Will Congress Create a Statutory Framework for Digital Asset Regulation?

Featuring Hon. Patrick McHenry (NC-10)

Event Video

Listen & Download

Will the 118th Congress succeed in creating a statutory framework for effective regulation of cryptocurrencies?  Join House Financial Services Committee Chairman Patrick McHenry and our expert panel to discuss the status of this complex legislative issue, the competition among regulators and potential division of regulatory jurisdiction, the differences between stablecoins and other cryptocurrencies, federal vs. state regulation, what financial reports and other disclosures should be required, and what key decisions must be made.


Hon. Patrick McHenry, United States Representative, NC-10

Brian P. Brooks, Managing Partner, Valor Capital Group; Former Acting Comptroller of the Currency

Patrick D. Daugherty, Partner, Foley & Lardner; Adjunct Professor, Cornell Law School

Gary Kalbaugh, Deputy General Counsel, ING Americas; Special Professor of Law, Hofstra University

Paul Watkins, Managing Partner, Fusion Law, PLLC

[Moderator] J.C. Boggs, Partner, King & Spalding


To register, click the link above.


As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.

Event Transcript



Sam Fendler:  Hello, everyone, and welcome to this Federalist Society virtual event. My name is Sam Fendler, and I’m an assistant director of practice groups with The Federalist Society. Today’s webinar asks the question will Congress create a statutory framework for digital asset regulation. Our program will begin with remarks from Congressman Patrick McHenry. We will then move into a panel discussion featuring Brian Brooks, Pat Daugherty, Gary Kalbaugh, and Paul Watkins.


Our moderator today is J.C. Boggs. J.C. Boggs is a partner in King & Spalding’s Washington office where he leads the firm’s FinTech, blockchain, and cryptocurrency practice. As former counsel to the Senate Banking Committee, J.C. represents financial services and technology companies before Congress and the Executive Branch and regularly interfaces with financial regulators on a wide array of policy and institution specific issues relating to financial technology and innovation. If you’d like to learn more about today’s speakers, their full bios can be viewed on our website, fedsoc.org.


After our speakers give their opening remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A function at the bottom of your Zoom window, and we’ll do our best to answer as many questions as we can. Finally, I’ll note that, as always, all expressions of opinion today are those of our guest speakers and not The Federalist Society. With that, J.C., thank you very much for being here today, sir, and the floor is yours.


J.C. Boggs:  Well, thank you, Sam. We are delighted to have Congressman Patrick McHenry with us here today. He’s chairman of the House Financial Services Committee. Thank you, Mr. Chairman.


Elected to Congress in 2004, Congressman McHenry is now serving his tenth term in the U.S. House of Representatives. I recall first meeting the congressman when he was a new member of the Financial Services Committee and remember how impressed I was with his strong grasp of the issues. And clearly I was not the only one who is impressed with his smarts. And Congressman McHenry quickly rose through the ranks from freshman back bencher to House leadership. He was appointed Vice Chairman of the House Financial Services Committee by then Committee Chairman Jeb Hensarling and elected Republican leader in the House of Representatives at the beginning of the 116th Congress.


Today, Congressman McHenry is Chairman of the House Financial Services Committee with jurisdiction over a broad array of banking, securities, insurance, housing, and economic policy issues, including today’s topic, cryptocurrencies. So on behalf of The Federalist Society for law and public policy, we’re incredibly grateful for your time today and look forward to your observations and insights. As Sam mentioned, the title of today’s webinar is “Will Congress Create a Statutory Framework for Digital Asset Regulation?” So Mr. Chairman, thanks again and you have the podium. And you’re on mute.


Hon. Patrick McHenry:  There we go. All right. Well, great to be with you. And very much appreciate the intro. It’s really important to the legal community (inaudible 00:03:25) in short order here.


So we’ve got a number of things at play in sort of a level set. We are more than a dozen years past the bitcoin white paper. We saw at the height a trillion dollar asset class develop around digital innovation. And we have no federal regulation nor definition of what is a digital asset. So that’s the backdrop.


Furthermore, you have two important regulatory agencies, CTFC and the SEC, in conflict. And as a result of their conflict we don’t have any consumer protection around this broad new asset class of digital innovation. Existing regulatory powers don’t fit for the unique nature of most – well, many digital assets. And as a result of that we have to step in. Congress has to step in. And Congress stepping in and providing some level of clarity here of what is a digital asset and the nature of digital assets is highly important.


So that is the basis by which Congress and in particular the House Financial Services Committee worked in a bipartisan way to pass legislation out of committee that we called FIT21. So how do we approach asset classifications? There have been a number of discussions, especially following the two recent Court actions this summer, on what is a digital asset itself and whether or not it is considered a security.


A digital asset is not necessarily a security, and we codify that basic principle. Something I think that has been lost in the shuffle is that the Securities Exchange Commission also holds the position that obligations related to the digital asset exist if the transaction meets a Howey test, which makes it unclear whether the digital assets can be freely transferrable. Our bill solves for this by providing a path for non-security digital assets to be deemed digital commodities and provides the CFTC jurisdiction over digital commodities.


Now, the difficulty here is the Financial Services Committee oversees the Securities and Exchange Commission. The Agriculture Committee in the House oversees the Commodities and Futures Trading Commission. So we’ve had to work across two committees in order to write this bill and pass it out of our respective committees in the same week.


Our bill builds on the SEC’s current exemption regime for the offer and sale of certain digital assets by establishing a new exemption and creates an enhanced disclosure regime in that new exemption. Other exemptions could be used for raising capital and for the development of digital assets. For digital assets, it may be offered as part of an investment contract.


What rules apply to SEC registered intermediaries, and what is the SEC’s jurisdiction over restricted digital assets? These are major questions that we answer in our legislation. We clarified the SEC’s remit that is only over digital assets offered as part of an investment contract, and we provide a process for the SEC to certify that a blockchain system is decentralized, meaning that it’s not offered pursuant to an investment contract. We modify and mirror existing authorities such as allowing for the registration of digital asset platforms under the existing regs ATS framework as well as digital asset brokers and dealers under the existing broker-dealer framework. And furthermore, we require digital asset intermediaries to come under federal regulation by registering with the SEC and/or the CFTC.


So then the question is how the CFTC registered intermediaries like exchanges, broker-dealers -- how should they be regulated when they’re dealing with non-security digital assets? Well, today there is no regulatory framework to address the circumstances in which a digital asset that is not itself a security and was once offered as part of an investment contract to be freely traded and for the intermediaries to be registered with the CFTC. So we need to bring a comprehensive federal regime for the spot trading market of digital commodities. And we do that as a part of our bill.


The CFTC will have clear legal authorities over intermediaries in the digital commodity market. They will act as an exchange or will serve customers as brokers or dealers. Similar to how the CFTC -- this is quite similar to how the CFTC regulates the derivative exchanges, so a registered digital commodity exchange would be required to comply with regulations on the moderating of trading activity. We prohibit abusive trading practices. We provide for minimum capital standards, public reporting of trading information, conflicts of interest, governance standards, cybersecurity, and a host of more. But that is similar to but enhanced to what is existent in existing CFTC regulation and approaches.


