[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
AMERICA ON ``FIRE'': WILL THE CRYPTO
FRENZY LEAD TO FINANCIAL INDEPENDENCE
AND EARLY RETIREMENT OR FINANCIAL RUIN?
=======================================================================
HYBRID HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JUNE 30, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-35
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-360 PDF WASHINGTON : 2021
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York PETE SESSIONS, Texas
DAVID SCOTT, Georgia BILL POSEY, Florida
AL GREEN, Texas BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado ANN WAGNER, Missouri
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa TED BUDD, North Carolina
SEAN CASTEN, Illinois DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York VAN TAYLOR, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
Subcommittee on Oversight and Investigations
AL GREEN, Texas Chairman
EMANUEL CLEAVER, Missouri TOM EMMER, Minnesota, Ranking
ALMA ADAMS, North Carolina Member
RASHIDA TLAIB, Michigan BARRY LOUDERMILK, Georgia
JESUS ``CHUY'' GARCIA, Illinois ALEXANDER X. MOONEY, West Virginia
SYLVIA GARCIA, Texas DAVID KUSTOFF, Tennessee
NIKEMA WILLIAMS, Georgia WILLIAM TIMMONS, South Carolina,
Vice Ranking Member
C O N T E N T S
----------
Page
Hearing held on:
June 30, 2021................................................ 1
Appendix:
June 30, 2021................................................ 37
WITNESSES
Wednesday, June 30, 2021
Goldstein, Alexis, Director, Financial Policy, Open Markets
Institute...................................................... 6
Hammer, Sarah, Managing Director, Stevens Center for Innovation
in Finance, The Wharton School, University of Pennsylvania..... 10
Parker, Christine, Partner, Reed Smith LLP....................... 8
Su, Eva, Financial Economics Analyst, Congressional Research
Service (CRS).................................................. 5
Van Valkenburgh, Peter, Director of Research, Coin Center........ 11
APPENDIX
Prepared statements:
Goldstein, Alexis............................................ 38
Hammer, Sarah................................................ 51
Parker, Christine............................................ 59
Su, Eva...................................................... 66
Van Valkenburgh, Peter....................................... 79
Additional Material Submitted for the Record
Sherman, Hon. Brad:
Wall Street Journal article, ``Bitcoin Miners Are Giving New
Life to Old Fossil-Fuel Power Plants''..................... 90
Van Valkenburgh, Peter:
Written responses to questions for the record from
Representative Davidson.................................... 96
Written responses to questions for the record from
Representative Emmer....................................... 99
AMERICA ON ``FIRE'': WILL THE CRYPTO
FRENZY LEAD TO FINANCIAL INDEPENDENCE.
AND EARLY RETIREMENT OR FINANCIAL RUIN?
----------
Wednesday, June 30, 2021
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Al Green
[chairman of the subcommittee] presiding.
Members present: Representatives Green, Adams, Tlaib,
Garcia of Illinois, Garcia of Texas, Williams of Georgia;
Emmer, Loudermilk, Mooney, Kustoff, and Timmons.
Ex officio present: Representative Waters.
Also present: Representatives Sherman, Davidson, and
Gonzalez of Ohio.
Chairman Green. Good morning, everyone. I am Congressman Al
Green, and it is my honor to call the Oversight and
Investigations Subcommittee to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, Members of the full Financial Services Committee who
are not members of this subcommittee are authorized to
participate in today's hearing. And I would like to note that
Mr. Brad Sherman, who is a member of the Full Committee,
without objection will be accepted as a participant.
Today's hearing is entitled, ``America on `FIRE':--`FIRE'
being an acronym for financial independence/retire early--Will
the Crypto Frenzy Lead to Financial Independence and Early
Retirement or Financial Ruin?''
With the hybrid format of this hearing, we will have some
members and witnesses participating in person and others on the
Webex platform. I remind all Members participating remotely to
keep themselves muted when they are not being recognized by the
Chair. The staff has been instructed not to mute Members,
except when a Member is not being recognized by the Chair and
there is inadvertent background noise.
Members are also reminded that they may participate in only
one remote proceeding at a time. If you are participating
remotely today, please keep your camera on, and if you choose
to attend a different remote proceeding, please turn your
camera off.
I now recognize myself for 2 minutes to give an opening
statement.
It is my pleasure to open the second in a series of
Financial Services Committee hearings on issues related to
cryptocurrency and digital assets. Most of us in this room are
old enough to remember the financial calamities that cost so
many, so much: the 2008 mortgage crisis; the Allen Stanford
Ponzi scheme; and the Bernard Madoff Ponzi scheme. In each of
these cases, and in others that I haven't enumerated, investors
and financial institutions suffered severe losses, then sought
and/or received bailouts from the Federal Treasury. Their
refrain seems to have been, ``Keep the government out of my
life until I lose money.''
So today, we ask, will there be a bailout of digital asset
investors if their investments' market value drops to zero? If
we believe that such is not the role of the Federal Government,
should there be an amount or form of reserves required to
backstop digital securities should they fail, or, instead, are
today's investors in digital assets entirely reasonable in
expecting the Federal Government to provide a backstop in
certain cryptocurrencies should these digital assets become
large enough to have a systemic impact on our economy? If so,
should there be greater Federal oversight and rating agencies
to evaluate the risk and performance of these digital assets?
Today's hearing will consider the answers to these
questions and assess the systemic risk to the economy, as well
as the risk of loss to individual investors posed by recent
periods of extreme volatility in crypto assets that are not
backed by any form of tangible collateral.
It is now my pleasure to yield to the new ranking member of
the subcommittee, whom I must congratulate, the gentleman from
Minnesota, Mr. Emmer. And I do look forward to working with
you.
Mr. Emmer. Thank you, Mr. Chairman. I, too, look forward to
working with you. I appreciate you holding this hearing today,
and I will give a big thank you to our witnesses for appearing
before the committee. I look forward to all of your testimony.
Financial technology and cryptocurrency are the future of
the global financial system. In general, Fintech lowers the
barriers to entry to the traditional financial system and
offers all consumers, no matter where they are, the ability to
access convenient financial services at low competitive costs.
Cryptocurrency is no exception, as we have seen from the
huge consumer demand for these innovative assets backed by
technology that is permissionless, open, and private.
Cryptocurrency allows people to transact with each other in
real time across borders for very little cost in a way that is
so transparent and verifiable, that it maintains more trust
than traditional financial transactions with a third-party
intermediary.
Most importantly, cryptocurrency and blockchain technology
unlock access to opportunity. The open-source nature of these
technologies offers millions of Americans the opportunity to
study the underlying code, develop blockchain projects, and
launch their own businesses, all without having to ask anyone
for permission. That is an incredible opportunity.
Over the last few years, I have been fortunate to meet with
many great crypto and blockchain innovators. The common refrain
during our discussions is that they so badly want to develop
their new crypto and blockchain ideas right here in the United
States, but they don't, because of continuing uncertainty with
Federal regulation and, perhaps more importantly, the lack of
enforcement of existing laws and regulations. They are afraid
to launch new projects that, for example, might classify them
to be a, ``money transmitter,'' even though their work has
nothing to do with money transmission.
Still, the thought of having to comply with an overly
burdensome State-based money transmission licensing system in
the United States is too much of a challenge for these
entrepreneurs to be worth their time and their investment, so
they head overseas where the regulatory compliance is more
streamlined.
I have also been told by two co-founders of a company, who
are in the midst of developing a new blockchain network, that
they wanted to hire American developers, but because there
isn't a streamlined process at the SEC to determine, what is a
security, they couldn't pay American developers with their
token. So, they actually went out and hired a team of
developers in Europe instead, where they can confidently comply
with existing regulation.
As I mentioned, Fintech and cryptocurrencies are the future
of finance, but we are missing out as a country because
American entrepreneurs are still unsure of how to navigate our
existing regulatory system. This means high-tech jobs are going
overseas, and capital formation opportunities for everyday
Americans are being missed, all part of the chilling effect
that comes when we do not answer the questions that industry
leaders and consumers are begging for, questions like: what
digital assets are a security; what digital assets are a
commodity; and what digital assets are a currency? Answering
these questions will keep innovation here in America and unlock
new opportunities for every American to access.
To conclude, let's be clear that these things are already
regulated, but we need clarity in application and enforcement
of the existing laws and regulations. There are also areas
where we can and should streamline our regulatory framework to
ensure that we realize and benefit from crypto investment and
innovation right here in the United States. I look forward to
learning from the witnesses how we can address these
challenges, and I yield back the remainder of my time.
Chairman Green. The gentleman yields back. The Chair now
recognizes the gentleman from California, Mr. Sherman, who is
also the Chair of our Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, for 1 minute for an
opening statement.
Mr. Sherman. Thank you so much for this time. Those in the
cryptocurrency space are naturally pro-crypto. Their fortunes,
their relevance, and their fame depends upon the success of
cryptocurrency. Cryptocurrency is something you can bet on, but
if people want to have the animal spirits to take risks, I
would prefer them to invest in equity markets to support the
building of American companies, or the California lottery to
support the schools in my State. Cryptocurrencies are highly
volatile, so one person makes a million dollars and retires at
age 45 and loses $100,000, Coinbase makes money, and one
millionaire goes on TV and says how wonderful it is, but nine
others do not retire in dignity, but instead become eligible
for Medicaid.
Cryptocurrencies can ultimately be successful only if they
are successful currencies, and evading the Know Your Customer
(KYC) rule is the one thing the cryptocurrencies have as an
advantage to the U.S. dollar. Cryptocurrencies have the
political support of the patriotic anarchists who are rooting
for tax evasion. I hope we shut it down.
Chairman Green. The gentleman's time has expired.
The Chair now recognizes the Chair of the full Financial
Services Committee, the gentlewoman from California, Chairwoman
Waters, for an opening statement.
Chairwoman Waters. Thank you very much, Chairman Green.
Congress and regulators face many challenges as we grapple with
how to best regulate cryptocurrencies, including cryptocurrency
issuers, exchanges, and investments. This committee is
committed to providing not only more transparency in this
minimally-regulated industry, but to ensuring that appropriate
safeguards are in place, and so we have begun a thorough
examination of this marketplace.
Today, I look forward to hearing from our panel about the
risk of fraud and market manipulation that can hurt retail
investors and regular consumers. Furthermore, I look forward to
learning about the systemic risk presented by hedge funds
rushing to invest in highly-volatile cryptocurrencies and
cryptocurrency derivatives. So, thank you, Chairman Green, for
convening this hearing today, and I yield back the balance of
my time.
Chairman Green. Thank you, Madam Chairwoman.
The Chair now recognizes the Vice Chair of the
subcommittee, Representative Williams of Georgia, for 1 minute
for her opening statement.
Ms. Williams of Georgia. Thank you, Mr. Chairman, and thank
you to all of our witnesses for joining us today for this
critical conversation. Often in Congress, it is up to us to
write the rules of the road while the road is being built. This
rings especially true when we talk about the rapid development
of digital assets. We have to be sure that the legislative
regulatory frameworks governing digital assets keep up with the
pace of innovation. What is at stake is ensuring that financial
innovation is appropriately serving all of the people. The
people of Georgia's 5th District want financial services that
are responsible and help them improve their lives, and it is
our responsibility to make sure that any financial innovations,
including digital assets, meet that bar. I look forward to our
discussion today, Mr. Chairman, and I yield back the balance of
my time.
