[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
DIGITAL ASSETS AND THE FUTURE
OF FINANCE: UNDERSTANDING THE
CHALLENGES AND BENEFITS OF FINANCIAL
INNOVATION IN THE UNITED STATES
=======================================================================
HYBRID HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 8, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-63
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
46-302 PDF WASHINGTON : 2022
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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 BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
December 8, 2021............................................. 1
Appendix:
December 8, 2021............................................. 93
WITNESSES
Wednesday, December 8, 2021
Allaire, Jeremy, Co-Founder, Chairman and CEO, Circle............ 5
Bankman-Fried, Samuel, Founder and CEO, FTX...................... 6
Brooks, Brian P., CEO, Bitfury Group............................. 8
Cascarilla, Charles, CEO and Co-Founder, Paxos Trust Company..... 10
Dixon, Denelle, CEO and Executive Director, Stellar Development
Foundation..................................................... 12
Haas, Alesia Jeanne, CEO, Coinbase, Inc., and CFO, Coinbase
Global, Inc.................................................... 14
APPENDIX
Prepared statements:
Allaire, Jeremy.............................................. 94
Bankman-Fried, Samuel........................................ 97
Brooks, Brian P.............................................. 123
Cascarilla, Charles.......................................... 131
Dixon, Denelle............................................... 138
Haas, Alesia Jeanne.......................................... 145
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Statement for the record from the American Bankers
Association................................................ 161
Statement for the record from Chamber of Progress............ 201
Statement for the record from Creative Investment Research... 203
Statement for the record from the Electronic Transactions
Association................................................ 213
Statement for the record from the Independent Community
Bankers of America......................................... 215
Statement for the record from Satoshi Nakamoto, Founder of
Bitcoin.................................................... 218
Statement for the record from the National Association of
Federally-Insured Credit Unions............................ 222
Statement for the record from the Securities Industry and
Financial Markets Association.............................. 224
Statement for the record from Yugen Partners................. 228
Written responses to questions for the record submitted to
Jeremy Allaire............................................. 230
Written responses to questions for the record submitted to
Samuel Bankman-Fried....................................... 259
Written responses to questions for the record submitted to
Brian P. Brooks,........................................... 298
Written responses to questions for the record submitted to
Charles Cascarilla......................................... 307
Written responses to questions for the record submitted to
Denelle Dixon.............................................. 317
Written responses to questions for the record submitted to
Alesia Jeanne Haas......................................... 327
Foster, Hon. Bill:
Written responses to questions for the record submitted to
Jeremy Allaire............................................. 251
Written responses to questions for the record submitted to
Samuel Bankman-Fried....................................... 353
Written responses to questions for the record submitted to
Brian P. Brooks,........................................... 356
Written responses to questions for the record submitted to
Charles Cascarilla......................................... 306
Written responses to questions for the record submitted to
Denelle Dixon.............................................. 360
Written responses to questions for the record submitted to
Alesia Jeanne Haas......................................... 349
Maloney, Hon. Carolyn:
Written responses to questions for the record submitted to
Jeremy Allaire............................................. 253
Written responses to questions for the record submitted to
Alesia Jeanne Haas......................................... 351
Williams, Hon. Nikema:
Written responses to questions for the record submitted to
Jeremy Allaire............................................. 255
Written responses to questions for the record submitted to
Samuel Bankman-Fried....................................... 362
Written responses to questions for the record submitted to
Brian P. Brooks,........................................... 304
Written responses to questions for the record submitted to
Charles Cascarilla......................................... 315
Written responses to questions for the record submitted to
Denelle Dixon.............................................. 365
Written responses to questions for the record submitted to
Alesia Jeanne Haas......................................... 352
DIGITAL ASSETS AND THE FUTURE
OF FINANCE: UNDERSTANDING
THE CHALLENGES AND BENEFITS
OF FINANCIAL INNOVATION IN
THE UNITED STATES
----------
Wednesday, December 8, 2021
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:04 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Maloney,
Velazquez, Sherman, Meeks, Green, Cleaver, Perlmutter, Himes,
Foster, Beatty, Vargas, Gottheimer, Gonzalez of Texas, Lawson,
San Nicolas, Axne, Casten, Torres, Lynch, Adams, Tlaib, Dean,
Ocasio-Cortez, Garcia of Illinois, Garcia of Texas, Williams of
Georgia, Auchincloss; McHenry, Lucas, Luetkemeyer, Huizenga,
Wagner, Barr, Williams of Texas, Hill, Emmer, Zeldin,
Loudermilk, Mooney, Davidson, Budd, Kustoff, Hollingsworth,
Gonzalez of Ohio, Rose, Steil, Gooden, Timmons, Taylor, and
Sessions.
Chairwoman Waters. The Financial Services Committee will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
Today's hearing is entitled, ``Digital Assets and the
Future of Finance: Understanding the Challenges and Benefits of
Financial Innovation in the United States.''
I now recognize myself for 5 minutes to give an opening
statement.
Today's hearing is part of this committee's ongoing review
of digital assets. Earlier this year, I created a Digital
Assets Working Group of Democratic Members to meet with leading
regulators, advocates, and other experts on how these novel
products and services are reshaping our financial system. This
hearing, and subsequent hearings on this topic, will help this
committee consider how to support responsible innovation that
protects consumers and investors, safeguards our financial
system from systemic risk, promotes financial inclusion, and
addresses environmental content, as well as to consider a
potential central bank digital currency (CBDC).
We have also held several subcommittee and task force
hearings earlier this year to better understand the landscape
of this industry. At today's hearing, which I worked with
Ranking Member McHenry to organize, I look forward to engaging
directly with this panel of cryptocurrency CEOs, whose
companies issue stablecoins and provide an exchange to buy and
sell digital assets, to understand where they think their
products, services, and technologies are heading.
Americans are increasingly making financial decisions using
digital assets every day. Even some pension funds are beginning
to invest in cryptocurrencies on behalf of retirees, despite
the track record of volatility of cryptocurrencies as
investments.
The pandemic has also continued to contribute to working
families looking for alternatives to rebuild their nest egg by
investing in cryptocurrency. The rapid growth of this industry
has also become more visible, with celebrity endorsements and
ATMs that exchange cash for cryptocurrency.
However, several questions remain as to how traditional
rules apply and whether regulators have sufficient authority to
protect investors and consumers while maintaining market
integrity and encouraging innovation. Currently, cryptocurrency
markets have no overarching or centralized regulatory
framework, leaving investments in the digital asset space
vulnerable to fraud, manipulation, and abuse.
Some cryptocurrency market exchanges and stablecoin issuers
have obtained State money transmitter and sale of checks
licenses from multiple States, and at least three
cryptocurrency companies have obtained conditional approval for
national trust bank charters from the Office of the Comptroller
of the Currency.
Meanwhile, the Federal Reserve is conducting research on
central bank digital currencies, and other Federal agencies,
like the FDIC and NCUA, have announced requests for information
from the digital assets industry. The SEC is also actively
utilizing its existing authorities to carry out enforcement
actions against market participants.
As the prevalence of cryptocurrency grows, it has also
raised environmental concerns tied to the computing power
needed to mine some of the coins, which can rival the energy
needs of entire countries like Sweden or Argentina. At the same
time, the promise of digital assets in providing faster
payments, instantaneous settlements, and lower transaction fees
for remittances are areas that our committee is exploring.
As more and more people invest in and use cryptocurrencies,
the committee will continue its efforts to look at how they are
affecting many aspects of our lives and our financial system.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 5 minutes.
Mr. McHenry. Thank you, Madam Chairwoman.
2021 was the year of the cryptocurrency. More Americans
than ever are taking notice of this transformational
technology. DeFi, DAOs, NFTs, and Web3--jargon that was really
once just used on crypto Twitter--is quickly becoming part of
the lexicon.
Technology and its adoption are moving fast. Entrepreneurs
and innovators are building and deploying the next generation
of the internet, and firms like the ones before us are the
onramp for many Americans to participate in the digital asset
ecosystem.
But this panel is only a bit of that broad ecosystem, and
this is the first time Congress is having a hearing about
cryptocurrencies in its fullness. But as with any new and fast-
growing industry, there are questions that need to be answered.
I want to be clear, though. This technology is already
regulated. Now, the regulations may be clunky. They may not be
up-to-date. I ask my friends, my policymaker friends here on
the Hill this question: Do you know enough about this
technology to have a serious debate?
If the answer is no, then we need to first seek to
understand, to build up that understanding of this new
technology so we can have a serious debate on how we
appropriately respond and update regulations and perhaps laws.
But I should be clear: The goal today is to listen, learn, and
ask questions.
This technology is new and exciting. It promises a new
direction for financial economies, services, and products. I
further ask this question: How do we make sure, as American
policymakers, that this cryptocurrency revolution, this
technology revolution, happens in the U.S. and not overseas?
There are a lot of questions we have to answer, but of
course, we need reasonable rules of the road. We know that. We
don't need knee-jerk reactions by lawmakers to regulate out of
the fear of the unknown rather than seeking to understand. And
that fear of the unknown and the move to regulate before
understanding will only stifle American ingenuity and put us at
a competitive disadvantage.
Throughout history, we have seen countless harmful examples
of overregulation around the world by governments. In the late
1800s, England reacted to the rise of cars with laws that
required three people to operate a vehicle at all times: one to
drive; a second to fuel up the vehicle; and a third to stand in
front of the car and wave a red flag.
Now, Congress should not be dumb enough to raise a red flag
around this technology revolution. We should embrace it. We
should understand it. And we should be the international
leaders in this space.
A further example is Skype, the videoconferencing platform
that may still be a little clunky but was vital during the
COVID shutdowns that we just experienced. And it was vital for
some of our kids to even go to school or even have hearings on
this massive screen here.
Skype was illegal in most of the world when it was
launched. There wasn't a regulatory infrastructure in place
that allowed this novel technology, this new technology.
And finally, when an invention called the internet began to
boom, U.S. lawmakers and regulators struggled to fully grasp
the immense possibilities of this innovation out of the gate.
That was in the early 1990s, and I think we are in a similar
state with Web3 30 years later, for Congress first to
understand before we would seek to legislate.
Today, it would be nearly impossible to go a day without
using the internet to communicate. We know that. Or to move
from point A to point B. We know that. Or to purchase
necessities for our families. We know that.
I would argue that the nascent technology we are discussing
today will have just as much impact on our daily lives, perhaps
more. And that is why we must get this right.
My fear, however, is that we will have a partisan divide
here. My fear is that some of my Democratic colleagues have
already made up their minds, and they have regulatory bills
that they are going to file in order to stifle this innovation
or to kill it before it fully grows and blossoms.
I hope we can work together in a bipartisan way, and I hope
this hearing is the first of many for us to understand and get
clarity from innovators and entrepreneurs about what is needed.
This should allow us to have these markets thrive and grow
while protecting our consumers and giving clear rules of the
road to prevent fraud and manipulation.
Forcing the private sector to navigate unclear public
statements and regulation by enforcement is the wrong approach.
So is demonizing an entire industry based off of the headlines
garnered by a few bad actors.
Understandably, there are concerns with the use of
cryptocurrencies for nefarious activities. Let me address that.
Do you know what else is used for nefarious activities? Cash.
Let us dispel the rumor now that digital asset technology is a
looming threat to our financial system. Instead, we should work
to fully understand the opportunities that the next generation
of the internet could provide to Americans.
I look forward to hearing from our witnesses. And I look
forward to having a deeper understanding as a policymaker about
the ramifications for action by Congress before we understand
this new technology that is now actually a decade old.
So, with that, Madam Chairwoman, thank you for having the
hearing. Thank you for working with us on a bipartisan panel,
and I hope Members will take the same spirit of bipartisan
cooperation in their questioning.
With that, I yield back.
Chairwoman Waters. Thank you very much, Mr. McHenry.
I believe that this hearing itself and the witnesses that
we have here today have answered all of your questions about
whether or not you think we are seeking information to arm
ourselves with the ability to make the right decisions.
We will now turn to our witnesses: Mr. Jeremy Allaire, co-
founder, chairman and CEO of Circle; Mr. Samuel Bankman-Fried,
founder and CEO of FTX; Mr. Brian P. Brooks, CEO of Bitfury
Group; Mr. Charles Cascarilla, CEO and co-founder of Paxos
Trust Company; Ms. Denelle Dixon, CEO and executive director of
Stellar Development Foundation; and Ms. Alesia Jeanne Haas, CEO
of Coinbase, Inc., and CFO of Coinbase Global, Inc.
You will each have 5 minutes to summarize your testimony.
You should be able to see a timer that will indicate how much
time you have left. I would ask you to be mindful of the timer,
and quickly wrap up your testimony when your time has expired.
And without objection, your written statements will be made
a part of the record.
Mr. Allaire, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF JEREMY ALLAIRE, CO-FOUNDER, CHAIRMAN AND CEO,
CIRCLE
Mr. Allaire. Good morning, Chairwoman Waters, Ranking
Member McHenry, and members of the House Financial Services
Committee. Thank you for the opportunity to share my testimony
with you today.
My name is Jeremy Allaire, and I am the co-founder,
chairman and CEO of Circle Internet Financial, a now 8-year-old
company that has operated at the cutting edge of the digital
assets market and digital currency technology innovation.
Today, we are at a pivotal moment in the development of the
next major infrastructure layer of the internet, extending from
an internet of data, content, and communications to an internet
of value exchange and economic coordination. In a world where
money becomes a core feature of the internet, the United States
should be aggressively promoting the use of the dollar as the
primary currency of the internet, and should leverage that as a
source of national economic competitiveness.
Circle's mission is to raise global economic prosperity
through the frictionless exchange of financial value, creating
a world where financial inclusion, responsible financial
services innovation, and protecting the integrity the global
financial system are not conflicting objectives.
Today, I would like to address some of the key policy
issues facing the United States around the rapid growth and use
of dollar digital currencies, also known as stablecoins. Circle
is the sole issuer of USD Coin, or USDC, an innovation that
brings the benefits of digital currency--fast, inexpensive,
highly secure, global, and interoperable value exchange--over
the internet without the downside of the extreme volatility
that has plagued most cryptocurrencies. USDC is helping to pave
the way for digital dollars to be the leading currency of the
internet.
While stablecoins got started as a dollar settlement layer
for digital asset trading markets, their use in everyday
payments is expanding rapidly. Just in the past several weeks,
Circle has signed on institutional customers who are using
these services for small business payments, international
remittances, and efficient payments for remote workers. Soon,
we believe that dollars on the internet will be as efficient
and widely available as text messages and email.
As the recent President's Working Group report on
stablecoins highlighted, not all of these payment instruments
are created equal. But by the same token, not all of them are
part of an unregulated, ``Wild West,'' as has often been
portrayed. In our case, we have prioritized building,
designing, and guarding the prudential standards for USDC
inside of and conforming with prevailing U.S. regulatory
standards that apply to leading fintech and payments firms.
This approach has helped USDC to reach over $40 billion in
circulation and has powered more than $1 trillion in on-chain
transactions. The reserves backing USDC are held in the care,
custody, and control of the U.S.-regulated banking system.
These are strictly held in cash and short-duration U.S.
Government Treasuries, and we have consistently reported on the
status of these reserves and their sufficiency to meet demands
for USDC outstanding with third-party attestations from a
leading global accounting firm.
With this growth comes an increasing responsibility to
foster financial inclusion. To that end, we aim to deploy cash
deposits across the country, where we will allocate a share of
USDC reserves, hopefully accruing to billions of dollars over
time to Minority Depository Institutions (MDIs) and community
banks as a way of improving their balance sheets, but also
ensuring that the future of payments and banking is more
inclusive than the past.
The President's Working Group report on stablecoins has put
forward a set of recommendations for establishing national
regulatory supervision of firms such as Circle. We support this
effort and believe there can be strong nonpartisan support for
the appropriate Federal supervision of this highly strategic
payments infrastructure.
Well before the President's Working Group report, we
announced our plans to pursue a national banking charter from
the OCC, and we continue prioritizing active engagement with
all of the relevant Federal and State banking regulators. There
is much work to do in defining the critical statutory
requirements for stablecoins. At the same time, the technology
of blockchains and digital assets is not standing still, and
whatever the ultimate policy and regulatory outcomes, it is
crucial that that policy embraces and enables the United States
to be global leaders in the development of the internet of
value.
As the committee works in earnest on these issues, we
welcome active engagement and believe this to be one of the
most important areas for economic infrastructure and growth in
the coming decade.
Thank you again, Chairwoman Waters and Ranking Member
McHenry, for the opportunity to present to you today. I look
forward to the committee's questions.
[The prepared statement of Mr. Allaire can be found on page
94 of the appendix.]
Chairwoman Waters. Thank you, Mr. Allaire.
Mr. Bankman-Fried, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF SAMUEL BANKMAN-FRIED, FOUNDER AND CEO, FTX
Mr. Bankman-Fried. Thank you, Chairwoman Waters, Ranking
Member McHenry, and members of the committee, for having me
here today to testify. It is an honor to be here.
A little bit about my background first. I grew up in
Stanford, California; went to MIT, where I majored in physics;
and I spent 3\1/2\ years as a quantitative trader after
college. My goal has been to find ways to have a positive
impact on the world and to maximize that and to do so by
supporting some really fantastic organizations.
In 2017, I felt like it was time to try starting up my own
thing. So, I left my job, and I moved out West and ultimately
got involved in the burgeoning cryptocurrency ecosystem. I
spent about a year trading, and in late 2018 began, with my co-
founders, building out FTX.
FTX is a global cryptocurrency exchange. We are the second-
or third-largest exchange globally, depending on what metric
you use, processing about $15 billion per day of trading volume
on the platform. About a year-and-a-half ago, we started up FTX
US, our United States-based and servicing operations.
A few points on FTX and the broader cryptocurrency
industry. The first is that I think that the industry has the
potential to improve a lot of people's lives. There are a lot
of ways that this can happen. I think that the payment side of
this gets a lot of attention, and rightfully so. Every time
that a common consumer goes to a market to purchase goods, they
pay multiple percent in fees to intermediaries, and that is if
they are lucky.
When you look globally, trying to send money back to your
loved ones at home is extremely difficult. It can cost tens of
percents in fees. It can take weeks to arrive. It can get
embezzled by various third-party scams in the middle. And in
general, the global financial ecosystem is not one where
sending assets to those who are important to you is easy to do,
and this hits the people who are least off the hardest, who
have the least access to the financial ecosystem as it exists
today.
When you look at the number of people who are underbanked
or unbanked, both in the United States and globally, it is
indicative of a system that does not work for everyone, and
this is a product of the intermediation involved. It is a
product of how the larger institutions have evolved. And it is
a product of the payments infrastructure that is difficult and
clunky enough to use that it just does not work for most
people.
Cryptocurrencies do provide a potential way to address a
number of these issues, making it easier, cheaper, faster, and
more equitable for people to do what they need to do to manage
their financial lives.
A little bit about FTX. We are a cryptocurrency exchange.
We have a different structure than the traditional exchanges
do, as do many digital asset venues. We provide open and free
market data to all of our users.
On a traditional venue, you pay tens of millions of dollars
per year if you want access to the data of the market that you
are expected to be placing orders in. You have minimal access
to the same tools and order types that sophisticated trading
firms have if you are accessing it through the normal set of
intermediaries.
On FTX, all of our users have full access to the platform.
They have full access to the same sets of tools that
institutions do, and they have full access to all of our market
data, which we make publicly available for free. This is true
whether you are accessing it via an Application Programming
Interface (API) as a sophisticated institution, via our
website, or via our mobile app.
We have also put a lot of work into the risk controls on
our platform. This is true from the financial crime side, where
we conduct sophisticated Know your Customer (KYC) diligence on
all of our users. In order to identify any illicit activity, we
monitor via multiple solutions all blockchain transfers into
and out of our exchange.
It is true of our risk engine, which is a 24/7 risk engine
that is unlike the traditional financial ecosystem, where risk
builds up overnight, where there need to be separate risk
models for weekends and overnight activity and holidays, where
hours or days can go by with no ability to mitigate risk to the
system. We have a transparent system where all of our public
market data is openly available and free, and where risk
parameters are transparent.
And we are already regulated and licensed. We have many
licenses globally. Here in the United States, we are regulated
by States under the money services business and money
transmitting regime, and we are regulated nationally by the
Commodity Futures Trading Commission (CFTC), where we have a
DCO, a DCM, a Swap Execution Facility, and other licensure. We
strive to conduct all of our business in a transparent and
regulated manner.
I think that it is coming, and I think it is important, and
I think that it is healthy that the industry will be regulated.
