Author: Steven Ehrlich, Forbes; Translation: Luffy, Foresight News
French Hill (R-Ark), a member of the U.S. House of Representatives, is the Vice Chairman of the House Financial Services Committee and also the Chairman of the inaugural House Financial Services Committee’s Task Force on Financial Technology, Digital Assets, and Financial Inclusion. He has held multiple hearings on issues such as stablecoins and the entire cryptocurrency market. He is also one of the initiators of the recently introduced FIT for the 21st Century Act, along with Representatives Dusty Johnson (R-S.D.) and Glenn G.T. Thompson (R-Pa.).
In this interview, we discussed various issues, including the legislative environment for cryptocurrencies, his views on the Ripple case ruling, how his team is working with the SEC to develop new legislation, and central bank digital currencies (CBDCs) and tokenized securities.
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Forbes: How do you view the current legislative environment for cryptocurrencies?
French Hill: The legislative environment for cryptocurrencies is clearly better than it was two or three years ago. In the House, we have now passed the first comprehensive regulatory framework for digital assets, and we have also passed the first ever prudent and effective stablecoin solution. We believe this fills a significant regulatory gap.
Forbes: What are the main differences between the House and the Senate?
French Hill: The Senate has a stronger interest in cryptocurrencies, led primarily by two senators, Senator Lummis (R-WY) and Senator Gillibrand (D-NY). I believe our approach to stablecoins and regulatory frameworks is more advantageous than theirs. But we have worked with them, and since we have successfully passed bipartisan legislation on the framework and stablecoin, we look forward to working with them in the coming days. In the Senate, the banking committee and the House Agriculture Committee must also be taken into consideration. So one of the significant strategic differences in how we address this issue is the decision by the House Agriculture Committee, led by Glenn Thompson, and the House Financial Services Committee, led by LianGuaitrick McHenry, to collaborate and integrate human resources and member participation. Many of our meetings are joint meetings, and we have also held joint hearings.
Forbes: What is the origin of the FIT for the 21st Century Act?
French Hill: We know the challenges in regulation. One of the core challenges revolves around the Howey test and what is considered a security and what is not. If something is related or unrelated to an investment contract, what are the surrounding circumstances? So that’s a core part. Second, during the Trump administration a few years ago, former SEC Chairman Clayton made comments for the first time on token issuances. It’s a way for blockchain projects to raise funds through tokens. We know this is an issue that must be addressed, it is related to the Howey test but also different. Finally, how do we maintain transparency in these digital asset transactions, and what are the associated requirements and rules? 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. We hope to address all of these questions in a regulatory framework bill that is fit for purpose. So we put forward the core challenges we see from court cases and enforcement actions. We have also encountered some issues related to commodities, such as the lack of spot market regulations to authorize spot markets, but we have Bitcoin futures. However, the Commodity Futures Trading Commission (CFTC) believes they need statutory fixes for this. And internally, the CFTC does not have a defined investor protection framework, but we know that is important.
Forbes: What do you think is the biggest difference between your bill and the Senate bill?
French Hill: I have been focusing on addressing the issues with our bill. But my belief is that, in order to build consensus, we should build on the existing framework of the SEC. So, if you look at how we transition from focusing on fundraising to decentralization, I explain that there are checks and balances throughout the entire process, from Reg-A private offerings to IPOs.
Forbes: What is the litmus test when new legislation and better guidance, better rules are needed?
French Hill: As a general statement, I think many of the challenges we see in the digital asset ecosystem can be effectively addressed based on the existing powers of the Securities and Exchange Commission through exemptions or proposed rulemaking. But this Commission and its Chairman have shown no interest in doing so. Therefore, my judgment is that we should take a legislative approach and address this issue through directive language in the law to guide them on how to engage in joint rulemaking. But it is going to be extremely difficult to mix these responsibilities between securities and commodities without a directive from Congress to make the Commodity Futures Trading Commission and the Securities and Exchange Commission work together. For example, we offer the ability for brokers or exchanges to have dual licensing from the SEC and the CFTC. CFTC Chairman Behnam and his team could certainly work with SEC Chairman Gensler and his team in an integrated way. But in some respects, I think the direct approach we are taking by statute is more persuasive and perhaps more helpful.