So what happens if we’re able to pass this bill and before the regulators can pass regulation or enact regulation? Well, we provide for that in the bill. In the Dodd-Frank Act, they contemplated a provisional registration concept, and so in essence the law would apply before regulation is put in place. But there would be a pathway for these institutions to be in compliance with the agency before the regulations are written.


And that means they can’t get away with things like fraud. And they would be protected -- those institutions would be protected against additional actions if they’re provisionally registered with those agencies. And our bill provides a rigorous process for both the agencies and the SROs. But this is frankly the only workable way to bring firms into compliance before the regs are written, and we worked very hard to build out that concept with a committee of Republicans and Democrats having significant conversations about that.


Now, the odds for passage, well, the odds for passage of anything are pretty low. But for this it’s different because it was not a partisan bill for either side of the House Financial Services Committee. We had Republicans and Democrats together vote for passage of both a stable coin regulatory regime and for a broader market structure bill that we’re talking about here, FIT21. Because we had bipartisan votes out of the committee, it leads to an easier pathway to the House floor. In a pretty complicated set of politics right now that you’re seeing covered extensively of what Congress is doing, to have bipartisan support for a major policy initiative is tough in this environment. But when you have it, it enables the unlocking of ideas not just in the policy or bills but into law.


Likewise, you’ve seen senators, in particular Senator Gillibrand, Senator Lummis, work in a bipartisan way to produce a significant market structure bill in the Senate. Our bill will marry up nicely to their approach, and that will enable us to reconcile significant differences between the bills. But the approach is similar. The broad approach is similar. So I think we have a very nice opportunity between the House Ag Committee and the House Financial Services Committee to have productive and real conversations later this year around legislation riding on one of the end of year packages or standalone measure.


The Senate is contemplating around a broader array of financial services or Senate Banking Committee bills. So we’ve got a lot of opportunities to legislate this year. We have bipartisan support in both the House and the Senate for a market structure bill for digital assets. We have the participation by the CFTC and the SEC on feedback on the legislation, the CFTC being much more open and favorable to getting new regulatory powers than -- well, the chair of the CFTC much more open to that than the chair of the SEC. But productive conversations nonetheless in a bipartisan basis with the leadership of both of those important agencies.


So all that gives us an opportunity to leverage significant policy through a complicated set of political math to pass law. That’s taken a significant amount of work over years and the results of a public desire and public need for regulatory framework to enable capital formation here, to enable money to be put to good work for digital innovation and things that can really change the landscape of the internet as we know it. So significant work, more work ahead, but here we are at a phase where the bill is out of committee, not yet passed by the House floor. But good work and good conversations in the House and the Senate on these things. So that’s the outline for it. And J.C., why don’t I hand it over to you?


J.C. Boggs:  Sure. Thank you so much, chairman. You clearly have a sophisticated understanding of a lot of these issues. I think that you’ve been working hard on this. We find that in talking to a lot of the members and staff they don’t have quite that understanding of the issue, but it’s getting better over time as folks study the matter and look at it, including legislation you’ve introduced. If I could ask you, I know yesterday—you mentioned the SEC—you had the chairman visit the committee. Did that shed light on anything or any observations you have on that hearing yesterday?


Hon. Patrick McHenry:  Well, one observation is he didn’t spend a significant amount of time talking about the bill. Very little in fact. And so I think that’s hopefully a good sign. He has his public stance. Chairman Gensler has his stance on digital assets that he’s made very clear. And through their enforcement actions that’s really the only way they’ve spoken as an agency.


And so I do think that gives us a solid opportunity to work out the balance of regulatory powers that the Securities and Exchanges Commission wants to retain. So I view that as overall with significant rulemaking a lot of questions, but in the particulars here for digital assets, it was better. It was a better interaction than what I’ve previously had with Chairman Gensler. That doesn’t mean it’s good, but it means it’s better.


J.C. Boggs:  Yeah, yeah. Well, I know you’re on the run, and you actually did this from the car as I understand it. We’re sorry we didn’t get to see you. I’ve been told many times I have a face for radio, but you’re a good looking guy. So we missed you today.


But let me ask a parting question. We’ve got a lot of smart folks on this panel today and in The Federalist Society generally that take an interest in digital asset regulation. What can we be doing as individuals or members of The Federalist Society to sort of help advance the ball either substantively or politically because we’d like to see some sort of legislation or guidance or framework come out sooner rather than later?


Hon. Patrick McHenry:  Well, I think calling for the need to legislate here -- look, it’s important that we have a smart regulatory frame so you can take legitimate investment dollars into innovative products. Now, that’s a different stance than I have about many, many issues around capital formation where benign neglect would be better than governmental action. In this circumstance the way that we’re going to advance Americans writing the rules of the road for the next internet is for us to get it right, get the regulatory regime right and the law right on digital assets and property rights connected with digital assets.


So the need for that I think is very important to call on policy makers to embrace the need for a regulatory remit here. Property rights are very important, and one of the basic things the government does well is ensure that we have public record keeping of property rights. So there’s a governmental role for us to have smart investments and better outcomes for capital formation, just like ensuring that you have a record system for real estate. This is an important foundational piece for us to get right with digital assets. So I think that would be an important thing for people to ensure that they’re talking to my colleagues about those things.


J.C. Boggs:  Yeah. Well, listen, thank you very much. You’ve been really generous with your time today and your comments. I think we have a lot of agreement in our camp with a lot of the things you said. So I want to on behalf of The Federalist Society thank you very, very much for your time and thoughts today. Really appreciate it.


Hon. Patrick McHenry:  J.C., thank you. I appreciate it, and I think you’ve got a fantastic panel after this. So I’m honored that I get to be the warmup act for them. And my apologies for not being able to be on camera here. It’s been a complicated day here on the Hill, so a lot of work ahead in a variety of other issues. But thanks so much.


J.C. Boggs:  Appreciate your leadership. Thanks again.


Hon. Patrick McHenry:  Thanks. Bye-bye.


J.C. Boggs:  All right. Thank you. Well, that was a great introduction to what can be a complicated topic. And next we go to Brian Brooks who many of you know. I met Brian back a number of years ago when he was chief legal officer at Coinbase in the Bay Area. And he later became the acting comptroller of the currency and now rejoined his old law firm O’Melveny, and I understand, Brian, you’re out in the west coast quite a bit and also east coast, so kind of bouncing back and forth. But appreciate you making time today to join us, and I turn it over to you.


Brian P. Brooks:  J.C., thanks so much and thanks for having me here. This is a great discussion, and I will say I’ve been the warmup act for Patrick many times. I’ve never had the reverse, so I feel like I’ve finally arrived.


