    [Senate Hearing 115-691]
    [From the U.S. Government Publishing Office]

                                                        S. Hrg. 115-691

                               STATE OF THE CFTC:
                            EXAMINING PENDING RULES,
                           CRYPTOCURRENCY REGULATION,
                          AND CROSS-BORDER AGREEMENTS

    =======================================================================

                                    HEARING

                                   BEFORE THE

                           COMMITTEE ON AGRICULTURE,
                            NUTRITION, AND FORESTRY

                              UNITED STATES SENATE

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               FEBRUARY 15, 2018

                                   __________

                           Printed for the use of the
               Committee on Agriculture, Nutrition, and Forestry

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

           Available via the World Wide Web: http://www.govinfo.gov/

                                  __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    36-550 PDF                  WASHINGTON : 2019

    --------------------------------------------------------------------------------------

              COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

                         PAT ROBERTS, Kansas, Chairman
    THAD COCHRAN, Mississippi            DEBBIE STABENOW, Michigan
    MITCH McCONNELL, Kentucky            PATRICK J. LEAHY, Vermont
    JOHN BOOZMAN, Arkansas               SHERROD BROWN, Ohio
    JOHN HOEVEN, North Dakota            AMY KLOBUCHAR, Minnesota
    JONI ERNST, Iowa                     MICHAEL BENNET, Colorado
    CHARLES GRASSLEY, Iowa               KIRSTEN GILLIBRAND, New York
    JOHN THUNE, South Dakota             JOE DONNELLY, Indiana
    STEVE DAINES, Montana                HEIDI HEITKAMP, North Dakota
    DAVID PERDUE, Georgia                ROBERT P. CASEY, Jr., Pennsylvania
    DEB FISCHER, Nebraska                TINA SMITH, Minnesota

                 James A. Glueck, Jr., Majority Staff Director
                    DaNita M. Murray, Majority Chief Counsel
                        Jessica L. Williams, Chief Clerk
                   Joseph A. Shultz, Minority Staff Director
                   Mary Beth Schultz, Minority Chief Counsel

                                C O N T E N T S

                                  ----------

                          Thursday, February 15, 2018

                                                                       Page

    Hearing(s):

    State of the CFTC: Examining Pending Rules, Cryptocurrency
      Regulation, and Cross-Border Agreements........................     1

                                  ----------

                        STATEMENTS PRESENTED BY SENATORS

    Roberts, Hon. Pat, U.S. Senator from the State of Kansas,
      Chairman, Committee on Agriculture, Nutrition, and Forestry....     1
    Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan...     3

                                    WITNESS

    Giancarlo, Hon. J. Christopher, Chairman, Commodity Futures
      Trading Commission, Washington, D.C............................     5
                                  ----------

                                    APPENDIX

    Prepared Statements:
        Giancarlo, J. Christopher....................................    26

    Document(s) Submitted for the Record:
    Roberts, Hon. Pat:
        CFTC and European Clearing House Oversight Letter............    54

    Question and Answer:
    Giancarlo, J. Christopher:
        Written response to questions from Hon. Pat Roberts..........    58
        Written response to questions from Hon. Debbie Stabenow......    65
        Written response to questions from Hon. Thad Cochran.........    70
        Written response to questions from Hon. Michael Bennet.......    71
        Written response to questions from Hon. Robert P. Casey, Jr..    78

                               STATE OF THE CFTC:
                            EXAMINING PENDING RULES,
                            CRYPTOCURRENCY REGULATION,
                          AND CROSS-BORDER AGREEMENTS

                                  ----------

                          Thursday, February 15, 2018

                                  United States Senate,
             Committee on Agriculture, Nutrition, and Forestry,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 9:30 a.m., in
    room 328A, Russell Senate Office Building, Hon. Pat Roberts,
    Chairman of the Committee, presiding.
        Present or submitting a statement: Senators Roberts,
    Boozman, Ernst, Grassley, Thune, Daines, Fischer, Stabenow,
    Brown, Klobuchar, Bennet, Donnelly, Heitkamp, and Smith.
        Chairman Roberts. Before I call the hearing--well, I will
    do that officially--I call to order this hearing of the Senate
    Agriculture, Nutrition, and Forestry Committee--but first I
    want to welcome Senator Grassley, who is always in the pursuit
    of justice.
        Senator Grassley. I hope what you are offering me is a
    point of personal privilege to go ahead of everybody else,
    including the Chairman, so I can get to----
        Chairman Roberts. I think when you----
        Senator Grassley [continuing]. so I can get to the
    Judiciary Committee to have an important meeting----
        Chairman Roberts [continuing]. when you threaten the
    Ranking Member and myself that you were going to investigate me
    and put us under oath, I thought I would recognize you.
        [Laughter.]
        Senator Grassley. Okay. Thank you very much.
        For the benefit of why he is letting me do this, is because
    I have to go to the Judiciary Committee to chair, and then we
    also have immigration on the floor that I am managing, so I
    appreciate this because I cannot be at this hearing.
        So this is a question I am going to want all the members to
    know I am asking, and Chairman Giancarlo to know that I am
    asking it. Then when his--he gets a turn to respond to this,
    then he can respond to it so every member of this Committee can
    hear it, but I also hope he will back it up and answer it in
    writing for me.
        The purpose of this is to have the CFTC, which has been
    working with the EPA and overseeing the RINs market, the two
    agencies signed a memorandum of understanding March 2014, so
    that predates the Chairman of the CFTC's involvement in it. So
    he does not have any involvement in it but he has obviously got
    some responsibilities now.
        So, to Chairman Giancarlo, my question. In March 2016, a
    memorandum of understanding was signed between EPA and CFTC
    regarding the market for RINs. RIN stands for renewable
    identification number and is a mechanism that we use to enforce
    the renewable fuel standard. The memorandum States, quote,
    ``CFTC review and analysis of the information will assist the
    EPA in protecting the public and providing advice to EPA on
    conducting possible investigations into potential fraud, market
    abuse, and other violations relating to the generation of
    trading in RINs.''
        So my specific question for you to answer later is, how
    have the CFTC and EPA worked together since signing the
    memorandum of understanding nearly 2 years ago? Has the CFTC
    ever analyzed RIN data with the intent of identifying the
    impact of speculators have on the markets? This issue of
    speculations on the markets has come up very recently, as
    several Senators have had disputes over what ought to happen to
    RINs.
        So I thank you for that consideration, and, more
    importantly, I thank the Chairman and Ranking Member for the
    courtesy that they just gave me. Thank you very much, Chairman
    Giancarlo.
        Chairman Roberts. We thank you, Senator Grassley. That will
    be submitted for the record and I know Chairman Giancarlo will
    respond in due haste, and thank you, sir.

     STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE STATE OF
    KANSAS, CHAIRMAN, U.S. COMMITTEE ON AGRICULTURE, NUTRITION, AND
                                FORESTRY