I think it is also already regulated in a number of ways. I
think that there are points that need to be addressed to give
oversight of various aspects of the industry that do not have
sufficient oversight right now, and I also think that it is
important to do so in a reasonable and common-sense way that
understands the industry.
I am happy to answer any of your questions.
[The prepared statement of Mr. Bankman-Fried can be found
on page 97 of the appendix.]
Chairwoman Waters. Thank you very much, Mr. Bankman-Fried.
Mr. Brooks, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF BRIAN P. BROOKS, CEO, BITFURY GROUP
Mr. Brooks. Thank you, Chairwoman Waters, Ranking Member
McHenry, and members of the committee. Thank you very much for
having me here today to talk about digital assets and the
future of finance.
The topic is an important one for anyone who cares about
American competitiveness in the financial services sector, a
financial ecosystem that empowers users over bank CEOs and
other powerful central decision-makers, and the next iteration
of the internet in which individuals are able not only to read
information and write content, but also to own a piece of the
networks themselves.
I am the CEO of Bitfury Group, a company that provides a
suite of infrastructure products and services in support of
various aspects of the cryptocurrency ecosystem, an ecosystem
many of us today refer to as Web3, since crypto assets
generally represent either the rewards paid to participants for
maintaining a particular decentralized network or an app that
operates on such a network.
Since 2011, Bitfury has designed and produced eight
successive generations of ASIC chips and related equipment for
conducting transaction validation activity on the Bitcoin
blockchain, a process known informally as, ``Bitcoin mining.''
Along the way, Bitfury developed a series of adjacent
businesses to make crypto assets safe, sustainable, and useful.
Our various businesses include LiquidStack, one of the world's
largest immersion cooling systems, focused on reducing the
energy used in Bitcoin mining and other high-performance data
centers by as much as 90 percent; Crystal, a blockchain
analytics company that provides transaction monitoring and
related compliance tools to more than 150 law enforcement
agencies, crypto exchanges, and financial services companies in
Europe, Asia, and North America; Axelera, a producer of
cutting-edge artificial intelligence ASIC chips; and others.
I believe the committee's topic today requires an
understanding of three important threshold issues. First, a
national policy agenda that takes crypto compliance seriously
should assess whether it makes more sense to continue to keep
crypto activities largely out of the regulated financial system
or whether it makes more sense to bring them inside the system
precisely so that they can be supervised and operated with
appropriate levels of risk management.
For example, is it consistent to take the position that
only banks should be allowed to issue stablecoins, but then
fail to grant bank charters to the largest issuers of
stablecoins? That would, after all, bring stablecoin activity
within the ambit of an existing national bank supervision
system, with which we are all familiar.
Or does it make sense to bring enforcement actions
challenging certain crypto assets as unregistered securities,
but then fail to allow those assets to be registered and trade
on a national securities exchange, subject to supervision by
FINRA and the SEC?
Second, Americans deserve to know what our national policy
is for a decentralized Web3 powered by crypto assets. Treating
crypto as a single unitary activity whose main feature is the
need for financial regulation would be like treating the
original internet in the 1990s as primarily a tax policy issue.
We didn't do that then. What we had in the 1990s with respect
to Web1 that we lack today with respect to crypto is a
comprehensive national policy predicated first on the notion
of, ``do no harm,'' to the emerging network.
Today, instead of focusing only on micro questions, such as
whether a particular token is a security or whether a
particular exchange-traded fund (ETF) may be offered, it would
be worthwhile for the elected branches of government to grapple
with the bigger questions, such as do we believe a user-
controlled, decentralized internet is better than an internet
largely controlled by five big companies? Do we believe that
the financial services sector is any less subject to network
effects than information and commerce were in earlier
iterations of the internet?
Do we trust big banks more or open source software more as
a tool for maintaining ledgers of account and allocating credit
and capital? Can we recognize the difference between crypto
projects failing for lack of demand, just as many publicly
traded companies fail, and the difference between individual
crypto projects actually being scams unworthy of being
presented to the fair, but sometimes harsh, judgment of
markets?
Third, crypto policy should take into account not only any
new risks introduced into the system, but also the risks in the
present system that are solved by decentralization. Having
issued almost a billion dollars in civil money penalties
against banks and bank executives during my tenure leading the
Office of the Comptroller of the Currency (OCC), it is clear to
me that the present financial system has plenty of examples of
risks and costs and safety and soundness problems that are
being addressed in the current system. Shouldn't we take
seriously the possibility that algorithms and open source
software that take a measure of human error--read, negligence,
fraud, and bias--out of the system might actually make the
system better on net, even if there are some new risks being
presented that need to be understood and regulated?
Apart from those three overarching considerations, I would
like to very quickly make two points specific to my current
perspective on the crypto economy. One relates to the effect of
U.S. crypto regulation on American competitiveness in both the
technology and capital market sectors. There are a number of
examples of U.S. regulatory decisions that have driven
legitimate activity offshore in ways that harm U.S. investors,
innovators, and workers.
Can anyone explain, for example, why Fidelity Investments,
one of America's best-known investment advisers, had to go to
Canada to offer a Bitcoin ETF? Or why physically settled crypto
ETFs are safe and legal in Germany, Brazil, Singapore, and
elsewhere, but somehow not in the United States?
Can anyone explain why crypto exchanges, stablecoin
issuers, and others can receive e-money licenses to access the
payment system in the United Kingdom, but in the United States
are reserved exclusively for chartered banks, with the result
that the GDP cost of the payment system in the United States is
roughly 4 times the cost in the United Kingdom?
For that matter, why is there no clear path for crypto-
focused insured depositories chartered in the State of Wyoming
to access Federal Reserve payment services like other insured
depositories?
These are the big questions that I hope to address today.
Thank you, Madam Chairwoman, and Ranking Member McHenry.
[The prepared statement of Mr. Brooks can be found on page
123 of the appendix.]
Chairwoman Waters. Thank you, Mr. Brooks.
Mr. Cascarilla, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF CHARLES CASCARILLA, CEO AND CO-FOUNDER, PAXOS
TRUST COMPANY
Mr. Cascarilla. Chairwoman Waters, Ranking Member McHenry,
and members of the committee, thank you for this opportunity.
My name is Charles Cascarilla, and I am the CEO and co-
founder of Paxos. During my 22-year career in financial
services as an analyst, investor, and entrepreneur, I have
witnessed the shortcomings and systemic risks for our financial
market infrastructure firsthand.
Paxos is a regulated financial institution and blockchain
infrastructure platform. Paxos' customers include Bank of
America, PayPal, Mastercard, Interactive Brokers, Credit
Suisse, and many others. We help financial institutions provide
their clients with reliable, regulated access to digital
assets.
Paxos also offers a uniquely structured and regulated
stablecoin, the Pax Dollar. Each Pax Dollar is fully backed by
one U.S. dollar. As a result, it is not volatile like other
types of digital assets. However, it retains the same
properties that make digital assets so appealing. It can be
transferred nearly instantly, overnight, and on weekends, and
it is programmable, secure, and traceable.
Digital assets and blockchain technologies can create a
more efficient, secure, and innovative financial system, and a
more inclusive and equitable global economy. In the existing
financial system, a person needs a bank account to safely store
money, establish credit, earn interest, and borrow. Yet,
according to the Federal Reserve, 18 percent of all Americans,
40 percent of Black adults, and 50 percent of adults without a
high school degree are unbanked or underbanked.
The current system is expensive and slow. International and
even domestic money transfers can take days. At any given time,
there are trillions of dollars' worth of capital held up in
transactions that have not yet settled.
Digital assets are vastly more accessible. Anyone with a
smartphone can download a wallet app to send and receive
assets. No bank account is required.
Transferring digital assets is instantaneous and
convenient. They can be sent or received 24/7. There is no
waiting around for wire transfers or money orders to arrive or
for banks and stock exchanges to open. The transfers are often
very inexpensive, in some cases costing just a penny per
transfer.
Digital assets can also reduce bias in finance. At its
heart, blockchain is just a math equation. It is agnostic to a
user's race, gender, nationality, or income. And blockchain
permanently and publicly records transactions, reducing errors,
fraud, and systemic risk.
A blockchain-based financial architecture could settle
trades on the same day, thus mitigating counterparty risk and
eliminating the need for costly central clearinghouses. For our
part, Paxos recently completed a successful pilot to offer
same-day security settlements in support of SEC Chair Gensler's
goal of reducing settlement times.
Paxos believes regulation is essential for increasing
public trust in digital assets and ensuring adoption. That is
why we sought oversight by a primary prudential regulator even
though we are not required to do so.
Paxos became the first regulated trust for digital assets
in the country when it was approved by the New York State
Department of Financial Services in 2015. We adhere to the same
Anti-Money Laundering (AML) and Know Your Customer (KYC) rules
as banks. We are subject to regular examinations of our
operations, procedures, and capital levels.
Our products are also regulated. Of the world's three
regulated, dollar-backed stablecoins, two are issued by Paxos.
Unfortunately, the uncertain state of digital asset
regulation is hampering the industry's development. The
solution is not to shoehorn digital assets into a regulatory
system designed for earlier generations of financial assets. We
have an opportunity to build a more efficient and effective
financial system. We believe a primary prudential State or
Federal regulator should regulate digital asset companies and
their products.
Compliance standards need to be enforced. Regulation must
ensure that customer assets are held segregated from the
company's balance sheet.
For stablecoins, independent auditors should regularly
attest that assets backing the token are always held in
reserve. Those reserves should be held in bankruptcy remote
accounts and not available to the issuer's general creditors.
If the Federal Government instead stifles the adoption of
digital assets, issuers' talent and capital will flee for more
welcoming jurisdictions. That would be a disaster for
Americans, both consumers and workers, and our economy as a
whole. Without regulated U.S. dollar-backed stablecoins, or a
central bank digital currency (CBDC) and the infrastructure to
support them, it will become increasingly less viable for other
countries and companies to continue using the U.S. dollar as a
global reserve currency.
We need the government's support to create a new, more
secure, more competitive financial system. The benefits of
getting this right are enormous, but so are the consequences of
getting it wrong.
Thank you for the opportunity to provide my testimony, and
I look forward to your questions.
[The prepared statement of Mr. Cascarilla can be found on
page 131 of the appendix,]
Chairwoman Waters. Thank you very much.
Ms. Dixon, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF DENELLE DIXON, CEO AND EXECUTIVE DIRECTOR, STELLAR
DEVELOPMENT FOUNDATION
Ms. Dixon. Good morning, Chairwoman Waters, Ranking Member
McHenry, and members of the committee. Thank you for inviting
me to testify today. I am honored to be here.
My name is Denelle Dixon, and I am the CEO and executive
director of the Stellar Development Foundation (SDF). I took
this role and joined the blockchain industry more than 2\1/2\
years ago. Prior to that, I was the chief operating officer of
the Mozilla Corporation, where I spent a lot of my time
advocating for, among other things, openness and
interoperability in Web technologies.
It is those same policy priorities that drew me to
blockchain, an industry that I believe can learn from past
mistakes made in other areas of Web development. Stellar is an
open, permissionless, decentralized network that is optimized
for payments. There is no single entity, including SDF, that
controls the code base of the network or its growth. You don't
need permission to use this technology. Just like the
underpinnings of the internet, it is ready and available for
use to anyone.
Importantly, and especially in the context of this hearing,
Stellar was designed for asset issuance, making it possible to
create, send, and trade digital assets backed by nearly any
form of value. And it also was designed with compliance tools
built in to help those asset issuers meet their own compliance
obligations.
The Stellar platform is a pioneer of tokenization,
optimized for fiat-backed asset issuance before stablecoin was
even a word, and over the last few years, an ecosystem of
businesses and users have built use cases around Stellar-based
stablecoins due to their incredible ability to solve many of
the problems we see in today's payment landscape.
Despite the headlines, what is happening in the world with
blockchain, with cryptocurrency, and with stablecoins is not
just lending, trading, and borrowing. Other use cases are
active and focused on solving real-world challenges using the
technology.
Let me start with MoneyGram International. MoneyGram is
building a solution on Stellar that enables seamless conversion
between cash and digital assets. MoneyGram's network integrates
with the Stellar blockchain to enable cash funding of digital
accounts and payout in different currencies of the consumer's
choice using stablecoin. It is using Circle's USDC coin.
In real terms, consumers will be able to send value in the
stablecoin and easily convert to local fiat currency for
instant pickup at thousands of participating MoneyGram
locations globally. This is in pilot phase right now in the
U.S., and is expected to be widely available in 2022.
Another example, Leaf Global Fintech, has built a solution
for refugees and cross-border goods traders who are vulnerable
to theft while carrying across borders. With Leaf's wallet,
these users can save their money in multiple currencies,
benefit from cross-border transfers, and pay for goods and
services.
That functionality is only possible because they leverage
Stellar's ability to issue assets, to issue stablecoins, and to
exchange value with low transaction fees and high speed. This
use case is live and operational today.
The last use case I would like to touch on is one that is
in development. Tala is best known for its mobile lending app,
which enables its customers to apply for a loan and receive an
instant decision, regardless of their credit history. Tala is
now working to expand their offering by using Stellar assets
and stablecoins to help their current customers with credit by
allowing borrowing, spending, saving, investing, and sending
and receiving.
There are many more valuable use cases in the Stellar
ecosystem that I would love to be able to share with you today,
but I would just briefly like to mention that in a recent
report from the G20 and IFC, there were five Stellar ecosystem
companies named for their innovative solutions in digital
finance supporting MSMEs.
Use cases like these are in varying states of maturity, but
their current and potential value is undeniable. And none of
these use cases would be possible without stablecoins.
Stablecoins are a core technological component, and by
extension, that means stablecoins are essential in delivering
on financial inclusion.
That brings me to the President's Working Group (PWG)
report on stablecoins. The PWG report raises legitimate risks,
but its recommended solutions go too far. Specifically, to
limit stablecoin issuance to insured depository institutions is
not narrowly tailored to the actual risk of stablecoin
arrangements for the simple reason that although there are
outliers, most stablecoins, unlike bank deposits, are fully
reserved.
Instead, we advocate for a regulatory approach that focuses
more on stablecoin reserves by requiring stablecoin
arrangements be fully reserved by appropriate assets, requiring
reserves to be held at insured depository institutions,
creating clear standards for regular audit and public
disclosure of stablecoin reserves and key contractual terms
regarding redemption, and by making it clear that payment
stablecoins are not securities.
Of course, regulators must be empowered to oversee these
requirements. The framework should allow oversight through
State banking supervision or a narrowly tailored charter of the
OCC. In our view, this would promote the safety and soundness
of stablecoin arrangements.
We have started to see how innovation can be hampered in
other parts of the world when regulators and lawmakers react
prematurely. In Nigeria, stablecoins and blockchain technology
were eliminating costly foreign exchange and transaction fees
and slow processing times until the Central Bank of Nigeria
abruptly ended that business model. Many innovators have
consequently been stopped in their tracks.
As we walk away from this hearing, I urge you to look at
the industry and technology beyond the narrow lens of
applications that often dominate the news.
Thank you for having me here today, and I look forward to
your questions.
[The prepared statement of Ms. Dixon can be found on page
138 of the appendix.]
Chairwoman Waters. Thank you, Ms. Dixon.
Ms. Haas, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF ALESIA JEANNE HAAS, CEO, COINBASE, INC., AND CFO,
COINBASE GLOBAL, INC.
Ms. Haas. Chairwoman Waters, Ranking Member McHenry, and
members of the committee, good morning, and thank you so much
for this opportunity to testify on digital assets and the
future of finance.
My name is Alesia Haas, and I serve as the chief financial
officer of Coinbase Global. I also serve as the chief executive
officer of Coinbase, Inc., our U.S. subsidiary.
I joined Coinbase in 2018. I was formerly the chief
financial officer of Sculptor Capital and OneWest Bank, and I
have spent 20 years in the financial services industry.
Today, I am here to introduce Coinbase, talk about the
evolution of crypto, and highlight today's regulations and how
they could be changed to advance bipartisan goals of protecting
consumers and promoting innovation.
Coinbase's mission is to increase economic freedom in the
world. We were founded in 2012 with the idea that anyone,
anywhere should be able to easily and securely send and receive
Bitcoin. Over the last 9 years, our products and services have
expanded to meet our customers' needs in the rapidly-evolving
crypto industry.
We have customers in every State except the State of
Hawaii, and as a remote-first company, we have employees in 45
States and in the District of Columbia, including 24 of the 25
States represented by this committee. We now securely store 12
percent of the world's crypto on our platform. This is across
over 150 asset types, and we offer customers the opportunity to
learn, to sell, to send, to receive, and to buy more than 100
assets on our platform.
Additionally, we offer customers the opportunity to spend,
to borrow, to earn, to stake and transact on select assets. We
serve more than 73 million customers globally, including 10,000
institutions and 185,000 application developers.
Importantly, nearly 50 percent of our transacting customers
are doing something other than buying and selling crypto, which
indicates to us that crypto has moved past its initial
investment phase, and we are now in the long-expected utility
phase of this ecosystem.
Since our founding, Coinbase has strived to be the most
secure, trusted, and legally-compliant bridge to the crypto
economy. Coinbase is federally-registered as a money services
business with the Financial Crimes Enforcement Network
(FinCEN), licensed as a money transmitter in 42 States, holds a
bit license and trust charter from the New York Department of
Financial Services, and we are authorized to engage in consumer
lending in 15 States. We have a robust Anti-Money Laundering/
Bank Secrecy Act (AML/BSA) program, and we are one of only two
digital asset members of the Department of the Treasury's Bank
Secrecy Act Advisory Group.
In addition to the various State regulatory regimes, we are
subject to Federal oversight from Treasury, the CFTC, the SEC,
the FTC, and the CFPB. Much like the adoption curve of the
internet in the 1990s, we are seeing dramatic advancement in
crypto participation. There are more than 220 million crypto
holders globally, and around 16 percent of Americans have
invested in, traded, or used cryptocurrency.
Total crypto market capitalization at the end of the third
quarter was over $2 trillion, up from $800 billion as of the
end of 2020. Coinbase's platform is powering the crypto
economy, a new financial system for the internet age, which we
believe is a critical infrastructure layer to Web 3.0.
Technologies like nonfungible tokens, which we call NFTs, and
decentralized application platforms will lead the way to Web
3.0, which will revolutionize the internet, much like the
industry was revolutionized when it went from static content to
the dynamic engagement content we have today.
We believe sound regulation is central to fueling crypto
innovation and adoption. That is why we introduced our digital
asset policy proposal, which we referred to as dApp. The dApp
assessed the challenges of the existing regulatory framework
and proposed a four-pillar solution.
First, we believe the government should recognize digital
assets under a new comprehensive framework that recognizes the
unique technological innovations underpinning digital assets.
Second, the responsibility for this new framework should be
assigned to a single Federal regulator. This regulator would be
charged with establishing a registration process for
intermediaries, which we refer to as marketplaces for digital
assets.
Third, this new framework should have three goals to ensure
holders of digital assets are empowered and protected: we
believe in enhanced transparency through robust and appropriate
disclosure requirements; we want to protect against fraud and
market manipulation; and we want to promote efficiency and
strengthen our market resiliency.
Our fourth and final pillar is to ensure that regulatory
solutions promote interoperability and fair competition.
In conclusion, Coinbase believes crypto will drive
transformational change across society in positive ways. This
is why our mission is to promote economic freedom around the
world. Disruption always challenges the status quo, but we
believe sound policies can improve the system for everyone.
We applaud Chairwoman Waters, Ranking Member McHenry, and
the members of this committee for holding this important
hearing. Thank you for the opportunity to discuss these
important issues, and I look forward to answering your
questions.
[The prepared statement of Ms. Haas can be found on page
145 of the appendix.]
Chairwoman Waters. Thank you very much.
I now recognize myself for 5 minutes for questions.
Mr. Cascarilla, I am a bit concerned about your company,
Paxos', partnership with Facebook, which is now calling itself
Meta. As you know, Facebook has attempted several times to
enter the cryptocurrency market. Starting in 2019, they founded
the Libra Association, based in Switzerland, with the goal of
creating a stablecoin, but suspended its activities after this
committee held hearings and I, along with other Members and
U.S. regulators, raised significant concerns, leading to a
number of Libra Association members pulling out.
Now, in partnership with Paxos and Coinbase, Facebook has
launched a pilot project with its digital wallet, Novi, for a
limited number of individuals in the United States and
Guatemala to send and receive money using your stablecoin,
known as USDP or Pax Dollars. As you know, one of the
recommendations in the recent President's Working Group report
focuses on mitigating systemic risk posed by stablecoins as
well as concentration of economic power concerns.