One of the things I would say just by way of opening is some people on the call here may be wondering why is this so important. Why is McHenry spending so much time on this, and why are we doing panels like this? And so when you mentioned my east coast-west coast thing just last night I had a dinner in New York on this very topic with people including President Bush’s former chairman of the council of economic advisors, the former FDIC chair, a former CFTC chair, and a number of other agency heads very focused on the critical importance of getting this kind of regulation right. And I’m going to try and spend my five or ten minutes here talking about a specific dimension of why it’s really crucial for American domestic and foreign policy and particularly soft power that we get this right.


So Patrick spent most of his time talking about his FIT21 bill, which is the bill that would provide market structure for cryptocurrency trading. What he didn’t talk very much about was his companion bill on stablecoins, which he spent more than 18 months working with committee Democratic leadership to craft in a bipartisan way. And I want to try and knit those two things together. The importance of his FIT21 bill is to provide a platform on which the tokens that power a set of decentralized networks could be freely traded. And the importance of that is not the tokens. It’s not the trading. It’s the networks.


So a lot of what’s going on in crypto trading is people are essentially buying and selling the equivalent of internet stocks. And if you think about the early days of the internet when it was not yet clear that there was a Google out there and people were beating whether Netscape or AltaVista or Yahoo or a set of other search engines would become the core platform of internet access globally and because the market was able to buy and sell those securities, eventually the market figured out that the strongest of those platforms was Google. And Google became the gigantic company that it is today, and as a result it facilitated the on ramping to the internet for all of the things that we use our smartphones for on a day-to-day basis.


But that could never have happened without a clear regulatory environment for the internet and the stock of companies that were building the internet. Same thing today. That’s what FIT21 is all about is making sure that the market has an ability to weigh in on whether the Ethereum network or Avalanche or Cardano or some other platform will become the smart contract network on which financial services will matter. That’s just background.


What I really want to talk about is why do we care if those networks succeed. And there are a number of answers, but the answer I want to talk about today is the future of the U.S. dollar and the idea that the success or failure of those networks will have a lot to do with whether we can iterate versions of the dollar that will protect its relevance globally in the next generation. So that brings me to the main thing I want to talk about which is something called stablecoins.


Stablecoins are the next iteration of dollar transmission that are in a sort of unbroken line going back 150 years, and I want to describe what that line really is. So long ago, we had banks in which you would hold your deposits. And really the only way for you to transmit value out of your bank account was in the form of something called a bank note, what we think of today as cash. And a bank note basically represented a bank’s promise to pay, based on its creditworthiness, the bearer or the person who was named in the bank note. And eventually those became standardized in our federal reserve system in the form of dollar bills that we used to carry around in our wallets.


At some point the concept of a paper check was invented, and this was different from a bank note. This was no longer a claim on the bank’s creditworthiness. It was a request that the bank pay money directly out of your account to somebody else. That was a big technology innovation like 125 years ago. And then after that, somebody invented the concept of the traveler’s check, which wasn’t a claim on your bank account. It was a claim on American Express or someone else you had paid. And that made it easier for people to pay debts abroad.


And then when that was done, then the very first credit cards were invented in the late ‘50s and early ‘60s. And credit cards were an ability to use debt for short term payments. And then after that ATM networks came out. And then after that pre-paid cards came out. And today we have stablecoins.


These are all different ways of remitting value based on certain kinds of technologies, initially certain accounting technologies, then early computer transmission technologies pre-internet, then internet-based technologies, and now stablecoins riding on blockchains. Stablecoins have a really core purpose in the future of the dollar in the following way, which is the world has been trying in a conscious way over the last 15 years to de-dollarize for a bunch of geopolitical reasons. So when I say de-dollarization, what I mean is that for two generations, certainly since the Bretton Woods Accords, the dollar has been kind of the central reserve currency that is used for trade settlement, that is used for foreign central bank reserves, and a whole set of other purposes, which is terrific for our country. And one of the reasons it’s terrific for our country is because it allows us to purchase goods abroad in our home currency without the need to engage in foreign exchange.


So the way I like to put that is the dollar as a reserve currency basically gives Americans sort of like a 10 percent off coupon in every single thing we buy in the world. We buy oil in dollars. We buy soybeans in dollars. There are all kinds of things that other countries have to convert money before they can purchase and we don’t. And that’s a really good thing.


But the role of the dollar as a currency has been under stress for a while, and there’s some statistics people throw out. But the most common statistic is that in the year 2000 72 percent of central bank reserves globally were held in dollars, and this year that number is more like 59 percent. And nobody knows where between 59 percent and 50 percent the end of the world will come, but it likely is somewhere in that range. And so we’re in a place where the status of our dollar and our purchasing power is at some risk.


There are arguments to the contrary. There are arguments that say that’s not the only measure, but I would argue that when the BRICS countries -- Brazil, Russia, India, China, and South Africa -- met just three weeks ago to talk about trade deals inside of that 3 billion person unit not being denominated in dollars anymore, that’s an urgent risk that we need to take very seriously. And so the relevance of stablecoins -- you may be asking what does this have to do with stablecoins?


The relevance of stablecoins is the following, which is even though governments around the world are looking for ways to price trade and price commodity sales in local currencies and drop the dollar—and they’re looking to do that for geopolitical reasons—their citizens generally would prefer to hold dollars if they possibly could for reasons that are probably obvious. In countries like Argentina where the inflation rate is north of 140 percent or Venezuela where it’s even higher or large portions of Africa or really any country with double digit inflation, which is a majority of the world’s population, every time a wage earner in one of those countries earns wages and stores it in a local bank account, their wages are devalued the moment they’re deposited.


Most citizens of those countries have no access to dollars. Their local banks don’t support retail dollar savings accounts. This is where stablecoins come in. Because stablecoins live on the internet and do not require a bank account but can be held in a wallet on your phone, stablecoins offer a way for people in these countries to hold their wages in dollars rather than local inflationary currency. And as a result there are two or three dozen startups in the world whose entire business is offering dollar savings accounts in Latin America and Africa via these stablecoins.


Stablecoins are simply digital representations of dollars held on deposit in U.S. banks. So the dollars themselves don’t move, but the instrument by which someone is able to access dollars doesn’t require a local bank account. And that’s important for the United States because it creates a revolution from below in terms of dollar demand.


So in the very countries whose leaders would like to drop the dollar, their billions of citizens demand dollars. The only problem we have and the reason this is a good Federalist Society topic is currently the administration is incredibly hostile to crypto in general and to stablecoins in particular. And that is why ranking member Maxine Waters after 18 months of bipartisan work tried to torpedo Patrick McHenry’s stable coin bill just a couple of months ago. Without a clear regulatory framework that specifies who can issue stablecoins, whether deposit insurance is available for stablecoins, and the manner in which stablecoins can be transmitted both domestically and internationally -- without that kind of framework it’s highly unlikely that dollar stablecoins will succeed in the mission of re-dollarizing the world’s economy. But at a time like we’re in today, re-dollarization is really a critical urgency.


And so I would just urge everyone on the call to spend some time looking into McHenry’s stablecoin bill as well as his market structure bill to understand why market structure is important. Without these networks, stablecoins can’t exist. But without sound regulation of stablecoins, their reserve assets, their FDIC insurance status, and similar things, this revolution from below which is so good for our country might never occur. So J.C., I’ll turn it back to you and the panel. But I’m just trying to set the table and let people know why all this matters.