        Chairman Roberts. I welcome my colleagues, especially the
    newest additions to the Senate Agriculture Committee, Senator
    Fischer from Nebraska, Senator Smith from Minnesota. For the
    benefit of the members I would like to note that Ranking Member
    Stabenow and I are both pleased to announce that Senator
    Fischer will be chairing the Subcommittee on Livestock,
    Marketing, and Agriculture security. Senator Smith is the
    Ranking Member for the Subcommittee on Rural Development and
    Energy. We welcome you to the Ag Committee. Thank you.
        [Applause.]
        Chairman Roberts. I welcome today's witness, Chairman of
    the Commodity Futures Trading Commission, Chris Giancarlo, as
    we examine a number of issues with him--the derivative market
    space, including key end user rules currently pending before
    the Committee; the status of cross-border equivalency
    agreements; and determining the proper role of regulators
    involving the market of crypto-currencies.
        Mr. Chairman, I speak for the whole Committee when I say we
    have been very impressed with your leadership heading up the
    CFTC since January of last year. While we held a number of
    confirmation hearings last year for you and your fellow
    commissioners, it has been almost 3 years since this Committee
    has held a true oversight hearing examining the CFTC and the
    markets that you regulate. This hearing is very timely, given
    that a lot has happened since that time.
        This is especially true in the derivatives sector, where
    commodities like Bitcoin and other crypto-currencies have
    become a major topic of discussion, not only among large
    financial institutions on Wall Street but among retail
    purchasers who are trying to determine what role, if any,
    crypto-currency should play in their investment decisions.
        Because crypto-currency offerings, and the technologies
    they are built upon, are skyrocketing, regulators like the CFTC
    are working hard to provide consumer protection, but without
    stifling further innovations in the market. Furthermore, the
    technology underlying crypto-currency has transformative
    potential. Blockchain, or distributed ledger technology, may
    offer the economy significant benefits as it is used to create
    more secure, transparent, and efficient ways for recordkeeping.
    I am pleased to see the CFTC taking such an aggressive and
    active role in this space.
        There was the historic vote by the people of Great Britain
    to leave the European Union. We are now seeing how the
    decisions of European officials regarding cross-border
    financial regulations may upend carefully negotiated agreements
    that would otherwise provide regulatory certainty to financial
    stakeholders operating on an international stage.
        We also continue to hear from important derivative end
    users in the agriculture sector and beyond, eagerly awaiting
    resolution to important rulemakings mandated under the Dodd-
    Frank Act. We understand you and CFTC staff are working
    diligently on a number of these issues and we look forward to
    hearing with regard to your progress.
        To that end, Mr. Chairman, I understand without an
    additional commissioner finalizing some of these important
    rules is made much more difficult. I think both the Ranking
    Member and myself would like to see Dawn Stump, who was
    reported out of the committee last year, confirmed as soon as
    possible. The hold of her pending nomination is unacceptable
    and we will move forward on consideration of the additional
    vacant commissioner spot as soon as an individual is nominated.
    We need to move forward and get a fully functioning commission.
        Whether it is market participants who rely on CFTC to
    provide regulatory certainty or consumer financial advocates
    who highlight the need for robust oversight of the market, I
    think everyone can agree we need a full panel of commissioners
    at the CFTC.
        Again, thank you, Mr. Chairman, for being here today. I
    look forward to your testimony. I now turn to my colleague,
    Senator Stabenow, for her opening remarks.

    STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
                              OF MICHIGAN

        Senator Stabenow. Well, thank you very much, Mr. Chairman,
    and welcome, again, Chairman Giancarlo. It has been good to
    work with you and I appreciate you being before the Committee.
        I also want to join the Chairman in welcoming our new
    members, Senator Smith and Senator Fischer. We are very, very
    pleased to have you on the Committee, particularly at this
    important time when we are coming into our major responsibility
    as a Committee in writing the 5-year farm bill. So thank you so
    much.
        Many people do not realize the importance of futures and
    swaps markets to the strength and stability of our economy. I
    know this Committee does. When a corn or soybean farmer in
    Saginaw County, Michigan needs protection from damaging swings
    in commodity market prices, they use the futures markets. When
    an auto manufacturer in Detroit needs protection against
    changes in foreign currency in order to export American-made
    products, they use swaps. Futures and swaps markets support our
    economy, helping to create American jobs and promote economic
    stability. We need a strong CFTC to ensure that those markets
    are fair and transparent and free of fraud and abusive
    practices.
        It has been roughly 10 years since the Great Recession,
    when the reckless actions of a few led to the pain and
    suffering of many. Over 8 million jobs were lost. Countless
    small businesses were shuttered. Farmers and businesses across
    the country faced foreclosure. Many older Americans were forced
    to delay their hard-earned retirements, while many younger
    Americans were unemployed and unable to pursue their piece of
    the American dream.
        We must never allow the devastation of the Great Recession
    to be repeated. It is critical that we do all we can to ensure
    that farmers and businesses and families are protected from
    financial ruin through no fault of their own.
        Congress has entrusted the CFTC with tremendous
    responsibilities--protecting customers, promoting transparency
    and stability in our markets, monitoring for market abuses and
    systemic risk, and holding wrongdoers accountable, just to name
    a few. Since the passage of Dodd-Frank, the CFTC has worked
    hard to promote strong customer protections. The agency has
    modernized its surveillance capabilities to better identify
    market abuses and systemic risks. Its enforcement program has
    exposed wrongdoing by some of the world's largest financial
    institutions, while also targeting the crooks and fraudsters
    who push Ponzi schemes and investment scams in our communities.
        As I have said before, there is more work to be done. We
    must continue to make progress toward a safer financial system,
    which is why I am concerned that the agency has not yet
    completed the rulemaking required by Dodd-Frank. Critical rules
    such as implementing speculative position limits and setting
    minimum capital requirements for swap dealers remain
    nonexistent.
        I am also interested to learn more about emerging market
    issues such as the CFTC's approach to automated trading and the
    tremendous growth of the crypto-currencies like bitcoin.
        Finally, we must continue to advocate for the CFTC to have
    the resources it needs so that it can really do its job. The
    CFTC's responsibilities have increased dramatically since the
    Great Recession, without the necessary funding to fully carry
    out those responsibilities, and, as a result, Americans have
    been placed at risk, and that is not acceptable.
        Chairman Giancarlo, I know you share this concern. I am
    committed to advocating for a fully funded CFTC and I urge my
    colleagues to join me in supporting this critical need. Our
    nation's farmers, ranchers, Main Street businesses, and
    consumers all depend on fair and transparent derivatives
    markets, and they need the security and protection provided by
    strong CFTC oversight.
        Today I look forward to hearing more about how the CFTC
    will continue to strengthen its efforts to safeguard our
    markets, minimize systemic risk, and protect consumers from
    fraud and abusive practices.
        Thank you, Mr. Chairman.
        Chairman Roberts. I thank the Ranking Member for her
    comments and I will turn to our witness for today's hearing,
    Chairman of the Commodity Futures Trading Commission, The
    Honorable J. Christopher Giancarlo. Welcome back, Mr. Chairman.
        You are a familiar face to the Committee, and in the
    interest of time I am going to skip the lengthy introduction.
    The value of your extensive prior experience in the private
    sector and your time as Chairman and as a CFTC Commissioner has
    been revealed in the way you have been leading the agency.
    Since taking the helm, you have done a great job advancing your
    vision of making CFTC a 21st century regulator. We look forward
    to hearing about the work you have done and your future plans.
        Just for the record, what was the level of funding that you
    requested, that you think you need to do a good job?
        Mr. Giancarlo. $281.5 million.
        Chairman Roberts. Then what was the result with regard to
    the President's budget?
        Mr. Giancarlo. The President's budget has put that number
    for $281.5.
        Chairman Roberts. $281----
        Mr. Giancarlo [continuing]. point 5.
        Chairman Roberts. Yes. But not all of it is in funding.
    There are what we call user fees. Is that correct?
        Mr. Giancarlo. That is correct.
        Chairman Roberts. What is that number?
        Mr. Giancarlo. $31.5 million.
        Chairman Roberts. $31.5 million, which will be a tax on the
    farmers and ranchers who use your capabilities and your trust
    as they try to manage risk. I am not happy with that. I think
    the Ranking Member joins me. I am not trying to put you on the
    spot. I just want to let you know that we will consider our
    budget according to our baseline, hopefully commensurate with
    your needs. Please proceed.

    STATEMENT OF THE HONORABLE J. CHRISTOPHER GIANCARLO, CHAIRMAN,
         COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, D.C.