The report, among other things, recommends legislation that
stablecoin users must comply with activity restrictions that
limit affiliation with commercial entities similar to
restrictions most banks face to promote the separation of
banking and commerce. While your partnership with Facebook is
reportedly a pilot limited to a number of users in Guatemala
and the United States, what is stopping Facebook from, in the
future, allowing its nearly 3 billion monthly active users to
make payments and save funds with the Pax Dollar or another
previously-issued stablecoin through a Novi wallet?
If this were allowed at such a scale, how would this not
undermine the U.S. dollar and the world's reserve currency?
Mr. Cascarilla. Thank you for the question, Chairwoman
Waters. I think it is important to note in the case of Novi
that they are a customer of Paxos, just like any other customer
of Paxos. We have an open product. They could use that product
in the open market. They decided to come to Paxos. And I think
they did that because we have the most regulated stablecoin
product, and I think that was an important decision for them
that they wanted to use a well-regulated product.
And I think another important point here is that Novi is
our customer that is a subsidiary of Facebook/Meta. But Novi
itself is a regulated money services business. They are
regulated to operate in almost all States in the United States,
and we have done extensive due diligence on their controls and
the regulatory oversight that they have, and we feel very
confident that they are following those.
And so, in terms of the Novi usage of our product, it is
just like anybody else, just like if they had a bank account,
which they do, and they were using it. In that way, the
services they are getting from us are no different than
services they get from any other financial institution with
which they have a relationship.
Chairwoman Waters. And this is supposedly a pilot that is
limited to a number of users in Guatemala and the United
States. What is stopping Facebook from, again, in the future,
allowing its nearly 3 billion monthly active users to make
payments and save funds with the Pax Dollar or other privately-
issued stablecoins through Novi wallet?
How long is this pilot? Can you describe it?
Mr. Cascarilla. Yes. The pilot is limited and controlled.
It is something that we worked together with our regulator on,
and they have reviewed our program.
Novi would be best-positioned to talk about their plans to
expand it. But right now, they are in a pilot phase. It is just
the U.S. and Guatemala. It is quite limited in scope and size.
Chairwoman Waters. I now recognize the gentleman from North
Carolina, Mr. McHenry, the ranking member of the committee, for
5 minutes.
Mr. McHenry. Thank you.
Mr. Brooks, let's step back from digital assets and
blockchain for a moment. Let's talk about where the internet
was, where it has come to, and where it is going. We are trying
to level set here for policymakers. So, originally, the
internet was a read-only format, in essence, for consuming
information. And then, there are additional layers that we
placed on it, and it became much more interactive.
But counterintuitively, much more interactive, but much
more centralized in Web1, and Web2. What we are hearing now is
Web3. Policymakers need to understand the nature of Web3. This
is a hearing about a component of Web3.
Along those lines, what are the characteristics that
defined Web1 and Web2?
Mr. Brooks. Mr. McHenry, thank you very much for that
question. I think that is critical to understanding what we are
all trying to build here.
The characteristic of Web1, if people remember their
original AOL account, was an ability to look in a curated
walled garden at a set of content that was not interactive, but
was presented to you on AOL the way that Time magazine used to
show you the articles they wanted you to see inside of their
magazine. Only you could see it on a screen.
The innovation of Web2 was that, suddenly, you could not
only read content, but you could also write content. This is
when the blogosphere became a big thing. People remember this
from the late 1990s, the early 2000s. The reason for the
centralization of the internet, of course, was that all of that
activity was being monetized by a very small number of
companies: Facebook, as the chairwoman mentioned; Google; and
two or three other companies.
What makes Web3 different is the ability to own the actual
network, and that is what crypto assets themselves represent is
an ownership stake in an underlying network. So, when you hear
people talk about, for example, Layer 1 tokens, what they mean
is this is your reward for providing the ledger maintenance
services, the computing power to the network that on Web1 and 2
was done by Google.
People in my hometown of Pueblo, Colorado, can actually own
the Ethereum network, but they can't own the internet. That is
owned by Google and a few other companies. That is what the
project of crypto was all about is allowing people to directly
own the networks that have native assets which are supporting
it, and that is the nature of decentralization, where the token
holders are the people who control the assets, not Google.
Mr. McHenry. Okay. Token holders, for our language here on
the Hill, those are digital assets, which are the keys to open
up the ledger for you to participate, right? Describe to us how
those digital assets fit into this internet revolution, Web3?
Mr. Brooks. The concept is that you have sort of
application layer tokens and you have protocol layer tokens.
So, if I am an owner of Bitcoin, let's say that I am a miner of
Bitcoin, somebody who actually creates Bitcoin, the Bitcoin is
the reward I receive for doing the work to keep the network
operational, and that allows me to own a piece of the Bitcoin
blockchain.
Or take Ethereum, which is easier to understand. The Ether
token represents an ownership stake in the network, but on top
of that network are all kinds of apps that get built on the
network, much like the apps on your phone depend on the
underlying existing network that lets the phone operate. And
people will make judgments about which network is likely to
win, and they will invest in the tokens in that network much
the same way you might invest in Google stock because you think
Google is going to scale access to the original internet.
The difference is that here, you can vote on what happens
in the future of a proof of stake network, for example. You can
get rewarded through a proof of work token for maintaining a
ledger on something like Bitcoin. But the real message here is
that what happens on the decentralized internet is decided by
the investors, versus what happens on the main internet is
decided by Twitter, Facebook, Google, and a small number of
other companies.
Mr. McHenry. Okay. Getting this layer on digital assets
right, for Congress to understand this, everything is built
upon that on-ramp to this new internet. So, it's very important
for us to be sensitive to how this develops and any actions we
take in terms of laws and updating laws to incorporate these
new technologies?
Mr. Brooks. Yes, Mr. McHenry, I couldn't agree more, and I
think when you hear about all of the problems of different big
tech companies, the importance of an owner-controlled network
becomes clear.
Mr. McHenry. Okay. Owner-controlled network rather than a
cooperative, right? And thinking in those terms, right? So if
you are not a part of management, you are not making a decision
in Web2. If you are a participant in the network, you are
cooperating in the making of those decisions?
Mr. Brooks. Exactly right.
Mr. McHenry. I ask this not to be insulting to this panel,
but to having level set here so we have an understanding of
what we are talking about. This is not simply about you on this
panel. It is about trillions of dollars of assets that did not
exist before Satoshi Nakamoto wrote his White Paper 13 years
ago. It is about $3 trillion in notional value at this stage
around the development of a whole new range, a whole new suite
of technology that will be developed across the globe, whether
or not the United States embraces it and wants to compete or if
it is pushed offshore.
So, as policymakers, we need to understand what we are
talking about here. This is a small panel--as important as you
may be--in the discussion about Web3.
With that, Madam Chairwoman, thank you for having this
hearing, and I hope that we can have more understanding as
policymakers about these important concepts.
And thank you, Mr. Brooks.
Chairwoman Waters. Thank you very much.
The gentlewoman from New York, Mrs. Maloney, who is also
the Chair of the House Committee on Oversight and Reform, is
now recognized for 5 minutes.
Mrs. Maloney. Thank you, Chairwoman Waters, for having
today's hearing.
Our financial system has been built up over time with us
learning from each financial crisis, fixing and adjusting as
new financial risks come forward, from the Great Depression and
the creation of the FDIC and deposit insurance, to the Dodd-
Frank Act reforms after the 2008 financial crisis. We may not
all agree on every aspect of those laws, but they have made our
financial system and our entire economy more resilient, and
consumers and investors more protected when things do go wrong.
In 2018, the New York attorney general released a report
from its Virtual Markets Integrity Initiative, which detailed a
few key findings regarding crypto trading platforms on
potential conflicts of risks interest, lack of serious efforts
to stop abusive trading activity, and limited protections for
customer funds.
The report stated, ``Customers are highly exposed in the
event of a hack or unauthorized withdrawal. While domestic or
foreign deposit insurance may compensate customers for certain
losses of stolen or misappropriated fiat currency, no similar
compensation is available for virtual currency losses.''
This is not a theoretical concern. In fact, Coinbase was
reportedly the subject of a hack earlier this year, impacting
at least 6,000 Coinbase customers.
Ms. Haas, what happens today for a Coinbase customer in the
event of a hack of Coinbase or a Coinbase wallet or in the
event of an unauthorized withdrawal? What protections does a
customer currently have? FDIC insurance, commercial insurance?
Could you answer that question, please?
Thank you.
Ms. Haas. Yes, thank you so much for the question.
Coinbase does secure 12 percent of the world's crypto, as I
shared with you earlier, and we have extensive controls to
protect our customer assets. We bifurcate our assets into two
different storage systems. We call one the, ``hot wallet,'' and
we call the other one, ``cold storage.'' And less than 2
percent of our assets are held in a hot wallet, which was the
subject of a cyber attack.
Specifically, the incident you mentioned was not a hack of
the Coinbase system. But in that event, where customers did
lose funds due to other losses, we did reimburse customers for
that event. We do protect our customers for any hack of the
Coinbase hot wallet, and we have third-party insurance, plus we
use our own balance sheet to protect our customers in the event
of loss on our platform.
With regards to what losses we typically see, though, in
the press, we typically see these are account takeovers at the
endpoint where a customer had lost their credentials, and then
has had a hack of their own phone, their own personal device.
And that is unfortunate at this point in time, because that
loss is not well-protected for within the broader crypto
economy. That is something that Coinbase continues to study and
would look to over time do more to support our users for those
losses.
Mrs. Maloney. Okay. Reclaiming my time. My time is very
limited.
Is that uniform, the protections you talked about, for all
crypto exchanges and wallets, or just for yours?
Ms. Haas. I am speaking specifically about the Coinbase
protections we offer.
Mrs. Maloney. Okay. So, it is not available to others.
Do you think customers could benefit from some uniformity
and standardized minimum protections if and when customers lose
their funds through no fault of their own?
Ms. Haas. I do believe there is an opportunity there.
Mrs. Maloney. In addition to this committee, I have the
honor of chairing the Oversight Committee, and we recently held
a hearing on the rise of ransomware, and strategies for
disrupting criminal hackers. As detailed by a recent FinCEN
report, $590 million in suspected ransomware payments were
reported by financial institutions in the first 6 months of
2021, and it is getting worse. So, it is no surprise to me that
these criminals frequently seek payment for ransomware attacks
through cryptocurrencies, and FinCEN identified several money
laundering typologies for these actors.
Mr. Allaire and Ms. Haas, our anti-money laundering
requirements are paramount to prevent fraud, sanctions,
invasions, and the financing of terrorism. And you and your
companies have highlighted your firms' compliance programs,
stating that these standards are important to protect the
financial system and to drive trust and adoption. But not
everyone in this industry believes that, and many have rejected
or avoided compliance standards. Some actively promote
themselves on not complying with Know Your Customer
requirements.
This is an entire financial services ecosystem, and one
weak link exposes the entire system to money laundering risk,
as highlighted by the FinCEN data I just mentioned. Could you
share why your firms have taken your anti-money laundering
compliance approach, and the benefits of doing so across your
various products and services, and what steps can we take to
bolster our anti-money laundering efforts and ensure that all
crypto marketplaces comply?
Chairwoman Waters. The gentlewoman's time has expired.
The gentlewoman from Missouri, Mrs. Wagner, is now
recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman.
Ms. Haas, let's continue. SEC Chairman Gensler has
indicated on multiple occasions that, ``The test to determine
whether a crypto asset is a security is clear.'' However,
Commissioners Peirce and Roisman noted that they believe there
to be an obvious lack of clarity for market participants around
the application of securities laws to digital assets and their
trading.
The lack of clarity is clear through the numerous requests
that the SEC receives for these no-action letters. In your
view, is additional guidance defining clear rules of the road
for investors and market participants needed at this time?
Ms. Haas. Thank you for the question. We believe this is a
very important area of focus for the SEC and this committee.
We do agree that the laws are clear. However, existing
laws, regulation, and legal precedent make it clear that
blockchain tokens are not securities, that we believe that the
law clearly shows that blockchain-based digital assets are one
of two things, either a new form of digital property or a new
way to record ownership, as Brian Brooks spoke about earlier.
We do believe that clarity is needed because these are new
assets. It is a new way of transacting with these new protocols
that we spoke about, and I think it would benefit all of us in
the ecosystem to have agreed-upon definitions.
Mrs. Wagner. I couldn't agree more, and I would hope that
Chairman Gensler would be listening to his Commissioners and
some of the feedback that you all are giving him.,
We talk a lot about financial inclusion in this committee,
and digital assets have the potential to provide fair access to
financial services to all Americans, I believe that Mr.
Bankman-Fried brought that up, and many of you did in your
written testimony.
I would like to start--and I know that I have limited
time--with Ms. Dixon, and then, Mr. Allaire. How would digital
assets and blockchain technology facilitate financial inclusion
and benefit the 1.7 billion unbanked people throughout the
world, and particularly the millions here in the United States?
Ms. Dixon?
Ms. Dixon. Thank you for the question. This is a really
important area. Understanding that your time is limited, I will
just say that blockchain allows value and money to flow just
like email, so it is very simple in terms of how it can get
from one point to another, and it does so very, very quickly.
The importance of that is it actually can cross borders
much more simply than anything else that is out there today.
So, the value of blockchain is the ability to send from the
United States, for example, to another country without having
to reconcile with all of the different software intermediaries
that exist today. It eliminates intermediaries, it creates less
friction in the marketplace, and it allows users who don't have
bank accounts today, or who choose not to get bank accounts, or
have been derisked by a bank from being able to, to be able to
access this technology very cleanly, because they can do so
with a wallet.
Mrs. Wagner. Thank you very, very much for that input. And
Mr. Allaire?
Mr. Allaire. Thank you, Congresswoman. I think financial
inclusion is a critical design goal for many of us, and
certainly as we think about USDC, today, USDC, as a payment
technology for dollars on the internet, enables users to
transfer dollars in a fraction of second with a transaction
cost that can be as low as 1/20th of a penny, and with the
throughput of the Visa network. That is a benefit that can be
brought to individuals.
And I would like to really emphasize something for the
committee, which is that one of the most powerful things about
this technology is that it is the open internet. Just like
anyone can have an email account or a text message or access
the internet, this is an open financial system. And when you
combine those kinds of access, efficiency, and that openness,
it creates an opportunity for anyone with a mobile device,
anywhere in the world, to seamlessly exchange value with one
another.
Mrs. Wagner. Great. Thank you.
Mr. Brooks, in your view, what should members of this
committee keep in mind to avoid hampering innovation, because
that is not what we want to do in this new marketplace, and to
increase the financial inclusion that we talked about here?
Mr. Brooks. Congresswoman Wagner, the answer is one word:
Parity. If we treat traditional financial assets in a certain
way, we should not treat internet-based financial assets in a
worse way. For example, if you have a stablecoin that is
functioning like a payment instrument, it should not be treated
differently from a prepaid card or a traveler's check in the
normal situation. The answer is parity.
Mrs. Wagner. Great. Thank you. I appreciate this panel.
Thank you very much, Chairwoman Waters, and I will yield back
the couple of seconds that I have. Thank you.
Chairwoman Waters. Thank you very much.
The gentlewoman from New York, Ms. Velazquez, who is also
the Chair of the House Committee on Small Business, is now
recognized for 5 minutes.
Ms. Velazquez. Thank you, Madam Chairwoman, and Ranking
Member McHenry, for this important hearing.
Mr. Allaire, Mr. Cascarilla, it is my understanding that
earlier this year both of your companies stated that your
stablecoins are now almost entirely backed with cash reserves
and U.S. Treasuries. Can both of you confirm that to be true?
Mr. Allaire. Congresswoman Vazquez, thank you for the
question. Yes, I can confirm that 100 percent of the reserves
that back USDC are held in cash and--
Ms. Velazquez. Thank you.
Mr. Allaire. --U.S. Treasuries.
Ms. Velazquez. Mr. Cascarilla?
Mr. Cascarilla. I can confirm that as well.
Ms. Velazquez. Okay. Are both of your stablecoins fully,
100-percent backed by cash reserves and U.S. Treasuries?
Mr. Allaire. Yes, that is the case.
Ms. Velazquez. Mr. Cascarilla?
Mr. Cascarilla. Yes, that is right, and I would add one
addendum. All of our U.S. Treasuries are maturing in less than
3 months. They are T-Bills, so short maturities.
Ms. Velazquez. Thank you. And can you please explain why
you were offering a stablecoin that was not backed by fiat
currency, and what prompted you to make this change? And please
be brief.
Mr. Allaire. Thank you, Congresswoman. USDC has been
governed by the money transmission statutes throughout the
United States, the permissible investment rules of money
transmission statutes, the same statutes that govern the
balances, the $35 billion of balances with PayPal or Square or
other fintechs. And so, we have always been within the
statutory requirements, and I think we have reported on that
every month since USDC launched in 2018.
Ms. Velazquez. Thank you. Mr. Cascarilla?
Mr. Cascarilla. We have always only backed our stablecoin
by short-term Treasuries or cash and cash equivalents, and the
reason we did that is because we have a regulated stablecoin.
We are overseen by the New York Department of Financial
Services. We operate through our trust company. We have a
primary regulator. That primary regulator also regulates our
token, and importantly, that primary regulator sets the
supervisory agreement with which we are able to then offer our
products. And so, this was a statutory requirement for us.
Ms. Velazquez. Thank you for your answer. And can you
guarantee to the global public that your product is, and will
continue to be, backed fully by the U.S. dollar?
Mr. Allaire. We are committed to a one-for-one backing, and
we look forward to working with Congress and Federal regulators
on ultimately the reserve standards that are really needed for
stablecoins as a financial instrument in the financial system.
Ms. Velazquez. Thank you. Mr. Cascarilla?
Mr. Cascarilla. Yes. We will always be 100-percent backed
by U.S. dollars that are cash and cash equivalents.
Ms. Velazquez. Thank you. Mr. Allaire and Mr. Cascarilla,
while I do appreciate both of your decisions to back your
stablecoins with cash and U.S. Treasuries, and voluntarily
sharing this with the public, unfortunately, an investigation
by New York State Attorney General Letitia James earlier this
year calls into question the veracity of the entire stablecoin
industry and the statements made to the public. Attorney
General James' investigation revealed for periods of time, the
stablecoin Tether deceived clients and markets by failing to
hold reserves to back their Tether in circulation, which was
contrary to your representation.
My question to both of you is, do you think mandatory
reporting of your reserves to Federal regulators and submitting
to their regular examination is a good idea and something you
will each support?
Mr. Allaire. Congresswoman, I am supportive of that Federal
supervision and of those reporting requirements and mandates,
and I think that is critical to make this a mainstream
infrastructure that can benefit the U.S. economy.
Ms. Velazquez. Thank you. And Mr. Cascarilla?
Mr. Cascarilla. It is important to say that we are
regulated as a trust company. We are a regulated financial
institution. We have been since May of 2015, where we were the
first one in the entire country, and we are proud of that. And
so, our products already have a primary regulator that oversees
our issuance. That is different from everybody else.
Ms. Velazquez. Ecuse me. Maybe I need to add to my
question, Federal regulators. Mr. Allaire?
Mr. Allaire. Yes. We are supportive of Federal supervision.
Ms. Velazquez. Good. And Mr. Cascarilla?
Mr. Cascarilla. I think Federal supervision can make sense,
especially for firms that do not have a State regulator that
oversees their activities.
Ms. Velazquez. Very good. Thank you.
Ms. Haas, and Mr. Bankman-Fried, digital asset trading
platforms like yours play an important role in the current
functioning of stablecoins, and therefore, also raise the
broader question about digital market regulations, supervision,
and enforcement. Can each of you describe the method your
platforms use to determine the price for exchanging digital
currency for fiat currency? I see that my time has expired.
Thank you. I yield back.
Chairwoman Waters. One minute?
Ms. Velazquez. Okay. Ms. Haas?
Ms. Haas. Coinbase is an agency-only platform. We do not
engage in proprietary trading on our platform. All prices
established in our platform are due to market makers, so we
offer a platform for customers to come together to offer bids
and asks on a variety of currencies that we offer on our
platform. So, the market price is determined by the market
participants.
Ms. Velazquez. And at what stage of the transaction do you
provide an assurance of or lock-in of an execution price?
Ms. Haas. We have two products. We have a consumer product
and we have what we call our pro product for our institutions
or more advanced traders. It is important that any customer can
choose either platform, but we tend to see consumers choose our
easy-to-use consumer platform.