J.C. Boggs:  Brian, thanks so much. You set the table very well. I always enjoy hearing your remarks and observations and particularly looking at any sort of larger global picture here on stablecoins. Appreciate that.


Nextly, I’m going to turn to Pat Daugherty. And Pat, we heard from you earlier this year. We had Congressman French Hill as one of our speakers, and you joined that conversation. You’re a partner at Foley & Lardner in Chicago -- based in Chicago, also an adjunct professor of digital assets at Cornell Law School. And I think you spent many years at the SEC, and rumor has it that you might’ve been the first Federalist Society member from inside the SEC. I don’t know. There may be some challenges to that, but I think that’s pretty good, going back to the late 80s. And you’ve told me digital assets turn you on. So what turns you on about digital assets?


Patrick D. Daugherty:  The entire topic does. I just want to ramify one point that Brian Brooks just made which is the point of view from the rest of the world. In my seminar at Cornell I have students from five continents. That’s significant in itself.


The Americans in the group are somewhat skeptical about digital assets, and the entirety of the U.S. faculty is skeptical about them. But the non U.S. students get it. If you are from Argentina, which do you prefer: a guaranteed 100 percent devaluation of your holdings or a crypto asset that might go up, might go down? And if it’s a stablecoin, it will not move at all. The answer’s obvious. They get it. It's the U.S. where there’s been issues.


Now, congratulations to Chairman McHenry and the bipartisan committee majorities for passing the FIT Act out of committees. The FIT Act does fill a regulatory gap that should be filled. I don’t like to talk about regulatory gaps because one person’s regulatory gap is another person’s momentary glimpse of freedom. But here, this gap should be filled because too many people lost too much money because of misconduct by centralized crypto companies.


Regulation of these cash markets is needed. FTX is the poster child for this plight, but other actors share the blame. The SEC itself is partly to blame as SEC Commissioner Peirce has observed because it declined to evolve its rules and instead drove the industry offshore. This legislation will remedy problems. At the same time, it does not harm financial innovation or technology development. Under the FIT Act regulation is charged to both the SEC and the CFTC. The statute requires the SEC to cooperate with the CFTC as appropriate for sister agencies.


I want to talk a bit about that. Joint rulemakings, the statute calls for joint rulemakings by the two agencies, including rulemakings relating to defining key terms in the act that even go to their own jurisdiction. It is good that the SEC and the CFTC are being directed to cooperate because so far the SEC I will say has failed to cooperate. The CFTC recognizes at least three tokens as non-security commodities that SEC Chair Gensler refuses to acknowledge as such: Bitcoin cash, Litecoin, Eth. In its testimony yesterday, he would not even concede to Chairman McHenry that Bitcoin is not a security. I thought that was astonishing, but that’s the way the testimony went.


So as I read the record, Chair Gensler is trying to reserve the right to claim in his war against crypto that every digital asset is a security. As an aside, he will inevitably lose that war against crypto for the same reason that the Women’s Christian Temperance Union of Evanston, Illinois, lost its war against alcoholic beverages. Globally and in the U.S. multitudes want to buy and own crypto just as they wanted to drink. And decentralized networks and tokens are not susceptible to government control.


You might be able to drive crypto out of the U.S. You shouldn’t, but you might be able to do that. But you cannot stop its spread globally. The IMF flagged this for the G20 in India earlier this month. The crypto genie is out of the bottle now, and it’s not going back in.


At present in the U.S. the SEC is obviously trying to preempt the other agencies, but this is the sort of inside the beltway turf war that I need not remind you at least half of the nation considers repugnant. There is a legal process now that could be invoked by the CFTC to enlist the SEC in a joint process. The Shad-Johnson Accord created that process. I worked for John Shad. I remember this. But that process has been ignored relative to digital assets industry actions so far.


So here we see in the FIT Act that interagency cooperation and joint rulemakings will be mandatory. It’s unfortunate that Congress needs to mandate it, but it’s a good thing. It draws on the expertise of both agencies without giving either one of them the upper hand.


One other comment I’ll make up front, in the act treasury FinCEN is forbidden by the act from banning individual use of digital asset wallets. This is critical in my view. Without it, American citizens stand to lose their right to financial privacy. And without financial privacy, we stand to lose our freedom from government control. As a libertarian member of The Federalist Society, may I remind you the state exists to preserve freedom, not to take it away.


I’ll make a couple three other points if time permits, and I’ll let you tell me when it’s time to yield the floor, J.C. But as far as the statute touches on -- it doesn’t touch on it -- dwells on exempted transactions of digital assets, it requires those exemptions -- it requires the actors to satisfy certain conditions, including shorten claim disclosure about how the assets work and the protocols work, including risk factors. Now, such an offering cannot be made under current law because there is no exemption under current law that would work for a broad public distribution in the U.S. But we have it in the statute.


And Chairman McHenry mentioned the Gillibrand-Lummis Bill and explained how this could fit together with Lummis-Gillibrand. And I agree with that, and generally I favor the Lummis-Gillibrand bill, which is I think very thoughtful. On this topic, though, disclosure, the House approach I view as superior because it sticks to material information. It would not require the hundred pages or 200 pages of disclosure that the SEC currently requires for registered offerings, which invariably fail. So that’s an improvement in my view.


A couple other points, the chairman mentioned certification. I like the decentralization certification process in the statute because it’s the key for exiting the SEC as it should be. Decentralization judgments are challenging to make. There have been regrettable instances where the SEC has been asked to express agreement or concurrence that protocol decentralization has occurred. And the SEC has declined to answer, leaving innovators and their counsel to make that judgment alone. That’s wrong. I don’t blame the SEC staff for it, though. I don’t. But this statute will force the SEC to respond timely, which is only fair to the applicant.


About stablecoins, which Brian spoke about so authoritatively, giving the SEC fraud and manipulation enforcement authority relative to SEC’s supervised intermediaries but giving the SEC no other authority, that is the correct judgment in my view. Stablecoin design and operation raises prudential bank regulation concerns. That should be for the banking agencies to sort out, not the SEC. A couple other points -- have you still got me, or have I lost you?


J.C. Boggs:  Yeah. Pat, why don’t we come back to you? You packed a lot in there --


Patrick D. Daugherty:  Sure. Happy to.


J.C. Boggs:  -- already. Great observations and tied with some of the underlying principles of The Federalist Society too, which is always a bonus. I want to turn to Gary Kalbaugh. You talked a lot about the securities end of things. I think Gary’s going to focus more on the commodities area and CFTC. For those of you who don’t know Gary, he’s Deputy General Counsel and Director at ING Financial Holdings. He’s also a special professor of law at Hofstra University, teaching derivatives in banking. He’s also the author of Derivatives Law and Regulation, I think the third addition that came out a couple years ago, 2021, and also editor in chief of the Futures and Derivatives Law Report. So we have a real expert here and look forward to your remarks, Gary.


