Two of the witnesses called by Democrats to Friday's minority hearing of the House financial services committee are advocating for a new approach to updating financial-asset regulations with digital assets in mind.

Why it matters: Without some Democrats, market structure legislation cannot get through Congress.

Friction point: Market structure legislation will define the turf in the digital asset industry for the SEC and CFTC.

• Zooming in, one thing it does is create a legal pathway for projects that want to raise money by selling tokens.
• 🥊 And that puts it squarely in the crosshairs of a thorny fight in Washington: The profits made by the Trump family off the crypto industry make it politically difficult for Democrats to support legislation defining how to supervise cryptocurrency.

What they're saying: "The Clarity Act proposes ... when is a digital asset sufficiently 'decentralized' so that it should not be considered a security?" former CFTC chair Timothy Massad said in his testimony.

• "Thus, the Clarity Act takes us down a rabbit hole, one likely to generate more confusion than clarity."

Similarly, Carole House, a fellow at the Atlantic Council who served on the CFTC's technology advisory committee, agreed that some kind of regulatory update is overdue. But she expressed doubts about many of the specifics in this legislation.

The intrigue: The two critics effectively propose a more open approach: Direct the CFTC and the SEC to come together and work it out.

• "Congress could again direct the SEC and CFTC to jointly develop a framework and rulemakings to give greater specificity and adaptability to approaches to ensure appropriate coverage," House writes in her testimony.
• She suggests that Congress outline principles without getting into specifics and that it provide for temporary registration in the meantime.
• Massad makes similar arguments, preferring the model of a self-regulatory organization overseen by the two agencies.

The other side: At 236 pages, the CLARITY Act (HR 3633) does loads besides establish a legal pathway for issuers. And members of the majority Friday expressed frustration with the delays in writing new rules so far.

• Citing the billion-percent rise in bitcoin price since Congress began discussing regulation, Rep. Warren Davidson (R-Ohio) said, "What you've protected people from is making money."

💭 Brady's thought bubble: Critics might get their way, after a fashion, if no legislation passes.

• The seated SEC chair, Paul Atkins, has made it clear he intends to promulgate rules whether Congress acts or not.
• "I believe the commission has broad discretion under the Securities Acts to accommodate the crypto industry, and I intend to get that done," Atkins has said.
• Brian Quintenz, the nominee to be chair of the other agency, the CFTC, is expected to collaborate with him.

The upshot: If no market structure legislation passes this year, it's likely that the agencies will write their own rules, just without guidance from Congress.

What we're watching: The House financial services committee is holding a markup hearing today on CLARITY.

• It included an amendment that revised the whole bill, with an amendment in the nature of a substitute.
• The House ag committee passed the CLARITY Act this morning, with only a few votes against.

A vote — but not THE vote — on GENIUS is coming tomorrow.

Why it matters: It's one of the Trump administration's two big legislative priorities for 2025.

Between the lines: The crypto community had feared GENIUS would be derailed by an attempt to attach a more controversial measure to the bill, around competition in the credit card market.

• Bloomberg is reporting that won't happen.

State of play: Congress.gov shows that S. 1582 from Sen. Bill Hagerty (R-Tenn.), the current version of the legislation, has been sent back to the Senate banking committee "with instructions to report back forthwith with the following amendment (SA 2312)."

What's next: Debate on GENIUS could be closed by vote in the Senate tomorrow.

• A final vote could happen early next week, and then eyes will be on the House.

Brian Quintenz, nominee to lead the Commodities Futures Trading Commission, will have his hearing before Senate Ag at 3pm ET today.

"Blockchain and crypto tokens are here to stay and will allow individuals to own their digital intellectual property, their digital identities, and the value of their contributions to networks. But that value can only be realized if holders of those products have markets with integrity in which they can transact and have clear rules of the road to build without fear of regulation by enforcement."

Flashback: Quintenz has been on the commission before.

• Most recently, he's been on the policy team at a16z, a major investor in the digital assets space.

Regulators and policy makers have struggled to agree on a definition of decentralized finance, but regulating this area of the crypto industry is far from impossible, panelists said at the SEC's latest crypto roundtable.

The big picture: The SEC's challenge in regulating DeFi is applying current rules aimed at intermediaries — like broker-dealers and exchanges — to a system designed to operate without them, SEC chair Paul Atkins noted.

• Panelists at the fifth crypto roundtable yesterday, titled "DeFi and the American Spirit," suggested three target areas for regulation: common activities, disclosure rules and risk identification.

With activities, the idea is to focus not on the software creators behind DeFi protocols, whose code and rules are transparent, but on the common activities taking place around them.

• "It's the only way to do it," Michael Jordan, co-founder of blockchain VC firm DBA, said. "The reason is, the technologists like myself will come up with a new way to provide the activity if we regulate the technology. If we regulate the agreement, someone will circumvent it."

With disclosure rules, panelists noted the need to focus on what might be taking place outside of public protocols.

• Jordan suggested that off-chain agreements, like market-maker deals or anything else that may distort natural activity in markets, should require disclosure.
• Gabe Shapiro, co-founder of MetaLeX, said investors and other types of operators should have all material information that they would want to have to reasonably make intelligent decisions about things.
• "Not everything in crypto is on chain," Shapiro said. "And so you have to look at where the potential conflicts of interests exist, where are the rooms for collusion, where are the ways people can break these systems, and require disclosure around those."

With risk, Rebecca Rettig, the chief legal officer of Jito Labs, identified three main types for regulators to consider: cyber risk, system management risk, and illicit finance.

• Regulators need to think about mechanisms to address those, agreed Kevin Werbach, a professor of legal studies and business ethics at the Wharton School. Regulators should catalog them and identify the ways to address these risks where necessary and identify where the laws may have to change, he said.
• Jill Gunter, with Espresso Systems, noted that blockchains increasingly operate in a "modular way," necessary for interoperability, and that regulators need to identify for rulemaking where points of control exist in the system, and where they don't.

What's next: While the SEC contemplates how it should regulate DeFi, Atkins — appointed by President Trump — said he has directed SEC staff to consider an "innovation exemption" framework that would allow registrants and non-registrants to bring on-chain products and services to market.

🇯🇵 Japan's version of Microstrategy, Metaplanet, will raise $5.4 billion to buy more bitcoin. (The Block)

🔐 At least 60 companies have jumped on the bitcoin treasury strategy trend. (WSJ)

🇵🇾 It looks like the president of Paraguay's social media account has been compromised in a crypto scheme. (Reuters)

🔵 Circle's IPO success suggests it left a lot of money on the table, but it looks good. (Fortune)

🔒 Crypto security startup Hypernative raises $40M (Axios Pro)