Chairman Green. The gentlelady yields back, and thank you,
Ms. Williams. It is now my honor to welcome each of our
witnesses, and I am pleased to introduce our panel: Eva Su, a
Financial Economics Analyst for the Congressional Research
Service; Alexis Goldstein, the director of financial policy at
the Open Markets Institute; Christine Parker, a partner at Reed
Smith LLP; Sarah Hammer, managing director of the Stevens
Center for Innovation in Finance at the Wharton School of the
University of Pennsylvania; and Peter Van Valkenburgh, the
director of research at Coin Center. Welcome to each of you,
and thank you for being here today.
The witnesses will be recognized for 5 minutes each to give
an oral presentation of their testimony. Once the witnesses
have finished their testimony, each Member will have 5 minutes
within which to ask questions.
For the witnesses in the hearing room, on the table in
front of you is a timer that will indicate how much time you
have left. When you have 1 minute remaining, a yellow light
will appear. I will ask you to be mindful of the timer, and
when the red light appears, to quickly wrap up your testimony
so that we can be respectful of both the other witnesses' and
the committee members' time. And without objection, your
written statements will be made a part of the record.
Ms. Su, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF EVA SU, FINANCIAL ECONOMICS ANALYST, CONGRESSIONAL
RESEARCH SERVICE (CRS)
Ms. Su. Thank you. Chairman Green, Ranking Member Emmer,
and members of the subcommittee, thank you for the opportunity
to testify today. My name is Eva Su, and I am an analyst in
financial economics at the Congressional Research Service
(CRS), focusing on capital markets and securities regulation.
The CRS provides Congress with analysis that is authoritative,
confidential, objective, and nonpartisan. Any arguments
referenced in my written or oral testimony are for the purposes
of informing Congress, not to advocate for a particular policy
outcome.
In recent years, financial innovation in capital markets
has fostered a new asset class, digital assets, and introduced
new forms of fundraising and trading. Digital assets, which
include cryptocurrencies, crypto assets, or crypto tokens,
among others, are digital representations of value.
The current regulatory landscape for digital assets is
perceived by certain industry observers to be fragmented.
Multiple agencies apply different regulatory approaches to
digital assets at the Federal and State levels, regardless of
the terms used to describe digital assets. Depending on their
characteristics, some digital assets are subject to securities
laws and the regulations that are designed to protect investors
and maintain fair, orderly, and efficient markets, and
facilitate capital formation. Others, such as Bitcoin and
International Securities Services Association (ISSA), are not
considered securities and, generally, not directly subject to
those requirements.
The Securities and Exchange Commission is the primary
regulator overseeing digital assets, securities offerings,
sales, and investment activities. My testimony focuses on
issues related to digital assets securities regulation.
Digital assets' increasing presence in capital markets
raises policy questions regarding whether changes to existing
laws and regulations are warranted, and if so, when such
changes should happen, what form they should take, and which
agencies should take the lead. The current innovative
environment is not the regulatory regime's first encounter with
changing technology. In the past, some technological
advancements have led to regulatory revamps, whereas others
were dealt with through the existing regime. Regulatory
oversight generally strives to balance the need to foster
financial innovation with objectives to ensure market integrity
and investor protection as well.
In general, policymakers contending with major financial
innovations have historically focused on addressing risk
concerns while tailoring a regulatory framework that was
flexible enough to accommodate evolving technology.
Current developments that raise policy issues include,
first, digital asset exchanges. Some industry observers
perceive digital asset trading platforms as functional
equivalents to securities exchanges in buying and selling
digital assets. These platforms are not subject to SEC
regulation, potentially making them less transparent and more
susceptible to manipulation and fraud.
Second, digital asset custody. Custodians provide
safekeeping of financial assets. Digital assets present
custody-related compliance challenges because custodians face
difficulties in recording ownership, recovering lost assets,
and providing audits, among other considerations.
Third, digital asset exchange traded funds (ETFs) are
pooled investment vehicles that gather and invest money from a
variety of investors. ETF shares can trade on securities
exchanges like a stock. The SEC has not yet approved any
digital asset ETFs because of market manipulation and fraud
concerns.
Fourth, stablecoin. Stablecoin is a digital asset designed
to maintain a stable value by linking its value to another
asset or a basket of reserve assets, like Facebook Diem,
formerly known as Libra and Tether. In policy discussions, some
suggest applying ETF regulatory frameworks to certain
stablecoins. Others argue for more disclosure of the underlying
reserve assets to expose potential deceptive activities.
That concludes my testimony. I look forward to your
questions. Thank you.
[The prepared statement of Ms. Su can be found on page 66
of the appendix.]
Chairman Green. Thank you, Ms. Su.
Ms. Goldstein, you are now recognized for 5 minutes to give
an oral presentation of your testimony.
STATEMENT OF ALEXIS GOLDSTEIN, DIRECTOR, FINANCIAL POLICY, OPEN
MARKETS INSTITUTE
Ms. Goldstein. Chairman Green, Ranking Member Emmer, and
distinguished members of the subcommittee, thank you for
inviting me to testify today. I am the director of financial
policy at the Open Markets Institute, where my work focuses on
financial regulation and consumer protection. Previously, I
worked as a computer programmer at Morgan Stanley in electronic
trading, and at Merrill Lynch and Deutsche Bank as a business
analyst serving on the equity derivatives trading desks.
Earlier this year, the blowup of a single-family fund,
Archegos Capital, led to $10 billion in bank losses after the
firm's bets on about a dozen total return swaps imploded.
Because these sorts of derivatives aren't currently reported to
the Securities and Exchange Commission on Form 13F, banks and
regulators alike were entirely in the dark about Archegos'
positions until it blew up. The extent of hedge fund and family
involvement in cryptocurrencies lives in a similar regulatory
blind spot.
Chairwoman Waters, to her credit, has introduced discussion
draft legislation to try and address some of these concerns
with Form 13F, and I believe that Congress and regulators
should also consider requiring that hedge funds report their
cryptocurrency positions on this form. If a majority of hedge
funds with billions of dollars in assets under management begin
to hold significant positions in crypto, as certain surveys
indicate they are interested in doing, it may produce dire
risks for financial systemic risk, and it may induce future
crises as volatile swings in the cryptocurrency markets could
lead to things like forced liquidations of their assets.
In addition to hedge funds, large, too-big-to-fail banks
and Silicon Valley venture capital firms are also a growing
presence in crypto. Venture capital firms have already invested
$17 billion in crypto firms so far this year, which is more
than 3 times what they invested in all of 2020. If you combine
this with the fact that some cryptocurrencies have a majority
of their supply held by a very small number of people, it
raises concerns around concentration. For example, as of
February, the top 20 largest Dogecoin addresses held half of
the cryptocurrencies' entire supply.
There are also broad investor and consumer protection
concerns in cryptocurrency that I have personally observed as a
user of crypto exchanges and DeFi platforms. In traditional
financial markets, barring a serious liquidity crisis, if you
buy something, you can generally assume you can sell it back,
especially with a stock. But on DeFi protocols, like Uniswap
and SushiSwap, anyone can upload a new cryptocurrency token,
and anyone can add a liquidity pool for it, including malicious
actors who design tokens that can be bought but never sold.
These so-called honeypot tokens are so prevalent that some DeFi
protocols include an explicit warning about them on their
website. Some crypto investors try to read the smart contracts
or code of new coins to look for common pitfalls and avoid
scams, but this is an extremely high bar for non-programmers.
Some of the more concerning areas I have seen in DeFi are
on platforms that offer derivatives. Frankly, it reminds me of
the over-the-counter derivatives marketplace before the Dodd-
Frank Act--I worked in as a banker in the late 2000s--with
things like the U.S.-based dYdX, OPEN, which offers options on
cryptocurrency, and Ribbon Finance, which offers structured
products based on crypto. Recently, CFTC Commissioner Dan
Berkovitz said in his speech that unregistered DeFi exchanges
may not be legal under the Commodity Exchange Act.
I have also used a DeFi protocol called PancakeSwap, which
often advertises very eye-popping annual percentage rates in
exchange for locking a pair of cryptocurrencies into the
platform's liquidity pools. Annual percentage rates (APRs) are
probably not the right metric to attempt to use for what the
crypto community calls yield farming, as the rates can vary
wildly even on a single day.
But just to give you one example, in early May, PancakeSwap
posted a tweet saying that you could get an over 100,000-
percent APR if you locked in your Dogecoin on PancakeSwap. They
later stated that special rate was only there for 13 days,
which is questionable to use for an APR. Users complained that
the rate offered was nowhere near what they were advertising on
Twitter, yet they tweeted again the same day that, ``The longer
you wait, the less free money you get.''
I believe that Congress should continue to examine if there
are regulatory gaps that require new legislation in order to
ensure consumer and investor protection in crypto and avoid
systemic risk. Regulators should continue to monitor the space
and ensure compliance with existing laws. Thank you. I look
forward to your questions.
[The prepared statement of Ms. Goldstein can be found on
page 38 of the appendix.]
Chairman Green. Thank you, Ms. Goldstein.
Ms. Parker, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF CHRISTINE PARKER, PARTNER, REED SMITH LLP
Ms. Parker. Thank you. Thank you, Chairman Green,
Chairwoman Waters, Ranking Member Emmer, and members of the
subcommittee for the opportunity to appear before you today,
and thank you to the subcommittee staff for their hard work in
putting together this hearing. My name is Christine Parker, and
I am a partner in the New York office of Reed Smith. I am
actually joined today by my colleague, Trevor Levine, who was
kind enough to brave the heat to come to D.C. with me.
My practice focuses on regulatory enforcement and
transactional matters related to commodities, derivatives, and
digital assets. I routinely advise both regulated and
unregulated digital asset market participants in connection
with a number of different Federal and State regulatory and
prudential regimes.
At the outset, I want to note that there are a lot of use
cases for blockchain and digital ledger technology, for which
cryptocurrency serves as the fuel. I urge this subcommittee to
engage with organizations that are working at the grassroots
level to establish industry-sponsored, voluntary, self-
regulatory associations for digital asset and crypto markets on
both a global basis and at the national level, because I think
there is a lot to be learned from them.
I also want to point out that if we are going to innovate
how we regulate these new markets, it really calls for a new
kind of financial regulator. At a minimum, we need financial
regulators that reflect the diversity of retail investors who
are active or want to become active in the crypto markets. As
advocates for responsible innovation, I don't think the crypto
industry has been very good at pushing forward diverse voices,
but we can, and we should, and we will do better on that front.
However, we are here today to talk about the retail
investors who are training in the crypto markets, and I know
there has been a lot of focus on the recent volatility in these
markets and what does that mean for Congress, for the
regulators, and for retail investors.
Just a quick point: The volatility in the crypto markets, I
think, is not solely attributed to their lack of regulation. I
will point out that crypto exchanges, such as Gemini and
Coinbase, are not regulated like the Chicago Mercantile
Exchange or the New York Stock Exchange, but they are regulated
by the New York Department of Financial Services as limited
purpose trust banks. They are subject to the same Anti-Money
Laundering (AML) and Know Your Customer (KYC) requirements as
any other Federal- or State-regulated bank, and the Commodity
Futures Trading Commission (CFTC) has anti-fraud and anti-
manipulation authority over the purchase or sale of Bitcoin in
spot and forward trades on these trading markets, and has
actively used that authority in this space.
Separately, volatility is not unique to the crypto markets.
Last April, the crude oil market went negative, and in
February, natural gas markets were incredibly volatile due to
Winter Storm Uri.
And there are products that are offered on CFTC-regulated
exchanges that are available to retail customers that are based
on market volatility, so some investors are actually seeking
out assets that are based on volatility on these very highly-
regulated exchanges. That being said, the question that we are
really grappling with today is, how do we best protect retail
customers who are actively trading in the crypto markets?