Gary Kalbaugh:  Thanks, J.C. Thanks for such a great introduction. And I truly have enjoyed Brian’s and Patrick’s remarks. And in fact I just want to build on what Brian noted about stablecoin. Stablecoin is very similar to a concept that we’ve discussed in policy circles since the mid-19th century. And that is a so-called narrow bank, meaning a bank that does not use fractional reserves.


Instead, the bank has an equivalent amount of assets on hand to the amount of deposits, or liabilities and deposits perfectly match. And it’s all on hand. So they would have gold if we had a narrow bank. It was very uncommon actually -- the implementation of it was very uncommon, but it’s been discussed for quite a long time.


To me this is finally our opportunity to do it. So instead of having the gold amount equivalent to all the deposits, what we could do is have the U.S. dollar be equivalent to all of the stablecoins issued. So you could have that balance that would exist in the narrow bank. I wonder though and I ask this for everybody why FDIC insurance? And I’ve always wondered this. There’s a lot of cross-subsidy issues. Could there be a private insurer market so that people could elect to get insurance and get a different -- especially in a circumstance where there’s not -- I assume these wouldn’t be interest bearing because it’s not a fractional reserve concept. So how is it being paid for? Typically, the banks pay for the insurance based on the amount of their deposit. So just some thoughts to throw out there for us all to reflect on.


Patrick mentioned SEC/CFTC cooperation, and he mentioned Shad-Johnson. I do want to throw in a cautionary note on that. I mean, Shad-Johnson in 1982 resulted in the prohibition of single stock futures in the United States because neither could agree on who had jurisdiction. So they said we’ll just ban it. That outcome is against the purpose of having a regulator. They’re not there to prohibit the market because they can’t do their job, to be direct about it.


In 2000 we finally saw the lifting of that ban. And the SEC and CFTC did do joint rules, and those joint rules resulted in such an onerous regime that today no single stock futures are offered in the United States at all. The last exchange failed about three or four years ago. The margin requirements were too high. So it’s just a cautionary note on how important it is to exercise some stewardship over this process and not perhaps just leave it to these two particular agencies without pretty clear guideposts.


Let’s talk a little bit about the problem here because we’re talking about legislation, and I don’t think any of us would be talking about legislation if we didn’t recognize that there’s a bit of a problem. And some of the problems have already been very well elucidated and identified by my colleagues Brian and Patrick. I want to add a couple of items to the policy concerns.


Mainly, right now we have great regulatory uncertainty as to what the Commodity Futures Trading Commission can regulate. Futures, absolutely. That’s been in their core regulatory competency. Remember, this agency when it and its predecessors were created beginning in 1922 its purpose was to regulate futures in a limited number of grain transactions.


Now, that expanded to other agricultural commodities. It was only in 1974 that the Commodity Futures Trading Commission had authority going beyond these agricultural commodity futures where specifically Congress said, hey, we know this future’s contract is trading, so you should have jurisdiction over it in related spot markets. And it made sense, right, that they’d have jurisdiction over related spot markets. Otherwise, people could influence the futures markets by their trading in the spot markets.


But now we have an inversion of sorts because now we’re looking at the CFTC having jurisdiction over a spot market because that spot market itself is perceived as needing regulation. The concern is no longer this spot market might influence a futures market over which the CFTC has core competency. Instead, we’re looking at the spot market directly. And there’s some precedent for that in retail commodity regime, in retail foreign exchange regimes, which came into effect beginning in 2000, 2008, 2010.


Putting that aside, 1974 something happened. There was a lot of fraud in precious metals. And so in 1974 the Commodity Futures Trading Commission which previously had jurisdiction over commodity futures and related spot market transactions, suddenly had the same thing. But the definition of commodity went from being just this narrow group of agricultural products to being some people say everything. And here’s the problem, and I’m just going to cite a little bit from the definition of commodity. “Commodity means all goods and articles and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.”


Now, I provided a very truncated version of that definition. This is a problem. What does “in which contracts for future delivery are presently or in the future dealt in” mean? Well, with bitcoin we saw in 2018 in CFTC v. McDonnell we saw a court in the eastern district of New York say that means everything. There was no bitcoin futures contract at the time. There was no digital assets futures at the time, no cryptocurrency futures at the time. And the court said the Commodity Futures Trading Commission has jurisdiction over the related spot market with respect to manipulation and fraud because this fits within the definition of commodity.


So it’s an extremely extensive definition of commodity that would include just about everything in the world. That’s a bit of a problem, and this is why we look at legislation as a possible solution because we have two problems on either end of the spectrum here. One problem is that extremely extensive definition which includes just about everything. Does that mean that the Commodity Futures Trading Commission can regulate the extremely robust sneakers spot market? There’s a very robust spot market in sneakers. No discussion of futures in sneakers. But based on that extensive interpretation of what commodity means the Commodity Futures Trading Commission would have that authority.


And why is that a problem? We say, well, it’s antifraud, antimanipulation. Well, there’s something called spoofing where I put a bid or an offer without really intending it. That’s manipulation. Now, if I do that with a sneaker offer -- I’m 16 years old, and I’m trading sneakers. And I bid on something without really intending to do it. I’m hoping my bid isn’t accepted. And I withdraw it before it’s accepted. Are we really suggesting that the Commodity Futures Trading Commission is the right agency or that we need any federal agency to exercise authority over this? It’s a policy question.


On the other extreme, some people look at that definition and they say hey, only if something is specifically trading as a futures contract does the Commodity Futures Trading Commission have related spot market jurisdiction. Okay. So if we look at that a little too narrowly, imagine we had a Fuji apple futures contract. Then I could manipulate the Gala apple spot market. And the Commodity Futures Trading Commission would have no jurisdiction. So there’s a medium, intermediate solution which is that they have jurisdiction over things of the same category.


Because the Commodity Futures Trading Commission has in the past taken the extensive or made arguments that implicitly assume the more extensive version of their jurisdiction, this legislation is helpful in clarifying the extent of the Commodity Futures Trading Commission’s jurisdiction. And I would take it a step further. I would suggest that it clarifies the definition of commodity generally and the CFTC’s spot market jurisdiction to largely truncate to when there’s a related futures market currently operating.


With digital assets, an exception ought to be made to provide more extensive spot market authority, including the ability to regulate spot market transactions. The legislation achieves a lot of this. I would just recommend it go a step further and clarify that amorphous definition of commodity that leaves us uncertain and leaves an entrepreneur uncertain as to whether they’re in the CFTC’s purview or not. And a very similar issue to what we find with some of these coins, cryptocurrencies that were issued where folks are now completely uncertain are they going to be in the SEC’s jurisdiction -- a very similar issue which is why we’re very glad to have some sort of legislative solution at this point.


J.C. Boggs:  Gary, thanks so much for that. Next speaker, last but certainly not least is Paul Watkins, with a W, which is why you’re last on this panel. And I’ve known Paul for some time. He’s now partner at Fusion Law. He formerly headed up the innovation lab at the CFPB and was also a former civil division chief in the Arizona Attorney General’s Office, where I think we first met. Paul I should note is also chair of The Federalist Society financial services e-commerce group or committee. So thanks for your leadership there, too, Paul. I’m going to hand it over to you.