        Mr. Giancarlo. Thank you, Chairman Roberts, Ranking Member
    Stabenow, and distinguished members, and new members of the
    Committee.
        When I appeared before this Committee last summer I stated
    my priorities for the CFTC--to foster open, competitive, and
    transparent markets, free from fraud and manipulation, in
    support of broad-based economic growth that respects the
    American taxpayer through careful management of agency
    resources. I pledged that, if confirmed, I would work with each
    of you in our common purpose of serving the American people and
    the agricultural producers on which we all rely.
        Thank you for this chance to report on our progress. I look
    forward to your questions on the CFTC's enforcement program,
    recent budget requests, swap dealer de minimis, position
    limits, swap data reporting, Project KISS, our upcoming ag
    futures economics conference, and other matters. I also look
    forward to discussing the complex challenges of virtual
    currencies, including the CFTC's response and increased staff
    competency, consumer education, interagency cooperation, our
    exercise of authority, aggressive enforcement, and heightened
    review of virtual currency futures.
        With your permission, I would like to use the next few
    minutes to talk about American agriculture. The U.S. Census
    Bureau estimates that there will be another 2 billion people on
    Earth in the next 20 years. This poses a massive challenge for
    the global economy and governments and societies worldwide. How
    will all these people be fed? How can we meet these challenges?
    American agriculture.
        Just as the U.S. has emerged as a self-sufficient producer
    of energy for global markets, thanks to American ingenuity and
    entrepreneurship, the U.S. will play a big part in feeding the
    globe in the decades to come, thanks to the hard work and
    intelligence of the American farmer and rancher. American
    agriculture and energy producers will respond to the rising
    global demand with the support of U.S. derivative markets
    regulated by the CFTC and overseen by this Committee.
        Our futures and swaps markets serve at least two critical
    roles in feeding and powering the world's growing population.
    First, they allow markets to resolve imbalances efficiently, by
    providing reliable price benchmarks set in U.S. dollars.
    Second, they reduce price volatility of the world's limited
    resources by removing the economic incentive to hoard physical
    supplies. They allow America's farmers, ranchers, and energy
    producers to measure and transfer the risks of production to
    those willing and able to take that risk, stabilizing earnings,
    and benefiting all parties, including consumers worldwide who
    otherwise do not participate in derivative markets.
        For these reasons, American agriculture and American
    commodity futures markets are vital national interests. CFTC-
    regulated markets are among the world's most robust and the
    most resilient. Even with extreme volatility, as we saw
    recently, CFTC-regulated markets were able to successfully take
    on and manage risk, enabling valuable risk transfer to support
    and stabilize the broader financial market. That is why I am
    grateful to you, Chairman Roberts, and Ranking Member Stabenow,
    for your recent letter supporting the CFTC's approach to the
    cross-border supervision of major clearinghouses and our
    current discussions with regulatory counterparts in the
    European Union.
        As you know, in 2016, my predecessor, Tim Massad,
    painstakingly negotiated an agreement with the EU for how we
    supervise each other's clearinghouses. That agreement, which I
    supported as a minority commissioner, is built upon the
    principle of regulatory deference. We believe that deference
    supports strong cross-border markets, recognizes our
    commonalities, and builds upon the strengths of our respective
    jurisdictions.
        The agreement aligns with the mutual pledges of the United
    States and Europe in the G20 accords to cooperate and avoid
    market fragmentation, regulatory arbitrage, and protectionism.
    That is why we continue to seek assurances from the EU that
    U.S. clearinghouses will not be treated differently than they
    are now. American markets must continue to be regulated under
    U.S. law, by American regulators, overseeing by this Committee
    of Congress.
        In closing, with the proper balance of sound policy,
    American regulatory oversight, and supervisory deference by our
    oversees regulatory counterparts, U.S. community derivative
    markets will continue to safely serve the needs of America's
    farmers, ranchers, and energy producers, enabling them to feed
    and power the world, not just today but in the generations to
    come.
        Thank you very much. I look forward to your questions.

        [The prepared statement of Mr. Giancarlo can be found on
    page 26 in the appendix.]

        Chairman Roberts. Chairman, thank you very much for a
    comprehensive commentary, more especially outlining the
    challenge that we face in feeding not only ourselves but a
    troubled and hungry world. Show me a country that cannot feed
    itself and I will show you chaos, and we have got a lot of
    that. It would be helpful if we had an aggressive and robust
    trade policy that anybody could figure out. Thank you for your
    comments.
        Blockchain is mostly discussed in its context as the
    technology underlying bitcoin. My understanding is that
    potential benefits are substantial for multiple industries,
    from agriculture to financial services to health care and so
    on. Notably, a few weeks ago, there was news of major
    efficiencies shown in the sale of approximately 60,000 tons of
    soybeans, using blockchain. As this technology and its
    transformative potential continues to emerge, what role, if
    any, should regulators play in this beginning stage?
        Mr. Giancarlo. Thank you, Senator. Blockchain, we have seen
    it expanded dramatically in not only the instance you mentioned
    but I know a number of other American agriculture merchants are
    now adopting it. We are even seeing the rail transportation
    system adopting blockchain techniques.
        The potential of this technology is truly transformative.
    Now, what it will take to realize it, and how it will be
    realized, and how long it will take, those are open questions.
    The more I read about it, the more I see that the impacts that
    it can have on so many of the traditional systems that we
    utilize, whether in finance, whether in logistics, whether in
    transportation, are extraordinary.
        It presents tremendous challenges for regulators. The
    concept behind it is the decentralization of information and
    the bypassing of central authorities that, for centuries,
    societies used to verify information. If you think about it,
    from a regulator's point of view, we, ourselves, rely on
    verifiers, whether they be exchanges or whether they be data
    repositories, and the traditional mode of regulation is to
    license those verifiers to play a role in our regulatory
    framework.
        So it presents tremendous challenges for us in our
    traditional ways of regulating, which brings me to the point,
    Chairman, it is so important for us to stay ahead of these
    transformations. If we fall behind, we could find a real
    disruptive impact on our traditional mode of regulation.
        Chairman Roberts. I appreciate that. I am going to get
    parochial here. One of the biggest issues in the derivatives
    space I hear about from farmers in Kansas, and elsewhere,
    concerns the lack of convergence. In the past Kansas City Hard
    Red Winter Wheat futures contracts, while time will tell,
    support of the change to a variable storage rate looks, at
    least, somewhat promising.
        What update can you provide on outreach the CFTC has done
    with producers and exchanges regarding this issue?
        Mr. Giancarlo. We focused very carefully on this issue, in
    hard red winter wheat and, actually, a number of other ag
    products. Just this week, my staff had meetings with the
    exchange and with the National Grain and Feed Association, as
    well, to talk about this issue and understand some of the
    dimensions of it.
        I will tell you that the upcoming contract--I believe it is
    the March contract--is one of the most used contracts, and the
    information that will come out of that is one we are going to
    be looking at very carefully, to determine whether we have got
    a broader problem or just an anticipated problem. I can assure
    you, Chairman, we are watching this very carefully.
        Chairman Roberts. Just for the record, I think we have too
    much wheat on the ground and not enough of a demand situation
    with regards to our trade policy.
        Mr. Chairman, you touch on the issue of cross-border
    agreements in the letter that the distinguished Ranking Member
    and I sent you in January. I ask unanimous consent this letter
    be submitted for the record, without objection.

        [The following information can be found on page 54 in the
    appendix.]