I think it is somewhat problematic to just sort of simply
equate the crypto markets with terrorism, tax evaders, and bad
actors. Realistically, every member of this subcommittee has a
law-abiding constituent who enjoys trading crypto, so what is
in the best interest of this constituent of yours who is
trading crypto right now? Access to crypto markets that operate
under a clear regulatory framework with both customer
protection mandates and opportunities for risk that are
commensurate with the suitability of the investor is necessary.
Right now, we have an absurd patchwork of regulatory
regimes at both the State and Federal level. We have regulation
by enforcement, interpretation, guidance, interpretive
guidance, and public statements from regulators. One regular
trader says that a crypto asset is a currency, another says
it's a security, and the outcome of that is incredibly harmful
to retail customers. This lack of clarity stifles innovation in
the U.S. and, frankly, drives retail customers to foreign
exchanges. So, how do we better regulate cryptos?
The CFTC and the SEC should be empowered by Congress to
move quickly to provide retail investors with a broader array
of regulated crypto products that are attractive to market
participants, but come with the robust market oversight of
these regulatory regimes. This should happen now.
First, Congress should direct the SEC to immediately create
clear, workable criteria as to which digital assets are
securities and, therefore, subject to U.S. securities laws and
regulations.
Second, while regulators in New York and Wyoming, in
particular, have been very crypto-forward regulators and will
continue to be leaders in this space, Congress needs to pass
legislation to provide for the Federal preemption of the
current State-by-State licensing requirements of the direct
purchase and sale of cryptocurrency. This will ensure that
these transactions are subject to the level of market oversight
that we currently have in the futures and securities markets.
The logical regulator here is the Commodity Futures Trading
Commission, but you must ensure that you fully fund them so
they can take on this mandate.
Thank you for the opportunity to speak today, and I look
forward to your questions.
[The prepared statement of Ms. Parker can be found on page
59 of the appendix.]
Chairman Green. Thank you, Ms. Parker.
Ms. Hammer, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF SARAH HAMMER, MANAGING DIRECTOR, STEVENS CENTER
FOR INNOVATION IN FINANCE, THE WHARTON SCHOOL, UNIVERSITY OF
PENNSYLVANIA
Ms. Hammer. Chairman Green, Ranking Member Emmer, and
members of the subcommittee, thank you for the opportunity to
testify today. My name is Sarah Hammer. I am managing director
of the Stevens Center for Innovation in Finance, and senior
director of the Alternative Investments Program at the Wharton
School of the University of Pennsylvania. I also oversee the
Blockchain Laboratory within the Stevens Center at Wharton.
Additionally, I am an adjunct professor of law at the
University of Pennsylvania Law School, where I teach an upper-
level juris doctor course on financial regulation.
Before I proceed, I would like to note that the views
expressed here today are my own and not the views of the
Wharton School or the University of Pennsylvania.
Blockchain is a shared immutable ledger that facilitates
the recording of transactions in a network. Today, blockchain
technology infiltrates and powers a myriad of institutions,
functions, and assets in the United States and globally. The
use cases for blockchain are too numerous to cover in detail
here, but they include decentralized finance, enterprise
blockchain, cybersecurity enhancements, and even addressing
climate change.
The subject of today's hearing is cryptocurrency. At the
outset, it is worth noting that there is no official public
data source for cryptocurrency prices, market size, or
volatility. This lack of data is a significant problem.
However, unofficial data sources have estimated that the total
value of the cryptocurrency markets may exceed $2 trillion.
Investors in cryptocurrency include retail, high-net-worth, and
institutional investors, such as private funds corporations,
and endowments. Retail investment in cryptocurrency may give
rise to particular concerns about investor protection, given
the possibility of fraud or business failure, the lack of
disclosure, and the high level of price volatility.
The Securities and Exchange Commission is charged with a
tripartite mission of protecting investors; maintaining fair,
orderly, and efficient markets; and facilitating capital
formation. At the same time, the SEC faces challenges in
applying capital markets and securities regulations to
cryptocurrency. Chief among these challenges is whether the SEC
has the authority to regulate a particular instrument.
Currently, the SEC evaluates crypto sales through the lens
of a test known as the Howey test, which evaluates whether an
instrument qualifies as an investment contract for the purposes
of the Securities Act. While the SEC has applied securities
regulation to dozens of initial coin offerings based on the
Howey test, there is still a lack of clarity as to whether it
applies to a number of crypto transactions that currently do
not comply with SEC registration and disclosure obligations. In
addition, a number of exchanges that offer trading and crypto,
including those that meet the definition of a, ``security,'' do
not register with the SEC. Given this, there is a strong need
to establish a clear, sufficient, and appropriate regulatory
framework for cryptocurrency.
I turn now to the issue of systemic risk. As discussed, the
value of the cryptocurrency market is estimated to possibly
exceed $2 trillion, and it is characterized by very high levels
of price volatility. Additionally, estimates are that more than
2,000 different cryptocurrencies currently circulate globally.
For context, estimates of subprime debt prior to the great
financial crisis are less than $1 trillion.
Moreover, since no official data source exists for crypto
markets, financial regulators are at a distinct disadvantage in
evaluating their regulatory options. Because of the
infiltration of crypto into so many institutions, functions,
and assets, the potential risks must be carefully evaluated in
a coordinated fashion.
In light of the risks and considerations of crypto, a
myriad of agencies, States, and international standard-setting
bodies are implicated. Thus, a key question for regulation is,
how should we proceed and in what forum?
Importantly, a government authority already exists that
could support the development of a clear, sufficient, and
appropriate framework for regulation of crypto. Established in
2010 by the Dodd-Frank Act, the Financial Stability Oversight
Council (FSOC) is the appropriate forum to engage in evaluating
and addressing potential systemic risks, convening and
coordinating Federal rulemaking on issues that touch multiple
agency jurisdictions, and consulting with State and foreign
regulatory authorities. I believe that by leveraging the
authorities of the FSOC to support the development of a clear,
sufficient, and appropriate framework for crypto, we can
address concerns about fostering innovation, providing
consistency, establishing global reach, and balancing our
regulatory objectives. Thank you.
[The prepared statement of Ms. Hammer can be found on page
51 of the appendix.]
Chairman Green. Thank you, Ms. Hammer.
Mr. Van Valkenburgh, you are now recognized for 5 minutes
to give an oral presentation of your testimony.
STATEMENT OF PETER VAN VALKENBURGH, DIRECTOR OF RESEARCH, COIN
CENTER
Mr. Van Valkenburgh. Chairman Green, Ranking Member Emmer,
members of the subcommittee, thank you for the invitation to
speak with you today. My name is Peter Van Valkenburgh. I am
the director of research at Coin Center, which is an
independent nonprofit that is focused on cryptocurrency public
policy.
The Bitcoin network has been processing transactions for
longer than Uber has been offering rides. Bitcoin and other
cryptocurrencies have enabled 3.1 billion transactions in the
last 10 years, securing over $2 trillion in value. If
cryptocurrencies were unregulated to this day, would that not
be an incredible failure of our regulatory system?
As I will outline, it is not a failure, because over the
last 10 years, cryptocurrencies have been regulated. Some of
that regulation, of course, does come from the technology
itself. The scarcity of Bitcoin, a total supply of only 21
million, is not preserved by the goodwill and honesty of the
participants on the network. It is secured by a transparent,
peer-to-peer accounting technology, a public blockchain that
makes fraud trivially cheap to detect and absurdly expensive to
commit.
But much regulation has also come from the Federal and
State Governments. The onramps and offramps where people buy
and sell Bitcoins for dollars and safekeep them are heavily
regulated. They are State license money transmitters or else
they are chartered banks and trust companies. Before offering
any services to Americans, they must prove minimum capital
requirements, post bonds, and open their doors to yearly
examinations. They are also classified as financial
institutions under the Bank Secrecy Act. They must register
with the Financial Crimes Enforcement Network (FinCEN), know
their customers, and share the details of suspicious activities
with law enforcement.
Cryptocurrencies like Bitcoin and Ethereum are commodities,
but many crypto assets meet the flexible definition of an,
``investment contract,'' and are, therefore, securities, which
means their issuance and their trading are regulated by the
SEC. Cryptocurrency derivatives are regulated by the CFTC.
Finally, anyone who markets a cryptocurrency service or tool
that is deceptive or fraudulent is liable under various laws
enforced by the CFPB, the FTC, the SEC, the CFTC, and State
attorneys general.
And the results of all of this regulation speak for
themselves. In 2020, only 0.34 percent of all cryptocurrency
transaction volume involved a criminal sender or recipient.
Despite several high-profile hacks of overseas exchanges, no
American exchange has suffered a substantial hack or loss of
consumer funds. Operators of money laundering exchanges
overseas have been arrested, sales of unregistered tokenized
securities have been targeted by SEC enforcement, and criminal
ransomware rings have had their servers seized and their
ransoms recovered. All of this has happened by sensibly
applying existing laws to the cryptocurrency space. We don't
need new regulations.
And all of this has also happened while preserving the
fundamental value of cryptocurrencies as open access platforms
for financial services and innovation. Unlike any other
transactions technology that works online, an open blockchain
network is accessible to people that banks and tech companies
would rather ignore than serve. With the rise of central bank
digital currencies from authoritarian nations happening in
tandem with the rise of Bitcoin, we are at a decision point as
an advanced technological society. Are we willing to accept
some risks if it means we can eliminate the choke points to
economic participation that further inequality and stifle
innovation, or would we prefer to strengthen those choke points
and outlaw alternatives in the hopes that a powerful elite will
smartly choose who should and should not have access to
powerful tools and volatile markets?
For every transaction that we want blocked, there is
another transaction we should celebrate for being unstoppable.
Yes, there are some criminals making payments on the Bitcoin
network because banks won't bank them. There are also pro-
democracy activists in Belarus and anti-police violence
protesters in Nigeria taking donations on the Bitcoin network
because local banks won't bank them. Nonprofits like Bisol and
the Feminist Coalition in Nigeria raised millions of dollars in
Bitcoin donations last year, donations they were forbidden from
accepting by a corrupt or otherwise uncaring banking sector in
their respective countries.
In America, we don't always agree, but no matter what, we
are tolerant and expect everyone to have the opportunity to
stand up and fight for their own vision of the good. Crypto
innovation embodies that aspiration. It is rough around the
edges but holds some values above all: every node is an equal;
no one's voice should be censored; and work, rather than
privilege, is what counts in consensus. Thank you.
[The prepared statement of Mr. Van Valkenburgh can be found
on page 79 of the appendix.]
Chairman Green. Thank you, Mr. Van Valkenburgh.
I now recognize the Chair of the Full Committee, the
gentlewoman from California, Chairwoman Waters, for 5 minutes
for questions.
Chairwoman Waters. Thank you very much, Mr. Green. Ms.
Goldstein, earlier this year, PricewaterhouseCoopers released
their third annual survey of hedge funds in the cryptocurrency
market. According to the survey, cryptocurrency currently
accounts for 10 to 20 percent of all assets under management
for 1 in 7 hedge funds. Over 60 percent of the hedge funds
surveyed expressed a desire to start investing in
cryptocurrencies or to accelerate their existing investments in
cryptocurrencies by the end of 2021. Hedge funds often manage
funds on behalf of mutual funds, pension plans, and other
institutional investors which affect millions of regular
consumers and investors.
Ms. Goldstein, do you see any systemic risks associated
with hedge funds investing heavily in cryptocurrencies? And I
am more interested in this, having just listened to the last
presenter who talked about the choke point that we should not
be so concerned about. What do you think?