The price displayed on the screen to the consumer is the
price that is locked in and that we guarantee the customer.
Ms. Velazquez. Thank you.
Chairwoman Waters. Thank you. The gentlewoman's time has
expired.
The gentleman from Oklahoma, Mr. Lucas, is now recognized
for 5 minutes.
Mr. Lucas. Thank you, Madam Chairwoman.
Ms. Haas, you discussed in your written testimony how the
future of blockchain might include new areas of tokenization,
such as property, titles, and even people's time. Could you
discuss further what trends you currently see and how new asset
classes could arise through blockchain technology? Where are we
going?
Ms. Haas. Thank you for the question. I think it is
important to share that anything can be tokenized, any item of
value, and this is the internet of value that we are talking
about with Web 3.0. The early things that we are talking about
are the protocol layer. Over the protocol layer, we see
infrastructure being built, and then we see applications being
built as the next layer. So, Bitcoin, Ethereum, Stellar, and
Solana are all important protocol layers that we are talking
about.
And on top of these, we see applications. An interesting
article was published yesterday that gaming platforms, so video
games that many of you may play, and your children may play,
gaming, where non-fungible tokens (NFTs), which means they are
different, every token is different--think about a shield or a
sword or something of value--are being most actively traded.
And a significant percent of the assets in D5, decentralized
finance in November were traded in apps.
And so, we are seeing all types of things. We have had
early conversations with real estate developers to get broader
global liquidity, more liquid markets for tokens. We have seen
a lot of innovation in the payment space and a lot of
innovation at NFTs, with digital art.
But this is just the tip, and I think just like back in the
early 1990s, when we were thinking about the internet and we
couldn't envision Uber, we don't know what the future is, and
there is so much ahead of us.
Mr. Lucas. Fascinating. Mr. Brooks, it is good to see you
before the committee again. Could you discuss what key
fundamental differences between banks and stablecoin issuers
are important for Congress and regulators to understand when
looking at regulatory proposals?
Mr. Brooks. Sure. Congressman Lucas, thank you so much, and
it is nice to see you again, as well.
One of the historical differences between banks and
stablecoin issuers is that banks in this country, historically,
have been engaged in multiple different kinds of financial
intermediation and risk-taking functions. Banks typically
engage in three different things: deposit-taking; lending; and
payments.
The core feature of stablecoins is they are a new payments
technology, and payments are one of the core things that banks
do, right? Banks historically innovated in payments by first
having check clearing, then later having traveler's checks,
then later having prepaid cards and things like that.
Stablecoin is just the faster, most modern way of transmitting
those values.
Stablecoin issuers, of course, don't present all of the
risks that banking presents. They don't typically engage in
lending or anything else. And this is one of the reasons why,
at the OCC, we look very carefully at the possibility that
payment companies, like American Express in a different
generation, and Circle today, might possibly qualify for bank
charters. They are engaged in a core banking function but not
in the other banking functions, as to my point earlier that
sometimes crypto is reducing risk, not increasing risk.
Mr. Lucas. Ms. Dixon, could you also discuss this for a
moment?
Ms. Dixon. I think that there is a really big opportunity
with respect to blockchain. I think when you mentioned before
about tokenized assets, there already are tokenized interests
in real estate that exist on Stellar, for example, or in
fractionalized interest in U.S. stocks. So, there is
opportunity for growth there.
With respect to what we have with blockchain and what can
be accessible, the method that banks already have available out
there, but when they derisk populations and they derisk
individuals out of the banking infrastructure, they can
actually access accounts, hold their assets in a digital
framework, and then do a lot of the same things that you can do
at banking institutions, but these individuals couldn't get
access to it before.
I think blockchain creates that financial inclusion that we
are all talking about and that we all want to get to, and it
does so, I think, as Ms. Haas indicated, with the different
layers, the infrastructure layer and the application layers--
there is so much creativity that is happening now. So, I think
we have a long road ahead of us with respect to this
technology.
Mr. Lucas. Mr. Bankman-Fried, could you respond to the
criticism that stablecoins would be rife for illicit financial
activity, and could you compare this risk with other payment
rails?
Mr. Bankman-Fried. Thank you, Congressman. We, as do most
market participants in the digital asset ecosystem, have
advanced surveillance techniques to prevent financial crimes
for all digital assets, including stablecoins, conducting Know
Your Customer policies and blockchain surveillance on all users
and deposits and withdrawals through our platform. And all
legitimate stablecoin issuers, in addition to that, conduct
sophisticated Know Your Customer policies on all issuances and
redemptions of those stablecoins.
If you compare that to, for instance, physical cash, where
no transactions effectively have Know Your Customer or Anti-
Money Laundering or anti-financial crimes surveillance on them,
I think that the digital asset industry has already set a
pretty strong standard on that front.
Mr. Lucas. Thank you. Madam Chairwoman, I yield back.
Chairwoman Waters. The gentleman from Texas, Mr. Green, who
is also the Chair of our Subcommittee on Oversight and
Investigations, is now recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman, and I thank the
witnesses for appearing as well. I trust that my volume is such
that I am being heard. If you can verify that, I would greatly
appreciate it.
Chairwoman Waters. We can hear you very well, Mr. Green.
Mr. Green. Thank you very much, Madam Chairwoman.
In the last year, the digital asset market has exploded
from about $500 billion to $3 trillion, and there is still
extreme volatility, it seems, in this marketplace. Bitcoin, for
example, lost half of its value over 2 days in March, and it
rebounded, of course, later on.
But there are many problems leading up to the global
financial crisis that seem to be manifesting themselves in the
market currently. Easy credit via margin investing, lack of
transparency, the lack of transparency that I would like to
see, and adequate financial disclosure is not readily
available.
With the explosive growth in cryptocurrencies, at what
point should we become concerned about the possibility of a
bubble?
Let's start, if we may, with Mr. Brian Brooks.
Mr. Brooks. Thank you, Congressman Green. It is terrific to
see you again, and I always find your questions extremely
perceptive.
What I would say about that question is that a lot of the
price volatility of cryptocurrency has to do with the early
stage of the market and the thinly-traded nature of the asset
compared to, for example, U.S. real estate, global equities, or
anything like that.
I think the message I would land with this committee in
response to your question, however, is that some of the things
that make U.S. equity and debt markets more stable and less
volatile have to do with the fact that there is a lot more
price discovery in those areas. And what I mean by that is in
the U.S., we have regulated equity mutual funds. We have
derivatives products and futures products that allow the free
trading on a 24/7 basis that provides the market with forecasts
of what is happening in the ecosystem.
In the world of crypto, the U.S. hasn't responded by
developing those tools for price discovery yet, and so the
result, in a relatively new, relatively thinly-traded market,
is that one person unwinding their position can have a massive
effect on the price.
The last point I would just make very quickly is that
something like 80 percent of Bitcoin holders have never sold a
Bitcoin. And so, when you hear about a day when there was a
giant price drop in Bitcoin, often it turns out that there was
one or two large traders who were unwinding a leveraged
position, and the vast majority of holders have enough
confidence in it that they have literally never sold a unit of
it.
So, I would argue we need more liquidity and more price
discovery to tamp down volatility, not less.
Mr. Green. Thank you. Let's go to Ms. Dixon, please.
Ms. Dixon. Thank you for the question. I think from the
standpoint of what is available in the market today, one of the
things that we need to do better in this industry, and I think
we are working in that direction, is much like the early days
of the Web, we need to focus on consumer-oriented products that
have a lot of information about the challenges and also brings
the person through from a literacy standpoint, so they
understand. You look at user experience. You look at UX design.
All of these things are really, really important. And as we saw
in the early days of the Web, it happened. It came together. We
became better at educating the audience about what is available
and what is out there.
The nice thing about blockchain is you have immutability.
You have records that are out there that can't be changed. This
information is already leveraged by Chainalysis, for example,
in Elliptic, to demonstrate the different things that are
happening on chain, and I think it allows us the opportunity to
create a lot more foundational efforts with respect to user
experience and focus on these consumer protection issues that
you are talking about.
Mr. Green. Mr. Samuel Bankman-Fried, if you would, please,
I would like to hear from you.
Mr. Bankman-Fried. Thank you for the question. One of the
really innovative properties of cryptocurrency markets are 24/7
risk monitoring engines. We do not have overnight risk or
weekend risk or holiday risk in the same way traditional assets
do, which allows risk monitoring and de-risking positions in
real time to help mitigate volatility.
We have been operating for a number of years with billions
of dollars of open interest. We have never had customer losses,
clawbacks, or anything like that, even going through periods of
large movements in both directions. We store collateral from
our users in a way which is not always done in the traditional
financial ecosystem, to backstop positions.
And the last thing I will say is if you look at what
precipitated some of the 2008 financial crisis, you will see a
number of bilateral, bespoke, non-reported transactions
happening between financial counterparties, which then got
repackaged and releveraged again and again and again, such that
no one knew how much risk was in that system until it all fell
apart. If you compare that to what happened on FTS or other
major cryptocurrencies in use today, there is complete
transparency about the full open interest. There is complete
transparency about the positions that are held. There is a
robust, consistent risk framework applied. And we are excited
to work with the Commodity Futures Trading Commission (CFTC) on
our U.S. license and regulated venue to bring a lot of this to
U.S. customers as well.
Mr. Green. Thank you. My time has expired. Thank you, Madam
Chairwoman. I yield back.
Chairwoman Waters. You are welcome.
The gentleman from Texas, Mr. Sessions, is now recognized
for 5 minutes.
Mr. Sessions. Madam Chairwoman, thank you very much, and to
the panel, we appreciate this opportunity to hear from you. I
think it is very important for us to hear from you. You are not
the inventors, necessarily, but you are the people who are
going to make this work.
I am tremendously impressed that, from what I see, a lot of
ingenuity, a lot of entrepreneurial spirit, and lots of advice
about the future about where this can grow is, I think, very
important for us to listen to.
I am in favor of what you do. I am not sure I want to go as
far as you do on robustness of how much oversight you really
want, because I think that in your perhaps infancy, perhaps in
your modeling, what makes you better is what you are, and I
respect that.
The question I would ask, and I don't know which one of you
to ask this, so I would just say we are always interested in a
traditional financial model of identifying risk--what is a
risk? We get very little into value but a lot into risk. And
so, I would ask you the value of much of this could be compared
to stocks. IPOs, when they first come out, they might come out
and be worth this amount of money, and one year later, they are
worth a lesser amount of money.
I am more concerned with the term, ``fraud,'' of the value
that we are selling of all these different positions that could
be held. What do you do to try and look at what might be fraud?
I know there has been openness, a lot of discussion about how
you allow information to be freely gleaned. You do these
things. But is there an investigation or an understanding about
what might be risky, even though you accept it, or fraud?
Anyone?
Ms. Haas. I am happy to take that one, Congressman.
Mr. Sessions. Thank you very much.
Ms. Haas. I want to share a little bit, and this is
specific to the Coinbase platform. On the Coinbase platform, we
have various tools. One, in onboarding, as we have talked
about, we do do KYC, but also, when we onboard our assets. We
offer, as I mentioned, over 100 assets for trading on our
platform. We have robust assessment of each of those assets. We
are looking at it for legal risks. Do we think it has the
contours of Federal securities? We do not list securities on
our platform.
Two, we are looking at it for compliance reasons. Is this a
scam? Are there real people behind it? Are there people behind
them on the Office of Foreign Assets Control (OFAC) list? We do
not want to list that token. So, we are doing a full compliance
review of the founders of the coin, the developers on the
project, and then we are looking at it from a security risk.
Can we safely secure and store this on our platform, or is
there underlying technology risk that would be rising to a
hack? One way we look at fraud is when we list an asset, to
make sure it is not a fraudulent asset.
Two, through our market rules, we do have traditional
exchange rules for looking for spoofing, for wash trading, for
all sorts of market manipulation on our platform, that we have
third-party tools as well as employees that came from former
regulators or from traditional financial services that do 24/7
monitoring. Much like Mr. Bankman-Fried responded to the risk
models, we do compliance monitoring on a 24/7 basis.
We also then monitor the blockchains. One of the wonderful
things about this technology is the transparency, and so we can
look for transaction activity, look for patterns on a
blockchain, and then partner with law enforcement, we file
Suspicious Activity Reports (SARs), and we have traditional
approaches, much like you would see in finance, but the
transparency really changes what we can do here.
Mr. Sessions. I think that is a key, at least to me. If you
know anything about the Medicare system, you have Medicare
providers, and we have probably 18 percent fraud in that
system. It is a Federal system that has been well-understood.
Wherever you open up your door, whatever your storefront is,
there is somebody there that is going to try and find a way to
take you, to spoof you, to take advantage of this.
And it seems to me that that is something that if you have
accepted this as part of the duty that you have, to make sure
for the integrity of your system, it seems like to me that I
have satisfied myself that what you have ongoing but where you
think you want to go, we need to be supportive of you. We need
to look at you less as something that we ought to get in and
understand and tackle you and hold you back and more to what we
believe the future should look like, for people around the
world, for people in the United States.
I would simply say to you, I encourage your integrity. I
encourage you to avoid the pitfalls that come from there being
some fraud that was hidden for a long period of time, and the
industry knew it. We have seen this happen in companies--I
don't need to go through that where fully-vetted market
individuals still did something wrong.
Madam Chairwoman, I want to thank you for doing this today.
I think it is good for all of our Members, and I, in
particular, want to thank my ranking member for his proactive
viewpoint, of Republican members, that I hope would be
supportive of what you are saying today.
Thank you very much. I yield back.
Chairwoman Waters. You are certainly welcome, and thank
you.
The gentleman from New York, Mr. Meeks, who is also the
Chair of the House Committee on Foreign Affairs, is now
recognized for 5 minutes.
Mr. Meeks. Thank you, Madam Chairwoman, and I also want to
thank you for putting together this very, very important
hearing. Look, the future is in innovation, and financial
industries is just unavoidable, and to get ahead of it. So,
your foresight, along with the ranking member, to do this is
really important.
Let me first ask my question to Mr. Allaire. As you may be
aware, communities of color often rely on minority depository
institutions (MDIs) or community development financial
institutions (CDFIs) to safely do business and get access to
crucial banking needs. And given their important role as well
as the challenges that they face, I have long been an advocate
for robust partnerships whereby MDIs and CDFIs can leverage new
technologies to better serve their communities, as well as our
Circle, actually, for using and exploring such partnerships and
creating an initiative to deploy and share United States Dollar
(USD) coin reserve into these MDIs and CDFIs, enhancing
financial inclusion.
My question to you is, can you provide us a status update
on where Circle is in implementing this program, and what sorts
of systems will be developed to ensure the long-term success of
the program?
Mr. Allaire. Thank you, Congressman Meeks. I appreciate the
question very much. For those on the committee who are not
familiar, we recently announced a new broad-based company
initiative called Circle Impact. It includes several key
initiatives.
First and foremost, something I did reference in my
testimony as well, is an initiative to take what we hope will
be billions of dollars of the deposits that are held behind
USDC and actually place those with minority depository
institutions and community banks throughout the United States.
I think one thing that is important to understand is that
unlike a bank that wants to maybe hoard its deposits for its
own lending business, as a full reserve model, we are not in
the business of lending, so it is a tremendous opportunity for
us to work closely with banking institutions that could benefit
from strengthened balance sheets, and that could benefit from
what that in turn can do to open up credit and lending and
other opportunities in these underserved communities.
This particular initiative is one that we just began. We
expect to have the first wave of that in place by the end of
the first quarter. We are also looking to coordinate with
Federal banking regulators who have their own initiatives that
are focused on supporting MDIs and community banks, and we view
this as a really critical and strategic part of what we can do
to foster a more inclusive financial system.
My final comment is simply that we believe that the
technology of digital currency, the frictionlessness, the way
in which individuals with mobile devices can actively
participate, and not just domestically but interacting with
family members around the world and safely exchanging value,
that these can also bring significant benefits to these
communities. And we will certainly keep the committee up-to-
date on progress with this initiative.
Mr. Meeks. Thank you very much for that, and let me go to
Ms. Haas really quickly. You talked about technology
enhancements, and I know what crypto and digital currencies can
bring to our financial markets. They are really impressive. For
example, I know a lot of communities rely on these new modes of
payment systems to send money to their families in their home
countries, and this type of activity, of course, is extremely
useful to our global economy, which is really important.
But there are also bad actors out there that could use
crypto or digital currencies to hide cash from illicit
activity. Also, people can hide cash, to not have to pay their
support payments and other things.
My question is, what is being put in place to keep the bad
actors out of there? I know in your testimony, Ms. Haas, you
mentioned that there is a small amount of noncompliant foreign
exchanges where criminal actors benefit financially from this
activity. So, what is your assessment about global coordination
on stamping out such activity, and what more can U.S.
policymakers do to better coordinate with regulators across
shores to prevent this arbitrage to which you referred?
Ms. Haas. Thank you so much for the question. On the
Coinbase platform, we do have KYC and BSA/AML programs, and we
ensure that we know who our customers are and then have clarity
on those transactions. I know other U.S.-regulated exchanges
that we speak to have similar controls, and everybody on this
panel here today, I think shares those views.
There are players who do not follow these, and I think that
is where regulation should be focused, to make sure that there
is an expectation on what it is to perform as a digital asset
marketplace, and that was part of our policy proposal.
Chairwoman Waters. The gentleman's time has expired. Thank
you.
The gentleman from Missouri, Mr. Luetkemeyer, is now
recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
In 2019, the average daily turnover value of the U.S.
dollar constituted 88 percent of foreign exchange market
transactions globally. This dominance by the dollar in global
marketplace is a key reason why the dollar remains the reserve
currency of the world.
Mr. Brooks, welcome back to the committee. It is good to
see you again. I think we have actually talked about this
subject before in the past. But as digital assets become more
common in the global marketplace, with the total digital asset
market reaching almost $3 trillion, as Ranking Member McHenry
just said, how do we ensure that the U.S. dollar remains the
reserve currency?
Mr. Brooks. Mr. Luetkemeyer, it is terrific to see you
again, and I would give you a couple of thoughts on that
important question.
One is, if we start with stablecoins before we talk about
other crypto assets, I have said for a long time that the
secular reduction in dollar holdings as a percentage of global
central bank holdings is alarming, and this has been going on
for more than 10 years at this point. So, dollars as a share of
the European Central Bank, the Japanese Central Bank, et
cetera, has shrunk from 80-plus percent to more like 60-plus
percent in a short amount of time.
What that tells me is that in the future, with the rise of
China and other major economies, the U.S. dollar can't take its
primacy for granted, and we need to start thinking about
competing on utility, and on features, not just based on a
post-World War II monetary system that we could take for
granted for the last 2 generations. And that is one of the
reasons that I have been such a supporter of internet-enabled
dollars, which allow us to compete on features, not only on
history. I think that is really critically important.
The second thing I would tell you is as we enter Year 11 or
12 of a highly inflationary environment--after all, we have
been printing enormous numbers of new dollars since the
financial crisis--there will come a time, gradually, then
suddenly, when the attractiveness of the dollar relative to
other currencies could change. One of the benefits of the
crypto economy is that it creates some counterincentives on the
part of the Fed to do that kind of policy, because people will
flee to other kinds of assets. And that sort of market
competition is something that I think will ultimately shore up
our monetary policy and keep the dollar where it rightfully
ought to be, which is as the dominant reserve currency it has
been for all of our lives.
Mr. Luetkemeyer. Yes, it is very concerning to me that if
we lose that position, our economy, our whole country, our way
of life is at risk.
Mr. Allaire, you made a comment in your testimony with
regard to promoting the dollar as a primary currency. I assume
you have a thought on this as well.
Mr. Allaire. Thank you, Congressman. Absolutely. I think,
as I said in my initial remarks, that we are at a really
interesting moment in time. We are seeing this infrastructure
layer, these blockchains, proliferate globally, at incredible
speed. It seems likely to us that the ability to access and
interact with these blockchain networks will reach billions of
users over the next 2 to 3 years, and the question is, in that
timeframe will the United States support the dollar and digital
dollars in the form of stablecoins, because they are in the
market, in operations today, to help the United States dollar
be the competitive currency of the internet?
I think that is the opportunity. I think it is in front of
us right now, and it is one of the reasons why we are so
focused on this as not just a national economic priority, but a
national security priority, because clearly, if this is the new
economic infrastructure of the internet, we want the dollar to
play a critical and strategic role. And partnering closely with
private companies and using open internet technologies becomes
a way for the United States to compete versus states that are
seeking to nationalize that infrastructure, and operate it
themselves in a surveillance-oriented model.