        Chairman Roberts. I understand you will be meeting next
    week with a number of your counterparts in Europe. Can you give
    us just a preview or a sense of where current discussions are
    going on the issue of clearinghouse supervision and other
    equivalency agreements entered into between your agency and the
    European regulator?
        Mr. Giancarlo. Yes. Thank you, Senator, and thank you for
    that letter. For our European counterparts to know of the
    resolve of this Committee and your support for our position is
    extremely helpful.
        The message I have been giving to them, and the message I
    will be giving them in the next meeting is the same one that I
    said in my opening statement, which is that American markets
    must continue to be regulated under U.S. law, by American
    regulators, overseen by this Committee of Congress. That is the
    position I have stated from the beginning and that will be the
    position I will maintain throughout the negotiations.
        Chairman Roberts. I truly appreciate your comments. Thank
    you for your responses. I appreciate your insights on all these
    topics. I do have additional questions for you but in the
    interest of time I will submit them for the record. I look
    forward to your responses.
        I now turn to Senator Stabenow for her questions.
        Senator Stabenow. Thank you, Mr. Chairman, and again, thank
    you, Chairman.
        I wanted to follow up. The Chairman was talking about the
    letter we had written to you, regarding, of course, bitcoin
    futures. I am wondering, as we look at protecting customers and
    market participants, what more needs to be done at this point?
        Mr. Giancarlo. Senator, it is such a fast-moving area that
    I think it is critical that we be learning, watching, and
    understanding every step of the way. We had a 4-hour meeting
    yesterday of our technology advisory committee at the CFTC, and
    we had some of the leading experts in this area in, educating
    us.
        As you know, we have also started something at the CFTC
    called LabCFTC, which is our outreach into these technological
    developments, to understand their innovations. The first step
    is a thorough understanding of this emerging technology and how
    it works.
        Senator Stabenow. One of the things you mentioned in your
    testimony was the shortcomings in oversight at this point in
    time, and that there are gaps in protections for traders and
    investors in the markets. So, that is worrisome and I am
    wondering how quickly something can happen. These markets are
    going to continue to grow and they have to be made safer for
    investors and the broader financial system.
        So, you know, I appreciate the approach you are taking but
    how soon will we see something definitive happening?
        Mr. Giancarlo. Well, so, as you know, in our budget request
    we do request additional funds for additional examiners, and
    that is very important.
        I am pleased to tell you, Senator, that since the launch of
    the new bitcoin futures product, since its launch there has not
    been a single margin breach, even during the heightened
    volatility that we saw over the last few weeks. So that product
    is operating in a completely lit environment, a transparent
    environment.
        We are monitoring--unlike bitcoin cash market, which we do
    not regulate, we do not have oversight authority over, we have
    enforcement authority but not oversight authority--in bitcoin
    futures, which we do regulate, and we see all the transactions,
    identified. It is not an anonymous market. It is a disclosed
    market. It is a thoroughly regulated market. It is a market of
    mostly institutional and high net worth. It is not a primarily
    retail market, as is the underlying market. So we are confident
    that the regulatory systems we have put in place over decades
    will serve well in this new futures market.
        The underlying market, as I have disclosed in my written
    statement, is a--it is not a supervised market, and that is a
    policy choice that I think we are all going to have to face in
    the months and the years to come.
        Senator Stabenow. Mr. Chairman, you have talked about
    adequate funding, and it is something I have talked about for a
    long time. I am glad to see the movement in the budget. We have
    to figure that out. You are talking about oversight--the CFTC's
    oversight. Could you talk, in general, about what you have done
    to strengthen the CFTC's oversight program? You talk about
    needing more staff to do this new piece. How much has this been
    a problem, in terms of providing accountability and oversight,
    with not having the staff that is needed to be able to do that?
        Mr. Giancarlo. Thank you, Senator. I would never let our
    oversight capability suffer any deterioration in its
    effectiveness. There are other needs that perhaps we might
    triage again, perhaps some training, some publications. We long
    had a library at the CFTC. I mean, there are areas where we can
    move.
        When it comes to oversight, we maintain cops on the beat.
    One of the structural changes I have made since becoming
    Chairman was to move our surveillance branch into our
    enforcement branch, so that the lag between detecting
    wrongdoing and acting on wrongdoing is immediate and not
    delayed by any type of interagency delay.
        So I feel that our effectiveness in rooting out fraud and
    manipulation is as strong as it has ever been, but we do have
    needs elsewhere. You know, we have suffered losses in our
    economics unit, our Office of Chief Economist, which we need to
    beef up. There are other areas. When it comes to fraud and
    manipulation, we are as strong--we are covering the waterfronts
    without any gaps.
        Senator Stabenow. Thank you. Finally, you have recently
    announced Reg Reform 2.0.
        Mr. Giancarlo. Yes.
        Senator Stabenow. Based on the fact that there are several
    critical rulemakings not yet done from Reg Reform 1.0, when
    will you complete the unfinished business, and will you commit
    to not weakening any of the safeguards that have been built in
    since the financial crisis?
        Mr. Giancarlo. Yes. If I can take the last question first,
    I can pledge to you I do not intend to weaken the safeguards
    built in. I am supporter of the core reforms of Title VII of
    the Dodd-Frank Act. I always have been and remain today.
        The two unfinished rules you mentioned in your opening
    remarks, the di minimis and position limits, I said to you,
    when I met with this Committee last June, that we would get
    both of those done, and in the fall, I said we would get the di
    minimis done in the first half of this year. I intend to put
    that in front. In fact, meetings are now scheduled with my
    fellow commissioners to present them with data through the end
    of 2017. So they will have the most up-to-date data, and those
    conversations will take place over the next several months.
        On position limits, I also pledged to you to move forward
    with that. We are moving forward with that. We will have
    something to present to the commissioners, I think, by the
    beginning of the second half of this year. The staff is working
    on it now. Now with position limits, as you know, that is a
    complicated rulemaking, but I think we can get this done. I do
    think it is something that does require a full commission. I
    think that for position limits to be a lasting rulemaking it
    should be considered by a commission of five, as intended.
        So we will not stop working on something, but I hope that a
    final rule can be voted on by five commissioners, not by three.
        Senator Stabenow. Thank you. Thank you, Mr. Chairman.
        Senator Boozman.
        [Presiding.] Thank you, and thank you, Mr. Chairman, for
    being here. We do appreciate all of your hard work, and your
    insight today as we, really delve into some important issues.
        One thing I would like to say, before I get into my
    questioning, is that I very much oppose the question of user
    fees. I opposed it in 2016. I think that if we go down that
    path then we would likely reduce liquidity, have increased
    volatility, and less efficient use of our futures markets.
        I know that you know the issues of funding, so that you can
    do what we ask you to do, is so important. As a member of the
    Appropriations Committee, and I think I can speak for the
    Appropriations Committee, we are working hard now, as we get
    into trying to finish out Fiscal Year 2018, and then also
    starting 2019, to try and address that.
        We have talked a lot about, in the past, cybersecurity, and
    I would like for you to comment on that. It seems like our
    agencies now because we can do it, we can gather all of this
    information, but as we essentially centralize it, comes the
    responsibility of protecting it. Can you tell us what you are
    doing in that regard?
        Mr. Giancarlo. Absolutely, Senator, and thank you for that
    question. I am delighted you asked me this because it is one
    that I have been focused on since I have joined the commission.
    I spoke--in 2015, I was honored to be asked to go to Harvard
    Law School and speak on 21st century challenges, and I said the
    No. 1 challenge to America's global financial markets is cyber,
    and I remain as convinced of that in 2018 as I was in 2015.
        Since becoming Chairman of the agency I have done a number
    of things. I now meet, once a month, in a scheduled meeting,
    with our chief cyber officer, and at that meeting he presents
    me with a full rundown of everything we have seen on the cyber
    front over the past month. I cannot disclose all of that to you
    but I have previously said that we receive close to 10,000
    cyber attempts per month. So to give you an idea of the