Ms. Goldstein. Thank you, Chairwoman Waters, for the
question. I am very concerned about the presence of hedge funds
and cryptocurrency. I think we have seen with the Archegos
meltdown this year that when banks have prime broker
relationships with hedge funds or family funds, as Archegos
was, who are doing risky things, it can redound to the
taxpayer-backed financial system. Credit Suisse lost billions
of dollars. All of the banks lost some $10 billion. If hedge
funds get further into crypto, they don't care about direction.
They will go long. They will go short. They can use leverage.
There are lots of cryptocurrency exchanges like FTX, and
Binance, and many others that allow people to use insane
amounts of leverage, 100 times to 1, and hedge funds are the
perfect client to use those sorts of leverage.
So what happens if a huge number of hedge funds, who have
prime broker relationships with too-big-to-fail banks, all
happen to be in similar crypto positions, whether it is long or
short, and there is massive volatility in the market? They may
have to sell some of their other assets. It may lead to margin
calls in their non-crypto assets, which could lead to forced
liquidations and sort of redound to the banks themselves in the
form of counterparty risks. So, I think--
Chairwoman Waters. Let me ask you, are there any reporting
requirements hedge funds must comply with that would provide
regulators and the general public more transparency regarding
which hedge funds are most heavily invested in
cryptocurrencies, and which of these institutional investor
counterparties may also be exposed to potential risk?
Ms. Goldstein. Madam Chairwoman, there are not, to my
knowledge, because cryptocurrency is not currently reported on
the Form 13F. It is not seen as an ownership interest, so
regulators are essentially totally in the dark about what hedge
funds' cryptocurrency positions are, and, I suppose, have to
rely on the financial press or trying to figure out, based on
the transactions on the blockchain and de-anonymize certain
addresses and figure out who are the hedge funds. But there is
no formalized way for regulators to know how much hedge funds
are in crypto.
Chairwoman Waters. Ms. Hammer, you just spoke to this issue
somewhat. Would you give me your knowledge about what kind of
oversight do we have now, what agencies have, what
responsibility, and what should we have?
Ms. Hammer. Chairwoman Waters, thank you for your question.
I, too, have concerns about crypto trading by private funds,
and one of the key issues, as I discussed in my opening
statement, is transparency and the availability of data. In the
crypto markets, we have no official public source for data.
Investors are operating based on online websites. There are
sometimes disparities over prices and interpretations of what
volatility may be.
And in some ways, it harkens back to credit default swaps
prior to the great financial crisis. That was a market that was
traded almost exclusively over-the-counter and highly
unregulated. When the great financial crisis hit, we saw that
credit default swaps exacerbated the risks, but once we
regulated them and instituted central clearing counterparties,
we had an official data source and an oversight regulator such
that we could identify where the risks lay. I think the same is
true for crypto.
And, as Ms. Goldstein said, the issues related to leverage
and whether it is appropriate or not for some of these assets
are extremely important. I do believe that, at a high level,
the authority of the FSOC to convene, to coordinate the
regulators is crucial because we are talking not just about
markets issues or private fund issues. We are talking about
crypto within banks. We are talking about crypto within
insurance companies and other non-banks, and that can implicate
taxpayer dollars in a number of different ways. So, in our
system, the FSOC can convene to coordinate those authorities to
work together.
Chairwoman Waters. Thank you very much. I yield back the
balance of my time.
Chairman Green. The gentlelady yields back.
The Chair now recognizes the ranking member of the
subcommittee, the gentleman from Minnesota, Mr. Emmer, who also
serves on our FinTech Task Force, for 5 minutes.
Mr. Emmer. Thank you, Mr. Chairman. This is interesting
following on the testimony, the questions we just heard. Mr.
Van Valkenburgh, let's start with this idea that there is a
need for regulation. When people promise investors wild profits
from proposed new digital tokens in an initial offering, is
that regulated?
Mr. Van Valkenburgh. A promise of future profits reliance
on the issuer's efforts is basically the Howey test. It is how
we classify things as investment contracts, and so the SEC
would probably treat those offerings in all cases as
securities. They regulate issuance and trading.
Mr. Emmer. Let me keep going. I want to come back to that
one, because I want to talk about what the SEC would probably
do and why that is a problem. When people make bets, again, Mr.
Van Valkenburgh, on the future price of cryptocurrencies or
trade with leverage, as we heard referenced, is that regulated?
Mr. Van Valkenburgh. That is on the future price of an
underlying commodity of swaps or futures. These are commodities
derivatives, and the CFTC has jurisdiction over that kind of
trade and those markets.
Mr. Emmer. So, yes, it is regulated.
Mr. Van Valkenburgh. Yes.
Mr. Emmer. Can companies sell and transmit--and this
probably goes to the first bit of testimony--cryptocurrency
without identifying their customers? Is that regulated?
Mr. Van Valkenburgh. That is heavily regulated, and while
Representative Sherman said that the one advantage of this is
avoiding KYC, I have to argue that every U.S. exchange is Bank
Secrecy Act (BSA)-regulated. They have to know their customers,
and file suspicious activity reports, and this has been the
case since at least 2013.
Mr. Emmer. So, the prices of cryptocurrencies, like
Dogecoin, have been quite volatile and seemingly susceptible to
influence by statements from persons and groups, maybe even
manipulated, as was suggested by one of the opening statements
here today. Is that regulated, Mr. Van Valkenburgh?
Mr. Van Valkenburgh. As an open source, open network
cryptocurrency, Dogecoin likely does not qualify as a security.
To the extent that line is unclear, Congressman Emmer, you
introduced excellent legislation last Congress that was
bipartisan and co-sponsored by Representatives Soto and Khanna,
that would help clearly delineate that line between securities
and commodities. But if we assume today that Dogecoin is a
commodity, it is still a regulated commodity for various
purposes. Specifically, in the manipulation context that you
raised, the CFTC has the duty to investigate and prosecute
manipulation, including at commodity spot markets under their
Commodity Exchange Act (CEA) authority, Section 6(c)(1), which
the Dodd-Frank Act added to the Commodity Exchange Act.
As SEC Chairman Gensler recently testified, there is, in
some ways, a gap here, because unlike traditional commodity
spot markets, which are like cattle auctions--I am buying a
commodity from you, you are selling it to me--these markets
have much higher volumes and a lot more retail participation.
So accordingly, it may be appropriate to extend market
supervision to these entities.
Another reasonable approach that I think would follow
Chairman Gensler's recommendations is another piece of
legislation that you introduced last Congress, the Digital
Commodity Exchange Act--I'm sorry, former Representative
Conaway introduced the legislation, but you co-sponsored it.
And for that, we are grateful because it would create a
reasonable guardrail-based approach to market supervision for
places where people are trading these commodities, even at the
spot market level.
Mr. Emmer. I would add that I also introduced the
Securities Clarity Act, which provides clarity for the SEC on
token issues to swiftly determine when and if a token is a
security. In the short time we have left, I believe that we do
have the regulatory framework, the laws in place. People in
this country don't get to run under the radar if they are not
complying with KYC and all of the other regulations that are
out there.
Would you agree, Mr. Van Valkenburgh, that the real issue
here is, while we can do some work perhaps as Congress on the
margins to clean up some of this, the real issue is that the
application of existing regulation and laws has not been
consistent, and there has been little enforcement in terms of
court decisions or things that can give us precedent so people
in this area know what is right and what is wrong?
Mr. Van Valkenburgh. I think that is right. There is a
certain wisdom to our flexible and open standards for investor
protection in this country, like our securities laws that have
these broad and flexible standards. However, they only work if
controversies end up in court and judges make clear rules about
new application of those laws. And one thing we have seen is a
replacement of a lot of decisions made by judges acknowledging
the interest of the parties, with administrative guidance that
is not always as clear as it could be. But the underlying laws
are sound and should be applied.
Mr. Emmer. Thank you.
Chairman Green. The gentleman's time has expired.
The Chair recognizes the gentlewoman from North Carolina,
Ms. Adams, for 5 minutes.
Ms. Adams. Thank you. Thank you, Chairman Green, Ranking
Member Emmer, and Chairwoman Waters for holding the hearing
today. To our witnesses, thank you as well.
Ms. Parker, there is a great deal of interest from both the
public and from Members of Congress with respect to the current
regulatory framework overseeing cryptocurrencies. So, as the
Vice Chair of the House Agriculture Committee, I have heard
plenty of discussion from my colleagues about not only who
should regulate cryptocurrencies, but how they should regulate
these entities. As you alluded to in your statement, many of
these discussions have centered around the roles of the SEC and
the CFTC. So, how are cryptocurrency markets currently
regulated in the U.S., and is this level of oversight and
regulation sufficient protection from the attendant risk posed?
Ms. Parker. Thank you. That is an excellent question, and
sort of like you, I come from the commodities world when I am
looking at these markets, and Bitcoin and Eth are the two
tokens that have a very clear regulatory framework. They are
commodities. And so at the spot level, the cash level, the CFTC
has generally not been active in that space in terms of the
robust market oversight that they provide to their futures
exchanges, and that is just because of the function of the
commodity markets. They sort of arose from commercial entities
coming together to buy and sell their pork bellies and orange
juice concentrate, and wheat, and corn, and soy. And so, those
markets--we don't really have established treating spot markets
for physical commodities or any form of commodities. So,
Bitcoin is sort of a novel application as an intangible
physical commodity. It is sort of a novel application of these
laws and these systems that have existed for almost 100 years.
What I would recommend, what I think makes sense is that
since the CFTC is a very sort of robust and experienced market
regulator, I think it makes sense to draw digital asset spot
products. I am not talking about other physical commodities, I
am not talking about financial commodities, just digital asset
spot commodities. I think it makes sense to pull them into the
CFTC's market oversight framework and apply those market
conduct and market surveillance requirements that are imposed
on the CME and ICE to these spot markets because they--
Ms. Adams. Thank you, Ms. Parker. I want to move on, if I
can.
Ms. Parker. Yes.
Ms. Adams. I am trying to get another question in, but
thank you so much.
Ms. Su, let me pivot to focusing on consumer protections.
In my opinion, we have spent too much time over the past few
years focusing on what happens on Twitter, but when it comes to
cryptocurrency volatility, Twitter has been front and center.
In January, we watched Bitcoin, with each Elon Musk tweet,
fluctuate in the months thereafter, so let me ask you, what are
the most concerning risks to investors in the marketplace, and
how can those risks be mitigated most effectively by
regulators? Ms. Su?
Ms. Su. Yes, thank you. I think from an investor protection
perspective, if you look at capital markets-related concerns,
there are three groups of primary risks we consider. Market
volatility, as you highlighted, is definitely front and center,
but the traditional way to handle it is through disclosure and
investor restrictions. By that we mean you provide material
information about the risk so investors would go into risk
taking in an informed way so they would price the risk
accurately. Similarly, with investor protection regarding
restriction, if you deem the instrument to be highly volatile
and highly risky relative to the risk tolerance and the
financial cushion certain individual investors have, you may
exclude those investors from such investments.
Ms. Adams. Okay.
Ms. Su. There are other risks related to fraud and scams,
so obviously, you handle it through rulemaking, enforcement,
reporting. And then the third category, which people usually
don't pay particular attention to, is safekeeping functions,
like the lost password. I think you are probably generally
aware that about 20 percent of a certain digital asset was lost
due to the lost key--
Ms. Adams. Yes, ma'am.
Ms. Su. --and custodian. Yes, custodian service, remedy
that.
Ms. Adams. Thank you, ma'am. Thank you very much. I am out
of time, and, Mr. Chairman, I am going to yield back.
Chairman Green. The gentlelady's time has expired.
