Congress Is Having Its First Hearing on DeFi. What Does the White House Think of It?

The first-ever Congressional hearing exclusively focused on DeFi is set to take place on Tuesday at 10 am ET.

Congressman French Hill (R-AR), Chair of the Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion, is holding a Congressional hearing titled “Decoding DeFi: Breaking Down the Future for Decentralized Finance”. The hearing may represent the “maturation” of DeFi as an industry that now has legislators exploring what the right policy approach should be.

Hill told Unchained in an email Monday that he believes DeFi “can deliver a better financial system through permissionless, peer-to-peer technology and shows great promise in preserving an individual’s freedom to transact.” But he criticized the Biden administration for how it has addressed the sector so far.

“Instead of taking a thoughtful approach to regulation, agencies in the Biden-Harris Administration continue to use rule-making and enforcement actions in a poor jurisdictional attempt to capture and kill off DeFi,” Hill wrote. The Congressman is in the running to become the the next Chair of House Financial Services if Republicans maintain their control of the House in November.

The planned witnesses at the hearing will be Amanda Tuminelli, chief legal officer at the DeFi Education Fund; Rebecca Rettig, chief legal and policy officer at Polygon Labs; Peter Van Valkenburgh, director of research at Coin Center; and Mark Hayes, senior policy analyst at Americans for Financial Reform. Further information on the hearing can be viewed here.

The hearing comes amidst actions on DeFi by regulators and a law enforcement agency in the Biden Administration that seem to contradict each other, or at least differ in terms of having a positive or negative stance on DeFi. The lack of a unified stance suggests that the Biden administration does not have a specific position or policy on DeFi yet, according to two industry sources.

The Biden Administration Sends Mixed Messages on DeFi

While the hearing would seem to be a positive sign from the administration on DeFi, recently, various agencies have taken actions that suggest a lack of a coordinated approach.

On Tuesday, the Federal Bureau of Investigations (FBI) issued a helpful public service announcement to the DeFi community notifying that, “the Democratic People’s Republic of Korea (“DPRK” aka North Korea) is conducting highly tailored, difficult-to-detect social engineering campaigns against employees of decentralized finance (“DeFi”), cryptocurrency, and similar businesses to deploy malware and steal company cryptocurrency.” Two industry sources viewed this measure as a very reasonable action in line with DeFi industry standards.

However, on the flip side, on Wednesday, the Commodity Futures Trading Commission (CFTC) issued an order filing and settling charges against Uniswap Labs as part of its continuing enforcement focus in the digital asset decentralized finance (DeFi) space. The enforcement action, for $175,000, for an infraction that Uniswap Labs took quick action to remedy in September 2023 upon viewing other enforcement actions, was seen even by at least one of the CFTC’s own commissioners as unreasonable.

These mixed messages from regulators could indicate there is no specific White House position or policy on DeFi yet, according to two industry sources. In September 2022, the White House shared a framework for the responsible development of digital assets that included an illicit finance risk assessment on decentralized finance published in April 2023. Unchained reached out for comment to the Biden Administration regarding any updated guidance or policy for DeFi, but did not receive a response.

The Downside of Regulation by Enforcement for DeFi

At the CFTC, all five Commissioners were not in lockstep agreement on the Uniswap settlement, as two CFTC Commissioners published dissents on the order. In an interview with Unchained, CFTC Commissioner Summer Mersinger, when asked if she felt there was a coordinated policy on DeFi from the White House, said she was “not certain” that Uniswap or any of the other DeFi cases were part of any coordinated effort. As to whether the CFTC is conducting regulation by enforcement, Mersinger further commented, “If we’re going to go down this path…whether we’re directed by someone or not, let’s do it in a way where we are engaging with industry, we’re having the conversation, and we’re providing clarity. That does not seem to be the path we’re taking at this point.”

Mersinger also shared concerns about how Uniswap seem to have paid attention to three DeFi orders issued by the CFTC in September 2023 and stopped trading leveraged tokens at that time, but the CFTC still took this action against them. “So they [Uniswap] were proactively looking at our [the CFTC’s] settlements, trying to react, and then we brought the case for the time before that settlement came out. So when you tell people it is against our rules, and someone follows them to not run afoul of the rules, but we still file the Uniswap case, there’s a fundamental fairness issue here that I think is at play as well,” said Mersinger.

Mersinger encouraged the DeFi community to use its voice and share its concerns publicly and with elected officials. As to DeFi protocols smaller than Uniswap that may not have a great deal of resources, Mersinger pointed out a stark reality for the U.S. and DeFi, saying, “…some of these smaller protocols, they can’t operate with the threat of enforcement coming in and saying, ‘You can’t do this.’ Their option becomes shut down or go offshore, and that’s the only option we are leaving them with.”

Progress in U.S. Agencies Toward Accepting Crypto and DeFi

The FBI’s public service announcement on DeFi provided helpful information on how employees of DeFi are being targeted by the DPRK. “This announcement includes an overview of the social engineering tactics North Korean state-sponsored actors use against victims working in DeFi, cryptocurrency, and related industries; potential indicators of North Korean social engineering activity; mitigation measures for those most at risk; and steps to take if you or your company may have been victimized,” said the PSA. With this more collegial approach, two sources also point to this announcement as examples of the FBI viewing crypto as a victim while the bad actor is the DPRK, not the technology or industry.

Another example of the administration having a positive stance toward DeFi is Treasury Secretary Janet Yellen’s decision last month to proactively withdraw the self-hosted wallets rulemaking seen by the industry as unduly onerous, unworkable and a threat to privacy. It would have required banks and money services businesses (MSBs) such as cryptocurrency exchanges to submit reports, keep records, and verify the identity of customers on digital asset transactions above certain thresholds. According to one source, Yellen proactively withdrawing the self-hosted wallets rulemaking that was previously done under former Treasury Secretary Mnuchin is essentially an example that people using their own cryptographic keys is not an illicit finance threat.

UPDATE (Sept. 9 11:43 a.m. ET): Adds information about Congressman Hill.