    relentless threat that we face, and I know a number of the key
    institutions that we oversee face even higher numbers, such as
    our exchanges and others. So this threat is serious.
        I am satisfied, from those meetings, that, as an agency, we
    are compliant with the key Federal regulations under FISMA, the
    Federal Information Security Modernization Act, the National
    Institute of Standards of Technology, NIST standards, and
    annual OIG audits.
        We have done more than that. One of the things we have
    started at the commission, that has never been done before, we
    now do full agency-wide cyber drills. A few weeks ago, we just
    did our second drill under my chairmanship, full agency-wide,
    all four offices, where we did a simulated attack on the
    infrastructure that we oversee, to see how we react to that.
    Because there is an old adage in the military service, that I
    think the Chairman may be familiar with, and that is you fight
    as you drill. So I have told the staff, we are going to drill
    repeatedly so we will know how to fight when the cyberattack
    comes. We are also asking the entities that we regulate to have
    similar protocols in place as well.
        Now one of the areas that we are asking for additional
    funding for is for is in our ability to examine the cyber
    readiness of the entities that we oversee, and the exchanges.
    We can use more resources to examine their cyber preparedness.
        Senator Boozman. Very good. I appreciate you coming out so
    strongly to protect the agreements with the EU commission that
    we worked in the past. Can you give us an example of what would
    happen if those were weakened significantly?
        Mr. Giancarlo. Yes. We are very concerned that the EU may
    have in mind the ability and the right to do unscheduled,
    independent examinations of our clearinghouses, to show up on
    their doorstep and to go in and conduct exams, to conduct test
    procedures, to require European standards and European practice
    on how our clearinghouses operate. I know of no other area
    where an overseas regulator can come into a U.S.-regulated
    environment and conduct their own independent exam, or even if
    they propose to do it in conjunction with us, that is not our
    legal structure. We are a sovereign nation. We are an
    independent agency. We report to this Committee and a committee
    in the House. We do not report to overseas regulators. The
    dimensions of what could come out of this proposed European
    legislation, I think are quite breathtaking.
        Now, what we are told is that we are maybe getting ahead of
    ourselves, that we need to wait and see what this all means.
    Well, I have never been one to much wait. I think that we need
    to make clear to Europe right now that we have been regulating
    our clearinghouses for decades. We have gotten it right. None
    of them failed during the financial crisis. You know, we can
    always improve, but, quite frankly, to be told that we will
    have to jointly work with an overseas regulator is something
    that is unprecedented.
        Senator Boozman. Well, thank you, and again, I think we
    have complete agreement on that issue.
        Thank you, Mr. Chairman.
        Chairman Roberts.
        [Presiding.] Senator Smith.
        Senator Smith: Thank you very much, Chair Roberts, and
    Ranking Member Stabenow.
        I would like to just start by telling you how excited I am
    to serve on this Committee and represent Minnesota farmers and
    also Minnesota forest products organizations with my colleague,
    Senator Klobuchar. I am really honored to be the Ranking Member
    on the Rural Development and Energy Subcommittee. So I look
    forward to working with Senator Ernst on those rural priorities
    and to work hard for Minnesota priorities on the farm bill. I
    am excited, also, really respect the spirit of bipartisanship
    that has been a hallmark of this Committee, and I look forward
    to working with all of you. So thanks very much.
        Chairman Giancarlo, I wanted to talk with you a little bit
    about the swaps market. So, like many Americans, Minnesotans
    certainly suffered deep losses as the result of the 2008
    financial crisis. Lots, as Senator Stabenow said, lost their
    homes, lost their jobs, lost their savings, and one of the
    contributing factors, of course, was this largely unregulated
    swaps market.
        So I think it is so important that we make sure that there
    is a strong swaps regulator here. I am sure we share that
    value. So can you just discuss with us a little bit about how
    the changes that you are working on to existing swaps rules
    will not increase the risk of another financial crisis.
        Mr. Giancarlo. Thank you for that question, and may I just
    simply say that, as Senator Klobuchar knows, I have had some
    very good education in Minnesota agriculture over the last few
    years. I got to visit the Blue Diamond Dairy Farm, just east of
    Sauk Centre, in 2016, and I was in Bloomington, just in
    December, with the Minnesota Cattlemen's Association. When you
    meet with folks like that, that are really at the grassroots
    level of agriculture you understand how important it is that
    we, back at the agency, get these rules right, so that they do
    not have to experience what they experienced, once again.
        You know, I am rather proud, at the CFTC, when I look
    around at our fellow derivative market regulators, we are
    really the only one--and I say this knowing that our European
    colleagues may be listening--we are the only one that has our
    full sweep of swaps regulations in place, and the regulations
    follow Title VII of Dodd-Frank. This agency embraced its role
    to implement those reforms, and those reforms are in place
    today, and they are working in place.
        Now, that does not mean that every element of them works as
    well as it should or as intended, which is why the process of
    regulation is not a one-and-done. It is a constant one to
    measure, to make sure that they--as markets change, and markets
    are very organic in their nature, they evolve and they change,
    and we need to make sure that our rules evolve and change to
    meet new changes in the marketplace.
        Senator Smith. Thank you. So how do you sort of assess, as
    you are making these sort of adjustments, tweaking to the
    rules, how do you assess kind of what impact that might have on
    the, you know, potential for a future financial crisis?
        Mr. Giancarlo. Well, we stay in constant contact with the
    market. One of the things that we have done since I have become
    Chairman is created a new branch within our Division of Market
    Oversight called Market Intelligence. The goal of this branch
    is to try to understand--there is a great hockey player named
    Wayne Gretzky who said he was successful not because he skated
    to where the puck was but where the puck was going. The goal of
    Market Intelligence Branch is to see where the puck is going,
    in terms of market evolution, and to try to make sure that our
    rules and regulations stay adequate for those changes in the
    market.
        Senator Smith. Thank you. As a Minnesotan, I am well
    familiar with the Wayne Gretzky analogy, so I appreciate that
    very much.
        Let me just, in the few minutes--the minute I have left,
    touch briefly on this question of budgets and user fees and how
    we might--you know, how we make sure that you have the
    resources that you need to do the work that you do.
        If we do not go to a user fee model on this Committee, and
    I understand that that--I understand that there is no decisions
    made about that--could you just sort of explain what impact
    that might have on your budgets and how you would--you know,
    what you would do.
        Mr. Giancarlo. Yes. I know that the number we put forward,
    $281.5, which is the same number we put last year, is the right
    number, and that is because I approached it the way I did in
    business of building of budget. I did not take the number from
    the prior year and add a percentage to it and say that is our
    new budget number.
        I said, I want to start from zero. This is my first time as
    a chairman. I made every division present to me what their
    mission was, what their needs were, what their capabilities
    were, and where they were lacking capabilities. We built the
    number up from zero--it is called zero-based budgeting--and the
    number we need, I know it, is $281.5.
        Senator Smith. Thank you, Mr. Chair.
        Chairman Roberts. Thank you, Senator Smith. Again, just for
    the record, I view user fees as a tax on the farmers, ranchers,
    and growers, and all of the people that depend upon you to make
    sure that their risk management strategy is protected.
        Senator Klobuchar.
        Senator Klobuchar. Well, thank you very much, and thank you
    very much, Mr. Chairman. We will forgive you, Senator Smith and
    I, for using an example of a hockey player that was not from
    the Wild or from the old North Stars, but that is okay.
        We do want to thank you for visiting our State, both in
    Stearns County and then the recent visit with our Cattlemen. We
    really appreciate that. One of the things you and I have talked
    about in the past is how commercial end users who base their
    derivative trades in the actual physical products that they
    produce or use is one group, and then you have financial
    institutions who base their derivative trades on fluctuations
    in prices--and you all know this--or the index, different types
    of companies.
        Just based on your visits to Minnesota and other places
    around the country, how has that helped inform you as you look
    at those different types of situations?
        Mr. Giancarlo. I am a firm believer that in so many walks