Paul Watkins:  Thanks so much, J.C., and what a privilege to be on this panel and be part of this discussion. I know we’re running up into Q&A here, J.C. So I’m going to try to be brief.


We’re talking about federal regulation of digital assets. And I want to ask the question are we looking in the wrong place? Is Congress structurally unable to develop a regulatory framework that promotes innovation and protects consumers? And I think the answer might be yes for a number of reasons.


When Congress acts, it’s acting in a way that’s national with very significant consequences that makes it very hard for them to act. There is considerable amount of risk that, for example, is not present for a state. Also, I think we need to acknowledge that Washington, D.C., is an incumbent town. Incumbents have the sway.


We have the strongest counterexample to that point on the panel today, which is Brian Brooks who ran an agency coming from an incumbent company, Coinbase. I’m not aware of any other regulator from either party with that background. And I think that proves the point that it is very difficult for challengers to come into Washington, D.C., and have a voice in this process.


When we’re talking about digital assets and specifically stablecoins, we’re also talking about an area where the federal government itself is a market participant. It is very clear from the President’s Executive Order on digital assets that developing a central bank digital currency is a high priority for this administration. When you look at that Executive Order, I think the first five directives were about developing a central bank digital currency. That is a direct competitor with a stablecoin, and it’ll be issued by the Federal Reserve.


And if you look at the stablecoin bill -- and I have a tremendous amount of respect for Chairman McHenry. I think this bill is probably -- if you’re going to try to get a bill through Congress, this is probably about as good as you can get. But look at the compromises that have had to be made.


The Federal Reserve has enforcement authority, which they essentially get to define. They have regulatory authority. They get to supervise the activities of stablecoin issuers that are chartered by state banks. And down the road, this is the same Federal Reserve that will be running a central bank digital currency and will also be supervising the primary competitor in the form of a stablecoin.


What is that agency going to do? I think it is not going to optimize efficiency. It’s not going to optimize competition. And so should we have a different approach? And let me suggest something that might be a long shot but I think it may be our best shot here. And that’s a two part strategy.


The first is consistently litigate overreach by federal regulators from any source, and the second is develop state-based regulatory frameworks. The states have been so far, I think, the heroes in digital asset regulation. You have New York which came out with a bit license which initially was not very successful. Unlike, I believe, maybe any federal agency on this topic, New York realized its problem, corrected itself, changed course, and came up with something that is now workable. Wyoming took a different approach. Both of these states moved forward.


If we encourage those sorts of regulatory framework and encourage coordination, we have the ability to see these projects launch at a somewhat limited scale still subject to supervision and still subject to federal fraud enforcement. I would suggest that that is the path we should be pursuing today to maximize innovation and protect consumers from fraud that we know comes up with every new source of innovation. So with that, J.C., I’ll turn it back to you for more discussion and Q&A.


J.C. Boggs:  Appreciate that, Paul. And I’m going to stay on that topic for a minute while I’ve got you, and of course you came from the AG’s Office in Arizona and then went over to the CFPB and ran their innovation lab in the regulatory sandbox, so giving states a more flexible ability to try things out. So what’s going on in Wyoming? You hear a lot about that. Have the states’ efforts to support the crypto-focused banks been set back by the Federal Reserve’s concerns about the industry? So far none of these states as far as I know -- the new special purposes depository institutions have received federal approval for a master account. So what’s going on there? Paul first and if others want to jump in, love to hear that too.


Paul Watkins:  Look, there is significant headwinds here, and there’s significant challenges. I think one of the benefits of the master account is the ability to access the Federal Reserve’s transaction network. And right now, that’s how money moves. And that’s quite significant and quite important. But right now we have stablecoins. We have USDC with no federal license. It’s licensed and supervised at the state level, and that is a product you can go out and you can use today.


Now, there may be a better way to supervise that. There may be a better way to regulate it, but I don’t think it requires a federal law that says all stablecoins that are not permitted stablecoins are banned. I don’t think it requires us to say we’re fine with the level of innovation that’s happened so far in the market and we’re willing to cap it. And this is enough.


So there’s certainly challenges. And part of this I think is the states have approached this as competitors. We’re going to be unique and distinct and try to get all the businesses here. I think if the states or some subset of the states would recognize their shared interest I think they would have a lot more power. For example, New York has developed framework for stablecoin regulation. If you saw a couple more states say, you know what, that’s good enough for us; maybe we’ll work on doing something a little bit different, but for now we’re going to accept what New York is doing, I think that you could see additional certainty develop that way.


And you know what? Maybe there would be enough of an impetus overtime that there could be payment rails outside of the Federal Reserve. And maybe that would be a good thing long term anyway, and that would help reduce some of the bottleneck around the master account access.


J.C. Boggs:  Yeah. And I think a good segue to Brian. Yeah, go ahead.


Brian P. Brooks:  Yeah. I was just going to jump in on this and say I think one of the problems when we talk about this is if you frame this in terms of crypto, how come a Wyoming crypto bank can’t get access to the Federal Reserve, you tend to elicit one reaction. When you ask the question slightly differently, though, you will get a different reaction. The way that I ask the question is why is the United States the only country in the developing world that only allows insured depository institutions access to the payment rails?


So forget crypto. How come Stripe and PayPal have no access to the Federal Reserve payment system and they have to piggyback on top of a megabank which adds gigantic friction in the process in order to access the Fed? I’m going to argue the issue is not crypto. The issue is the Federal Reserve’s approach to banking generally.


We need to think about open banking in this country as a real matter of urgency. If we’re going to compete with the EU, the UK, Japan, or any of our G20 peers, all of whom have licenses for non-depository financial services companies to access basic central bank clearing services, until we have that, we have bigger problems than just crypto. But I’m going to argue it’s not just discrimination against crypto banks. It’s discrimination against tech companies generally in favor of incumbent insured depositories which is fairly unique in this country globally.


J.C. Boggs:  And that raises a larger companies. Why are crypto companies looking outside the U.S. for growth?


Brian P. Brooks:  I think I may have just given you part of the answer.


J.C. Boggs:  Yeah. Exactly. Some of the regulatory -- will within the administration and the various regulators seem to not foster innovation but stifle innovation in the American competitor, so it’s a natural thing when they want to go to where they get a better opportunity. But you looked at the larger picture with the Federal Reserve and open banking. And Brian, when you were the chief banking regulator at the OCC, the comptroller, you had some significant I would say landmark rules or guidance that allowed national banks to get into the space. Update me. Has that been reversed since you left, or does that still stand as a policy for the administration?


Brian P. Brooks:  Well, you know, it’s funny. One of the first things that happened in this administration in I want to say April of 2021 was the OCC put out an interpretive letter assessing all of the crypto related guidance that had happened on my watch. And bizarrely they adopted and agreed with it, and that honestly is because we had a lot of great Federalist Society members working at the OCC when I was in charge. So we really lawyered the heck out of those letters. But the administration said, yeah, we do agree actually that banks do have the legal authority to custody crypto assets, to participate in stablecoins, etc., etc.