Forbes: We’ve talked before about how, despite centuries of regulated markets for commodities, the Commodity Futures Trading Commission does not have a specific spot market regulatory authority. Can cryptocurrency as a commodity fill this gap?
French Hill: I think the interest in Bitcoin is still continuing. It is generally viewed as fully decentralized and not a security. We already have a derivatives regulatory authority, but not a spot market. Clearly, that is needed in the market. However, the CFTC has not been able to truly accomplish that goal. That’s why I think the timing is right. It also allows us to take a comprehensive approach through our regulations, which basically define how you prove you are decentralized, and I think that will become easier over time. I think this puzzle will be solved as people bring forward projects that are clearly decentralized. It’s not clear yet today.
Forbes: What does decentralization mean to you?
French Hill: Decentralization means that blockchain and its functionality are operating in a way that is clearly similar to autonomous driving or self-fulfillment, and evidence shows that insiders and related parties do not have more than 20% of the tokens. So, it’s a functionality test, it’s a software test, and essentially, it’s an ownership test.
Forbes: It has been reported that the U.S. Securities and Exchange Commission (SEC) has been slow in providing feedback on this bill and several others. How do you evaluate the cooperation with the SEC on this bill?
French Hill: When we started conceptualizing the bill before actually drafting it, I didn’t expect much assistance from the SEC. However, once we put the words on paper and started fleshing out the framework (definitions, powers, and directions), the SEC was able to provide verbal and technical assistance to our drafters.
Forbes: When such cooperation occurs, Gensler’s team will be involved. You have already expressed your opinion about Gensler’s involvement in this issue. Is there anything more specific you can say about his involvement in this bill?
French Hill: My views have been expressed clearly. The SEC’s attitude towards digital assets has been disappointing during his two years as chairman. In the FTX case, there were one million creditors, but I didn’t see any evidence last year that the SEC took any action against FTX before it collapsed. Our oversight committee is very interested in obtaining all emails, messages, and meeting records of anyone involved with FTX who collaborated with the SEC. Despite their condemnation of Kim Kardashian promoting cryptocurrency, they have actually failed to protect American investors. Some find it incredible that the SEC approved the S-1 and allowed Coinbase to go public, only to turn around and claim that Coinbase was not operating fairly.
Forbes: What is your assessment of what the executive branch is doing and the role they play?
French Hill: As a general statement, I want to commend the Treasury under Yellen’s leadership and her team for their very constructive cooperation with both House Republicans and House Democrats on stablecoin legislation and regulatory framework legislation. I believe they see it as very important for Congress to take action here to achieve the goals of the President’s Working Group on Digital Assets.
Forbes: I’d like to understand why the hearing of the House Financial Services Committee is more lively than the hearing of the Agriculture Committee?
French Hill: Certainly, the House Financial Services Committee has oversight over the SEC, and currently, there is a Democratic chairman at the SEC. The Democrats on the House Financial Services Committee are very supportive of Chairman Gensler’s resistance to amending laws. He believes he has all the regulatory and legal authority he needs to manage and answer every question about cryptocurrencies. I disagree, I think that’s a mistaken position. But many in the Democratic camp seem to agree with him, so I think that’s the crux of the divide. During the House Agriculture Committee, Chairman Behnam of the Commodity Futures Trading Commission (CFTC) seemed to welcome more regulatory bodies and creative approaches to try to clarify his regulatory market, which he believes is beneficial to the futures market, the derivatives market, and the potential of this new digital commodity on his market. So I think that might be the nature of oversight, and these two committees are driving different conversations.
Forbes: Let’s talk briefly about the judgment of the Ripple case. What was your initial impression?
French Hill: Chaos. I don’t think it clarified the Howey test, consumer protection, and the role of insiders and cryptocurrencies at all. I think this is another example of why we need legislation here. I mean, when institutional investors are treated differently from retail investors, it fundamentally goes against the purpose of investor protection. Then insiders can freely sell their positions on the market without any additional scrutiny.
