Congresswoman Maxine Waters (D-CA), the top Democrat on the House Financial Services Committee, delivered the following testimony in front of the Rules Committee on H.R. 4763, the “Not Fit For Purpose Act” and H.R.5403, a bill to prohibit any issuance of a central bank digital currency (CBDC).
Thank you, Chairman Burgess and Ranking Member McGovern, for the opportunity to testify here today on H.R. 4763, sponsored by Rep. Thompson, and H.R. 5403, sponsored by Representative Emmer.
Let me begin with H.R. 4763, which should be called the “Not Fit for Purpose Act.” We have seen many efforts by Republicans to weaken safeguards for various industries, but this is perhaps the worst, most harmful deregulatory proposal I have seen in a long time. It reminds me of the time that Congress passed the Commodity Futures Modernization Act, or CFMA, which passed in 2000 in response to intense lobbying by the financial industry, claiming that the bill would provide legal clarity and promote innovation. At that time, the Chair of the Commodity Futures Trading Commission, Brooksley Born warned that failing to put guardrails around so called “over the counter” derivatives would cause significant harm, but Congress instead listened to the financial services industry pressing to ensure there were no rules. And, Mr. Chairman, less than a decade later, those same derivatives blew up our economy when AIG collapsed because of its unregulated derivatives exposures. And now, Congress is hearing similar arguments about the need to take off the guardrails for crypto.
While Mr. Hill focused his remarks on this bill on how it would apply to crypto, I want to be very clear that this bill is NOT just about crypto; it would affect traditional securities also. Specifically, the bill defines two new asset classes: (1) digital commodities and (2) investment contract assets. Crypto that meets the definition of a digital commodity would be able to switch from SEC’s purview to a higher lighter touch regime under the CFTC. This is highly problematic for several reasons, but I’ll just list two:
First, Congress never intended the CFTC to become a regulator for financial instruments that are directly or indirectly sold to retail investors. The bill does not remedy this fundamental issue. The bill puts the responsibility to regulate without, for example, providing CFTC general authority to go after fraud, market manipulation, or -investor practices, similar to the prophylactic authorities the SEC has today.
Second, while the bill has some disclosure requirements on issuers of digital assets, these requirements cease 180 days after the digital asset becomes a digital commodity. So, even as these products get marketed at CFTC-regulated crypto exchanges, the CFTC would have no authority to require ongoing, fulsome, reliable, and audited financial statements from the issuers, or even information on what the issuer of the digital asset plans to do with the investor’s money.
What is even more problematic is the bill’s definition of —quote “investment contract assets.” Securities that meet this definition would be transferred into a regulatory void, with no primary regulator and virtually no laws and regulations to speak of. Importantly, the definition of investment contract asset is not limited to crypto, and it would be fairly easy for both crypto and traditional securities to be formatted to meet this definition.
Moreover, this new category of asset was added after this bill was marked up by the Financial Services Committee and the Agriculture Committee, so this is the first time that we have been able to discuss the impacts of these dramatic changes.
By stripping the entirety of the securities law framework for this class of assets, this bill would eliminate critical protections for investors, consumers, and the markets built over the past 90 years, including:
- A private right of action;
- Protections against conflicts of interest;
- Disclosure requirements that provide market transparency;
- Enforcement by states; and
- Enforcement by the SEC.
Ultimately, the massive loopholes in this bill would degrade investor trust, cause broad market uncertainty, and allow fraud to proliferate, resulting in devastating losses for not just crypto consumers, but also for non-crypto investors who are trying to save for retirement, college, or other life goals. By degrading investor trust in our capital markets, this bill would also make it more expensive for businesses, both big and small, to raise capital, and ultimately raise the cost of a broad range of goods and services for everyone in America.
The SEC is the federal agency on the front lines of enforcing our existing securities laws on crypto firms who willfully chose to ignore the law and that have already defrauded customers out of billions of dollars with “get rich quick” schemes. Giving this industry a free pass to avoid most or all regulations cannot be the answer to the serious concerns that Members have raised about crypto fraud and the prevalent use of crypto by human traffickers and drug traffickers. For all Members who are concerned about fentanyl coming into our country, and young women and girls being trafficked, I urge you to remember that the preferred currency of these criminals is crypto. I would strongly urge Members to oppose this bill.
Now, let me pivot to talk about Mr. Emmer’s bill, H.R. 5403. This bill prohibits the issuance of any central bank digital currency, or C-B-D-C, by the Federal Reserve. This includes the Federal Reserve’s current CBDC pilot projects with U.S. banks and foreign counterparts to facilitate faster and less costly cross-border payments.
By prohibiting all CBDCs, the bill threatens the very primacy of the U.S. dollar and the power that affords our nation. Today, the U.S. dollar is the global reserve currency, with more than half of all international trade done in dollars. But the world is looking at how to speed up transactions and reduce costs, including by issuing their own central bank digital currencies.
Currently, 13 nations are racing forward with CBDC development, including our G-7 peers, which are in far more advanced stages of CBDC development than the U.S. In fact, if this bill becomes law, we would be the only country in the world to ban a CBDC.
The dollar’s dominance today also makes economic and trade tools like U.S. sanctions so potent, allowing us to leverage access to dollars and U.S. markets as a national security response to adversaries like Russia and Iran. However, our adversaries, notably China and Russia, are developing their own digital currencies to hopefully be an alternative to the dollar, enabling them to undercut our economy and sidestep U.S. sanctions.
If this weren’t bad enough, the nonpartisan Congressional Budget Office highlighted an issue Committee Democrats raised during markup, which is that the bill’s sweeping definition of a CBDC can be interpreted to encompass ALL of the Federal Reserve’s digital liabilities, such as bank reserves. This means that the bill could seriously impair the Fed’s monetary policy tools and its ability to combat inflation, and it could also disrupt critical Fed systems that facilitate the movement of payments between banks. This appears to be a deliberate backdoor way to advance Trump’s agenda to undermine the Fed.
It is ironic to say that these two bills are being considered together, one to halt digital asset innovation for government uses and the other to eliminate all rules for the crypto industry that has a record of ripping off consumers. But what isn’t surprising is the opposition the bills have received, including from our state securities regulators, organizations who are concerned about investors and consumers, labor organizations, technologists, environmental groups, and civic organizations concerned about good government. I join their opposition to these two bills, and urge members to reject H.R. 5403 and H.R. 4763.
I would also urge this Committee to make all Democratic amendments offered in order which will go a long way towards mitigating the great harms caused by these bills.
I yield back.
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