They agreed with all those things. But what they said is, nonetheless, we will not allow a bank to exercise those legal powers unless we give them specific nonobjection in a specific case. So basically it said you can stand in line for permission to exercise your legal authorities. And they haven’t really granted anybody permission to do that since that time.


So the one legacy that remains is one of the three banks that we had approved for a bank charter, Anchorage Bank, made it all the way through the process, and their conditional approval was converted into a bank charter. And they continue to operate as a national trust bank inside of the OCC system. The other two banks that received conditional approval never got across the finish line. And the administration was at pains not to extend that timeline. So they’re out. But there is one bank in the system, Anchorage, and that maybe provides a road map for future comptrollers.


J.C. Boggs:  Pat, you look like you want to say something. I’m just going to -- we started just five or ten minutes late, so I’m going to take the chairman’s prerogative and go another five or ten minutes into our conversation so we don’t have to cut it off too shortly. I think this is fascinating. I’d be interested -- Chairman McHenry talked about legislation, the FIT Act and the stablecoin bill. I’d be interested to get your comments. Is there anything you’d change or recommend they do otherwise? What’s good or not good in the bill? Maybe Pat, I’ll come back to you.


Patrick D. Daugherty:  I’ve got some I’ll call them drafting comments on the bill, nothing structural. I think the list of ancillary activities -- ancillary activities are those things you do on chain. And they are exempted from this bill, as they should be. Whatever you do to secure the blockchain, for example, should be exempted from SEC and CFTC regulation. So I think that list should be elaborated beyond what’s in the bill.


The definition of digital asset I think could use some work as well. Digital asset issuer could use some work. What disintermediation means could perhaps use some work. That’s a very complex subject. Generally it means that there’s no single person in control of the protocol who can change it or prevent changes according to his will or the small group’s will. But there are some other requirements that I think have gotten into this bill by way of compromise that are extraneous and really should go.


There’s a lot of compromise in this legislation, just as Paul Watkins has noted, I think in the effort to create a bipartisan bill. Some of it may be inevitable. If I could segue off of one of Brian’s points, he mentioned Anchorage, which is a client, but I’m not carrying the water for them here. And in a moment you’ll know that because they have essentially a monopoly because other applicants have been told to go away. And the Fed and the banking agencies say that they’re open to other banks taking on specific crypto activities, but they haven’t actually enabled it yet.


So is it a good thing for the government to essentially create a monopoly in this area? I’ll let competition law experts comment on that, but I flag that it has happened because of the backing off from the positions that Brian and his team took when they were running OCC. I’ll just leave it at that.


J.C. Boggs:  Okay. Gary, you just flagged for me we have a number of questions in the queue there which I didn’t see earlier, so I apologize. But one of the questions is to what extent -- and this is from Burt (sp). To what extent will the United States’ status as the world’s largest debtor nation, which is worsening by the day, impair the willingness of non U.S. citizens to hold dollar denominated stable coins? Anybody want to take that one?


Brian P. Brooks:  Well, maybe, J.C., I can jump in. This was a subject of a lot of discussion last night. So the way I framed it -- and I was a little bit worried about saying anything like this in front of Glenn Hubbard because he really knows what he’s talking about, and I’m sort of making this up.


But here’s what my theory is. My theory is that the role of the dollar in the global system depends on some combination of three things. First is the strength of the economy, meaning the overall productivity, the level of activity, the diversification, etc. That’s one of the factors.


A second factor is policy, which has to do with a combination of both fiscal and monetary policy. How many dollars are being printed and what kinds of deficits are we running? And then third is utility, how easy is it to access this asset relative to other available assets that somebody might hold abroad.


And I think on the first two issues, the size and scale of the economy, the dynamism of the economy, and policy one might argue those are headwinds to dollar adoption. Our rate of growth has slowed dramatically in the last three years for a bunch of reasons. We’ve crowded out private activity in favor of wealth redistribution. We’ve run enormous deficits. We’ve engaged in spending on things that I think many people on this call would regard as unproductive. So that’s an economic issue.


On the policy front, we’ve engaged in money printing for a long time, now followed by very, very rapid significant rate increases, which makes it very hard for the economy to continue forward. Those things are both difficult. So the point about stablecoins is we can push on the utility lever, which is if you are a person who lives in a country whose policy is even worse than ours and you’d like to hold dollars by for example instantly converting your wages into dollars and using them to by dollar stablecoins so that tomorrow’s inflation won’t affect you, we can make that happen if we choose to. The technology exists.


That’s the whole point of these internet enabled stablecoins. I can be an Argentine wage earner in Buenos Aires, and I can immediately on the day I receive my wages log onto Coinbase or some similar platform, buy a bunch of USDC tokens, and hold them as a dollar savings account. I can do that. But I can only do that if USDC’s allowed to operate.


And for that to happen, something like the McHenry bill has to get passed. Otherwise, the ability to scale up will go away. So three things, size and scale of the economy, policy choices, and utility. If utility’s all we have to press on, we should I would argue.


Gary Kalbaugh:  J.C., if I could pop in here, and Brian, this might be punting it back to you. I think Julius Locers’ (sp) question is directly a perfect follow on in this. Would a stablecoin issuer selling to an Argentinian refuse to accept Argentine currency or severely discount it? How does that transactionally happen? I say I have this super highly inflated currency, so I want to ditch it for U.S. dollars quite reasonably because tomorrow it’s going to be worth half of what it is today versus U.S. dollars. How do I do that? Especially by the way with Argentinian pesos, there’s no real offshore market and physical -- there’s no physical market.


Brian P. Brooks:  So look, I think there are two answers there, Gary. One answer is there are two components of Argentine currency risk. One is foreign exchange risk, and the other’s inflation risk. So the way that I think about it is on any given day there is an exchange rate between pesos and dollars. Tomorrow, your ability to buy the equivalent amount of dollars will be worse than it is today because of the high inflation rate.


So you’re correct that a given exchange in Argentine, Mercado bitcoin or Bitso, the major Latin American exchanges, might not be willing to accept pesos. They may only accept Brazilian reais or dollars. But my point is if you convert your wages into one of those currencies on the day the wages are received and invest them in dollar assets versus if you don’t convert them that day and wait a week, the exchange rate will be whatever it is. And it fluctuates every minute.


But the inflation on a secular basis irrespective of exchange rates will mean that the number of pesos that were equivalent to yesterday’s pesos need to be higher. So I’m envisioning a world where people just simply auto convert immediately as wages are earned and put them in the safest asset that they can find, namely dollar stablecoins.


Patrick D. Daugherty:  That’s my view as well. And I will add the point that we are talking about central bank monetary policy and fiscal spending and resulting inflation. There’s also the matter of distrust of central banking institutions. We don’t have a wide level of distrust of central banking institutions, by which I mean commercial banks, in the United States. But in much of the developing world there’s tremendous distrust, distrust not only in government but also the banks that are there to serve you. So I think that’s another headwind for the growth of this outside the States.


