regulatory framework legislation. I believe they think it’s important for Congress to act here in order to meet the goals of the President’s Working Group on digital assets.

Forbes: I want to get your sense of our markup sessions. Why were the House Financial Services Committee hearings a bit more boisterous than in the ag committee?

Hill: The House Financial Services Committee, of course, has oversight over the SEC, and the SEC currently has a democratic chairman. And the Democrats on the House Financial Services Committee were very defensive of Chair Gensler’s opposition to any change in the law. He believes he has all the regulatory and legal authority he needs to administer and answer every question around digital assets and crypto. I disagree. I think that’s a wrong position. But many on the Democratic side of the aisle seem to agree with him, so I think that is at the heart of the disagreement. While over on the House Agriculture Committee, Chairman Behnam of the CFTC seemed to welcome the additional authorities and the creative approach to trying to bring clarity to his market that he thinks benefits the futures market, the derivative market and this new digital commodity potential for his marketplace. So I think it’s maybe the nature of the oversight, these two committees have driven the different conversation.

Forbes: Let’s talk a little bit about the summary XRP/Ripple judgment. What were your initial impressions?

Hill: Confusion. I thought it didn’t bring clarity to the Howey Test, consumer protection or the role of insiders and crypto at all. I thought it was another example of why we need a statutory approach here. When you have institutional investors who were treated differently than retail investors for essentially, I would say, an opposite investor protection reason. And then insiders are freely able to sell their positions into the market without any additional scrutiny. I’m paraphrasing.

Forbes: How does this impact what you are doing with your bill?

Hill: We’re very clear about the role of related parties, a foundation or insiders in a startup environment that has capital raised for a digital asset project on its way to decentralization, and the protections of those airdrop token participants or non-insider token purchasers by virtue of an investment contract. This is not unlike the way we’re protective of that in a Reg D, private placement or emerging growth type company. And that was clearly a deficiency, I think, in XRP’s approach. And then we’re also clear about how you get liquidity before decentralization, an insider versus a non-insider. And then when decentralization occurs, we have a holding period, like the lockup period in an IPO of 12 months where they can then have free liquidity. We tried to treat institutional and consumer or ordinary retail investors in a logical way, deliver some protections and deliver some transparency, and I thought the XRP case indicated that would be helpful. Even if you claim that you latch onto the headline that it’s not an investment contract, that’s talking out of both sides of your mouth.

Forbes: What do you say about the fact that there are all these important pieces of crypto specific legislation?

Hill: I think it says that members of Congress recognize that Web3 innovation, blockchain innovation, the earliest stage of innovation here is growing; that there’s a demand among institutional investors and consumers. If we don’t facilitate that framework, then you’re going to see that engagement move offshore. The United Kingdom and the EU to name two perfectly developed markets have aggressive approaches to attract businesses there.

Forbes: What are your thoughts on a CBDC and the launch of the FedNow payments service?

Hill: FedNow is a long time in coming. The Fed asked the private sector to create a real-time payment system, which they did. Then the Fed said, we’re going to create one, too, which is what they’ve done since the 1960s, both in the ACH arena and then the wire. FedNow is going to be really positive, particularly in business. I think consumers already think they have it, they don’t, but they think they have it through Venmo, Visa Direct and MasterCard’s service. I think this is just catching up with reality. Among my questions: Are you going to finally let the wire or the ACH system be open seven days a week, 24 hours a day? How are you going to staff this? And how are you going to do it? We’re actually going to have a hearing on this in a few weeks. FedNow has nothing to do with a CBDC. I don’t support a retail CBDC. I don’t see the need for it in a developed market like the United States. That’s why I think private sector innovation in and around dollar-based stablecoins will facilitate innovation to determine the appetite for this kind of payment technology.

Forbes: Some of your colleagues are going further and trying to outright ban it. What do you think of those efforts?

Hill: I think that you shouldn’t launch a CBDC without an Article One law from Congress. And I think that resolves this issue. People are inventing demonization of this concept because of their fear of it, or lack of understanding of how it works. And so I think the best way to handle that is to just say, “Look, let Congress authorize its creation and how it would work, and then people have some confidence that their Fourth Amendment protections will be in place and that the technology will be useful.” But I think it’s premature and I haven’t seen a CBDC project around the world that’s particularly been effective.

Forbes: Do you think there’s ever going to be a world where stablecoin issuers pay yield? And if so, does that have to be a security?

Hill: I think that if you’re true to the intent, which is it is tokenized cash as opposed to a money market fund, then the answer to your question would be no, they wouldn’t pay interest. But I think we need to see how this evolves.

Forbes: What are all the big banks and traditional financial institutions saying about these pieces of legislation?

Hill: I think the large financial institutions are currently experimenting in blockchain and with tokenized payments within their networks. They are very interested in having clarity on the custody aspect of a digital asset so that they can benefit their customers. But some of the industry does not want any non bank issuers of payments, stablecoins. And to me, that’s a relatively ant-competitive point of view.

What are your thoughts about tokenized securities?

Hill: Our legislation does not deal with the tokenization of securities stocks or bonds. In fact, we specifically define a digital asset as not that. It specifically excludes commercial loans, mortgage backed securities, fixed income and stocks. But we are very interested in pursuing another piece of legislation where you set up a framework where you could tokenize an existing asset and see what those issues are. We’ll probably have a hearing on that.

Forbes: Is there anything else that you would like to share?

Hill: I’m very pleased with the vote and deep engagement among bipartisan lines. I mean, big time. The amazing collaboration between two committees, people in New York, Philadelphia, Little Rock, they don’t know. This gives momentum to a cause that exceeds normal expectations. I think that’s going to help us in the Senate identify people who want to come on and help us do this, even if they don’t know it yet, because they’re not involved. I think you’ll have some latent people who are not name brands like Elizabeth Warren who tries to dominate this subject in a not always particularly informed way. You’ll find other members who are going to want to work on this in the financial aspect and in the commodity aspect. I think that’s good. I believe the message in Congress that people are leaving the United States because of the actions of Chairman Gensler has sunk in. And I think that’s why you see more engagement here. I really do, in addition to the fact that institutional investors, institutions and consumers want to pursue the use of blockchain and distributed ledger technology. It’s just not going away. And so, you can be a member of the stick your head in the sand caucus or you can come try to get a regulatory framework that works.

Forbes: Thank you.