The gentleman from Georgia, Mr. Loudermilk, is now
recognized for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman, and thanks to the
panel for being here. It is a very important hearing we are
having here today, and I think it is something we need to be
looking at. But one of the aspects of being here is that a lot
of times, people draw a line in the sand very early on, and
they take an early position on something, especially when it is
dealing with technology, because it is something they either
don't understand or there is this fear factor. And I have seen
that with cryptocurrency, because a lot of times, we don't see
the forest for the trees. And in this case, I think there is
something that we miss out on because we have either decided we
are for or against cryptocurrency, and that part we are missing
out on is the blockchain technology that is underlining, which
I think is very valuable for us in this nation, especially in
the Federal Government.
And I have been advocating for a long time that we utilize,
or at least we look very strongly at using blockchain
technology as a solution to our cybersecurity issues here in
this nation. When you consider the Federal Government--and we
know that we have had cyberattacks--there has been loss of data
and people's personal data has been inadvertently disclosed,
which caused a lot of issues. That isn't that hard to do when
you consider at how many points my personal information and
others' personal information resides within the Federal
Government. There is duplication of data in every place. My
Social Security number, my date of birth, my address, phone
number, all of this resides in another system that is
susceptible to attack. And all it takes is one weak link, and
then you have exposed it.
If you look at it as a veteran, my information is at the
VA. From years of working in business, it has been with various
departments, the Social Security Administration, you name it,
the IRS--if you look at all of the different databases, I did a
count one time, and there could be 47 different data points
where just my information would reside, and all it takes is the
breach of one of those. Because of the decentralization of
blockchain, it seems to me, that may be the solution to the
cybersecurity problems that we have in this nation.
Ms. Hammer, is this something that you would agree with,
and can you describe how the blockchain technology could be
used to enhance cybersecurity?
Ms. Hammer. Congressman, thank you for that excellent
question. I appreciate the chance to talk about the potential
benefits of blockchain technology. It is absolutely something
that I would agree with and certainly something that we work
with on a day-to-day basis at the Stevens Center at Wharton. As
you mentioned, blockchain is a decentralized technology, and
that is key because it has no single point of failure, so there
are many different uses for the technology, in addition to
cryptocurrency. With each new block in blockchain, the previous
blocks are stored, and this creates a fully traceable history
log, so it can potentially have many cybersecurity
applications. Blockchain can, therefore, be used to create
security profiles for user data, such as you mentioned, and it
protects the data by decentralizing it.
In addition, blockchain technology incorporates something
known as public key and private key security. Public key
infrastructure, much like an email address, can be used to
authenticate and authorize parties. And private keys can be
combined with it for end-to-end security and encryption of our
data. Blockchain can be used for many different means in
cybersecurity. It can decentralize security devices, such as a
home security system, to discourage hackers. It can protect
websites by decentralizing domain name servers, such as
separating an IP address from a name. And it can be, in fact,
combined with other security protocols, like biometrics, in
order to strengthen our cybersecurity options. So, I fully
agree there are many applications for blockchain technology,
and it is important for us to remember that this is the
technology that powers crypto. But the technology itself also
has many applications, and we would behoove ourselves to
consider those innovative possibilities.
Mr. Loudermilk. And that is the challenge I have had, is
separating what some will consider the stigma of cryptocurrency
from blockchain. In the remaining time, I have one other
question. Do you have concerns with a potential central bank
digital currency?
Ms. Hammer. Thank you, Congressman, for that excellent
question. I know that central bank digital currency has been
the subject of other hearings in this forum, and certainly it
is something that is being studied really across the country by
many different academics and not-for-profits. I think it is
important to consider that central bank digital currency could
take many different forms. It could be blockchain-powered. It
could be not blockchain-powered and run along a traditional
database system such as we do currently. There are concerns
about central bank digital currencies. Some of them relate to
issues around privacy and whether it actually achieves the
objective of having a central bank digital currency because,
rather than a decentralized system, which cryptocurrency is or
blockchain is, having a central bank digital currency would
concentrate our private information and, therefore, could
potentially be a target for hackers. At the same time, I
recognize--
Chairman Green. The gentleman's time has expired. Would you
kindly give the rest of your answer in writing and submit it
for the record?
Ms. Hammer. Absolutely. Thank you.
Chairman Green. Thank you very much, and when I have my
time, I may give you the opportunity to finish with my time.
The gentlewoman from Georgia, Ms. Williams, the Vice Chair
of the subcommittee, is now recognized for 5 minutes.
Ms. Williams of Georgia. Thank you, Mr. Chairman. My top
priority in Congress is ensuring that those most marginalized
remain at the center of our policy considerations. When it
comes to digital assets, this means making sure that investors
of all experience levels have equitable access to information
about the digital asset that they are investing in.
Ms. Hammer, how can regulators best communicate with all
consumers, especially those who may be investing for the first
time, about any risk associated with investing in digital
assets and ways to avoid predatory behavior in the market?
Ms. Hammer. Congresswoman, thank you for that excellent
question, and, as I mentioned in my oral testimony, investor
protection is a key concern and priority when we think about
cryptocurrency. And I return to what I recommended in terms of
coordinating Federal agencies because investor protection,
consumer protection, and even ERISA in the Department of Labor
are implicated when we think about investing in these markets.
Not every investor is the same. Investors have risk profiles.
They have different periods of time that they can invest in,
and not every asset is appropriate for every vehicle.
Today, we are seeing cryptocurrency being introduced into
things like retirement funds. We are seeing the rise of
cryptocurrency amongst younger investors through different
applications. And so, I do feel strongly that: number one,
coordination through the FSOC, through the Federal financial
agencies is extremely important both from a consumer protection
perspective and investor protection; and number two, that we
have the data and the resources to evaluate what is happening
in the market. Without an official public data source, I think
that we are a little bit in the dark about what the proper
regulatory framework should look like.
Ms. Williams of Georgia. Thank you. It is important that we
ensure consumer protection when it comes to digital assets, but
we also have to be sure that we are protecting the health of
the broader economy as the use of digital assets expand. So,
Ms. Hammer, more on this. Given that digital assets can change
rapidly in value, are there legislative considerations that
Congress should keep in mind to ensure any risk to the broader
economy is minimized as investment expands in these assets?
Ms. Hammer. Thank you, Congresswoman, for that question as
well, and I do believe systemic risk is a key concern. I do
believe that the Financial Stability Oversight Council is the
proper authority to consider systemic risk. Under Section 120
of the Dodd-Frank Act, it actually has a specific mandate to do
so. The fact is that cryptocurrency has really infiltrated many
different aspects of our financial system, and regardless of
what we may think the benefits and costs of that may be, it is
the reality today. Not only do investors hold crypto in their
individual portfolios, but we see it in private funds, as Ms.
Goldstein mentioned. We see it in banks. We have permitted
banks to serve as custodians. We have national trust banks that
are operating as crypto companies, and we have 50 different
States that are looking at a myriad of crypto rules. I think at
last count, 31 States were actually looking at crypto
legislation in the current session, so this level of activity
can be useful if it is innovative, but I think the key thing is
that we have a race to the top and not a race to the bottom.
And there are some things that should be regulated on a Federal
level.
As far as what a specific legislative mandate would look
like, I think that is to be determined after substantive study
by the FSOC, after we have established some public data sources
and there is clear coordination amongst the agencies.
Ms. Williams of Georgia. Knowing that we need more research
and investigation around this, I am thinking more along the
lines of some of my priorities in Congress, which are ensuring
consumer protection and the benefits to financial inclusion for
more people. So, are there any considerations that you have in
mind for Congress that specifically speak to those two areas?
Ms. Hammer. Thank you, Congresswoman, for that point as
well. I think the issue of financial inclusion is crucial when
we think about crypto. As we digitize our economy, the reality
is that some people may be included more and some people may be
included less, and I tend to think globally, because that is
the kind of research that we do at The Wharton School. When I
think about financial inclusion globally, there are 1.7 billion
people who are unbanked, and two-thirds of them do have mobile
phones. Now, that may differ from what we have in the U.S. I
think that having legislative priorities around consumer
protection related to these assets would be important, but I
also think that clarity in that space and international
coordination is key because the technology, going back again to
the uses of the technology, has many beneficial functions for
others in other areas who may not be so lucky to have stable
currencies. They may be subject to political and economic
instabilities that make using crypto an important method for
them to run their businesses and to support their families.
Ms. Williams of Georgia. Thank you, and my time has
expired.
Ms. Hammer. Thank you.
Chairman Green. The gentlelady's time has expired.
The Chair now recognizes the gentleman from Tennessee, Mr.
Kustoff, for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman. Ms. Hammer, if I can
continue with you just briefly, I know that you were not
finished answering Mr. Loudermilk. Was there anything you
wanted to say in conclusion to his questioning?
Ms. Hammer. Thank you so much, Congressman. We were
discussing central bank digital currency (CBDC), and I wanted
to acknowledge that there may be privacy concerns around
central bank digital currency, but emphasized that there are
many different iterations the technology can take. And I think,
going back to some of our earlier discussion, one of the key
priorities that we focus on in our work related to Fintech and
blockchain at the Stevens Center is financial inclusion. And
so, when I think generally at a very high level about CBDC, I
believe that is a focus that we should continue with, and it is
an important topic of discussion related to crypto as well.
Thank you.
Mr. Kustoff. Ms. Hammer, if I could, along those lines,
Vice Chair Quarles of the Fed, I believe on Monday, I am going
to characterize, expressed some skepticism about central bank
digital currency. My question to you is, and we have talked
about innovation and about stifling innovation, do you
personally have concerns if we move slowly, and, say, the
Chinese accelerate? Can you play out what happens over 12
months, 24 months, 5 years?
Ms. Hammer. Thank you, Congressman, for that question, and
I know it is an important topic for all of us as we think about
CBDC. To be honest, I don't have any particular expertise on
China and our policy as it relates to China. I would say that
one of the things that I think is valuable about thinking about
blockchain technology generally and CBDC as it may relate, is
how it can improve our financial infrastructure and our
financial system. We live in a world today where it takes days
to clear and settle a payment. We live in a world where we have
intra-day between counterparties who are trading. We have an
antiquated central clearing counterparty system that is in need
of a revamp in some ways. And so, I believe that we should be
doing everything we can to modernize our system, and that we
should be taking advantage of the available technologies.
The key thing, from my perspective, is regulatory clarity.
I think that clarity is required for businesses to innovate. I
see it every day in some of the companies that we work with.
For a company to develop a product, or create a go-to-market
strategy, or raise money, they need clarity in the law, and
this is an area where they just don't have it on particular
issues. So, my belief is that we should be working in a
coordinated fashion to provide that.
Mr. Kustoff. Thank you, Ms. Hammer.
Mr. Van Valkenburgh, inflation is a concern for people
across the country, certainly in my district in West Tennessee.
In an interview recently, you talked about or you advocated
essentially that a consumer may want to buy Bitcoin because it
could be a way to balance an investment portfolio against the
threat of inflation. Could you expound on that, please?
Mr. Van Valkenburgh. Sure. So, the intuition here is fairly
straightforward. Bitcoin is the world's first digital
commodity, and it functions rather like gold, except it is gold
that you can send peer-to-peer over the internet. Now, as to
the wisdom of any particular investment in a portfolio, I think
most people agree that diversity is how we can achieve greater
financial stability for ourselves and for our major
institutions. And so, my point in that previous interview was
simply that, as part of a diversified portfolio, one might be
interested in owning some Bitcoin, along with some gold, along
with some stocks--American industries, overseas industries--in
order to achieve some balance and hedge against the risk of
inflation should we see it being pronounced.