Mr. Luetkemeyer. It is interesting, what you were talking
about a while ago. I think Ms. Velazquez asked questions about
reserves. And I think you were talking about basically a one-
to-one amount of backing of your coin, of your asset, with U.S.
Treasuries. You are looking, I think, at the value that you are
backing up your digital coin with, which is basically the full
faith and trust of the United States Government. Would that be
correct?
Mr. Allaire. That is exactly correct, and I think, in many
respects, the assets that back these dollar digital currencies
are in many ways far safer than the dollars in a bank account,
because dollars in a bank account, as we know, are fractionally
reserved and lent out. So, this is--
Mr. Luetkemeyer. I don't want to interrupt, but I have one
quick question for Mr. Brooks. You talked about, a minute ago,
how the owner controls the network. We had Mr. Zuckerberg in
here when he was trying to talk about his Libra, and the
control of that--the value of it was going to be with the
commission. My concern is, who controls the internet? We have
seen Twitter, we have seen Instagram, and we have seen Facebook
control people on their platforms. How concerned are you about
outside forces controlling the platform on which the digital
dollar is traded?
Mr. Brooks. Mr. Luetkemeyer, I will do you one better on
your hypothetical, which is that we have now seen major banks
de-platforming both industry and individual customers for not
sharing the right point of view, so these are scary ideas.
The point of crypto is to have true decentralization, and
the projects that succeed will be the projects that achieve
that. Bitcoin succeeded because there are literally millions of
participants in the node network, and so there is no CEO of
Twitter to de-platform you, or there is no CEO of JPMorgan to
take away your credit card. It is user-controlled.
Some of these won't achieve that. They will be consigned to
the ash heap of history, I predict.
Mr. Luetkemeyer. Thank you very much. I yield back, Madam
Chairwoman.
Chairwoman Waters. Thank you.
The gentleman from Colorado, Mr. Perlmutter, who is also
the Chair of our Subcommittee on Consumer Protection and
Financial Institutions, is now recognized for 5 minutes.
Mr. Perlmutter. Thanks, Madam Chairwoman. Mr. Brooks, it's
good to see another Coloradan on the panel.
But I want to start with a couple of questions for you, Mr.
Bankman-Fried. Ms. Haas mentioned knowing your customer, they
avoid getting into the securities transaction business, to the
best of their ability. That is one of the things they look for.
I have several questions for you, and one of them will be
completely from left field, so get ready for that one.
Cryptocurrency market exchanges such as yours are regulated
through a patchwork of different State and Federal agencies.
For instance, some exchanges register as money services
business with FinCEN at the Federal level and may also receive
money transmitter licenses, and you have talked a little bit
about that in your opening. How is your company registered in
this context?
Mr. Bankman-Fried. Yes. Thanks for the question, and I am
looking forward to the left-field question at the end.
In addition to a bunch of international licenses, in the
United States we are participating in that system you
referenced, with the money transmitter and money service
business licenses. In addition to that, however, we are also
licensed by the CFTC. We have a DCO, a DCM, and other licensure
from them through FTX US derivatives, and we look forward to
continuing to work with them to build out our products. We just
submitted an 800-page, I believe, proposal to them a few days
ago, that I am excited to discuss, and we are also happy to
talk with other regulators about potential products in the
United States.
Mr. Perlmutter. Okay. Let's talk about another regulator
that may touch on what you do. You talked a little bit about
derivatives and the fact that derivatives were sort of a key
component in the failure of the financial markets in 2008 and
2009. Is FTX registered with the SEC?
Mr. Bankman-Fried. The core derivatives regulator is the
CFTC, and FTX US derivatives is registered with the CFTC. With
the SEC, we have begun discussions and are excited to continue
discussions there. We do not list securities on our platform as
of now, although we would be excited to explore listing digital
asset securities in the future, under the guidance of the SEC.
I will also say briefly that I would be excited to see a
unified joint regime with both CFTC and SEC involvement, to
create sort of harmonious markets regulations between spot
derivatives, contracts, a number of things.
Mr. Perlmutter. Okay. Now, the left-field question. Our
role here--there is nothing new under the sun. The technology
may change. It may speed things up. It may make it more
transparent. But a deal is a deal--who is taking on the risk,
who is getting rid of the risk, who is the middleman?
One of the things we hear about blockchain is that it is
invulnerable, it is impenetrable, it is something that is
super-secure, and our responsibility is to make sure that
things are generally safe, generally honest, and that people
aren't swindled.
I also sit on the Science Committee with Mr. Luetkemeyer,
and the ranking member was talking about, we are at W-3. On the
Science Committee, we are doing a lot on quantum computing, and
so my question to you is, what threats or benefits to a
blockchain system will come from quantum computing?
Mr. Bankman-Fried. Thank you for the question. In terms of
the threats, some cryptographic algorithms are not at least
theoretically, might not be secure under quantum computing.
Obviously, this is going to depend on the exact details of what
comes. And it is important that, if and when that comes, that
blockchain security algorithms are resistant to that.
On the same front, I think it has the potential to create
basically new cryptographic algorithms that are faster, that
are more secure, and that are more efficient, from a number of
different perspectives. So, we will see what happens there.
Mr. Perlmutter. Okay. I have a million other questions, but
I don't have enough time to ask them, so I will yield back.
Chairwoman Waters. Thank you very much, Mr. Perlmutter.
The gentleman from Kentucky, Mr. Barr, is now recognized
for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman, and thank you for
holding this important hearing. Mr. Brooks, it's good to see
you back in front of our committee, and to all of our
witnesses, thank you for your testimony.
Mr. Brooks, I will start with you, and this is a bit of a
follow-up to Mrs. Wagner's question. Do you think Congress
needs to introduce legislation to provide more definitional
clarity with respect to digital assets, and if so, do you have
any specific suggestions?
Mr. Brooks. I really appreciate that question. That is the
most important issue in the short term for the industry. So.
let me just pick up where Mrs. Wagner left off.
If the question is, is the current test clear, it is clear
in the sense that we know what it is. It is not clear in that a
four-factor balancing test--I often think about what the U.S.
trucking industry would be like if the truckers didn't know
that the speed limit was 75-miles-an-hour. They just had a
four-factor test of general safety having to do with how much
sleep they got the night before, the overall size of their
payload, and other factors. People need to know what the speed
limit is.
In my old agency, the OCC, what would happen is a bank
would come to us with a new activity proposal and we would give
them an answer. We would either give them a non-objection or we
would not give them a non-objection, and it was very clear
whether they would be allowed to access that.
What happens in the United States is you have a new crypto
project, and you walk into the SEC and you describe it in great
detail and you ask for guidance, and they say, ``We can't tell
you,'' and you list it at your own peril.
Whether this comes from legislation that defines what is a
security and what isn't a security, or whether it comes from
Congress in the form of legislative discretion to an agency to
say, what is a security, I would argue that a four-factor
balancing test is no better here than it as truckers drive down
the highway and guess what safe is.
Mr. Barr. Yes, and SEC Chairman Gensler has been quoted as
saying the test to determine whether a crypto asset is a
security is clear. Mr. Brooks, do you agree that that test is
clear? I take it from your previous answer, that the answer is
no. But could you walk me through the process that exists today
to determine if a digital asset is a security?
Mr. Brooks. Yes. Thank you for that. The best test that is
out there is a test that several of us on this panel actually
helped to develop about 3 years ago as part of an industry
organization called the Crypto Rating Council. When I came to
see several of you several years ago in connection with the
Crypto Rating Council, the way I described it to you was it is
sort of like motion picture ratings for crypto. We don't know
authoritatively what is a security and what isn't, because no
authority will tell us. But what we can do, at least, is we can
tell you the difference between an R-rated asset and a PG-rated
asset, and people can make their risk tolerance judgments.
The way that process works is it is an objective,
quantitatively-based process that asks several dozen questions
about the asset, across each of the dimensions of the Howey
Test. It gives you a number and that number tells you how close
you might be to danger and how far away
Mr. Barr. Let me interrupt and just say I recognize that
some rules or Federal regulation of both digital assets and
cryptocurrency trading platforms might be supportive of
bringing clarity, but I would never underestimate the ability
of the Federal Government and regulators to stifle innovation.
Can you give me an example of an overreach that would stifle
innovation?
Mr. Brooks. The idea would be to, say, let traveler's
checks exist inside the banking system and not bring a
stablecoin issuer inside the banking system, when they have
applied.
Mr. Barr. Okay. Mr. Allaire, to you. Can you talk about the
difference between a stablecoin versus a central bank digital
currency and what advantages does a stablecoin offer that a
digital dollar, say at the Fed, would not be able to offer?
Mr. Allaire. Thank you, Congressman Barr. I am happy to. I
think the first difference is that stablecoins are operational
and growing in the market today, and they are built on an open
internet technology model. When we think about all of the
things that we have seen built on the open internet, on these
open protocols and networks, whether it is ubiquitous
information exchange, communications, interaction the world,
that same open internet model is the foundation for
stablecoins. And so, I think that is a fundamental difference.
A CBDC, which is a concept right now--it is not
operational--would very likely be a very closed-loop technology
that is tightly administered and run by the government, and
would unlikely to be accessible in the same way that these open
networks are accessible. And so, I think that is a critical
difference.
But I would come back to the most important difference,
which is that most payment system innovations in the world have
been driven by the private sector, and I think what is taking
place today with digital currency is no different.
Mr. Barr. Could stablecoin and your product, could it
address some of the concerns about China's advances and the
threat that China's advances pose to sanctions enforcement and
protecting the dollar as the world's reserve currency?
Mr. Allaire. I think so, yes. I will try and make this
point concisely--the United States and the U.S. dollar is
winning the digital currency space race today. Dollar
stablecoins are doing trillions of dollars of transactions. The
experimental beta of a Chinese yuan, which is government-
controlled in China, has done $10 billion of transactions. So,
the United States is winning.
This has the potential to grow at a very significant speed
around the world and benefit the U.S. dollar, and benefit
American businesses and households. So, I think that is one
really, really critical thing to understand, and I think the
primacy of this infrastructure and the development of this
infrastructure, it is a strategic national security and
national economic priority for the United States, and we need
to get going on it right now.
Mr. Barr. Thank you. I have many other questions as well,
but my time has expired. Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much.
The gentleman from California, Mr. Vargas, is now
recognized for 5 minutes.
Mr. Vargas. Thank you very much, Madam Chairwoman. I
appreciate very much you bringing this to our attention. And I
appreciate the ranking member, and everyone participating
today, especially the witnesses.
First, one of the things that has been interesting is, I
have heard a lot of very high and noble motives today. I don't
want to misquote people, but I have heard that the digital
asset world, the open internet model, for all people in the
world, is easier, cheaper, open, free market data, it is
transparent, reduces risk, not increases risk, and there is
less friction in the marketplace. These things are all great,
but it is interesting that most of the people I know who have
invested in digital currency, it is not because of that. It is
because they think they can get rich quick, and the
appreciation of Bitcoin is something that they want a part of.
It is not because of all of these other wonderful things that
the internet can do. That is not the reason at all.
Second, it is interesting when I ask them, ``Well, do you
know what cryptocurrency and digital assets and Bitcoin, what
it actually is?'' And most of them say, ``No. I just know that
you make a lot of money, and I want to invest in it. I want to
be part of it. I want to be able to invest because I know that
it is appreciating.''
We have seen this before, unfortunately, and it led to, I
think, a financial crisis around the world, when you were
investing in derivatives and other things, and people didn't
know what they were investing in. Then, it became very
problematic. So, I do see the risk in this.
Now I have to say, when this was a B problem or a B issue,
a billion-dollar problem, it didn't seem like such a big deal.
But now that it has become a trillion-dollar issue, and I do
think it is challenging, really, the supremacy of the dollar
around the world, I do think it is potentially a big problem. I
do have concerns.
I want to follow up on what Mr. Barr said, the issue of the
dollar being the reserve currency, it seems that this does
challenge it. Does someone want to comment on that? If not, I
will pick on somebody in particular.
Mr. Allaire. I am happy to comment, Congressman. I want to
respond to a couple of things in your comments.
I would agree with the fact that there are passersby and
then there are people who are actively building and who are
very, very close to the technical innovation, and I think, like
investments in technology companies or in other businesses that
we see in the stock market, you have people who are investing
because they think it is a business or a product that might go
up. They may not understand the details of a given
pharmaceutical company's science but they believe that perhaps
it is an area of innovation and they want to invest in it.
So, I do agree that there is that distinction. But I think
it is certainly incumbent on all of the industry participants
to ensure that there is a great amount of disclosure, financial
literacy around these products.
But more importantly, coming back to the comment about the
dollar, I think there is this growth in digital assets as a new
kind of asset class, and I think what is important to note is
understanding those in contrast to fiat currencies, many of the
digital assets, in fact, I think the overwhelming majority of
the digital assets are commodities that have utility, that are
used to power some kind of technology network or protocol,
thought of more like an oil or a gas than a fiat currency, so
they exhibit those properties.
And I don't think those will ever rival the dollar. I think
they will grow in value because they are utilized to help
facilitate all kinds of activity on these Web3 applications and
networks, and I do believe that with innovations like
stablecoins and dollar digital currencies, we could actually
see a dramatic amount of growth in the use of the dollar
Mr. Vargas. I am going to reclaim my time just for a
second, because one of the things that I see is that we do have
digital currency. We have the digital dollar already. The
digital dollar can do all of the things that you guys were
talking about today, with the exception that it is a fiat
currency that wouldn't be as easily manipulated by some
nefarious group because it would be controlled by the Fed and
the United States of America.
I do have great apprehension that you have these
cryptocurrencies that are used by drug traffickers or used by
people trafficking other human beings, and there is no good way
to control it. I am all for digital currency, but why not the
dollar? Why can't the dollar be the digital currency? Why can't
we, once again, not 60, 80 percent but maybe even higher with a
digital dollar? That, to me, makes much more sense, and it is
much more protected, and people will not have the risk.
But anyway, I yield back my time, but I did find this to be
a very interesting discussion. Thank you.
Chairwoman Waters. Thank you very much.
The gentleman from Texas, Mr. Williams, is now recognized
for 5 minutes.
Mr. Williams of Texas. Thank you, Madam Chairwoman, and for
those of you who don't know me, I am a small business owner in
Texas, and I still own those businesses. I am a car dealer, and
a former professional baseball player. And when I am trying to
wrap my head around a new topic, like cryptocurrencies, I try
to relate it back to something I understand, like baseball or
business.
Now, some of you may know this, but modern-day baseball can
really be attributed to Babe Ruth. He brought in the live-ball
era of the time and introduced power to the baseball diamond,
and before this, teams would play small ball that was very
conservative, where teams would literally play for one run a
game. The entire objective was simply to get the ball in play
so they could try to steal their way around the base pass. And
there was nothing wrong with this whole way of playing, but
when the White Sox won the World Series in 1906, the entire
team had a total of 6 home runs all year.
Then, Babe Ruth came along. Babe Ruth came along and
totally changed everything. In 1920, he set the American League
record of home runs with 54. To put that in perspective of how
fantastic this feat was at the time, the previous mark to be
set was by Socks Seybold, in 1902, with just 16. This
introduced an entire new generation of new baseball fans, and
for the first time ever, the New York Yankees' over one million
fans came to see them in a single season.
Now, with that being said, many of you are becoming the
Babe Ruth in the financial services space. You are introducing
a blockchain technology to the financial services industry and
working to upend a tradition and a traditional way of doing
business. And while many economists and so-called experts have
been calling on the downfall of cryptocurrency, and discounting
the future of blockchain technologies, all of you were working
tirelessly to create something new in order to bring this new
technology to the masses. Unfortunately, it would only take a
few misguided curve balls, we will say, from Washington, to
undo some of the progress you have all put into motion.
Mr. Brooks, can you talk about some of the negative
consequences that could happen if we take a heavy-handed
approach to regulating this developing technology?
Mr. Brooks. Mr. Williams, as a long-suffering Dodgers fan,
I share a lot of the things you are talking about, and I think
the era that you are talking about was an era when baseball
went from focusing on not losing, to an era where it is focused
on winning. And winning and not losing are not the same thing.
I come back to Mr. Vargas' question from a second ago,
which I think is the right way to answer your question. Mr.
Vargas asked the question of people having the potential to
lose a lot of money. These things are volatile. They are risky.
How do we protect them from those kinds of issues?
There are two ways of answering that. One is to prevent as
many people as possible from accessing this amazing technology.
For example, the way the current legal regime works is certain
kinds of assets can only be purchased by accredited investors,
meaning rich people. So, the only people who can get rich on
this are people who are already rich. That would be one way of
protecting people from losing money is to make sure that only
the richest can access it.
Another way of addressing it would be to make it safer, the
way that we made equity safer 40 years ago. Right? We created
mutual funds, diversification, sector funds, and other things
that make it easier for regular Americans from places like my
hometown in Colorado to buy equities without having to be stock
experts.
Strangely, in the U.S., we have refused to do that so far,
so we don't allow crypto mutual funds. We don't allow people to
diversify, the way that they do in Canada, Germany, Singapore,
the United Arab Emirates, and a series of other regulated
economies around the world.
So, I would argue the way to win is to bring more people
into the system more safely, and not to keep them out at their
own peril.
Mr. Williams of Texas. Great. Second question, we often
hear that the crypto industry is the Wild, Wild West, where
there is no regulation guiding the industry. But as all of you
are aware, that simply is not true. The SEC and the CFTC are
the primary Federal regulators, and our States also have strict
regulations that all of you must be abide by.
Mr. Bankman-Fried, can you discuss the different layers of
regulation that FTX must abide by as an exchange, and also in
order to uphold customers' deposits in your digital wallets?
Mr. Bankman-Fried. Yes. Thank you for the question,
Congressman. And putting aside the 190 other regulatory
jurisdictions that we take part in, and the dozens of licenses
that we are acquiring each month, in all of those, in the
United States, there is the sort of state-level money
transmitting license regime with money services business and
MTLs, which we and many others are part of. For any merchant or
financed or derivates transactions in the United States, there
is a CFTC regime, where there is licensure required to offer
those products.
For any products that might be security as a digital asset,
there doesn't exist currently a very clear pathway forward, but
that would be an SEC-registered regime for it. Obviously, there
are discussions about additional registered regimes for
stablecoins and other assets as well.
Mr. Williams of Texas. Thank you. I think my time us up
Madam Chairwoman, so I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from Illinois, Mr. Casten, who is also the
Vice Chair of our Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, is now recognized for 5
minutes.
Mr. Casten. Thank you, Madam Chairwoman, and I came up
vastly before I thought I was going to, which means that you
will have to humor me for my ill-formed thoughts.
I really appreciate our witnesses coming here, and I also
feel terrible for you because we could have an entire hearing
on stablecoin. We could have an entire hearing on blockchain.
We could have an entire hearing on, oh, CBDCs, I suppose. And
we could probably have an entire hearing on whether or not
things that have forced scarcity are inherent stores of value,
except that I think we resolved that a hundred years ago, and,
yet, we still sort of need to debate it periodically.
All that said, I want to start just focusing on
stablecoins, if I could, and Mr. Allaire, I want to start with
you. I am sure that you have seen the President's Working
Group's report, raising all sorts of issues with stablecoins,
primarily around, do they really look like money? Do they have
sufficient reserve assets behind them? What are the redemption
rules? Is there transparency around permission blockchains, the
custody of reserve assets? You have read the report, I am sure.
I see you nodding. I could go on.
The first question is just really simple. Do you support
the recommendations of that report for stablecoins?
Mr. Allaire. I support a number of things, but not
uniformly. I think there are a number of challenges with the
report. I think the first, maybe, to discuss is, really, this
question of what form of Federal charter ought to be in place
around a large-scale dollar stablecoin issuer.
I think the report recommends that it would be an insured
depository institution. But I think one of the really critical
things to discuss there is that an FDIC-insured bank, is FDIC-
insured because the bank is taking risk with deposits and so--
Mr. Casten. If I could--and I apologize for cutting you
off--but I want to just narrow sort of specially to the issue
of, if I deposit something in a bank that is indexed to a
dollar, and I perceive as a customer that I have eliminated the
FX risk, but now, I am left saying, is it actually there when I
want it, and other reservations?
Setting aside how we get it done, broadly speaking, are you
supportive of the idea that if this is going to look and feel
and attract investors with the expectations that this has all
the risk and liquidity profiles of a dollar, that we should
make sure that it actually has those features?
Mr. Allaire. Absolutely, full reserve disclosures,
transparency, I think definitions around what those reserves
are and the liquidity mandate on it, those are all really
critical features that need to come in place.
