Congress has been notoriously slow to tackle crypto as a subject of legislation. The standard protocol for handling bills related to crypto is that they are introduced through various committees — sometimes to great fanfare — but struggle to find bipartisan support. The process is often drawn out, leaving many bills in legislative limbo.
The emergence in June of a 162-page draft bill codifying many of the more granular concerns of the crypto industry was different, largely because of its authorship and scope. The McHenry-Thompson bill, as it’s been dubbed, is the work of congressmen Patrick McHenry (R-NC), Chairman of the House Committee on Financial Services, and Glenn Thompson (R-PA), Chairman of the House Committee on Agriculture. The two committees oversee the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), and the bill aims to address their respective roles in regulating the crypto industry.
Thompson formally introduced the Financial Innovation and Technology for the 21st Century Act, or FIT Act, at the end of July, which he said hopes to “close existing authority gaps.” McHenry did not take up sponsorship, leaving it to fellow HFSC members French Hill (R-AR), Warren Davidson (R-OH) and Tom Emmer (R-MN) — all Republicans and all notable fans of crypto.
“The digital asset space is muddled with regulatory uncertainty, lack of authority and a lacking framework for core operating principles,” said Johnson in a statement. “The crypto industry wants clarity and our collaborative bill gives both the CFTC and SEC a seat at the table.”
The FIT Act passed out of both committees, meaning that it is bound for a vote in the full House. Both chambers were on recess for all of August. The Senate is back in action, while the House returns next week.
There’s a fair dose of industry optimism about the bill. Kristin Smith noted the bill as the “top priority” for the Blockchain Association, the crypto trade group she heads in D.C.
The key hook for the industry is protecting tokens from what many perceive as SEC overreach. SEC reporting requires that individuals and companies answer for the welfare of tokens and their markets in perpetuity — undercutting any given token’s claims to decentralization.
The core feature of the legislation is establishing definitions for a “digital commodity” and allocating authority over them to the Commodity Futures Trading Commission (CFTC), as opposed to the SEC.
The crypto industry has depicted the SEC under Chair Gary Gensler as the great boogeyman of innovation. McHenry took the occasion of SEC Chair Gary Gensler’s April appearance before the Financial Services Committee to call Gensler’s approach to policing the crypto industry “nonsensical.”
Coinbase referred to the existence of the draft legislation in its legal battle with the SEC, which indicates how the crypto industry is gearing up to use it in its defense.
“Congress has expressly recognized that it has not yet delegated such regulatory authority and is actively considering regulatory structures for the digital asset industry,” reads a July 12 filing arguing that the SEC lacks its current authority.
Gensler, for his part, is adamant that the SEC can rein in the crypto industry based on its existing legal powers. A recent spate of courtroom setbacks for the agency challenges this confidence.
A House Divided
The Democrats within the House are significantly more hesitant to legislate powers away from the SEC on what has become an increasingly partisan issue. That includes within the HFSC, despite the committee passing the bill 35-15, with six moderate Democrats breaking ranks. Among the bill’s sponsors, none are from the Chamber’s left wing.
Maxine Waters (D-CA), the head Democrat on the committee, wrote to Gensler and Treasury Secretary Janet Yellen asking that they weigh in on the legislation before proceeding. Waters ultimately voted against sending it out of committee.
“I support the efforts of the SEC and I’m opposed to legislation that’s clearly designed to undermine the SEC,” Brad Sherman (D-CA), a vocal critic of cryptocurrencies, told Unchained of the McHenry-Thompson bill.
Progressive financial policy groups have voiced similar concerns, roundly coming out against the legislation as allowing “a rubber-stamp certification scheme for crypto ‘commodities.’”
“We need to clearly delineate what modern regulation is going to look like and what the SEC’s authority should be [and] what the CFTC’s authority should be,” Ro Khanna (D-CA) told Unchained.
Khanna is not on the Financial Services Committee but is a notable tech and crypto advocate on the left flank, with a district that is squarely within Silicon Valley. He said McHenry had reached out, calling the bill’s author “very thoughtful on these issues” though he had yet to read the text of the bill himself.
“To my mind, the CFTC/SEC is just noise,” said Bill Foster (D-IL). “I would be delighted if crypto provided an opportunity for the SEC and CFTC to start working together. That’s my dream.”
The Senate Awaits
If it comes down to it, the Republican majority is on track to push the current bill through the House.
The real bottleneck for the bill is, however, the Senate, which retains a Democrat majority and has fewer members with strong political stances in favor of the crypto industry. Indeed, there is no real equivalent to Ritchie Torres (D-NY), who espouses progressive views while making overtures to the crypto industry.
Moreover, the House rules allow a bill to be under construction in multiple committees. The Senate formally demands that the parliamentarian refer bills to single committees. So, within the Senate, the analogous Banking and Agriculture Committees would be in contention rather than in tandem when it comes to the FIT Act.
The Banking Committee recently held its first legislative markup in four years, suggesting a thaw in legislative progress. But Sherrod Brown (D-OH), the committee’s leader, has by and large deferred to Gensler. And while his Republican counterpart, Pat Toomey, was a high-profile crypto advocate, he retired last year. His successor, Tim Scott (R-SC), has kept largely mum on his attitudes towards crypto.
The committee will hear testimony from Gensler on Tuesday about the SEC’s recent activities, which will likely illustrate the environment the House bill finds itself in.
Senate Agriculture, however, got burned especially badly when FTX went down in flames, as committee leaders Debbie Stabenow (D-MI) and John Boozman (R-AR) pushed forward a bill that similarly carved out a CFTC regime for crypto but featured heavy input from FTX’s Sam Bankman-Fried and Mark Wetjen, his D.C. guru starting in late 2021.
Boozman has been somewhat more reticent on crypto this congressional session, but he maintains, “There’s some things that — there’s no ifs, ands or buts — they are commodities,” he told Unchained.
Asked if he supported the McHenry-Thompson legislation specifically, Boozman dodged, saying “I’m supportive of their efforts.”
Closing Walls and Ticking Clocks
Stabenow told Unchained that we need new legislation on CFTC authority “now more than ever.” But she has also publicly announced her retirement at the end of this Congress, following a lengthy career on Capitol Hill.
Stabenow’s timeline puts a rush on any legislation but also means she may be free to spend accumulated political capital. But her impending retirement is not the only pressing timeline. Republicans in the House are subject to six-year term limits on committee leadership, which will take McHenry off the top spot in Financial Services come the next Congress. This may be part of why he has hastened work on the legislation while he controls the calendar.
On the flip side, Sherrod Brown on the Banking Committee is up for re-election this year. The noted progressive is the last statewide elected Democrat in an increasingly Republican Ohio, so he is likely to face fiercer competition than he has in the past.
“I’m in the fight of my life to defend Ohio’s seat and our Democratic Senate majority,” a recent Brown campaign ad said.
Brown may veer more towards the center of the aisle as the election approaches. But crypto did not appear particularly compelling to voters in the 2022 midterms, even before FTX collapsed. And as election cycles become ever more engrossing, the 2024 presidential race will likely blot out other political considerations.