Mr. Kustoff. And you may have answered this, but would you
advocate that strategy, for lack of a better word, for the
average retail investor?
Mr. Van Valkenburgh. I think we have guardrails in place
now for these Bitcoin spot markets, for example, that make that
a safe bet as long as we have good investor education, which is
always a perennial problem. But if you go to the right places,
the American-run companies, they are State-licensed money
transmitters, they are New York Department of Financial
Services-chartered banks and trusts. And these are safe places
where a customer will be given clear information about what
they are buying from a person who has posted a bond, can prove
minimum capital requirements, and has a robust regulatory
structure around them to ensure investor protection.
Mr. Kustoff. Thank you, sir. I thank you, I thank the other
witnesses, and I yield back.
Chairman Green. The gentleman yields back.
The Chair now recognizes the gentlewoman from Michigan, Ms.
Tlaib, for 5 minutes.
Ms. Tlaib. Thank you so much, Mr. Chairman. We all know
that cryptocurrency like Bitcoin currently consumes enough
energy to power a small nation, and the Cambridge Bitcoin
Electricity Consumption Index is one of the most-cited
cryptocurrency energy estimates. Right now, estimates sit
actually at an annualized consumption of 66.14 terawatt hours.
That is actually around a third of the energy consumption of
Facebook, Google, and Amazon's data centers combined. But due
to the decentralized nature of cryptocurrency, even the
Cambridge model is just a small--not a precise estimate, and
their upper bound is probably as high as 150 terawatt hours
each hour. As Bitcoin miners compete against one another for
increasingly scarce tokens, energy usage increases.
Mr. Van Valkenburgh, how can we better measure the energy
consumption and energy resources of cryptocurrency to account
for its carbon footprint?
Mr. Van Valkenburgh. I agree that the Cambridge data is our
best shot right now at looking at this question. What we have
the benefit of is knowing everything that the peer-to-peer
ledger tells us. It is shared and open. It is not a proprietary
standard from a corporation. And the peer-to-peer ledger shows
us how much work these miners are performing to make sure that
transactions get in blocks and they are not censored by some
third party or some government that wants to coerce certain
transactions or block certain transactions. It is this vibrancy
between miners that guarantees that the miners cannot form a
cartel and choose to systematically exclude certain persons
from this financial system. When you have them compete and when
you have evidence of their competition in the form of proof-of-
work calculations on a public ledger that any person can audit
independently, you get that censorship resistance. As far as
energy usage--I'm sorry.
Ms. Tlaib. No, go ahead. I need to get to my next question,
because I really want to talk about the carbon footprint.
Mr. Van Valkenburgh. Okay. I will be brief. I'm sorry. So
as far as energy usage, it is worth noting that the traditional
financial sector uses an estimated 5 times more energy than
Bitcoin. Now granted, the traditional financial sector moves
more money, but it is worth noting that Bitcoin energy usage
does not scale per transaction, so most of the costs are the
fixed costs of setting up an open peer-to-peer system that is
robust, and we have technologies like the Lightning Network
that can bundle millions of transactions into that existing
system without a meaningful increase in energy. So, it is
possible we can have an open financial system that is
censorship-resistant using one-fifth of the energy of the
current financial system, if we were to eventually move more
transactions--
Ms. Tlaib. Sure. Thank you. Ms. Goldstein, is
cryptocurrency fundamentally incompatible with a carbon-neutral
future?
Ms. Goldstein. Congresswoman, thank you for the question. I
think it depends. It depends on the cryptocurrency. It depends
on which system it uses for validation. So, proof of work, I
would argue, is the most carbon-intensive of the validation
systems in cryptocurrency. This is the one that Bitcoin uses,
this is the one that Ethereum currently uses, but it is trying
to move away from it, and that is because it is effectively a
lottery system. Any miner can try and compete for the 6.25
Bitcoin reward that is generated every 10 minutes, and everyone
is essentially trying to guess the address of the next block.
Some people describe this as solving complicated math problems,
but it has a lot of people competing for a single reward and it
generates a lot of energy.
I think as more cryptocurrencies embrace different
validation methods, whether it be proof of stake, proof of
history is another one, perhaps the footprint could be reduced,
but it seems unlikely that Bitcoin will move away from the
proof-of-work method. And as you cited, the Cambridge Index,
when crypto is very high, when Bitcoin reached its highs in
May, we saw an estimate of 143 terawatt hours, which is more
than the consumption of Argentina and more than the consumption
of Norway. And so, I think the answer is it depends, but I
think the proof-of-work validation method is climate-
incompatible.
Ms. Tlaib. Well, no, a recent study out of China suggested
that without taking any action to curb the greenhouse gases
produced by electricity generation for Bitcoin mining, that
they could see, like, 130 million tons of carbon per year. Mr.
Chairman, my point is that the climate crisis is here. We need
to do everything we can in our power and our purview to really,
truly reduce our carbon footprint and so many other things that
we are trying to do in addressing that. I saw firsthand what
was happening in my community as we saw record rainfall. But I
really do appreciate this committee hearing, and I yield back.
Chairman Green. The gentlelady yields back.
The Chair now recognizes the gentleman from South Carolina,
Mr. Timmons, for 5 minutes.
Mr. Timmons. Thank you, Mr. Chairman. Some of my Democrat
colleagues have painted a broad brush against cryptocurrency as
the purview of charlatans and scammers. In fact, Mr. Sherman
has called for an outright ban on cryptocurrencies in the
United States. If we could, just for a moment, take a deep
breath and heed the words of President Obama's own CIA
Director, Mike Morell, who, in a recent report said that,
``Bitcoin's use in illicit finance activity today is extremely
limited and blockchain ledgers are a highly effective crime-
fighting and intelligence gathering tool.'' He urged for a more
fact-based dialogue between industry and government to ensure
that real risks are mitigated and the opportunities for
potentially revolutionary technologies are not squandered.
Mr. Van Valkenburgh, is this the road we are headed down?
Are cooler heads prevailing or will alarmism win out?
Mr. Van Valkenburgh. I have been lucky to have the job that
I have had for the last 6 or 7 years now where we have gotten
to meet with all of the regulatory agencies that have some
piece of jurisdiction over cryptocurrency, both in the Obama
Administration and now in the Trump Administration. And I have
always been impressed by the level of knowledge of that one
person, or maybe that small group of people within the agency
who is focused on this technology and focused on reasonably
applying the existing rules to the risks presented by the
technology. I think at the regulatory level, we have seen
cooler heads prevail for a long time, and I am grateful for
that. We have had reasonable regulation from an anti-money
laundering standpoint. To counter what Representative Sherman
suggested, we have seen KYC and AML at all of the U.S.
exchanges and robust suspicious activity reporting. And I have
talked to law enforcement who have actually said they prefer
doing investigations when it is on an open blockchain network
because there is a single source of truth, which is a ledger,
rather than a number of dubiously well-held records at
international financial institutions.
Mr. Timmons. Sure. Thank you. Thank you for that answer. It
really frustrates me when I hear members of this committee
imply that Americans are not smart enough to know that
investing in cryptocurrencies carries risk or even the capital
markets, more broadly. We heard a similar tone in the GameStop
hearings as well. They won't come right out and say it, but I
find it insulting that members of this committee feel that
their constituents don't know what they are doing when they
make investments. I am not going to patronize the folks back
home in my district. Do we have a role in making sure they know
what they are getting into? Absolutely. But let's stop implying
that our constituents don't know what they are doing.
My next few questions are for Ms. Hammer. There is a common
misperception which we have heard several times today that
cryptocurrency is, ``unregulated.'' However, we have seen the
SEC and other regulators at the State and Federal level be
proactive in enforcement actions and providing guidance as to
how businesses can offer services in relation to
cryptocurrency. Can you describe the current regulatory state
of cryptocurrency in the United States, and regulations that
crypto companies have to comply with in regards to consumer
protection?
Ms. Hammer. Thank you, Congressman, for that excellent
question, and it definitely covers many of the issues that we
have discussed here today and the complexity of the regulatory
framework. The reality is that crypto and crypto companies
receive different types of regulatory treatment throughout our
regulatory system. This is how our system works. The Internal
Revenue Service issued a notice in 2014 that crypto would be
treated as property, but if you are paid in crypto for your
work, it is treated as income and taxed as such. The Securities
and Exchange Commission may regulate cryptocurrency as a
security if it meets the criteria of the Howey test unless that
particular asset is eligible for an exemption. In some cases,
crypto may be regulated as a commodity by the CFTC, and there
are many different types of companies that interact in the
crypto world now that have different authorities, such as the
National Trust Charter from the Office of the Comptroller of
the Currency. And as I mentioned earlier, we have a number of
States that are innovating their own regulatory frameworks.
So, my key issue is that we need regulatory clarity in our
policymaking, and I believe that we have an authority in place
through the FSOC to lead that at a high level. The FSOC has a
mandate under Dodd-Frank Section 120 to coordinate around
issues related to potential systemic risk. And in addition to
that, it has the ability to form a technical or advisory
committee, including one that would work with the States. In
addition, the FSOC is charged with consultation with
international standard-setting bodies, and we have talked about
a number of issues today that are international in nature. In
fact, crypto crosses borders. There are places where there are
gaps in the regulation, and the best way to address that is
through international standard setting.
Mr. Timmons. So, do you think that the Federal agencies
have the tools necessary to coordinate their efforts around
blockchain and crypto regulation, or do you think it is going
to require congressional action?
Ms. Hammer. I believe that we have the authority in place
to coordinate through the Financial Stability Oversight
Council. That said, I think we have a lack of clarity in the
regulatory framework, and I strongly believe that we need to
have official public data sources. In order to create a
framework for cryptocurrency regulation, we need a map, and to
have a map, we need data about where is crypto, where do the
risks lie, et cetera.
Mr. Timmons. Ms. Hammer, I'm sorry, my time has expired. I
appreciate your answer. With that, I yield back. Thank you.
Ms. Hammer. Thank you.
Ms. Williams of Georgia. [presiding]. The gentleman from
Illinois, Mr. Garcia, is now recognized for 5 minutes.
Mr. Garcia of Illinois. Good morning everyone, and thank
you, Chairman Green and Ranking Member Emmer, for hosting this
important hearing, and, of course, thank you to the witnesses
today. I think it is easy to fall into a trap of believing that
cryptocurrency is too technical for everyday people, that
trends like GameStop and crypto are funny, weird coincidences
that might make you rich. The fact is that the crypto market
represents more than $2 trillion in assets, and $2 trillion
matters to everyone. In this committee, it is our
responsibility to look after the financial system.
I watched my neighbors lose their homes in the great
financial crisis, and many neighborhoods in my district never
recovered. I am glad that we have not faced another crisis like
that yet, but I am very worried about the future. The fact is
we don't know all of the risks that cryptocurrencies create for
us, and we know that cryptocurrencies are extremely volatile.
We know that some of our largest banks are figuring out ways to
get into them, but we don't know how concentrated ownership is,
and we don't know how exposed our hedge funds already are. So,
in short, we know that crypto is big, but we don't know all of
the threats that it can pose.
Ms. Goldstein, it seems like many of the cryptocurrency
proponents are at least honest. They want to get around
regulations. How much of the appeal of cryptocurrency is just
regulatory arbitrage instead of real innovation?
Ms. Goldstein. Thank you for the question, Congressman. I
come at this from the perspective of someone who worked at
Merrill Lynch and Deutsche Bank--well, Merrill Lynch prior to
the 2008 financial crisis. I worked for the over-the-counter
equity derivatives trading desk before Dodd-Frank, when there
was no regulation, and all of the trading was essentially
opaque, and the cryptocurrency markets remind me of that time.