Brian P. Brooks:  I think that’s right, and I would just comment that that I think is one reason why the policy discussion around this in the U.S. is so different from other cases because in this country, for all of our 9 percent inflation last year and our SPP failure and everything, it still works pretty well. And so we don’t understand why any of this matters.


Patrick D. Daugherty:  Right, right.


Brian P. Brooks:  But if you travel abroad, you very well would understand.


Patrick D. Daugherty:  Right. I worry about a lot of things, but I don’t worry that J.P. Morgan Chase is going to steal my money. In parts of Latin America, Africa, and to go on, that is a risk.


Brian P. Brooks:  Yeah. Remember, it was not that long ago that in Argentina the Argentine government simply declared that they would repay you tomorrow in a haircut currency.




Gary Kalbaugh:  Or if you’re a Canadian truck driver.


Brian P. Brooks:  One hundred percent.


J.C. Boggs:  Well, another question came in about the U.S. dollar has even in a domestic context become a powerful policy lever with disastrous effects in terms of inflation, unintentional effects on the viability of U.S. trade. The question is wouldn’t re-dollarization of the world create even more reasons for the government to use monetary policy to achieve local and international goals as opposed to other safer mechanisms?


Brian P. Brooks:  So again, I’ll throw out a hypothesis which is that exists as long as the dollar is a reserve currency, which it is today. And so we’re left with sort of what are the alternatives kind of a conversation. So if alternative A is let’s allow de-dollarization to turn us into Britain, there was a time when sterling was the world’s currency. And Britain is not the same country it was because that’s no longer the case.


Or we can do something which modestly preserves the Fed’s current -- I wouldn’t even say the Fed, the administration’s current ability to tax and spend and tax and spend and devalue, but it’s all relative to what? And what I would argue is the benefit that all Americans receive by having unique status given to our currency far outweighs the marginal increased incentive that the government currently has to spend. Let’s face it. One of our parties in this country has an ideology that believes spending is inherently good. That’s not going to change with this. It’s just that the impact of it will be worse.


Paul Watkins:  J.C., can I jump in on that question --


J.C. Boggs:  Yes, please.


Paul Watkins:  -- as well? Just to approach it from a different angle, not so much the global aspect, but when you think about the dollar, our financial regulatory system is much more politicized than I think it has ever been, partly because of what I think are some correctly decided Supreme Court decisions, like say the law which says the CFPB director can be fired. What that means is the President now has more direct control over federal financial agencies than I think at any other time.


At the same time, you can’t pass bills through Congress. At the same time, the technology of the dollar is changing dramatically where it is a much more powerful policy lever, especially as we get closer to central bank digital currency. And what that means is that we need a lot more competition than we have had historically at this level. And again, I think that’s a reason for some sort of state-based system that is outside of this federal purview because we have not had this confluence of events before of highly politicized actors now managing a very powerful policy instrument that we haven’t seen before.


J.C. Boggs:  That sounds like maybe Washington, D.C., in the wake of Dodd-Frank has become the financial capital of the world, like New York and L.A. -- or London and others. We have -- this is a great discussion. There’s a lot of things we could talk about. We didn’t really get into CBDCs. We could have a whole other webinar on that issue. So as we kind of get close to wrap up, I just maybe throw it out there around the table again if you have any kind of final thoughts or predictions on what the future of cryptocurrency regulation might look like. You may respond to somebody earlier, just kind of final parting thoughts before we wrap up. And Pat, why don’t we start with you?


Patrick D. Daugherty:  I’m worrying because I think Paul is absolutely right about too much power in the hands of the federal banking authorities. Central bankers don’t like competition, and central governments don’t like competition. So if you say that all stable coins must be essentially chartered and regulated by the feds and they then go to CBDCs, they will squeeze out the stablecoins. And then now when you go to retail CBDCs, tremendous loss of personal financial privacy and freedom. Tremendous loss of freedom. And I’m not sure everyone sees that endgame the same way I do, but I worry about it a lot.


Brian P. Brooks:  Yeah. I would just say hear, hear to that. I am deeply concerned. The Canadian trucker protest was mentioned a moment ago, created by my college classmate the finance minister of Canada. So that was a shocker. That is what a CBDC world looks like. I will say there are a couple of models of that, however. And I look at my friend Roberto Campos who’s the governor of the central bank of Brazil.


There they have built a CBDC platform that is open sourced and interoperable and freely allows private stablecoins to travel across the same rails and compete. So in a theoretical world, at least it’s possible for markets to speak in that sense, although no market will ever be as big as the central bank. That’s not the approach our Federal Reserve is going to take. Believe me. The Federal Reserve Rails will not be accessible to Tether or USDC.


J.C. Boggs:  Sort of an oxymoron there, too. The distributive ledger technology is supposed to be decentralized. Now you have a centralized decentralized ledger technology with a CBDC. But Paul or Gary, do you have any parting observations?


Paul Watkins:  My closing comment is I’m not sure that the federal agencies have as much authority here as we’re assuming, and it may be possible to get a better hearing from a court than you can get right now in at least some committees on Capitol Hill.


Gary Kalbaugh:  Yeah. Great observation. And I just have two things to note. One is the questions were amazing from our participants. I would love to be in a room with you all. I would learn a lot, so hopefully some of you go to FedSoc events that are in person. I’d love to meet you. Fantastic questions.


The other item is where will legislation end up? I think it’ll end up in a much more simple form. I think we’re going to see Howey and Reves by legislation a more tailored version applying to digital assets that is tailored specifically. So we’ll see a legislative regime in a sense supplant those court decisions defining investment contract. That’s a very simple fix. Just change the definition of security. So it’s just one section that needs to be changed at the 33 act.


Secondly, on the commodities side, I think we can also just see merely a change to the definition of commodity, and it solves for 90 percent of the issues that the FIT Act is trying to solve for. So I’m an Occam’s razor sort of guy. I think because we have pretty simple solutions that are readily available I think those solutions are the likely outcome and maybe the preferable one.


J.C. Boggs:  Well, Gary, you had the last word. I want to thank all of you. A tremendous conversation, discussion today. Thanks to Financial Services Committee Chairman Patrick McHenry for joining us as well. I’d be remiss if I didn’t mention the leadership of Alex Pollock who chairs the cryptocurrency working group. This would not have happened today without Alex’s leadership and prodding. And Sam, thank you for helping put this together as well. And as well as our audience for being here today, very thoughtful questions and I appreciate your interest. Sam, back to you.


Sam Fendler:  Well, J.C., thank you very much and on behalf of The Federalist Society I want to thank our panelists for your valuable time today. I also want to thank the congressman for being with us and J.C., of course to you for facilitating such a great conversation. I also want to thank our audience for joining us. We greatly appreciate your participation. Please, check out our website, fedsoc.org, or follow us on all major social media platforms @fedsoc to stay up to date with announcements and upcoming webinars. Thank you all once more for tuning in and we are adjourned.