    of life that diversity adds value to the marketplace, and I
    think that is especially true in financial markets. I think the
    broader range of market participants, from big to small, from
    what some call naturals, all the way to speculators--not
    excessive speculators but speculators--add depth and value to a
    market.
        When I meet with end users, agricultural and energy
    producers, and understand their concerns, I see how critically
    important it is that we make sure that they continue to be
    comfortable operating in these markets, alongside some of these
    commercial, some of these proprietary traders as well. What we
    need to do, at the agency, is always try to find--make sure
    there is an environment where all can participate. That will
    provide us the greatest depth.
        Senator Klobuchar. Thank you very much. I know that
    Chairman Grassley--oh, no, former Chairman of the Judiciary
    Committee Grassley, excuse me--asked you about the issue of RIN
    data. As you know, the RFS is critically important, and I have
    been working on that for a long time. The CFTC's willingness to
    work with the EPA to combat fraud in the creation and sales of
    RINs is important as we work to sustain confidence in the
    market-based regulatory system.
        Based on your experience, do you believe that current
    information in trading data in RINs markets would increase
    transparency?
        Mr. Giancarlo. What I can tell you, Senator, is we were
    asked by EPA to look at certain physical market data, which we
    did. We do oversee, as a regulator, trading in the RINs futures
    contract. Unfortunately, there is virtually no trading in that
    contract. I mean, I think one or two trades. That is how little
    activity is there, and we monitor that but there is virtually
    no activity.
        In the underlying market--we are not the regulator of the
    underlying market but at the request of EPA we did review data
    and we gave them results. Based upon the data, we were not able
    to find any misbehavior in the market. The data was both
    limited and not of sufficient quality, and we are a data-driven
    agency, and analyzing bad data, you do not necessarily get good
    results, unfortunately, and we had a conversation about that.
        I recently spoke with Ag Secretary Perdue about this
    market, and shared these thoughts with him, and we have agreed
    that we are going to put our best economists on taking a look
    at this, and they are going to be meeting in the next few
    weeks. So there are opportunities for engagement here and we
    will have that engagement and we will see what comes out of it.
        Senator Klobuchar. Okay. Thank you. Last, as you know from
    your visit, the livelihood ranchers in Minnesota depends on the
    prices that they receive for their cattle, the cost to raise
    them. Can you talk about how the CFTC documents transaction
    data within cattle markets and cattle future markets, help to
    determine what is irregular, what is regular with the
    fluctuations, and during the CFTC's collaboration with GAO,
    were there any initial findings about the cattle markets that
    you can share with our Committee today.
        Mr. Giancarlo. So, you know, the cattle contract has been a
    concern of mine for some time. It became quite clear, over the
    last few years, that there were some convergence issues in that
    contract and other problems. We communicated with the CME,
    which operates that contract, our concerns, and to their credit
    took a number of steps to restructure that contract and improve
    that contract.
        Now we continue to watch it to see how these improvements
    are working--as of last year it looked like they were
    addressing a number of concerns of the cattlemen. It was one of
    the very subjects I spoke to Minnesota Cattlemen about when I
    was up there. How is it working? Are these changes making--
    having an impact?
        There still may be a number of issues there. What I would
    say broadly is one of the things I have learned, as Chairman,
    is that it is vitally important for the agency to keep an eye
    on how contracts, especially in the ag market, are working, and
    to let those that operate the contracts at the exchanges know
    that their responsibility is to keep these contracts fresh,
    updated. Sometimes contracts are not even updated for a long
    period of time, many, many years, and that needs to be done
    frequently. These contracts need to be looked at, because they
    need to serve our ag users.
        Senator Klobuchar. Thank you very much.
        Chairman Roberts. Well, Coop, it is 10:17, maybe :16. It is
    not high noon yet. Did you get all the critters rounded up? You
    are recognized here.
        Senator Thune. Terrific. Well, thank you, Mr. Chairman. I
    appreciate you and Senator Stabenow having the hearing today
    and I want to thank Chairman Giancarlo for appearing before the
    Committee.
        I appreciate the CFTC's efforts to bring transparency and
    integrity to crypto-currencies. I understand that the CFTC does
    not have the authority to conduct regulatory oversight on
    virtual currency platforms, but that it is working with a
    number of agencies on multi-regulatory approach for crypto-
    currency oversight.
        What are your thoughts on the current multi-agency approach
    and what is the most effective way, would you say, to regulate
    crypto-currency?
        Mr. Giancarlo. Thank you, Senator. It is tremendously
    challenging. Bitcoin or other virtual currencies is a legally
    traded product, and yet there is no Federal agency with direct
    regulatory oversight over those spot markets. What I mean by
    that is the ability to set standards, to determine capital
    adequacy, best practices, how they deal with customers, what
    are their cyber protections, what are their security
    protections. There is no Federal agency that sets those
    standards. We do not have the jurisdiction to do it, as we do
    not in any spot cash market.
        What we do have is enforcement authority for fraud
    manipulation to the extent we are able to see it. As I
    explained to Senator Klobuchar, we are a data-driven agency, so
    having that data, or the lack of that data is very important.
        With our new bitcoin futures products we entered into
    unprecedented arrangements with those two exchanges offering
    those products, to gather data from the five bitcoin spot
    markets so that we can now start analyzing. So for the first
    time, as a Federal agency, we can see data, at least in a
    limited number of cases, in spot markets, so we can police them
    for fraud manipulation.
        Senator Thune. Do you think you need to have more
    regulatory authority and resources to bring greater
    transparency and integrity to those platforms?
        Mr. Giancarlo. I think if it is the policy choice that
    those platforms need direct supervision, then some agency will
    need the resources to do it. We are not an agency that
    traditionally supervises spot platforms, so it would be more
    than a question of resources. It would mean a change of our
    mission, of our mandate, of our approach. So it would be a very
    significant change for us across the board, were we to take
    that on.
        Chairman Clayton and I thought, our first step should be to
    just make sure the policymakers are aware that this is an
    unregulated environment. It is a legal environment but it is an
    unregulated environment.
        Senator Thune. Let me shift gears real quickly. In March
    2016, CFTC and EPA signed an MOU related to RIN markets. The
    purpose of the MOU was, in part, to permit sharing of
    confidential information, business information I should say, on
    the RIN market so that the CFTC could advise EPA on, and I
    quote ``techniques that could be employed to minimize fraud,
    market abuses, or other violations and to conduct appropriate
    oversight in RIN and renewable fuel markets.''
        Have you given EPA any advice, and if so, what was it?
        Mr. Giancarlo. Our advice is that the data that they are
    collecting is--you know, there is an old saying in technology
    and software, you know, garbage in, garbage out. If the data is
    not terribly good, it is awfully hard to make heads or tails of
    it, and one of the problems we had in analyzing the data was
    that it was not really adequate to tell us--what they were
    hoping that we could tell them which was the presence of
    manipulation.
        Senator Thune. So more and better data would help.
        Mr. Giancarlo. Absolutely.
        Senator Thune. Okay. We hope that you are a part of
    providing advice on that subject. Obviously, as you know, there
    is a lot of controversy and a lot of discussion around it.
        Mr. Chairman, thank you, sir.
        Chairman Roberts. I appreciate it, Senator. Let us see. We
    have Senator Brown.
        Senator Brown. Mr. Chairman, I share the concern of a
    number of my colleagues. I know the Chairman has mentioned
    this, Senator Smith mentioned it, about your budget, about the
    fees. I particularly share the concern, I know--I mean, I know
    you say you have enough, but I also know this agency has been
    shorted in too many cases, and as you testified in the Banking
    Committee last week, Mr. Chairman, about the demands created by
    the emergence of virtual currencies, bitcoin and related
    derivatives, that I am even more concerned about your budget.
    So I hope that you will kind of relook at this, reflecting the
    bipartisan concern here about your ability to do some of the
    things that we think you need to do.
        Just a statement. You do not need to respond to that.
        I know that CFTC has recently announced some high-profile
    enforcement cases on market manipulation and virtual
    currencies. I am concerned, though, that the overall trend
