Senate Dems sweat tokenisation, DeFi in market structure hearing

BlackRock CEO Larry Fink said it’s the “next generation for markets.” Senate Democrats fear it could cripple the US financial system.

The tokenisation of stocks and bonds took center stage Wednesday when lawmakers on the Senate Committee on Housing, Banking, and Urban Affairs discussed so-called market structure legislation, which would settle a long-running debate over the regulatory status of crypto in the US.

“It’s critical that any crypto regulation bill we pass does not have massive unintended consequences,” Senator Elizabeth Warren, a Democrat from Massachusetts, said.

“Consequences that would reach far beyond the crypto market and take a tire iron to the $120 trillion golden egg that is America’s capital markets.”

Tokenisation refers to the practice of representing real-world assets as tradeable tokens on blockchains. The supposed benefits include instant settlement of transactions and around-the-clock trading.

But Senate Democrats fear that tokenisation, coupled with proposed regulatory exemptions for decentralised finance, create a loophole that would let companies skirt century-old rules meant to protect investors from fraud.

Market structure

Last month, lawmakers in the House of Representatives advanced the Clarity Act, a market structure bill that would largely hand oversight of the crypto industry to the Commodity Futures Trading Commission, rather than the Securities and Exchange Commission.

Under the Clarity Act, a centralised “digital commodity” issuer would have to provide the SEC and the public with a vast amount of information regarding its business, including its finances, tokenomics, its planned path to decentralisation, its source code, and perceived risks.

But the bill proposes lighter regulations for “mature blockchain systems,” blockchains and protocols that meet, or plan to meet, its definition of decentralisation.

The bill also exempts many DeFi activities — such as operating certain crypto infrastructure or developing and publishing DeFi code — from those regulations altogether.

On June 24, Senate Republicans released a two-page set of “principles” for market structure regulation that echo many of the provisions in the Clarity Act.

“This is a crucial step toward developing a comprehensive framework that gives innovators the clarity they need and gives investors the protections they deserve,” Senate Banking Committee Chair Tim Scott, a Republican from South Carolina, said Wednesday.

“Our job is to set clear, light-touch guardrails.”

Scott has set a September deadline for passing market structure legislation.

‘Back door’

Warren called Republicans’ proposals a “back door to destroy the securities laws that have served as the bedrock of our capital markets for nearly 100 years.”

The Clarity Act, for example, “would allow non-crypto companies to tokenise their assets to evade the SEC’s regulations,” she said.

“Under the House bill, a publicly-traded company like Meta or Tesla could simply decide to put its stock on the blockchain, and — poof! — it would escape all SEC regulation.”

A minor controversy over tokenisation erupted last week when retail trading platform Robinhood detailed plans to offer trading in perpetual futures and tokenised stocks.

The announcement culminated with a giveaway of tokens that purportedly offered exposure to OpenAI and SpaceX, two of the world’s most sought-after, privately-held companies.

OpenAI quickly distanced itself from the promotion.

“These ‘OpenAI tokens’ are not OpenAI equity,” the artificial intelligence firm wrote in a statement, adding that it was not involved with Robinhood’s promotion and had not approved any transfer of its shares.

Without mentioning Robinhood, SEC Commissioner Hester Peirce issued a statement on Wednesday in which she said blockchain technology “does not have magical abilities to transform the nature of the underlying asset” and that “tokenised securities are still securities.”

Cypherpunks and spilled urine

Senator Cynthia Lummis, a Republican from Wyoming, said opposition to crypto was the latest example of authorities’ longstanding fear of cypherpunks — the libertarian-minded activists who have long pushed to keep the digital realm free from government interference.

“The cypherpunks of the 80s and 90s were creating code and using cryptography, and the government was afraid of it,” she said

“But our courts in this country decided that cryptography and code writing is protected free speech under the first amendment.”

But at least one Republican seemed skeptical of the crypto industry’s growing influence in Washington.

“I hear you saying that digital assets are different. Digital assets hold great promise. Digital assets need special rules. I agree with that,” Senator John Kennedy said Wednesday.

“The obvious question is, what should those rules be and to what extent should we allow you to draft them? I’ve also heard some of you say that digital assets represent the next generation of the internet. Well we let the current generation of the internet draft their own rules and frankly, it looks like what we got as a result looks like someone knocked over a urine sample.”

Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can reach him at aleks@dlnews.com.