And there have been statements in this hearing today that all
U.S.-based exchanges have Know Your Client requirements, which
is true, but that is not the only place U.S. users can trade
cryptocurrency. There are DeFi platforms, and I have yet to
come across a single DeFi platform that has Know Your Customer
requirements. And so, there are a number of ways to sort of
evade some of the so-called safeguards that are already being
touted as being in place.
And I think we need to look at what CFTC Commissioner Dan
Berkovitz recently said in a speech, which is that some of
these DeFi platforms are operating as unregulated, unregistered
exchanges and may be illegal under the Commodity Exchange Act.
I also think that we need to be concerned about leverage--
leverage by institutions, but also leverage by retail
investors. Retail investors in the stock market traditionally
can't have more than a 2 to 1 leverage, but in cryptocurrency
markets, many individual investors can get up to a 125 to 1
leverage, and that can wipe you out quite quickly. And so,
there are opportunities in the space, unfortunately, for
regulatory arbitrage, and I do think that is part of the reason
that they have been successful to date. I do think that the
regulators should take a close look at their existing
enforcement abilities to see what can be done about that.
Mr. Garcia of Illinois. Thank you. I think you just got to
the second question I was going to ask you, and that is, what
are the most important things that regulators can do to keep
crypto from threatening our financial system?
Ms. Goldstein. Congressman, I will take a shot at
elaborating. I do think that in some ways, the United States is
behind. There has been a lot of recent regulatory activity.
Canada has pursued enforcement actions against Bovet and
KuCoin, among others. Japan and Germany have warned Binance
about their so-called tokenized stocks, which are essentially
crypto assets that track the performance of stocks and look
very similar, to me, to the kinds of equity swaps or total
return swaps that crashed the Archegos Family Fund. We recently
saw the U.K.'s Financial Conduct Authority (FCA) tell Binance
that they need to put a warning on their website as of today
saying that they are not registered with the FCA. And I think
in some ways, the U.S. regulators are behind international
regulators in putting out these sort of consumer warnings, so
that is one thing that they could do.
Another thing that they could do is look at leverage by
retail investors. Why is there this difference between the
access to leverage of retail investors in the stock market and
in the crypto markets? And as I said in my opening statement, I
think it is very important, whether it is Congress or the
regulators, that we pursue an avenue to ensure that private
funds, like hedge funds, are disclosing what their
cryptocurrency positions are so that the regulators can get a
handle on any systemic risk concerns.
Mr. Garcia of Illinois. Thank you so much. I yield back.
Chairman Green. The gentleman yields back.
The Chair now recognizes the gentlewoman from Texas, Ms.
Garcia, for 5 minutes.
Ms. Garcia of Texas. Thank you, Mr. Chairman, and thank you
for calling this very important hearing on a topic that has
been on the minds of many of us. The issue of crypto assets is
so important to us because we must understand what the
financial marketplace of the future will look like. Digital
assets present an exciting new frontier with the potential to
bring the unbanked into our economy. In fact, 12.2 percent of
Latinos and 13.8 percent of Black households were unbanked in
2019 compared to only 2.5 percent of White households. This is
not the first time I have discussed that, and I will continue
to discuss it.
While cryptocurrency is a new frontier, we must be cautious
to make sure that we protect consumers from any avoidable
risks. We need to bring disenfranchised Americans into the
financial fray, but we must also look at the bigger picture to
make sure that we do not inadvertently allow a system to grow
that grants too much market power to a few decision makers. It
is our job as lawmakers to protect the consumers from financial
abuses. This includes protecting the sovereignty of the U.S.
dollar. We cannot allow anyone to compete with our U.S. dollar.
Without a sovereign dollar that represents the primary form of
currency in this country, we risk destabilizing our financial
markets, and I would also suggest it would destabilize global
markets. We must protect the valued merits of the U.S. dollar,
both in cash and digital form.
Stablecoins, such as Facebook's Diem, present a sovereignty
risk to our domestic currency. In other words, there is a risk
of these stablecoins replacing the U.S. dollar and undermining
the Federal Reserve's ability to perform its critical functions
as the central bank. The World Economic Forum has warned its
member countries of this risk, and the Bank for International
Settlements has urged countries to form their own central bank
digital currencies so they can offer access and still protect
the sovereignty of their currencies.
Last Congress, I introduced a bill to regulate and manage
stablecoins as securities. Pegging them to a currency without
proper regulation, like Facebook has done with Diem, is a step
forward, but it does not address all of the risk.
Ms. Goldstein, I wanted to start with you. How urgent is
this need for regulating stablecoins and protecting the U.S.
dollar?
Ms. Goldstein. Congresswoman, thank you for the question. I
think it is an urgent need for regulators to look into
stablecoins. Thankfully, we have already had State attorneys
general looking at the problem. New York State Attorney General
Letitia James has looked at BitConnect, which operates the
Tether stablecoin, and they have recently reached a settlement,
and you can no longer buy Tether in the State of New York. But
I think there are a lot of questions about what is Tether
actually backed by. They recently had to disclose a number of
their reserves, which included commercial papers and cash-like
products, but they had very little actual cash. They had some
commodities. They had some other digital assets. And I think
there was recent reporting, I believe it was in the Financial
Times, where they asked some of the large banks, who tend to be
one of the major counterparties for commercial paper, and they
said they hadn't done any business with BitConnect, so who are
they doing business with?
I think this is an opportunity to make sure that
stablecoins are actually based on something, and we are not
just relying on faith, that it is actually pegged to some
denomination of the U.S. dollar or another currency. And I
think perhaps one way to approach that would be to have central
banks issue central bank digital currencies--
Ms. Garcia of Texas. Right. And we hear from some, ``You
can't do that.'' It is not about regulation. We can't go under
as a government. We always just regulate. We have to allow for
innovation. Do you see that it is possible to strike a balance
where we protect innovation and we allow that to occur, but
balance the need for the sovereignty of our dollar, and balance
of protection that we need for consumers?
Ms. Goldstein. Congresswoman, yes, I think we absolutely
can achieve that balance. I don't think it is unreasonable to
want to ensure that something that pretends to be pegged to one
U.S. dollar actually is and isn't capable of breaking the buck
and people losing their funds. That is not to say that there
aren't existing problems in the financial system. I think there
may be similar problems with money market mutual funds and
their sort of ability to peg themselves to the dollar and break
the buck. But we can always do better, and we can strike the
right balance to both protect consumers and also encourage
innovation. I don't think that they are in conflict.
Ms. Garcia of Texas. Thank you. I did have one more
question, but I will submit it in writing, Mr. Chairman. I see
that my time is down to 3 seconds, so I will yield back.
Chairman Green. The gentlelady yields back. The Chair now
recognizes the gentleman from Ohio, Mr. Gonzalez, for 5
minutes.
Mr. Gonzalez of Ohio. Thank you, Mr. Chairman, and thank
you to our panel. In a way, I am sort of encouraged by today's
hearings. I think there is more broad agreement than is normal
in this committee, at least amongst the panel, the majority of
the panel, that we do need clarity. We do need clarity with
respect to how we are going to regulate in this space because
we are pushing a lot the innovation overseas. I hope we get
that clarity.
Ms. Parker, I want to start with your testimony. You
suggest, to my earlier point, that this uncertain regulatory
environment does choke innovation and pushes projects overseas,
correct?
Ms. Parker. That is correct.
Mr. Gonzalez of Ohio. Thank you. And it forces Americans to
do things like use VPNs as a workaround, and I think you
rightly highlight that this is a bad outcome for Americans.
Ms. Parker. That is correct.
Mr. Gonzalez of Ohio. Thank you. You also say that
regulators are hesitant to get involved when, in your words,
``relevant Members are hostile to crypto.'' Subcommittee Chairs
on this specific committee would qualify as relevant. I won't--
Ms. Parker. They qualify as relevant, but not hostile.
Mr. Gonzalez of Ohio. Right.
Ms. Parker. Right.
Mr. Gonzalez of Ohio. But some, potentially. So assuming
regulators are listening, and I didn't want to put you in that
box there, but you did say it, listening, I would encourage
them to listen to the Full Committee and not ``relevant
Members'' who say ridiculous things, like people should invest
in the California lottery instead of cryptocurrency, and
suggest that if it is possible to lose money, that some people
are going to make money and others are going to lose money,
that whatever that thing is, whatever that instrument is, ipso
facto should be banned. And also, people who suggest that
because there are money launderers and bad people who use
cryptocurrencies--and there are, we know that--that it should
be banned.
I would like to cite a statistic by Katie Haun, who broke
up the Silk Road scheme a while back: 99.9 percent of money
laundering with fiat currencies goes unprosecuted. So, the
commentary around whether we should allow cryptocurrencies to
exist on AML lines, I would ask, compared to what? Compared to
a fiat where 99.9 percent goes unprosecuted?
I want to shift now to Mr. Van Valkenburgh. Another comment
was made was, well, it is highly volatile, and because it is
highly volatile, there is necessarily systemic risk, and we
should ban it because it is highly volatile. Here are some
bubbles in the crypto space: in 2011, it went from $1 to $31
down to $2, with no systemic risk; in 2013, $13 to $266 down to
$65; in 2015, $65 to $12.42 to $200. And then obviously, in the
last year, we have seen it go from a couple thousand to
$60,000, back down to $30,000 and bounced up. At any point, Mr.
Van Valkenburgh, did the Federal Government have to step in and
prop up the cryptocurrency markets or save anybody?
Mr. Van Valkenburgh. No. By definition, cryptocurrencies
are unbacked. We have heard some Members question whether that
is wise, but something that is not backed doesn't have promises
associated with it, and so there aren't promises to be
disappointed and someone to be bailed out in that case. It is
like gold. How would you bail out the price of gold? Whom would
you pay?
Mr. Gonzalez of Ohio. Exactly. And then with my final
minute, I would like to talk to you. There was a comment made
that people are going to lose money, and that is definitely
true. Can you compare blockchain and cryptocurrencies to the
early internet? Maybe use the Pets.com and Amazon analogy, if
you could.
Mr. Van Valkenburgh. Absolutely. So, these are brand new
systems that do something amazing. They allow people across the
world to coordinate to perform and provide a service that
previously could have only been performed and provided by a big
company. So, just like the internet suddenly gave us the
ability to all have our own blogs and not necessarily have to
rely on the New York Times or the Wall Street Journal, the
nature of Bitcoin is quite radical. It allows us to rely on
ourselves in addition to centralized entities. And the
radicalness of that innovation is something that people will
get excited about for the right reasons, and sometimes overly
excited for the wrong reasons. So, I think it is a good
metaphor.
Mr. Gonzalez of Ohio. Right. And so, there is risk in the
system, but with great risk comes great reward, and if you want
to ban risk, well, guess what? You also ban reward and you ban
innovation. And so, I thank you, and with that, I yield back.
Chairman Green. The gentleman yields back.
The gentleman from California, Mr. Sherman, who is also the
Chair of our Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, is recognized for 5
minutes.
Mr. Sherman. Especially after the last gentleman's
comments, I have a lot to say, and I will use my 5 minutes to
say them. Of course, as I pointed out in my opening statement,
and thank you, Mr. Chairman, for allowing me to make an opening
statement, those who live in the crypto world have their
relevance, their fortunes caught up in making this successful.
We are told that cryptocurrencies are fun and useful, and there
might be somebody in my district who enjoys trading them. One
thing that would be useful would be a $10,000 bill. It would
occasionally be used to buy an automobile, but it would be
uniquely valuable for those drug dealers. We would make their
lives so much easier when they have to deal with these $100
bills. Imagine if they had a $10,000 bill. And our natural
tendency is to try to facilitate and help people do their
financial transactions. But I, for one, am not looking for a
more accurate heroin scale to make sure that one drug dealer
doesn't get cheated by another.