Forbes: How does this affect your bill?
French Hill: We are very clear about the role of relevant parties, foundations, or insiders in raising funds for digital asset projects in the startup environment and moving towards decentralization, as well as protecting airdrop token participants or non-insider token purchasers (with investment contracts). This is no different from how we protect this in Reg D, private placements, or emerging growth companies. I think this is clearly a flaw for Ripple. Then we are also clear about how liquidity is obtained before decentralization occurs; then when decentralization occurs, we have a holding period, like the lock-up period of 12 months in an IPO, where they can have free liquidity in it. We are trying to treat institutional and ordinary retail investors in a logical way, providing some protection and transparency, and I think the XRP case shows that this would be helpful. Even if you claim it’s not an investment contract, it’s just talk.
Forbes: What are your thoughts on all the important parts of cryptocurrency legislation?
French Hill: I think this shows that members of Congress recognize that Web3 innovation, blockchain innovation, innovation at its earliest stages is happening; there is demand from institutional investors and consumers. If we don’t promote that framework, then you will see this activity move overseas. Both the UK and the EU, these two developed markets, have taken proactive steps to attract businesses.
Forbes: What are your thoughts on the launch of CBDCs and the FedNow payment service?
French Hill: The arrival of FedNow will take a long time. The Fed asked the private sector to create a real-time payment system, and they did. Then the Fed said, we’re going to create one too, which is what they’ve been doing since the 1960s, whether it’s in the ACH field or in the wire transfer field. FedNow will have a positive impact, especially in the commercial sector. I think consumers already think they have it, they don’t, but they think they have it through services like Venmo, Visa Direct, and Mastercard. My question is, are you eventually going to open up the lines or the ACH system 7*24? How are you going to staff that? In fact, we will have a hearing on this in a few weeks. FedNow has nothing to do with CBDCs, I do not support retail CBDCs. I think developed markets like the United States don’t need them. That’s why I think stablecoins based on the US dollar and the private sector around them will promote innovation to determine the interest in this payment technology.
Forbes: Some of your colleagues are going further, trying to completely ban CBDC. What is your opinion?
French Hill: I believe that CBDC should not be launched without the first law from Congress. The reason why people demonize this concept is because they are afraid of it or do not understand how it works. Therefore, I think the best way to deal with this issue is to say, “Listen, let Congress authorize its creation, and then people will have confidence that their Fourth Amendment protection will be in place, and the technology will be applied.” But it is still too early, and I have not seen a particularly effective CBDC project around the world.
Forbes: Do you think stablecoin issuers will pay interest? If so, would it definitely be considered a security?
French Hill: I believe that if it is tokenized cash rather than a money market fund, the answer to your question is no, they will not pay interest. But we need to see how things develop.
Forbes: What do major banks and traditional financial institutions think of cryptocurrency legislation?
French Hill: Major financial institutions are currently exploring blockchain and tokenized payments within their networks. They have a strong interest in cryptocurrency custody. However, some industry insiders do not want any non-bank institutions to issue stablecoins.
Forbes: How do you view tokenized securities?
French Hill: Our legislation does not involve the tokenization of securities stocks or bonds. In fact, our specific definition of digital assets does not include them. It does not include securities supported by commercial loans, mortgage-backed securities, fixed income, and stocks. But we are very interested in promoting another legislation, in which you can establish a framework to tokenize existing assets. We may hold a hearing on this.
Forbes: Anything else you would like to share?
French Hill: I am very satisfied with the results of the vote and the bipartisan approach. People in New York, Philadelphia, and Little Rock don’t know about the collaboration between the two committees. I think this will help us find people in the Senate who are willing to join and help us, even if they don’t know yet because they haven’t been involved. You will find other members who want to engage in this work financially and with commodities. I think that’s great. I believe the message conveyed by Congress is that people are leaving the United States because of Gensler’s actions. That is why you will see more viewers here.