    shows a decline in enforcement actions and penalties. Fiscal
    year 2017 showed a significant decline from prior year levels.
    Democrats, especially, on Banking and on this Committee are
    concerned that some of the new Trump regulators are a bit too
    close to the industry, shall we say.
        So explain, in that context, why we--sir, reassure us why
    the downward trend in the enforcement data is not a bad thing.
    It seems like a deliberate pullback in enforcement.
        Mr. Giancarlo. So, Senator, you can understand, I became
    Chairman in the middle of Fiscal Year 2017, and that year
    really reflects the enforcement priorities of my predecessor,
    not me, because enforcement actions take time to generate.
        Also the Wall Street Journal article which, looked at that,
    compared years where the CFTC had some extraordinarily large
    awards against a few large banks, in the hundreds of millions
    of dollars. So on those two points, a better trajectory is to
    look at just recent activities. Just in the last month alone,
    we have brought $100 million worth of settlements against Wall
    Street banks, just in January alone.
        I think you will see, going forward, an enforcement agenda
    that reflects more of my priorities as opposed to perhaps my
    predecessor's priorities.
        In terms of--and I think if you----
        Senator Brown. Are some of those penalties against repeat
    offenders?
        Mr. Giancarlo. In the--repeat offenders meaning banks that
    have been fined or----
        Senator Brown. Yes.
        Mr. Giancarlo. Yes.
        Senator Brown. Okay. I am concerned about--I mean, you do
    not represent SEC. I understand that. I know that you, your
    agency, and, I think you have--you have continued this--when
    move on an action you send a press release, which is helpful, I
    think, in sending that message. SEC does not always do that. So
    do you believe that publicizing those major actions tends to
    have a dampening effect on cheaters, on people going too far?
    Is that sort of your purpose, and comment on that.
        Mr. Giancarlo. Absolutely, Senator Brown. You know, one of
    the criticisms that has been aired is the lack of criminal
    activity. Now we do not have criminal enforcement activity, but
    under my watch we just completed a very successful joint action
    with the Department of Justice and the FBI in which we brought
    criminal charges against a number of those, at some of these
    Wall Street banks, that were manipulating markets, over the
    last few weeks.
        So I do believe that not only do press releases help but
    also the actions that an agency is willing to take to work
    across the aisle with other agencies to not only bring civil
    charges but also criminal charges, sends a message that we are
    serious about enforcing the laws.
        Senator Brown. Would it help you if SEC would be--is
    visibly troubled, if SEC would send out the same kinds of
    releases you do, to send the message you send, that you think
    is important to send? Would it be helpful if they would also do
    that?
        Mr. Giancarlo. I have to say, Senator, I am not familiar
    enough with their practice to form a judgment as to its
    adequacy. I know that we work hard to make sure that our press
    releases send out the message that we are trying to send, that
    we are serious about enforcement.
        Senator Brown. I guess I would close, Mr. Chairman, by
    asking that--I mean, I know that you and the SEC, you have sat
    together in committee the other day, I know that you seem to
    have a warm relationship. I would hope that you could use--I
    know that you run this agency, he runs that agency, but I would
    ask that you make clear to him, at some point, that you think
    it is really helpful that you send those releases out and use
    that to discourage bad behavior in those whom you regulate.
        Mr. Giancarlo. Thank you, Senator.
        Chairman Roberts. I thank the Senator. I think the message
    the Chairman is trying to send out, there is a new sheriff in
    town.
        Senator Heitkamp.
        Senator Heitkamp. Thank you, Mr. Chairman.
        Just to highlight, maybe, some of the macro issues that we
    are confronting. A farmer, just a couple of minutes ago, gave
    me this. This is U.S. farm income, 2013, $124 billion. U.S.
    farm income, 2018, $70 billion. Farm income has been cut in
    half, driven by low commodity prices, driven by disruption in
    trade, which I know the Chairman is very active on, and we need
    to continue to be active. But, also, I think there is a growing
    challenge that we have in trying to figure out how we can
    expand markets. That is why the RIN question keeps coming up.
    That is why we keep talking about kind of your role in all of
    this.
        The last thing that we can afford is a distorted or
    unproductive market, and for a lot of the commodities that are
    grown in my State, the work that you do is absolutely critical,
    and so preventing fraud, preventing manipulation, and seeing
    market trends is absolutely critical. So, you know, we can talk
    about all the other issues, crypto-currencies, but I think we
    need to stay razor-like focused on how critical commodity
    prices are to making a living on the farm.
        You know, we do not want to--in farm country in my State we
    want to grow crops, we want to market those crops, and we want
    to make a living, and, you know, the ability to access the
    market is critical, which takes me back to a question Senator
    Klobuchar asked, which is about the cattle markets. I want to
    thank you, Chris, for coming out to North Dakota. We had a
    great trip where we talked about cattle markets, but we also
    had an opportunity to talk about oil and oil futures, and
    understand kind of what that shale play is. I took him to an
    oil rig, so it was all very exciting----
        Mr. Giancarlo. It was.
        Senator Heitkamp [continuing]. in North Dakota. Your wife
    is from South Dakota?
        Mr. Giancarlo. No. My wife is from Long Island, New York.
        Senator Heitkamp. Oh, well, that is too bad.
        [Laughter.]
        Senator Heitkamp. Well, you said she would have had fun.
        Mr. Giancarlo. She was a 4-H girl and she understood a lot
    better than I did on some of the farm issues.
        Senator Heitkamp. Okay. So I just have a couple of
    questions on crypto-currencies. I know--I did not get a chance
    in Banking to ask you some of these questions, but one of the
    stories that was recently highlighted in the media is that most
    of the trading and most of the work that is being done on
    crypto-currencies, whether it is bitcoin or other currencies,
    is really going under the tax radar. So that the disruption
    that may happen in other kinds of participation in markets may
    transition to a crypto-currency market, because it is, you
    know, the new hot thing. Also if you think that you can gain 35
    percent, 20 percent, whatever your effective tax rate is, by
    moving over, you know, that has some destabilizing effects, it
    seems to me.
        So can you comment about the tax consequences on crypto-
    currency and what you think you and the SEC could be doing to
    highlight that concern? After all, you know, Al Capone even had
    to pay taxes, so even if we do not think that this is all
    legitimate and some of it is nefarious, we need to know what it
    is.
        Mr. Giancarlo. Senator, thank you for that question, and I
    know that a lot of people in the crypto community may be
    watching this hearing so this is a very good opportunity to
    remind them that taxes are due on crypto-currency transactions
    that may be taxable. So this is not a, you know, off-the-grid
    from a tax point of view environment. U.S. law still applies,
    whether it is a crypto-currency transaction or anything else.
        Senator Heitkamp. Typically, tell me what the 1099
    consequences are of crypto-currency transactions.
        Mr. Giancarlo. Well, the IRS treats it--I am not an expert
    in this, but it treats it as an asset, and the depreciation in
    the value of an asset means that a tax may be due for that
    appreciation as a capital gain.
        Senator Heitkamp. Yes. But typically, how the IRS would
    know if I made a trade in the equity markets or in your markets
    is I would get a 1099, and then there would be accountability.
        Mr. Giancarlo. That is exactly right.
        Senator Heitkamp. So tell me whether you think 1099s are
    being enforced in the crypto-currency space.
        Mr. Giancarlo. I do not have data to that. My suspicion is
    not to a great extent.
        Senator Heitkamp. Well, this is a problem, and it is a
    problem that is going to continue to grow without some early
    intervention. So, again, another whole incentive to move over
    as people read that and say, ``Hey, if I can get a 20 percent
    tax-free gain on, you know, a $10,000 investment, that looks
    pretty good.''
        Mr. Giancarlo. Mm-hmm.
        Senator Heitkamp. So more reason to elevate our concern
    about this----
        Mr. Giancarlo. Yes.
        Senator Heitkamp [continuing]. because it, in fact, maybe
    become a choice that people make to move over.
        Mr. Giancarlo. Indeed. Indeed.
        Senator Heitkamp. Okay. Thank you, Mr. Chairman.
        Chairman Roberts. Senator Boozman.
        Senator Boozman. Thank you, Mr. Chairman. I appreciate the
    shout-out for 4-H. My girls were all State record book winners,
    and it is truly an excellent program.
        I wanted to get you to comment on, I know that you have
    started, under your leadership, a process of simplifying and
    modernizing the rules so that they are easier to comply with,
    not weakening the rules but rather a way to make them less
    burdensome. Can you update us on Project KISS?