If it is full reserved, is it an FDIC-insured product or is
it a statutory set of constraints around what the reserves are?
Those are some of the things that I think have to be worked
through.
Mr. Casten. Okay. And I want to get to two more questions,
so I apologize if I am being quick. But in the absence of those
protections being in place, it seems to me that somebody who is
currently holding a stablecoin perceives that they are holding
a currency, but in reality is holding something that is subject
to a lot of exogenous risks beyond their control, which feels a
lot more like a commodity.
So if we agree that as of right now it is not really a
currency, would you also be supportive of saying, well, we
should regulate it as a commodity until such time as we have
the protections in place to give it the robustness of a
currency that the market is expecting of it?
Mr. Allaire. I don't agree with that, but I think it raises
a couple of key points. The first is--and I can only really
speak on behalf of Circle here--USDC, for example, operates
under the same stored value electronic money and electronic
money transmission statutes that govern Square and Stripe and
PayPal and the balances there. So today, there are consumer
protections.
There are reserve requirements around holding of those
assets, one-for-one redeemability, anti-money laundering
requirements, surety bonds that need to be posted to protect
consumers, segregation of client funds and for benefit of
customer accounts.
There is a great deal that is there--and we have operated
under such statutes, really, since 2014. We were the first
company to go and get all those licenses. So, there is a
framework today. I think as these get larger and are operating
at a global scale, I think, really, there needs to be something
more, that is more bespoke to this.
Mr. Casten. Let me, if I could, because I am just nervous
watching the time here, let me sort of get to the last
question, leave it to the whole panel, and if we are out of
time, I will follow up separately.
The concern I have is that a stablecoin, at some level, is
an ETF, and we could imagine a stablecoin indexed to all sorts
of different currencies and some kind of baskets of currencies
that are behind there, and we regulate those in certain ways
with expectations of who is bearing the risk, to Mr.
Perlmutter's question.
We have this emerging world of central bank digital
currencies, and I am satisfied that no central bank wants to
allow counterfeiting. They all want to protect the integrity of
the currency and so they will put those rules in place.
On the other hand, different countries are going to have
very different ideas about what kind of data they would like to
track when we trade a central bank digital currency.
And so, a question for any of you who feel technically
competent to answer this, if you have a stablecoin that
includes some portion of central bank digital currencies that
are tracking things that we, as Americans, would not like to
track, can we design the stablecoin to insulate the
contamination of that system so that somebody who believes that
they are buying something that looks like a dollar is not
actually being tracked by our adversaries?
Would anybody like to comment on that?
Mr. Allaire. I will make one quick comment, which is that
one of the benefits of this technology is these stablecoins,
all of the code that they provide and how they interact is all
public and open source, and so everything that functions inside
of that is visible to everyone who interacts with it. So, there
is the ability to have, I think, greater transparency into how
are these things functioning, including a foreign-issued coin.
Mr. Casten. I am out of time, but I do have some concerns
about the encryption rules as well.
Chairwoman Waters. The gentleman's time has expired.
Mr. Casten. Thank you. If anyone would like to follow up, I
would like to know.
Chairwoman Waters. The gentleman from Ohio, Mr. Davidson,
is now recognized for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman, and thanks to
the ranking member, thanks to our witnesses, and, frankly, many
people who have worked literally years to get to this point, to
have a hearing.
The market has been way ahead of this and, frankly, it has
been painful to watch, in 2017 and since when you see the ICO
market ripe with people committing fraud or just regulatory
arbitrage taking advantage of the fact that our regulators
haven't paid attention to bad actors.
And it has been especially frustrating to watch some of our
regulators take aim at people who are working very hard and
very aggressively to be legitimate businesses, to come into
compliance with every kind of licensure and regulatory regime
that our country currently offers.
It has been woefully inadequate, so it is so good to get to
this point for the hearing. Thank you, and thanks to my
colleagues.
I have been very encouraged by the amount of preparation
many colleagues have done to close the gap in any knowledge
they have had, and over the past few years, the number of
Members of Congress who really understand this space has
certainly increased.
Three years ago, we had a hearing--not really a hearing,
because as a junior Member, I can't hold those or pick them--so
in exasperation, we just held a meeting over at the Library of
Congress, and some of the folks in this room were there or
representatives from your companies were there, and we came up
with that the most essential thing was to establish a bright
line test, not just for the players in the industry, not just
for the investors, but also for the regulators. So that if
somebody at the SEC, for example, says this looks like a
security, it is not a form of interpretive art to say, does it
really fit this test?
We came up with a four-part test that said it is already
created, it exists, that it is recorded on a distributed,
secure, and immutable ledger that is not controlled by a
central authority, that permissionless peer-to-peer
transactions can be done without an intermediary and it does
not represent a financial interest in any entity.
More important than that particular test is the fact that
there is, as Mr. Brooks, you highlighted, a speed limit so that
there is some clear thing, not just, as I say, for the
investors, not just for the participants in the market, but for
the regulators themselves so that we have continuity.
If only there were such a body that could provide this
clarity. My hope is that the next time we have a hearing, we
will notice some bills and will be able to talk about
particularly the text towards that.
Mr. Brooks, when you look at stablecoins, which is maybe
the lowest-hanging fruit, some of those are well-established in
long-standing things like New York trusts.
Some of those aren't traded in anything. They are just U.S.
dollars stored in a vault for every token. Some have U.S.
dollars in components of M2, like U.S. Treasuries. Some have
other things.
When you were at the OCC, you provided some clarity there
and you also dealt, importantly, with self-custody.
Mr. Allaire, you mentioned that the code is literally
online. Any of us right now during the hearing could download
code and could begin to self-custody a digital asset.
As you look at that, how important is it to provide this
clarity, Mr. Brooks?
Mr. Brooks. Specifically on the issue of custody and self-
custody, this is a way that crypto tries to make an advance
over the current systems. The issue with custodial assets, we
have seen, and this committee has looked at many, many times.
Think about the financial crisis when there was an issue of
foreclosures and it was difficult for custodians to produce the
original note that proved whomever was entitled to enforce that
transaction and foreclose on a property, because the piece of
paper had gone missing or the custodian had merged with another
custody company or whatever.
One of the things crypto is trying to do is to use
technology so that you can safely keep your own assets for
free, versus having to pay somebody else to custody them. That
also provides a layer of financial privacy, something that this
committee usually favors, but sometimes, strangely, doesn't
favor.
Self-custody is one of the key things, along with self-
ownership and self-determination, on this internet of value
that is really critical to the nature of the network.
Mr. Davidson. Thank you. And as we have digitized
information, it is frankly amazing that we finally digitized
money in a way that we can move not just a store of value but a
means of exchange.
The use case for digital assets has partially been that it
is this stable store of value. Certainly, stablecoins solve
that. Some have pointed out that Bitcoin, for example, doesn't.
Mr. Bankman-Fried, one of the ways that people have
speculated that volatility is created in the market isn't by
holders of the asset who are hold-on-for-dear-lifers (HODLers),
as it has become known in the space, but by the other big group
that owns these assets, which are traders.
Many of them trade on leverage, so when you looked at
leverage, you made a lot of news by saying, we are capping
people at 20 times leverage. That is a lot of leverage. But you
also pointed out that the average leverage on FTX was around 2
times. Could you talk about the importance of leverage in
volatility?
Mr. Bankman-Fried. Thank you for the question, Congressman.
The first thing that I will say is in crypto currencies and
digital assets, as, like, essentially every other financial
asset in the world, more volume trades through futures
contracts than through the spot asset.
The reason for this is, basically, it is more economically-
efficient. It is much more capital-efficient. The lack of an
immediate delivery requirement on the physical creates a much
easier ability for people to hedge exposure, for people to
express opinions, and so, for all of those reasons, I think
that they are an important part of the digital asset ecosystem,
as they are for every other ecosystem.
I will just briefly say it is important to have robust risk
engines that monitor the positions on these assets. We have
gone through multiple very large up and down moves and have
been able to manage positions both times.
Mr. Davidson. Thank you, and thanks again for the hearing.
I feel like I have just spoken to Steve Case in, like, 1990.
So, thanks for the vision that you guys have, and thanks for
the hearing, Madam Chairwoman.
Chairwoman Waters. You are welcome.
The gentleman from New York, Mr. Torres, is now recognized
for 5 minutes.
Mr. Torres. Thank you, Madam Chairwoman.
I represent the South Bronx, which is often said to be the
poorest congressional district in America, and of greatest
concern to me are the use cases of crypto that would improve
the lives of the people of the South Bronx.
I represent a heavy population of immigrants, who often pay
predatory fees in order to send remittances to their loved ones
abroad. What can crypto blockchain, Web 3, do for that
Dominican immigrant in the South Bronx who is burdened by
remittance fees that she cannot afford? How much more
affordably and quickly can the crypto economy facilitate
remittances?
Mr. Cascarilla, if you could take that question, and please
be specific?
Mr. Cascarilla. Yes. Thank you for the question.
I think this is a really important element of the
technology, which, again, is that it is open to anybody. You
don't need to have a bank account. You don't need to, in fact,
rely on any intermediary. So, somebody who is an immigrant and
wants to send a remittance to a family member in another
country is able to do that, and there are ways to do that with
both crypto and with stablecoins, and all you need to do is
download a wallet and then you can send it to somebody else
anywhere in the world.
So, this is a really powerful tool for democratization of
access, especially for those who have difficulty getting bank
accounts. There are no minimum fees. There are no minimum
balances. There are no check cashing fees that are part of this
technology, and you can do it, in some cases, for a penny or
less.
Mr. Torres. And how much quicker?
Mr. Cascarilla. This is an important point. Blockchains,
part of the beauty of them is that they are operating 24-hours-
a-day, 7-days-a-week, 365-days-a-year. So, it would be sent
just about instantaneously.
There are no multi-day lags that you have right now, and
that change in speed is just crucial because usually it is
these lags that really are very costly.
Mr. Torres. I am going to interject.
Mr. Brooks, I have a question about the challenge of
enforcing laws in a world of decentralization, whether it be
law enforcement relating to financial crimes or SEC disclosure.
How exactly do you enforce the law when there is no central
entity against which to enforce the law? How do we grapple with
that challenge?
Mr. Brooks. That is a great question, Mr. Torres. I really
appreciate you asking it. I would say a couple of things about
it.
First of all, to the extent that some of the activity we
are talking about is parallel to activity that happens in the
supervised system, my question is, why don't we allow it in the
supervised system? Again, you have heard me say it before this
morning.
But you have on this panel a big stablecoin issuer who has
applied for a bank charter, and it doesn't look like they are
going to get it. The easiest way to supervise that would be to
let them in the banking system and have the OCC have authority
over them. I would start with that.
The second point is that lots of these decentralization
protocols are designed to solve the exact problems that create
the need for enforcement in the first place, because most
enforcement in the securities and banking system is about some
combination of human error, human negligence, human greed, or
human bias.
And the point of some of these decentralized systems is to
take that out and have an open source piece of software that
everybody can look at and deal with those things
algorithmically.
As an example, I used to sit on a bank credit committee. We
would decide who got credit and who didn't, and I think we had
a really good system for it.
But we were human beings. We might have been indulging in
implicit bias. We might have made mistakes. Algorithms don't do
that. So, some of the need for what you are talking about goes
away in a decentralized system.
Mr. Torres. And I know there are critics who have said that
the blockchain might not be as secure and as unhackable as
advertised. But, for me, the proper question is not whether the
blockchain is perfectly secure and unhackable. The question is
whether it is better than everything else? Like Winston
Churchill famously said, democracy is the worst form of
government with the exception of everything else.
Is there a computer network that is more secure than the
blockchain?
Mr. Brooks. I think the beauty of the blockchain is not
that it is perfectly secure. It is that it is perfectly
transparent, so you can see when somebody messed with it.
Mr. Torres. But I want to specifically address security. Is
there a computer network, to your knowledge, that is more
secure than the blockchain?
Mr. Brooks. I don't know of one. But we have a Ph.D. in
physics sitting right next to me, so we will let him answer.
[laughter]
Mr. Bankman-Fried. If you are talking about any major
global use blockchain, I don't know of one. There are small
blockchains that are less secure. All of the major ones are
incredibly secure.
Mr. Torres. And one of my concerns about crypto is that it
would present a challenge to the supremacy of the U.S. dollar
as the world's reserve currency. But what I have found striking
is that the leading stablecoin issuers have actually chosen to
peg their stablecoins to the dollar, which strikes me as a vote
of confidence that reinforces rather than challenges the status
of the dollar as the world's reserve currency.
What are your thoughts on the relationship between the
dollar and the crypto? Is it is it as contradictory as many
have feared or could it be actually complementary?
Mr. Cascarilla. I will answer that. I actually don't think
that it is contradictory at all. What people want is a U.S.
dollar bank account. Everywhere in the world, people want to be
able to have U.S. dollars and, actually, that is the hardest
thing to get. And crypto is a tool for a lot of different
things, including bringing communities together, but what
people want for their everyday spending is dollars.
If you are in Argentina, you want dollars. If you are
somebody anywhere in the world, you want to have access to
dollars, and that is the hardest thing to get access to right
now, and that is why tokenized dollars are so valuable, because
you don't need to have a bank account, yet, you can have access
to the dollar-based system and a very, very important tool for
inclusion.
Chairwoman Waters. The gentleman's time has expired.
The gentleman from Michigan, Mr. Huizenga, is now
recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman. My apologies to
the panel. I had to leave to manage a bill on the House Floor
dealing with the very exciting issue of LIBOR.
Chairwoman Waters. Thank you.
Mr. Huizenga. You are welcome. We are getting there, Madam
Chairwoman.
But to my colleague from New York, I do want to point out
that this isn't quite the same, but the same idea exists.
Committee Republicans released a CBDC Central Bank Digital
Currency principles recently and of those, we had said in this
as one of those principles is we need to make sure that the
private sector leads the way but we need to ensure that the
U.S. dollar remains the preeminent currency.
So, that is a common goal, certainly, and we have been very
aggressive in trying to lay that out.
I only have a short amount of time, so I am going to try
and go as quickly as possible, and I am going to peek around my
colleague from West Virginia here, trying to get to Mr.
Bankman-Fried, quickly.
And again, I apologize. I am not trying to replow ground
that has already been gone over. But how many various levels
and types of regulators do you currently engage with? Because I
know you are worldwide. You have indicated that you have
multiple regulators that you currently work with, so I am
curious if you can even peg that number?
Mr. Bankman-Fried. Yes. There are dozens, probably soon
hundreds worldwide that we are engaging with, and that includes
all across Europe, all across Asia, and then, within the United
States, we are engaging with State money, transparent money
services, and business licensure.
We have a CFTC license for derivatives that we are engaging
with the SEC, and I anticipate more agencies getting involved
soon as well.
Mr. Huizenga. Yes. And I want to make sure that we are not
overregulating that law, and I am sure it has cost you an
untold amount of money so far, and I am sure everyone has been
dealing with that.
But I also want to make sure--no offense to any of you--
that there are others who are going to be able to enter that
space and that they are not being blocked out and that there is
an artificial barrier to entry that is going to allow others to
do, frankly, what you all did, which was be innovative and
supply a product to people who are looking for that product.
I am going to have to move really quickly. I am going to go
to Mr. Brooks on a couple of things.
Would you describe why establishing these clear rules of
the road is an important step before we add additional
regulation and consider that regulation?
Mr. Brooks. Mr. Huizenga, it is good to see you again.
I think the most important reason of many is international
competitiveness. Other countries make this easier. Let me just
make clear, other companies make this easier in other
countries.
I just came yesterday from the Middle East, we were in
Dubai and Abu Dhabi, and they have super clear derivatives
regulations, super clear ETF regulation. They are trying to
lure Americans over there to build these products and they are
moving there.
Mr. Huizenga. How are they viewing these crypto assets
differently than traditional assets? What Rubicon have they
crossed that we haven't, and why is it important to think about
digital assets differently?
Mr. Brooks. I think one of the things that they have
figured out is that crypto actually is less fundamentally
different than equities in depth than you would think it is. It
is a risk on asset that people want to invest in.
They want to invest in it in Canada, so Canada builds a
regime for it. They want to do it in Germany. We are the last
country standing that hasn't figured that out. It is a risk on
asset that people want exposure to as part of asset
diversification.
Mr. Huizenga. As opposed to traditional assets?
Mr. Brooks. Correct.
Mr. Huizenga. Okay. I have a minute left here.
Ms. Haas, you indicated in your testimony that, ``every
asset listed on the Coinbase platform is subjected to rigorous
legal compliance and security review.''
Could you provide us specific details on what Coinbase's
process has been to be able to make that type of statement?
Ms. Haas. Thank you for the question.
Yes. Specifically, for the legal review, we assess each
asset under the Howey Test where we, as Brian Brooks spoke
about earlier, through the Crypto Rating Council, have
established a framework where we look at the risk factors and
we determine whether or not it meets characteristics of the
Howey Test.
It is a risk-based assessment. It is not a black-and-white
test. But based on our assessment, we believe it is lower risk
that these are securities before we list them on our platform.
We separately do a compliance review.
Our compliance review includes looking at the developers of
the token, and ensuring they are not on an OFAC sanctions list.
We look to make sure it is not a scam, that there are actual
people using this coin, that it was developed in sound manners.
And then, we look at a security review to understand the
underlying code to say, can we provide custody for this, is
this at heightened risk of an attack or someone pulling the
value from these assets?
So, it is security, legal, and compliance before we list an
asset.
Mr. Huizenga. Okay, and I am hoping that the Chair will
grant me leave for my LIBOR work to just scoot, and with a
closing statement, as my time is up here, a number of you have
brought up the unbanked and underbanked. And despite rhetoric
that gets thrown around, all of us on this committee are very
concerned about it.
I happen to represent the second-poorest county in the
State of Michigan, which is in the top 100 poorest counties in
the nation, and I understand what it means for these unbanked
and underbanked folks to be involved in the process.
I want to make sure that what we do, not just here today,
but in the future--we tend to be lag indicators at the
government level and with regulators rather than on that front
end, and I am hoping that we do nothing to harm their
opportunity to engage in the process.
With that, I yield back.
Chairwoman Waters. Thank you very much, and thank you for
LIBOR.
The gentleman from Florida, Mr. Lawson, is now recognized
for 5 minutes.
Mr. Lawson. Thank you, Madam Chairwoman, and Ranking Member
McHenry. This is a very extraordinary hearing, and I would like
to, again, as everyone else has, welcome everyone who is
testifying today at this hearing, which is a very important
one.
It will probably take me a long time to understand what all
we mean by crypto currency, and I just heard some testimony
stating how we lag behind all other countries in making
changes.
And this is to everyone. My colleague, Representative Soto,
and I, and eight other Members of Congress led a letter to
leadership addressing the digital assets provisions that expand
the definition of broker under Section 6045(c)(1) of the
Internal Revenue Code in 1986 to include any person who for
consideration are responsible for the regular provision and
service of effectively to transfer of digital assets on behalf
of another person.
As drafted, the provision would include minors and other
validated as well as software and hardware wallet makers who do
not engage in trading activity and beyond the scope of broker
services.
What are your thoughts on this provision? Do you think this
is a good tax policy requiring nonbrokers to report on
transactions for people who are not even their customer? Why or
why not? And this is to the whole panel.
Mr. Brooks. Maybe I can jump in there, Congressman. It is
Brian Brooks speaking here just for a moment.
I have said many times that that language would be sort of
like requiring YouTube to get an FCC broadcast license because
they are a person engaged in distributing television content.
I think what we need to recognize is that there is a
difference between centralized exchanges--you have two of the
biggest ones represented here--who all agree that they should
be engaged in tax reporting, and they do that, versus
decentralized algorithms where there is no company involved in
the transactions at all, and there is no one well-situated to
provide that kind of tax reporting.
I think that distinction is super clear. The technology has
enabled people to transact peer to peer with no intermediary.
So, who is it that we are asking to do the tax reporting in
that context?
Mr. Lawson. Would anyone else like to speak on that?
Ms. Dixon. Yes. This is Denelle Dixon from the Stellar
Development Foundation.
One of the issues that I think is a problem with this is
that it may seek to require these entities that actually don't
have access to any personal information at all--because as the
validators, they are actually just validating the transaction
and don't know who those individuals are that are on the other
side of it--to gain access to that information, which is
exactly what I think many of you don't want, and neither do we.
Mr. Lawson. Anyone else before I go to the next question?
[No response.]
