Congress’ First Ever DeFi Hearing; DEF at Cato Event

Congress’ First Ever DeFi Hearing

What happened? 

Last week, the House Financial Services (HFSC) Subcommittee on Digital Assets, Financial Technology and Inclusion held Congress’ first ever DeFi-Focused hearing: "Decoding DeFi: Breaking Down the Future of Decentralized Finance.” DEF’s Chief Legal Officer, Amanda Tuminelli, testified before the committee, emphasizing DeFi’s ability to promote financial inclusion while also highlighting the challenges posed by the current untenable regulatory environment. Other witnesses included Polygon Chief Legal Officer Rebecca Rettig, Coin Center Research Director Peter Van Valkenburgh, Universal Decentralized Holdings Corporation's Chief Legal Officer Brian Avello, and Americans for Financial Freedom Senior Policy Analyst Mark Allen Hayes.

Subcommittee Chairman French Hill (R-AR) opened the hearing stating, “Decentralized Finance envisions a financial system that’s permissionless, transparent, efficient, and built on top of blockchain networks. It’s based on the fundamental idea that individuals should have the freedom to transact without the fear of illegal financial surveillance or abuse by governments. By substituting intermediaries for autonomous, self-executing code, decentralized finance can shift the way the financial markets and transactions are currently structured and governed.”

Amanda’s opening statement left the subcommittee with two main points: First, DeFi is different from, and an improvement upon, traditional finance, because it does not rely on intermediaries. And second, the existing approach of demanding that DeFi look like, function like, or be treated like traditional finance has not and will not work. Amanda explained to the committee how DeFi enables open-access, peer-to-peer transactions in which users self-custody their assets, embodying DeFi’s financial inclusion and addressing the pitfalls of traditional finance.

Furthermore, Amanda articulated to the committee why the current regulatory approach to DeFi is failing: “Existing law assumes that there is some identifiable entity that can take possession of my funds, collect information about my transaction, and even block a trade, but that entity does not exist in DeFi. The untenable position between the law as it stands and the reality of DeFi technology has led to an increasing amount of regulatory uncertainty…..That's why judges in multiple district courts across this country have called on Congress to make new rules regarding digital assets, and this chamber has supported bipartisan efforts and signaled that the status quo is not working for DeFi and digital assets.” 

Other witnesses opened by highlighting concerns regarding financial privacy and the risk of “reintermediation” via government regulation. The minority witness, Mark Allen Hayes, recognized how DeFi promises to eliminate powerful intermediary gatekeepers and offers a new tool for access to finance and wealth building. However, Hayes alleged that crypto markets have issues with volatility, predatory business practices, ingenuine decentralization, fraud and abuse, underscoring the need for market oversight and regulation to ensure transparency and prevent investor losses. Therefore, Hayes argued that Congress should work with regulators to use “their existing regulatory authorities” and to hold DeFi accountable to existing laws and regulations. 

Criticism of DeFi in the hearing centered on “genuine” decentralization, cybersecurity threats, and illicit finance risks. However, witnesses pushed back on each of these lines of criticism, noting that cybersecurity threats are not specific to DeFi but rather a risk to all internet technology. Witnesses also touched on illicit finance concerns brought by Democratic members, noting that public blockchains are, in fact, one of the worst ways for illicit finance to be conducted as transactions and wallets are easily identifiable and traceable. Witnesses highlighted industry efforts to partner with law enforcement to identify and stop bad actors, incentivize reporting, and improve consumer education. 

Generally, the hearing underscored the need for regulatory clarity on digital assets, specifically touching on the Securities and Exchange Commission’s (SEC) overly broad “Exchange” Rulemaking, Internal Revenue Service’s (IRS) “Broker” Rulemaking, and concerning DOJ prosecutions of allegedly “unregistered money transmitting businesses” (in direct contradiction to the Financial Crimes Enforcement Network (FinCEN) 2019 Guidance) - all of which would capture DeFi protocols and developers. 

Rep. Sean Casten (D-IL) took aim at DeFi developers during the hearing, suggesting that

DeFi developers who create and deploy neutral code should be held criminally liable for the illegal actions of third parties. Amanda pushed back stating that, “I think bad actors should be held liable for the bad conduct that they engage in, not the developers, not the people who created the software. It’s the bad actors who actually committed the crime. We should go after them.” After further pushback from Rep. Casten, Amanda continued, asserting that, “if I make a neutral tool that somebody uses to commit a crime, I should not be held responsible for that person’s conduct.” Directly after this exchange, Rep. Warren Davidson (R-OH) cautioned that under Rep. Casten’s theory of liability, Google would be held criminally liable for the third-party use of their Google Maps function to navigate to commit a crime. 

Several Members also expressed concern about the off-shoring of the American DeFi industry due to regulatory uncertainty and incompatibility. The hearing ended on a more positive note, with Rep. William Timmons (R-SC) seeking bipartisanship, stating that, “I think we can all agree that [DeFi] is the future of technology. There’s going to be disruption associated with it, but we need to lead the way and not have the enormous amounts of resources invested in what is the future go offshore.”

Read Amanda’s full written testimony here. 

What does this mean? 

This hearing represents a significant moment for the DeFi industry. Many Members recognized the promising innovations of DeFi and demonstrated a solid understanding of DeFi’s incompatibility with the current regulatory approach. 

We look forward to continuing to work with Congress to address these core issues. 

DEF at Cato’s “Financial Privacy under Fire: Protecting and Restoring Americans’ Rights”

Last Thursday, DEF’s Miller Whitehouse-Levine spoke at an event hosted by Cato’s Center for Monetary and Financial Alternatives: “Financial Privacy under Fire: Protecting and Restoring Americans’ Rights.”

Miller spoke on a panel on decentralization and financial privacy where he touched on, among other things, the tension between individuals' desire to transact privately and the governments' belief that the current financial surveillance regime must remain intact to achieve policy objectives.

You can watch the full event and Miller’s panel at the link.