        Mr. Giancarlo. I would be delighted to, and it gives me a
    chance to clarify any misunderstanding.
        Project KISS is not about changing policy. It is a policy-
    neutral program. It is about simplifying and making our laws
    and our rules, our rules and regulations less complex, less
    costly, less burdensome. When you think about it our desire in
    the market is to bring more market participants in. When rules
    are complicated it is real easy for the big players to hire the
    lawyers necessary to go through complicated rules, but it is
    harder for small firms. The simpler we can make our rules, with
    the same policy implications, then the more accessible our
    markets are for small and medium-sized firms, which, as we
    know, are the engines of growth and job creation in this
    country.
        So we, just this morning, announced one of the elements of
    our Project KISS initiative. Now our rules--our laws were first
    written in 1937, in a number of cases, and some of our
    provisions go back. One of the provisions is that all the
    defined terms are alphabetized, and after you get to Z you
    start over again. So you go from Z to AA, and then you go to AA
    to ZZ, then you go to AAA. Well, we have gotten up to
    quadruple-Z in our definition system, and that runs then
    through the whole body of law that you have got to reference
    back, and it makes for a tremendous mess when you are trying to
    read these provisions.
        So we are getting rid of the alphabetized approach. We are
    just putting the defined terms in as they are, but it requires
    us to go back through the whole rule set to redefine it.
        This may seem like a lot of nothing, but believe it or not,
    it simplifies the rule book, and it is just part and parcel of
    good government. Every so often rules need to be simplified so
    they are more accessible to the small and medium-sized
    companies that might want to come into our marketplace, and
    just find the rulebook too daunting. Now it may mean some less
    billable hours for some Wall Street law firms or Washington law
    firms, but you know what? It is good for American business.
        Senator Boozman. Thank you, Mr. Chairman. It is refreshing
    to hear that we are trying to simplify things, and, as you say,
    that is one of the greatest deterrents to people not
    participating, just simply not understanding something. So
    thank you very much.
        Chairman Roberts. Thank you, Senator.
        Mr. Chairman, triple-Z?
        Mr. Giancarlo. Quadruple-Z.
        Chairman Roberts. Quadruple-Z. Better go back to triple-Z.
    That sounds like a ranch. It is the Triple Z Ranch, or
    something like that. Well, thank you for trying to clear that
    up and get rid of that mess.
        We are waiting on Senator Daines, who is on the way. Let me
    just ask a real quick question.
        You noted in your testimony, even as I speak--Senator
    Daines, you are up, if you are ready, and I know you are always
    ready.
        Senator Daines. Mr. Chairman, thank you, and thanks for
    testifying in front of the Committee. Good to see you, Mr.
    Chairman.
        Mr. Giancarlo. Thank you.
        Senator Daines. With the emergence of market volatility
    last week--I guess it was called the re-emergence; it happens
    from time to time--it is times like this that emphasize the
    CFTC's importance to regulating derivatives that allows
    businesses like farmers, ranchers, and manufacturers to hedge
    their risks. These instruments lock in their profits, which
    could otherwise be eroded by either rising input costs or lower
    sales. It is important that we do get regulations right,
    including with your regulatory counterparts in the EU, as well
    as in emergent technologies.
        Last September, in Columbia Falls, there was a school
    district that was hacked. It was allowing overseas hackers to
    issue death threats to children in the Flathead region, and
    their preferred method of payment was crypto-currency. It had a
    chilling effect for many, many families in Montana,
    particularly those up in the Flathead region.
        A few weeks ago we had a Homeland Security Committee
    meeting on preventing opioid producers from shipping fentanyl
    into the country. Committee staff directly interfaced by email
    with the sellers, learning how they actually operated. Their
    preferred method of payment? Crypto-currency.
        Mr. Chairman, could you share your guiding philosophy for
    how the CFTC balances licenses to innovate with the need to
    guard against the proliferation of illicit activity?
        Mr. Giancarlo. Thank you for that, Senator. It is sobering
    and upsetting, especially when we think about the children
    involved and what we have been through in the last day. It is
    troubling to know, but we do know that with a lot of these
    crypto-currencies there is a lot of illicit use. Examples like
    this give us an indication but we do not know, with hard data,
    percentage-wise, how much of it is used for illicit activities,
    but we do know it is being used in cases for illicit activity.
        I met recently with the new head of FinCEN, the financial
    crimes unit, and they assured me that their anti-money-
    laundering procedure are in place for all domestic virtual
    currency trading platforms, which we do not regulate at the
    CFTC but about which we are concerned. We are broadly concerned
    about the use of these virtual currencies for activities like
    this, and yet no Federal regulator has direct authority. That
    is something that I think, as policymakers, Congress, but also
    the regulatory agencies, need to probably put first and
    foremost on our list of what are the next steps and where we do
    go next.
        I think the industry itself has something to do in this
    area as well. I know that in the UK now a number of virtual
    currency platforms are banding together to develop a self-
    regulatory organization to clean up the industry of this, and I
    think that is something that they have not been called out on,
    but to the extent that people who are advocates for virtual
    currencies are listening, I think they need to know that they
    have got a responsibility in cleaning up this industry, if they
    really want it to be something that earns respect and becomes
    part of not only our future but their future as well.
        Senator Daines. I want to shift gears and talk about
    blockchain. Both of the chairmen, my Chairman to my right and
    my Chairman to the left here, were in Montana for our Ag
    Summit. I thank both of you for coming, Mr. Giancarlo, and
    thank you for that, Mr. Chairman.
        You spoke about Project KISS.
        Mr. Giancarlo. Yes.
        Senator Daines. Keeping It Simple, Stupid--which is in
    keeping with President Trump's broader regulatory agenda to
    eliminate outdated and unnecessary regulations. We know that
    reporting requirements, unregistered market participants poses
    great overhead costs. I saw that firsthand when I was in the
    private sector.
        Could you share some of your efforts through LabCFTC to
    pioneer blockchain technology?
        Mr. Giancarlo. Sure. So before you joined us, Senator, I
    was talking a little bit about Project KISS, and I was saying
    that one of its goals is to simplify our rules so that small
    and medium-sized companies can enter. I gave an example of
    something we announced this morning.
        I would like to give another example. One of the things
    that an agency like ours does is use no-action relief to make
    adjustments in the rules, and that body of no-action relief
    appears in letters, but in no formal way that someone new to
    the market can understand, really, the way our rules work. So
    another element of Project KISS is to embody all of that--
    hundreds of no-action letters into actual rulemakings so,
    again, our rules are easier to understand for new players
    coming into the market.
        LabCFTC is our focal point for how we interact and how we
    learn about all these new innovations. Fintech is probably the
    most creative area of technology innovation right now. It is
    transforming financial markets. We needed to find a way that we
    could bring in talented people that understand these
    technologies and open up a window. So with our LabCFTC, we have
    held office hours in New York, Chicago, and recently in Silicon
    Valley, because you cannot sit in Washington and say
    ``innovators, come to us.'' You have got to go to them, onto
    their turf, and understand what they are doing, and have them
    do demos. So that is what we are doing with LabCFTC.
        Senator Daines. I am out of time, but Chairman Giancarlo, I
    want to thank you. Your last comment, the fact that you are
    getting out of this ivory tower of Washington, DC, out to where
    the action is actually occurring. There is a lot of inaction in
    this town, and you are out there where the people are. You
    mentioned New York, you mentioned Chicago, you mentioned
    Silicon Valley. You also came to Great Falls, Montana, for our
    Ag Summit, and I appreciate that. Thank you.
        Mr. Giancarlo. Thank you.
        Chairman Roberts. Senator Daines, thank you very much for
    some very pertinent questions.
        That will conclude our hearing today. To the Chairman,
    thank you for sharing your views on these important topics. You
    have given this Committee much to think about as we continue to
    look forward to the CFTC reauthorization and that challenge.
        To my fellow members, we would ask that any additional
    questions you may have for the record be submitted to the
    Committee clerk five business days from today, or by 5 p.m.
    next Friday, February the 23d.
        The Committee is adjourned.
        [Whereupon, at 10:47 a.m., the Committee was adjourned.]

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