Mr. Lawson. This question is for Ms. Haas. Does Coinbase
have multiple lines of business? And if so, how is each line of
business segregated and ring-fenced from one another in a way
that confidential information is not improperly used?
Ms. Haas. Thank you for the question.
Coinbase does have multiple products. In many cases, we
consider our products a product family where we are serving one
customer and the customer benefits by having those products
within one application.
For example, we provide custodial services, which is, for
all intents and purposes, a wallet where they can hold their
crypto assets. But then integrated with that is the ability to
trade out of that account, and then to settle new assets back
into that account.
So, those are different products to be able to store versus
be able to buy or sell. But they are integrated products. Those
we have within one legal entity, as an example, are offered as
one product family.
That is different from when we offer products such as our
Coinbase cloud offering where we are using our technology to
allow others to build in the crypto economy. That data is 100
percent ring-fenced, not allowed through any of our other
products, and we do segregate data.
We have different engineers, we have different legal
entities, and we provide a lot of protection. So, it depends on
the product that you are speaking about, Congressman, and some
we share and some are very much ring-fenced.
Mr. Lawson. Okay. And a really quick question, do
withdrawal fees apply to taking crypto off the platform? What
fees apply? How are these fees calculated?
Ms. Haas. No, we do not charge any fees to withdraw crypto
from our platform.
Mr. Lawson. Okay. With that, Madam Chairwoman, I yield
back.
Chairwoman Waters. Thank you. The gentleman from Arkansas,
Mr. Hill, is recognized for 5 minutes.
Mr. Hill. Thank you, Madam Chairwoman. I appreciate this
good productive hearing and the good questions from both sides
of the aisle, and I appreciate the panel being here.
Let me start with Mr. Brooks. You have had some good
comments about the President's Working Group on whether or not
stablecoins should be banks.
But on the issue of the wallet, what should Members of
Congress be concerned about in sort of that regulatory umbrella
of any individual's wallet?
Do you anticipate, really, tens of thousands of wallet
providers or hundreds or and I know in the Working Group they
suggested it, too, should be a bank or, I assume, connected to
a bank. So is that really necessary, and talk to me about
wallets for our consumers to have access?
Mr. Brooks. Yes. Congressman Hill, thank you for that
question. That is an important one, and I think, as I said
earlier, the ability of people to self-custody their own assets
and to send them directly without using an intermediary is at
the core of what we are trying to build.
So if we made it so that wallets had to be hosted by a bank
or some other regular institution, we already have that. We
already have banks and that will take time--
[interruption]
Chairwoman Waters. Mr. Lawson, please mute. You are
unmuted. Please mute. Please mute. Mr. Lawson, please mute.
Thank you.
Mr. Brooks. Okay. So, just to finish the thought--
Mr. Hill. Meanwhile, back at the ranch.
[laughter]
Mr. Brooks. Exactly. So, the ability to self-custody is
really, really important. My point about the role of the
banking system is simply that, again, to my point of parity, an
asset that is or a transaction that is allowed to be done
inside of a bank shouldn't be technology-specific. It should be
technology-agnostic.
If your agent payments are lending you should be able to do
that however. But wallets are critical. What is missing from
this, which technologists are building today, are crypto-native
identification protocols that will allow us, without getting
the name and the taxpayer ID number of the person on the other
side, to know that it is a safe wallet, not a blocked wallet.
And that is in development today by multiple companies.
Mr. Hill. Yes, I think that is critical because we like the
concept of not being spied upon by the actions in our wallet.
And yet, we all want to comply with the rules around AML/BSA.
And so, anonymously securing that the wallet is in compliance
is sort of an important feature.
Mr. Brooks. Absolutely.
Mr. Hill. Ms. Haas, community banks have been the backbone,
of course, of our local markets, and in September, it was
announced that your institution partnered with Vast Bank to
provide crypto banking services.
Maybe others can comment, but let's start with you. For
aiding a normal community bank customer out there in my
district, or someone who wants to innovate in a bank and using
crypto products, are we in a good position regulatorily or are
there changes we need to make?
Ms. Haas. I am going to speak about two things. One, I am
going to talk about how they can do it, and separately, we can
talk about the regulatory environment.
Coinbase has tools to allow any bank to be able to provide
crypto to their customers where we want to make our back end
services, our 9 years of experience of safely custody and
crypto assets of being able to integrate with blockchains
available to all global users, and one way we do this is by
letting banks partner with us and white label our tooling so
that they can offer this directly to their customers.
There does need to be continued innovation and clarity on
behalf of many banks about what are permissible activities for
them and--banks that we partner with and speak about their
ability to offer crypto to their end customers are working with
their various State and Federal regulators to gain clarity
about what would be permissible for them to offer to their end
consumers.
Mr. Hill. Thank you. This is a big deal because having
spent almost 4 decades in and out of that business, banks are
gun-shy about their regulatory burden, as Mr. Brooks certainly
knows, and being cleared for that IT exam or their new product
review exam at their board level is really not something that
bank boards want to be surprised about in this arena.
Mr. Cascarilla, on taxes, do you have a view on that, on
partnering with banks?
Mr. Cascarilla. Yes. As maybe some Members know, we have a
number of partnerships with banks and they work with us today.
I think we are an infrastructure provider. So for us, banks are
an important customer set.
I think that they are trying to upgrade their
infrastructure to be able to adapt to this new technology.
There is a recognition that the way the current financial
system is working today is not really adapting to the 21st
Century needs of a digital economy.
And so, I think that there are important ways in which the
current financial system can upgrade itself. Traditional assets
can now move on blockchain dollars, gold, and securities, and
it is not just about crypto, which, as exciting as it is, is
only one piece of this broader transformation that is
happening.
Mr. Hill. Thanks. What one regulatory issue would be
important to you at that community bank level? And if you would
respond to me in writing?
Thank you. I yield back.
Chairwoman Waters. Thank you. The gentleman from Illinois,
Mr. Foster, who is also the Chair of our Task Force on
Artificial Intelligence, is now recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman, and I thank our
witnesses as well.
I would like to focus on what I think is the crucial
importance of having a secure digital identity for crypto asset
transactions.
First, regarding controlled anonymity for prevention of
criminal activities, it seems to me that if we wish to prevent
crypto assets from being used, for example, for ransomware or
other criminal payments, that there is no logical alternative
to having all crypto transactions be associated with a legally-
traceable identity--someone who can be extradited if they do
something criminal--and these can be pseudonymous to market
participants and to the public then must be capable of being
de-anonymized pursuant to the action of a court in a trusted
jurisdiction.
Do any of you disagree with that conclusion, that this is a
necessary condition for preventing, for example, ransomware?
[No response.]
Mr. Foster. Let the record show that no one raised an
objection to that statement. I think that is very significant.
So, we have to start planning for a system where, in a court
and a suitable jurisdiction, it can actually de-anonymize any
legitimate crypto asset.
Okay, and, now, that is relevant to crypto assets such as
stablecoins or CBDCs that have stable valuations but still
could be used for criminal activities. But for crypto assets,
which are speculatively traded, then we also have an additional
worry, which is abusive trading practices.
In that case, we need to know not only the beneficial owner
behind a trade, but there has to be a uniquely-identified
beneficial owner. There has to be a regulator that can see, oh,
this is a wash trade, because even though they look like
separate pseudonymous IDs, they are, in fact, the same person.
Historically, in trading, it is required to have a
regulator that can see the true beneficial owners. We had spent
a decade trying to get the beneficial owner under the
Consolidated Audit Trail (CAT), of which you are probably
aware.
So, do you think that is also a logically necessary
condition to prevent wash trades and similar abuses?
Mr. Bankman-Fried?
Mr. Bankman-Fried. Yes, I will say I do think that it is,
and we conduct Know Your Customer diligence on all of our users
so that we do know who the participants are, and we are
responsive to governmental inquiries about that.
We are overseen by the CFTC on that with FTX US
derivatives. I also think that this is a powerful argument in
favor of having harmonized regulatory and market frameworks, in
particular, between different asset classes, where if you end
up with a different regulatory framework for the market's
regulation of Bitcoin, Bitcoin derivatives, stablecoin,
stablecoin derivatives, Ethereum, Ethereum derivatives, and
other assets, you end up making it not just riskier and harder
and more annoying for the user to access, and more overhead for
the industry, but you make it hard to have consistent
regulatory oversight of a fractured regime.
Mr. Foster. I agree completely. Look, I have been lurking
in the deep weeds for over a decade and trying to get this
split inside Congress between the SEC and the CFTC. This is not
something anyone would have created.
But if you had built that discussion with--a number of you
expressed enthusiasm for having a single, unified national
regulator. Have you run that past the EAC committee?
[No response.]
Mr. Foster. No, look, I know the answer to that. This is
one of the original sins of Congress as it is constituted, and
financial services have been suffering from it for a while.
Now, in terms of tax payments, it seems to me that if there
was simply the requirement for any digitally-traded asset to be
associated with a pseudonymized, basically, a tax ID, that you
have an API provided by the government which says, I want you
to give me a pseudonymous tax ID, and that that be put publicly
on the blockchain, then and that that blockchain be listed with
the tax authorities that then the tax authorities could just
run a piece of software and calculate how much tax everyone has
owed.
It seems like that is a very lightweight requirement, even
on a startup in this business. Is there anything wrong with
that concept?
Mr. Allaire. Congressman Foster, I think you have raised a
number of really critical issues here around identity and the
importance of that for law enforcement, and transparency and
auditability.
I think it is a critical area. I think there are some
critical things that have to be balanced, of course. I think
most of us would agree, I hope, that privacy, security,
limiting the leakage of personal identifiable information in
data breaches, these are real challenges.
Blockchains provide a very powerful way to have assured
data. They also provide auditability and transparency. And
there is actually a risk of if you connect too much personally
identifiable information to these, that that could be abused.
And so--
Mr. Foster. But the only personal identifier is the
pseudonymous--you can cryptographically inspect it.
Mr. Allaire. Right.
Mr. Foster. Make sure it is valid issued by whatever
government you claim to be domiciled in that has issued this
and then that is all you need to know.
Mr. Allaire. I would agree with that. I think that, really,
a critical next step for this industry are digital identity
standards that allow using cryptographic proofs, using crypto
technology itself to prove that someone has been KYC'd, prove
that someone has a pedigree.
Mr. Foster. Oh, sure. I agree, and we have legislation on
that subject. Thank you, and I--
Mr. Allaire. Of course.
Mr. Foster. --yield back.
Chairwoman Waters. Thank you. The gentleman from Minnesota,
Mr. Emmer, is now recognized for 5 minutes.
Mr. Emmer. Thank you, Chairwoman Waters, and thanks to our
witnesses for joining us today.
Congress really needs to better understand the great
opportunities that your businesses are bringing to this
country.
Mr. Bankman-Fried, I have several questions for you, and I
would appreciate, as much as you can, quick answers so we can
make the most of the time that we have.
FTX US offers crypto commodity derivatives products, such
as futures and options contracts. To provide these products in
the United States, it is my understanding that FTX US has
obtained at least four licenses from the CFTC, which you listed
in your testimony.
Mr. Bankman-Fried. That is correct.
Mr. Emmer. Do you know if there are any additional licenses
separate from those four listed in your testimony that are
required by the CFTC for FTX US derivatives to be fully
compliant with U.S. derivatives regulation?
Mr. Bankman-Fried. I do not believe so.
Mr. Emmer. I think that is correct. And where does the
price discovery, sir, for your CFTC-regulated crypto commodity
derivatives contracts primarily come from?
Mr. Bankman-Fried. There is a very large number of market
participants that partake in those. There are hundreds of
billions of dollars per day globally of volume in similar
products.
And like other markets, we don't choose that pricing. It is
a market-based pricing that comes from a variety of liquidity
buyers, market-making firms, individual users, and other
people.
Mr. Emmer. Right, and I will note that for Bitcoin futures
contracts that trade on the CME, which is a CFTC-regulated
exchange, 100 percent of that pricing comes from five U.S.
crypto spot exchanges: Bitstamp; Coinbase; Gemini; itBit; and
Kraken.
We have seen disapproval letters from the SEC on multiple
Bitcoin spot ETF applications. I don't know if you are aware of
that.
SEC Chair Gensler's justification for not allowing Bitcoin
spot ETFs to trade is his belief that Bitcoin spot markets are,
``vulnerable to fraud and manipulation.''
Now, it is my understanding that FTX uses surveillance
trade technology akin to the technology that national
securities exchanges use to protect investors and to ensure
sound spot markets.
What does this technology and any other tools FTX uses to
protect the spot market from fraud and manipulation look like?
Mr. Bankman-Fried. Yes. So, like other exchanges, we do
have these technologies in addition to the Know Your Customer
policies so that we can identify individuals associated with
trades. We have surveillance for unusual trading activity. We
have manual inspections of anything that gets flagged either by
the automated surveillance or by manual inspection, and we do
this with the trading activity, with the deposits or
withdrawals and everything else.
Mr. Emmer. It sounds like you are doing a lot to make sure
there is no fraud or other manipulation. I thank you, Mr.
Bankman-Fried--
Mr. Bankman-Fried. Thank you.
Mr. Emmer. --again, for helping us understand the extensive
guardrails a crypto currency exchange like FTX has in place to
ensure sound crypto spot markets for investors.
The SEC has approved several Bitcoin futures ETFs that get
100 percent of their pricing from U.S. crypto spot markets.
I guess I am left incredibly confused by how the SEC's
concern over spot market vulnerability applies to Bitcoin spot
ETFs when it doesn't apply to Bitcoin futures ETFs. And by the
way, this is not a partisan issue. I have been working closely
with Darren Soto, our Blockchain Caucus Co-Chair, on this very
issue.
Why? Because the bottom line is that Americans deserve
access to a wide diverse range of investment products. They
deserve to choose what investment vehicle they want to put
their hard-earned money into.
But the SEC is not providing Americans this choice when it
comes to crypto commodity ETFs for reasons, again, that just
don't make a lot of sense, especially after highlighting the
extensive measures that crypto exchanges take to protect their
spot markets.
Our strong crypto and Web 3 markets in the United States,
have been giving the United States incredible capital market
success. These markets are also teeing Americans up for
incredible capital formation opportunities.
But our regulators simply aren't capitalizing on the
opportunity here, and it is my constituents and all of your
constituents who are taking the hit because of this, and it
must change.
Again, I want to thank the witnesses for being here. I hope
this is the first of many of these discussions we have as
Congress tries to put together a thoughtful, light-touch guide
framework for the industry.
Thank you. I yield back.
Chairwoman Waters. Thank you very much. We have been joined
by Mr. Sherman from California, who has been on the House Floor
working on his beloved LIBOR bill, and I understand it has been
put up for a vote, and we are all looking forward to voting for
this bipartisan legislation.
So, the gentleman from California, Mr. Sherman, who is also
the Chair of our Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, is now recognized for 5
minutes.
Mr. Sherman. Crypto is many different things. Crypto
currency is an incredibly volatile investment that aspires to
be a currency that might displace or at least compete with the
dollar. A stablecoin aspires to be incredibly stable and is
tied to the dollar.
What they share is a culture, a vibe, a stick-it-to-the-man
moniker, a belief that somehow this is new and hip, and a
attack on the powers of society. But the fact is that the
advocates of crypto represent the powers in our society.
The powers in our society on Wall Street and in Washington
have spent millions and are trying to make billions or
trillions in the crypto world. These include Goldman Sachs,
JPMorgan, Visa, BlackRock, Citadel, Musk, and Zuckerberg, not
to mention the CEOs who are before us here today.
Everyone before us today is a crypto advocate. We will at
some point hear from the crypto critics. We won't hear from
CEOs. We will hear from academics with their pencils and pens.
Today, we hear from the CEOs with their lobbyists, their PACs,
and their power.
And we wonder why we won't be able to protect investors.
The regulators need to listen to this hearing very carefully.
With all of the money and power on one side, we will not be
able to pass meaningful legislation.
Don't cop out and say we are not going to do anything until
we pass meaningful legislation. And if you wonder about where
the power is, Zuckerberg had to come here himself, and sit
there. Brian Armstrong sent his number two, and Tether didn't
bother to show up at all.
Zuckerberg did not have a day in the park. He did not enjoy
it, but he had to come. Armstrong didn't, and Tether hasn't
been here at all.
Now, the number-one threat to crypto currency is crypto.
Bitcoin could be displaced by Ether, which could be displaced
by Dogecoin, which could be displaced by HamsterCoin. And then,
there is CobraCoin, and what could MongooseCoin do to crypto
coin?
In the area of fiat currency, the dollar will always be
more important than the Uruguayan peso, and the Uruguayan peso
is not a joke. There will always be an Uruguay, and the
Uruguayan peso will always have some value.
Will MongooseCoin always have a value? I don't know. I just
made it up. It is a joke. Although I said that about
HamsterCoin, and then I found out there really was a
HamsterCoin.
It is not fair to compare fiat currencies' current system
to what crypto currencies aspire to be. It is true that if you
try to use a credit card or a debit card to buy a sandwich
today, the system takes half a percent, 50 cents, away from the
merchant. If you try to use crypto to buy a sandwich today--I
don't know where you can go in Washington you can use a Bitcoin
to buy a sandwich. It can't be done at all, but someday.
We compare what we hope crypto can do, to the problems that
we face with fiat currencies now. That is not a fair
comparison.
Now, looking at Ms. Haas from Coinbase, if I take a hundred
bucks on your exchange, buy some Bitcoin, and then a couple of
days later, say, Bitcoin happens to be selling at the exact
same price, and I sell it, it is my understanding that I get
$94.02 back. Am I wrong?
Ms. Haas. We have multiple products and it--
Mr. Sherman. Yes or no? Would I get, in that exact
transaction, $94.02 back? Am I wrong?
Ms. Haas. I can't answer the question. It depends on the
product.
Mr. Sherman. Okay. Are there products where I would be
right?
Ms. Haas. There is a product where you would be right.
Mr. Sherman. Okay. So, I could lose $6 in 2 days. What
about Tether? Buy a hundred bucks worth of Tether, 2 days later
sell the hundred bucks worth of Tether or sell the Tether,
could I lose six bucks?
Ms. Haas. Yes.
Mr. Sherman. Okay.
Ms. Haas. It is a 2 percent charge.
Mr. Sherman. A 2 percent charge. I thought it would be a 3
percent charge. It was $2.99 last time I was on your site.
Ms. Haas. No.
Mr. Sherman. Okay. I am looking at the Coinbase fee, $2.99
on USTD. We will put this in the record. In any case, to lose
even 2 percent, let alone 3 percent, and then another 2 or 3
percent on the way out in scarcely a couple of days, that is
well over 1,000 percent interest lost in that period of time.
Mr. Allaire, are your reserves all in instruments that
yield less than one-tenth of 1 percent?
Mr. Allaire. That is correct.
Mr. Sherman. Then, how do you pay 1 percent interest on
some deposits?
Mr. Allaire. We don't pay interest on deposits.
Mr. Sherman. And yet, you have a deal with oh, my time is
expired.
Chairwoman Waters. Thank you very much. The gentleman from
Georgia, Mr. Loudermilk, is recognized for 5 minutes.
Mr. Loudermilk. Thank you, Madam Chairwoman, and thank you
for having this hearing. I think it is very intriguing and very
timely with where we are with the progression of technology. I
go back and I think about my 30 years I spent in the IT field.
Had the government gotten in the way of the internet, we would
still be using dial-up today to do a lot of what we are doing.
So, I think we have to proceed very cautiously. One thing I
have learned in my 30 years in the IT sector, especially the 10
years that I spent in the intelligence realm in the Air Force,
is that the most important aspect, from an IT perspective, is
data security--cybersecurity.
That is something we have to be focused on all the time. In
fact, in my business, 20 years in the private sector, that was
the number-one issue for most of my customers.
And it really got to the point--when I ran for Congress, of
course, I couldn't continue that business. I sold it primarily
because I knew that with the way things were, the question
wasn't if someone was going to be hacked and lose data, it was
when.
And one of the things that I learned when I was in the
military, one principle is that you don't have to secure what
you don't have. So if you don't need data, don't keep it. But
then you have the aspect of, yes, we have to secure the data
that we do need to keep.
Now, this is one thing that the Federal Government has yet
to learn is you don't need to acquire a whole lot of data and
keep that data, especially for the Federal Government, which is
the riskiest of anyone out there of letting data get out.
And then, you see more proposals like the one that we have
heard recently, the craziest proposal, that the banks would
have to report every transaction by Americans in their banks to
the Federal Government. This is the type of thing that we don't
need to be doing.
