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Thompson, McHenry, Hill, Johnson Press Yellen on FSOC’s Calls to Fill Regulatory Gaps in Spot Market for Non-Security Digital Assets

Today, the Chairman of the House Committee on Agriculture, Glenn “GT” Thompson (PA-15), Chairman of the House Financial Services Committee, Patrick McHenry (NC-10),  Chairman of the Digital Assets, Financial Technology and Inclusion Subcommittee, French Hill (AR-02), and the Chairman of the Commodity Markets, Digital Assets, and Rural Development Subcommittee, Dusty Johnson (SD-AL), sent a letter to Treasury Secretary Janet Yellen in her capacity as Chair of the Financial Stability Oversight Council (FSOC) demanding answers on FSOC’s calls to fill existing regulatory gaps in the spot market for digital assets that are not securities. 
Despite identifying these gaps, regulators have failed to facilitate an environment that ensures consumer protection and fosters digital asset innovation in the United States. The bipartisan FIT for the 21st Century Act would provide the clarity and certainty that digital asset spot markets desperately need.
Read the lawmakers’ full letter to Secretary Yellen here and key excerpts below:
“Following the collapse of FTX, the House Committees on Agriculture and Financial Services (Committees) embarked on a historic effort to craft legislation providing increased regulatory oversight over the digital asset markets. The Financial Innovation and Technology Act for the 21st Century (FIT21) would provide federal regulators with clear authority over the digital asset spot markets and ensure the customer protections seen in the current financial regulatory structure apply to intermediaries and digital asset-related activities. The Committees engaged in this effort to address the many limitations of digital asset regulations under current law, including a lack of clarity on the treatment of certain digital assets, the lack of sufficient disclosures and other protections for digital asset market customers, and the lack of federal oversight of non-security digital asset intermediaries.
“In 2021, Securities and Exchange Commission (SEC) Chair Gensler identified some of these same gaps as it relates to trading platforms, specifically stating, ‘I think it’s only Congress that could really address it, it’d be good to consider – if it was – if you asked my thoughts, to consider whether to bring greater investor protection to the crypto exchanges.’ The same week, Chair Gensler emphasized, ‘while the [SEC’s] sister agency, the Commodity Futures Trading Commission (CFTC), has some limited anti-fraud and anti-manipulation authority, there is no federal authority to actually bring a regime to the crypto exchanges… [the SEC] will be working with Congress, if they see fit to try to bring some protection for people who want to invest in this asset class.’
“Last year, in testimony before the House Committee on Financial Services, you stressed the importance of FSOC’s recommendations, stating ‘[t]here are some gaps like spot markets for crypto assets that are not securities.’ In June of 2023, Chairman Behnam testified before the House Committee on Agriculture further emphasizing, ‘[t]he events over the past year bring added urgency to these recommendations. The bankruptcy of several large digital asset platforms erased billions of dollars in customer funds. Multiple large market participants allegedly engaged in manipulative and abusive trading activity, including through opaque arrangements with affiliated trading platforms, undermining confidence in these nascent markets. Cybersecurity vulnerabilities continue to be exploited in weekly hacks, resulting in billions of dollars in lost funds.’
“Moreover, in January 2024, Chairman Behnam reiterated his call for spot market oversight, declaring ‘[t]he concerns I have publicly voiced for the better part of six years regarding the digital asset commodity spot market have only become magnified. The need for federal legislation over cash market digital assets has never been more critical, and I will continue my call for action.’ We could not agree more with you and Chairman Behnam. 
“To address these gaps, the Committees worked together to introduce and advance FIT21. In doing so, the Committees engaged with several members of FSOC for feedback. The legislation provides the CFTC with jurisdiction over non-security digital asset spot markets and clarifies the SEC’s jurisdiction over digital assets offered as part of an investment contract. Most importantly, FIT21 imposes robust customer protections on all entities required to be registered with the SEC and CFTC. 
“Over a year after the collapse of several digital asset firms and the associated customer losses, digital asset firms continue to operate despite the ongoing gaps in federal oversight. FIT21 provides comprehensive oversight of the spot market for digital assets that are not securities, and closes the gaps repeatedly identified by FSOC.”