We are told that you have to be for cryptocurrencies,
otherwise, you are anti-science. I am for the internet. I am
for semiconductors. I am for computers. I am for blockchain.
That does not mean I have to be for a cryptocurrency or, for
that matter, for that $10,000 bill that would make the lives of
some of our constituents easier. We have to keep pace with
China. China is close to banning all cryptocurrencies. They are
going to protect their economy, protect their currency, and
protect their tax collection system. If we fail to keep up with
China, we will fall behind.
The biggest threat to Bitcoin is Ethereum. The biggest
threat to Ethereum is Dogecoin. The biggest threat to Dogecoin
is Catcoin, Dogecoin, and Hamstercoin. There is an unlimited
number of potentially popular cryptocurrencies. Compare that to
sovereign currencies. There are a limited number of nations,
but even then, there are four or five big economies. The
Uruguayan peso will never displace the U.S. dollar, but will
Ethereum displace Bitcoin? Will Hamstercoin displace Ethereum?
And, oh, by the way, if people are going to take the time and
effort and the intelligence to create new cryptocurrencies,
will they have a back door so that they can have a few trillion
dollars of their own? We are told that is impossible from the
same people who say it was impossible that between 2017 and
2020, more than $19 million worth of Bitcoin and Ethereum were
successfully double spent, effectively counterfeiting the
supposedly hamper-free currencies. We are going to have one
cryptocurrency after another, and those cryptocurrencies will
have less and less protection.
I want to commend Rashida Tlaib for talking about the
effect on our planet, and I ask unanimous consent to put in the
record an article from the Wall Street Journal detailing how
coal plants that had been mothballed, that were no longer being
used, are being put back online just to create electricity to
mine Bitcoin.
Chairman Green. Without objection, it is so ordered.
Mr. Sherman. One of our witnesses says that traditional
financial systems use 5 times as much energy. Yes, that is to
do 500,000 times more transactions. Everything that is
purchased on this planet at the retail level is purchased with
a sovereign currency, so the 5 times is a tiny percentage. We
are told that cryptocurrencies can be a hedge against
inflation. We know that currencies are supposed to be a store
of value. The dollar does erode in value, perhaps a quarter of
a percent a month. You can buy Treasury inflation-protected
securities and be fully protected from inflation, or you can
say that you are trying to get a good store of value, so you
are going to invest in a cryptocurrency that could lose a
quarter of its value if there is a joke on SNL, as there was
recently and, as we saw, a nearly one-quarter drop.
We are told that we are going to have Know Your Customer at
the level where you are trading and investing, but ultimately,
Bitcoin is supposed to be a currency, and so you transfer it to
your individual wallet, and there it is totally anonymous. Yes,
the records are maintained forever anonymously, and, with that,
you have the perfect tool for those who are underpaying their
U.S. taxes by a trillion dollars a year, concealing $3 trillion
a year in income. And that means perhaps $30 trillion that has
to be hidden every decade. Only with cryptocurrencies can we
evade the effort to enforce our tax laws. That is why
cryptocurrency is popular.
Chairman Green. The gentleman's time has expired.
Mr. Sherman. I yield back.
Chairman Green. The Chair will request that the gentleman
place his question in writing for the record.
Mr. Sherman. Thank you.
Chairman Green. The Chair now recognizes the gentleman from
Ohio, Mr. Davidson, for 5 minutes.
Mr. Davidson. I thank the chairman, and I really appreciate
this hearing. We have come a long way in Congress, just by
having this hearing, so thank you. Thank you for the colleagues
who have taken time to prepare for it. Some know the topic very
well, and some are just getting acquainted with it, and some,
no matter how well-acquainted, will remain hostile to the idea.
Look, I won't spend long on Mr. Sherman's remarks, but China is
building the creepiest surveillance tool in history. We should
absolutely not emulate them. The whole fact that China is doing
that is why we should be embracing decentralized distributed
ledger technology that is more secure and does protect privacy.
We could actually go further to defending freedom and restoring
our Fourth Amendment constitutional protections in the
financial sector by embracing the potential of this technology,
not by being hostile to it. The third-party doctrine has
annihilated the whole concept of privacy, and, yes, we
absolutely should keep the country safe. I could spend a lot
longer, but I am reminded of Proverbs 26:4, so I won't spend
longer on his comments.
Ms. Su, your testimony is the only one I saw that discussed
Tether at length. I would like to delve into that for a moment.
Ms. Goldstein, you spoke about the same topic. Last month,
Tether revealed the breakdown of its reserves. In their
disclosure, we learned that nearly 50 percent of its reserves
are held in unspecified commercial paper of unknown quality. I
looked at a few constant net asset value funds or liquidity
funds held by larger banks to see how their composition
compares to Tether's. While these funds are not a part of the
crypto market, they are targeted for investors with surplus
cash deposits who seek liquidity from their investments. Thus,
they serve a similar function to Tether or other stable coins.
What I found when I looked into these liquidity funds was
that commercial paper accounted for around 25 to 30 percent of
their underlying reserves in the net asset value funds.
Additionally, we know the quality of those commercial paper
holdings is disclosed. Ms. Su, based on Tether's disclosure, do
you think there should be further disclosure regarding its
underlying composition?
Ms. Su. Yes, I think that one was the first disclosure
ever, and the New York Attorney General's office took actions
in investigating the case prior to its mandated disclosure as
part of the settlement agreement. And some of the argument
focused around the earlier promise of full backing and whether
the disclosure came out to match that early promise.
Mr. Davidson. Yes, and definitely a relevant piece. It is
easy to break the buck, particularly when you hold structured
credit with an undisclosed quality for the structured credit,
so where they are at in the position is really important. It
may not actually be a stablecoin.
Ms. Parker, in your written testimony, you said that the
SEC is not comfortable approving traditional regulated products
based in crypto, such as a Bitcoin ETF, even though it, ``would
provide more transparency into crypto markets.'' You go on to
say, ``Because of this hesitancy, there is a lack of regulated
products that are commercially attractive to market
participants.''
Ms. Parker, can you expand on how regulated commercial
products like a Bitcoin ETF and other traditional regulated
products would bring additional consumer protection elements to
the cryptocurrency system?
Ms. Parker. Thank you, Congressman. That is a great
question. My point really is that there are not sort of the
Bitcoin ETFs, the leveraged products, the margin products that
are available on foreign exchanges that U.S. customers are
routinely accessing through the internet with a VPN that
provides, frankly, too much leverage. And they are likely
inappropriate for most retail customers. So my point is, to
sort of stop that phenomenon, let's counter with having U.S.-
regulated exchanges, securities exchanges, futures exchanges,
list regulated products that have some form of margin, that
have some form of leverage that is available to retail
customers that is appropriate for their sort of credit and
suitability for their trading experience.
So, let's have this as a U.S. alternative to the foreign
exchanges that U.S. customers can access because it is just a
website. So, the Bitcoin futures, the margin products, the
leveraged spot products that retail customers are desperately
seeking at the overseas exchanges, let's have them in the
United States.
Mr. Davidson. Thank you for that. I really appreciate it.
It is a great point. Some regulation would be good. I would
love to talk more, but this is the point of the Token Taxonomy
Act that has been bipartisan from its origins, and it would
provide some regulatory clarity for what is a security and what
is not. It wouldn't have anything to do with the ETFs, but it
would provide a basis for it, and if we can get to that, we
really can do a better job of protecting consumers. Generally,
when we protect consumers, we do provide some regulatory
clarity, and we had a great hearing on SPACs. You can have an
ETF in SPACs, but currently nothing with Bitcoin, so thanks a
lot. My time has expired, and I yield back.
Chairman Green. The gentleman's time has expired. The Chair
now recognizes himself for 5 minutes.
Dear friends, I do have some consternation, and my
consternation emanates from 2008 when I, as a member of this
very committee, sat down on a lower part of the dais, and I was
here when then-Secretary of the Treasury, Hank Paulson,
appeared. He sat right out in front. I remember Representative
Cleaver was to my left, I believe, and Representative Scott was
to my right. The Secretary wanted $700 billion. He had
approximately, I thought, 5 pages asking for $700 billion. I
have since read that it was 3 pages. Be that as it may, $700
billion to bail out what were called exotic products at the
time--$700 billion. As you can well imagine, my constituents
were up in arms. They were calling me by the hundreds demanding
that I vote against a $700-billion bailout. Being the good
steward that I am, I voted against it. And as I stood in the
cloakroom and I could see the tabulation of votes, there also
was a television monitor, and I could see the monitor
indicating that the vote was failing and the stock market was
directly proportional to what was happening with the vote. As
the bill failed, the stock market was going down. The next day,
my constituents were calling by the hundreds. ``What is wrong
with you? You voted against the bailout. My 401(k) is now at
risk.'' I learned an important lesson: Do what you think is in
the best interests of your constituents, even when they may
disagree.
This hearing is taking place because I think it is in the
best interests of my constituents that we get a better
understanding of what we are dealing with. I remember Chairman
Bernanke--I have a statement from him that I would like to
read, and I will do this quickly. He said that the $182 billion
bailout of American International Group (AIG) made him angrier
than anything in the recession. AIG took risks with unregulated
products, like hedge funds--I am paraphrasing--while using cash
from people's insurance policies. He said the government had no
choice but to bail it out. Who knew AIG was the glue holding
the world together, the global order together? This is of
concern to me.
And, Ms. Hammer and Ms. Goldstein, if I can get to both of
you, I would like your comments on my concern. You have
mentioned FSOC. I don't know how that will help us with a
living will, for example. This is of concern to me. How do we
manage a behemoth once it becomes so big, that if it fails, it
may bring a nice sizable portion of the economy with it?
Nothing is too big to fail, but you can be so big that if you
fail, you will hurt the economy.
Ms. Hammer, let's start with you.
Ms. Hammer. Mr. Chairman, thank you so much for your
question, and I fully agree with your statement about the
importance of evaluating potential systemic risk where taxpayer
dollars are concerned. I often speak in my law class about the
difference between an emergency response and a proactive
policymaking framework. And the problem with an emergency
response is that it is inherently backwards looking, and you
create what is known as an emergency state relationship between
the actors.
We have the opportunity, through the FSOC and Dodd-Frank
Section 120, to create a proactive policy framework for
cryptocurrency. That means gathering and evaluating data,
coordinating the agencies, creating a committee that could
consult with the many States that are legislating in this area
as we speak, and consulting with international standard-setting
bodies. And you mentioned living wills, Mr. Chairman. I think
that is an important point because there are many aspects of
our regulatory framework that still need to be ferreted out and
relate to cryptocurrency. And so, I strongly believe that is
the place to start and that we have the resources to do it, and
that by putting together our collective minds, we can tackle
this problem.
Chairman Green. Thank you. My time has expired. My
apologies, Ms. Goldstein, but if you would submit comments for
the record, I would greatly appreciate it.
Dear friends, I thank the witnesses for their testimony and
for devoting the time and resources to share their considerable
expertise with the subcommittee. Your testimony today will help
to advance the important work of this committee and of the U.S.
Congress in understanding and addressing the risks and
opportunities inherent in widespread investment in digital
assets, including cryptocurrencies.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
Dear friends, the hearing is now adjourned, and, witnesses,
I would like to come down and thank you personally.
[Whereupon, at 12:05 p.m., the hearing was adjourned.]
A P P E N D I X
June 30, 2021
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