However, there is data that is important that we do have,
whether you are in the private sector, or whether you are in
public sector, and that is where I see the value of the
underlying technology of crypto currency, particularly
blockchain, as a solution to our cybersecurity problems because
of the distributed ledger aspect of it, is the data is
available but is not centrally located to where it could be
taken.
Mr. Brooks, can you discuss how blockchain and distributed
ledger technology can enhance our cybersecurity posture?
Mr. Brooks. Mr. Loudermilk, it is good to see you, and I
appreciate the question.
The simplest answer, as I said earlier today, is that
blockchains are as much about transparency as they are about
security. One of the biggest problems when you think about the
biggest cyber hacks we have ever had in the United States is
how long it took for us to figure out that they occurred--the
case of Target, the case of Equifax, etc.
We found out days and weeks later by accident that they
occurred. And if you think about the Equifax hack, in
particular, initially, we thought it was a small problem. Weeks
later, we learned it was a medium-sized problem, and only
months later did we learn it was a gigantic problem that
involved all of our data, because there was no transparency.
The thing about blockchains is every single block as it is
validated is publicly visible to the network. The other thing
about blockchain is it is based on a consensus mechanism. So,
before you can have a change to the ledger, you have to have a
significant majority of all of the validators agree that that
is the correct change.
So, unlike normal networks, where one bad guy can defeat
the entire system, here, you have to have thousands of
computers agreeing at the same time that the change can be
made, and even then, everyone sees it.
That hiding in plain sight aspect is the safest thing about
blockchain, is why it is so critical to our security
infrastructure.
Mr. Loudermilk. And I think that is one of the most key
values of this emerging technology is bringing us into a new
era where we can do some of the things that we need to do
without amassing this data.
Another area I have been interested in is, really, with
payments, and I have done some work on a related issue with the
CFPB's regulation of remittance transfers.
So, Ms. Dixon, I understand that your organization is
active in that space. Can you describe how blockchain and DLT
are being used to facilitate payments?
Ms. Dixon. Yes, thank you for the question. This is one of
my favorite topics, because it is something that actually is
defining the use case that is happening today.
I think that there are businesses that transact on the
network, that can actually go from the interoperability with
the traditional financial system, is remarkable.
You can actually take money from a bank account, put it
into a digital asset, transfer that value to another to the
end, wherever it is being sent, and then it can convert right
back into a bank account.
The fact that you have such complete interoperability with
the existing financial infrastructure should give us all the
ability to take, like, excitement about elevating that
technology to the right level so that we continue to innovate
there.
Payments are something that are constantly being leveraged
on the Stellar Network. They are done with business payments.
They are also done with remittances from the personal
standpoint.
When you live in California, for example, and you want to
send money to your family in another country, you can do so in
3 to 5 seconds, 100,000 transactions for less than a penny on
the Stellar Network. It is a remarkable use of this technology.
Mr. Loudermilk. And this is what can happen if government
doesn't get in the way of the development of technologies that
benefit the individual.
I have several other questions, but I see my time has
expired, and I want to be respectful of everyone.
With that, Madam Chairwoman, I yield back the balance of my
time.
Chairwoman Waters. Thank you. The gentlewoman from Iowa,
Mrs. Axne, who is also the Vice Chair of our Subcommittee on
Housing, Community Development, and Insurance, is now
recognized for 5 minutes.
Mrs. Axne. Thank you, Madam Chairwoman, and thank you all
for being here.
Mr. Bankman-Fried, I would like to start by asking you the
first question. FTX US has a derivatives platform and recently
bought LedgerX as part of that. Is that correct?
Mr. Bankman-Fried. Yes.
Mrs. Axne. Okay. Thank you. And that platform is registered
with the CFTC. Is that correct?
Mr. Bankman-Fried. Yes.
Mrs. Axne. Okay. Perfect. I just want to clarify something.
And this isn't to say anybody is doing anything wrong. It is
just to get the lay of the land. You also have an exchange for
Bitcoin and other tokens, but that is not registered with
either the CFTC or the SEC. Is that correct?
Mr. Bankman-Fried. That is correct. Currently, neither of
them. Our primary market is regulated for spot Bitcoin to USD
markets.
Mrs. Axne. Okay. Thank you. And I know you are registered
as a money transmitter, but that is not the same kind of
oversight that we will see from a Federal market regulator.
I also sit on the House Agriculture Committee, which
oversees the CFTC, so, a gap like this is especially concerning
to me. And the big problem that I see here from what I
understand is that the CFTC doesn't have regulatory authority
for spot trading of commodities, just their derivatives. That
leaves consumers with inconsistent protections, which is a
concern that I have.
Mr. Bankman-Fried, both you and Ms. Haas run exchanges, but
the investor protections, basically, can be whatever the
companies separately come up with and they won't necessarily be
the same. Is that correct?
Mr. Bankman-Fried. I completely agree with your worry. We
do, in fact, have much the same investor protections on our
spot markets as on our derivatives markets. But I would be very
much supportive of a similar regime for spot commodities
markets like Bitcoin USD markets as we see for the derivatives
markets.
Mrs. Axne. Very good. Thank you.
When it comes to oversight, I have a couple more questions
here. Do you report your full order history publicly, either
you, Mr. Bankman-Fried, or Ms. Haas, and are there public
standards for that to make sure it is accurate?
Mr. Bankman-Fried. We do report all of our public market
data. It is available on our webpage. It is available via our
API. We do not charge anything for it, and never intend to.
I would be supportive of that becoming more than just a
norm but a regulatory standard as well.
Mrs. Axne. Okay. Ms. Haas?
Ms. Haas. We also make all of our data available, and we do
not charge for our data. It is available to our customers.
Mrs. Axne. And is that order history public as well?
Ms. Haas. Yes, it is.
Mrs. Axne. Okay, thank you. I just want to make sure I am
clear on this. Bitcoin, which has almost a trillion dollars
invested, has CFTC oversight for people who are trading futures
and options, but not for people who are trading the currency
itself, is that right?
Mr. Bankman-Fried. That is essentially correct.
Mrs. Axne. Okay. That kind of difference in protections is
really what I want to focus on here. I am not here to tell
anyone what they should or shouldn't buy, if they should have
crypto or not have crypto. I think there are pros and cons, and
certainly, I have had plenty of conversations with my own son,
who wants to get into crypto.
But I will tell you that what I care about is that when
folks do, I want to make sure that they are protected and they
have the same investor protections that they would for other
forms of currency.
I am asking, can you as an industry, and it sounds like you
can, benefit long term from having more regulation that sets
better standards to protect investors in this area?
Mr. Bankman-Fried. Yes, I absolutely think so and I think
it is--I am not concerned about more regulation. I think
getting consumer protection in areas where there is not
currently enough can be extremely helpful for a robust
ecosystem. I think it is just important to do so in a way that
fits the product and in a way that fits the regulators as they
are.
Mrs. Axne. Okay, thank you for that. And, listen, I agree.
I think it is something that we absolutely need to look at, and
I would certainly ask all of you to think about the steps that
you can take within your own organizations to make crypto more
safe and trustworthy for investors.
But I completely agree with you that we have to be doing
something to make sure that we are protecting investors.
There are things that you, as exchanges have to help the
industry long term. You mentioned that you think we could do
some of these regulations, and they would be good for the long-
term growth.
What do you think that you could do to help you build
trust, and trust for folks in general for crypto currency?
Mr. Bankman-Fried. I will say that we have had
conversations with a very large number of institutional
players, everyone from banks, investment banks, pension funds,
and the number-one thing that comes up is, what is the
regulatory framework for the industry, how can we feel that we
are protected both from a commercial standpoint, but also from
a regulatory standpoint in pursuing these options for our
investors.
And I think it could be extremely helpful to clarify the
regulatory frameworks, to build them out where they are
missing, and to make sure that we have streamlined and uniform
standards that are clearly communicated.
Mrs. Axne. Thank you so much for that. I would love to make
sure that crypto is safer and more trustworthy for investors.
I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from West Virginia, Mr. Mooney, is now
recognized for 5 minutes.
Mr. Mooney. Thank you, Madam Chairwoman.
I am certainly thankful to the witnesses for being here. I
appreciate your expertise as we all learn more about the
growing digital currency issue.
Back in August of this year, the Cuban government announced
their central bank would work on a rule to officially recognize
digital currencies. So, I am wondering whether the country's
recent embrace of crypto could be a way for the Communist
Regime to evade tough U.S. sanctions.
So, let's start with Mr. Bankman-Fried. What process does
FTX use to ensure that rogue and, frankly, murderous autocratic
regimes like Cuba cannot use an exchange to avoid United States
sanctions?
Mr. Bankman-Fried. We run sanctions checks on all of our
users. We conduct Know Your Customer surveillance on them. In
addition to that, we conduct surveillance on the blockchain and
fiat assets that transfer into and out of our system.
Mr. Mooney. Okay. Thank you.
I want to ask Ms. Haas the same question, propose the same
question to you as it relates to Coinbase.
Ms. Haas. Largely, the same answer. We similarly run OFAC
tasks on all of our customers, both on onboarding and then
ongoing. We believe that sanctions are an effective tool of the
U.S. Government in combatting illegal activity.
In addition to our onboarding controls, we do transaction
monitoring. We do surveillance on all of our transactions on
our platform, but we also have tools that are looking across
the industry, looking in, and we partner with law enforcement
on investigations.
Mr. Mooney. Okay. So, second question. Let me set it up for
you. One of the ways that bad actors or rogue states could try
to fool exchanges is by using technology like VPN that spoofs
IP addresses, fooling others into thinking they are in a
different location.
Let's go with Mr. Brooks on this one. Can you speak to the
importance of moving away from IP addresses to verify location,
and a follow-up to that, what is an alternative way of
verifying location?
Mr. Brooks. I have a couple of quick answers. On the
compliance side, I think the utilization of VPNs to avoid
geolocation and to avoid sort of geofencing is something that 3
years ago, was effective and useful, and the industry has
developed lots of technology which makes that much, much harder
today. So, some of these decentralized tools, several of the
companies that have been mentioned already--Chainalysis,
Elliptic, and some others--have an ability to actually trace IP
addresses based on probabilistic sort of network information.
So, it is not just that that IP address might have been issued
by an ISP in a given jurisdiction; it is also that that IP
address is associated with lots of other transactions that
could only be Cuba or could only be Libya or whatever. And the
probability assessment is one of the things that makes this
much easier. That is why the network is so important.
Mr. Mooney. Okay. Thank you.
I referenced Cuba. The Cuban government's continued tyranny
is personal for me and my family. My mother fled Communist Cuba
when she was 20-years-old to come to the United States. She
even wrote a book about the horrific experiences and the
aftermath of the revolution there, including her time as a
political prisoner in the Castro regime and the Marxist Cuban
government cannot be allowed to continue to oppress the Cuban
people.
Former President Trump's tough sanctions restricted access
to resources for Cuba's rogue government, and I want to work
with the members of this panel to ensure that the digital
marketplace does not enable the Communist Cuban regime or other
bad countries around the world who hate us and kill their own
people and are tyrannical. I am sure we all share that goal. I
know there are those who think that that is a role for the
Federal Government to come in and issue a whole set of
regulations, because you can't do it yourselves, but I think it
is better if we work with you, and if you can do it yourselves
better than the Federal Government, then that might be the
answer.
Thank you, Madam Chairwoman, and I yield back the balance
of my time.
Chairwoman Waters. Thank you.
The gentleman from New Jersey, Mr. Gottheimer, who is also
the Vice Chair of our Subcommittee on National Security,
International Development and Monetary Policy, is now
recognized for 5 minutes.
Mr. Gottheimer. Thank you, Madam Chairwoman.
And thank you to all of our panelists for being here today.
I am very grateful.
If I can start with Mr. Bankman-Fried, in my role on our
National Security Subcommittee, I am committed to ensuring that
bad acquisition torsion like terrorists and drug dealers cannot
access the financial services sector for purposes contrary to
U.S. interests. And while, obviously, I support cryptocurrency
and its potential benefits to the digital payment space, one
area remains particularly concerning for me: the theft of
cryptocurrency and its potential use in illicit or terrorist
financing.
These issues are also related insofar as stolen funds may
be used for nefarious purposes. I introduced my bill, H.R.
3685, the Hamas International Financing Prevention Act, in part
because of the increased reporting around the use of
cryptocurrency donations to support Hamas.
Two questions, if you don't mind: one, what are exchanges
doing today to both ensure that consumers are protected from
hacking and theft, and to prevent bad actors such as Hamas and
other terrorist organizations from accessing cryptocurrency
markets and in what context; and two, in what context would you
flag a transaction to law enforcement and have you ever flagged
transactions to law enforcement agencies?
Mr. Bankman-Fried. Yes. I guess I will first briefly talk
about the security aspect of this, about stopping breaches to
accounts where we mandate that all users have to factor
authentication for all of their accounts. We have a very broad
suite of security practices that all users can access on the
site, in addition to all familiar customer policies.
On the bad actor side, we conduct KYC surveillance on all
users of the exchange. We do that on all deposits and
withdrawals, using multiple tools on the blockchain and for
fiat currencies. And to address any care question about law
enforcement, we work cooperatively with law enforcement here in
the United States and globally on tracking down any bad actors.
We are in constant communication. We strive to be as helpful as
we can be.
The combination of the Know Your Customer surveillance that
we do, plus the transparency of the public ledgers of
blockchains actually can make it a really powerful tool for
tracking down any funds from illicit activity. We have been
participating in freezing a substantial amount of assets on our
platform in cooperation with law enforcement, and we look
forward to continuing to work with them globally.
Mr. Gottheimer. Thank you so much.
Mr. Allaire, the President's Working Group's recent paper
on stablecoins includes a recommendation that all stablecoin
issuers be required to become insured depository institutions,
such as banks. I understand that Circle has stated that it
intends to become a bank, but currently backs the USDC in
circulation 1:1 with reserves held at partner banks.
I am working on a bill that could potentially implement a
number of these recommendations. If I can ask, do you think it
is necessary for safety and soundness for stablecoin issuers
to, themselves, be insured depository institutions, or is
partnering with insured depository institutions sufficient, and
what are the pros and cons of each model, please?
Mr. Allaire. Thank you for the question, Congressman.
I think it is a very important issue. As noted, we have
decided to pursue a national bank charter and we are open to
being an FDIC-insured bank, as well. I think, however, there is
some subtlety in this topic, and I think it is important for
the committee to consider it. A full-reserve digital currency
model, such as USDC, where 100 percent of the assets are fully
reserved in high-quality liquid assets such as cash and short-
duration U.S. Treasuries, is not the same as a bank deposit
where the bank is, in turn, taking the deposit and
rehypothecating it and lending it.
And, really, the purpose of FDIC insurance is for that
fractional reserve lending that takes place. I think it can be
really powerful for a stablecoin issuer to have a Federal bank
charter, to be able to access the Fed and hold cash at the Fed
in terms of the ultimate form of safety and soundness for those
cash assets, but not necessarily being lending banks that are
rehypothecating capital. The form of insurance, perhaps, could
be investigated.
I know that the FDIC, itself, has been thinking about, what
are potential appropriate forms of insurance on stablecoin
issuers, and so I think it is a live issue. But just applying
the kind of apples-to-apples model on a full-reserve banking
model, I think, does raise some questions.
Coming back to your question, I think that statutes in the
United States should support stablecoin issuers that are
operating at a State level, and at a Federal level, and support
money services businesses, as well as banks, being active
participants in the stablecoin ecosystem. And I think it is
important that the barriered entry in the stablecoin space not
be so high that start-ups that are innovating as money services
businesses can't participate in this innovation.
Mr. Gottheimer. Thank you so much.
And I yield back.
Chairwoman Waters. Thank you.
The gentleman from North Carolina, Mr. Budd, is now
recognized for 5 minutes.
Mr. Budd. Thank you, Madam Chairwoman.
The United States has a huge opportunity with crypto, but
my fear is that this regulatory state is going to crack down on
an industry that the regulators really don't understand yet,
and it is going to force the next generation of financial
technology to be created outside of our country. And we can't
let that happen.
Mr. Brooks, it is good to see you again. Where do companies
draw the line and say, enough is enough, with this anti-
innovation, ``regulation by enforcement,'' and then just decide
to take their industry elsewhere to another country. Where is
the line?
Mr. Brooks. Mr. Budd, it is good to see you, and thank you
for that question.
What I would say is that in some aspects of the industry,
the line is super clear. There are some products that are legal
in other countries and are just not legal here. Take some of
the investment products we talked about earlier today, for
example, exchange-traded funds. One of the things that makes
crypto risky is that consumers may not understand the
difference between one token and another token and so they may
want to diversify much as I own an S&P 500 mutual fund.
We don't allow that in the United States. We do allow it in
Canada. We also allow it in Germany, Singapore, Portugal, and a
number of other places. So, if you are a developer of those
products, there is no fuzzy line. It is super clear: you can't
do that here, so you have to go abroad.
There are some other--
Mr. Budd. Please say why we can't do that here?
Mr. Brooks. Sure. It is because the Securities and Exchange
Commission has consistently refused to approve products that
other G20 nations have approved.
Mr. Budd. So, we are behind the curve?
Mr. Brooks. Unquestionably.
Mr. Budd. Given your previous experience running the OCC, I
would love to hear your perspective on where a regulator's
authority begins and ends.
And remember the joke earlier this year that everything is
infrastructure? It seems like SEC Chairman Gensler thinks that
everything is a digital asset that he can regulate. He cites
the Howey Test and the Reves Test without providing any other
explanations. So, Mr. Brooks, what are we missing, because
Chairman Gensler clearly doesn't see a limit to his regulatory
authority in this area?
Mr. Brooks. Congressman, one thing I learned running my
little agency is that the U.S--and this is not specific to
crypto--is sort of unique among the developed countries in our
fragmented approach to regulation. So, when I hear people talk
about the idea that we need one regulator for crypto, I would
say we should first have one regulator for banks, but we have
three of them, or if you are an investment bank, five of them.
So, that is inherent to the system that we have.
What I say to that is, the last thing we need to do is add
another regulator to a system that already has dozens of
regulators. What we need to do, instead, is have parity for
crypto activity, along with traditional finance. If I make a
crypto lending platform, I should probably be regulated by the
FDIC. If I make a crypto trading platform, I should probably be
regulated by the CFTC and the SEC.
But somehow, we treat crypto, because it is new, as
different from everything else, and I am going to argue that
crypto is just a step-function improvement in the system. We
already have a regulatory system. The laws are super clear how
it works, but there is something about crypto that scares
people. I don't know what it is. Maybe it is just because it is
new.
And I remember in my banking law class when banks were
first allowed to use computers to keep ledgers, people sued
over that at the time. I remember when I was a second-year
lawyer, and we got email, and the ADA said that lawyers
couldn't use email because it would travel over this mysterious
network of computers. These all seem ridiculous today, but it
seems like we haven't really learned the underlying lesson,
which is that technology usually advances human flourishing. We
have a regulatory system. Let's use it.
Mr. Budd. Thank you for that.
Ms. Haas, as you are aware, the infrastructure bill was
signed into law last month, and it had lots of problems for
digital assets. So, I was very vocal about a need for a fix for
this, and I was proudly supporting Ranking Member McHenry's
bill to make those fixes. Would you please address some of your
concerns, and why those flaws would be so bad for the crypto
community?
Ms. Haas. Thank you. And thank you for your support on this
important bill.
First of all, I want to make it clear that Coinbase
supports tax payments in crypto. We think that everybody should
be paying their taxes, and we think that centralized entities
like Coinbase should be reporting, no different than a Schwab,
no different than a Fidelity. It is an important value-added
service for our customers.
But what concerned us about the drafting of the
infrastructure bill, specifically to the tax provisions, was
that these are complex issues. Crypto taxation is complex. The
technology has new players in the space and we didn't have the
public comment period that we would typically have for
something so complex, and so what happened was the risk of an
unintended consequence.
And I think that we can still solve this. I think that we
are not to the place that it could be scary, but the definition
of a broker was potentially overly-wide and could be
interpreted to include players such as minors, such as the
hardware wallets that do not have access to this information
that have no ability to comply with reporting regimes, and
there could be consequences. There could be penalties. There
could be Federal risk to them. So, we thought it was overly-
broad.
And then separately, in Section 6050I, we thought that
there were additional reporting risks that were privacy, and
also could be deemed overly-broad and pull in parties that were
not necessarily deemed to be covered by this rule.
Mr. Budd. Thank you very much.
Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you very much.
I think you need to make a correction. You referred to Mr.
Brooks as having been at the SEC, and he has been saying all
along that he was at the OCC.
Mr. Budd. Okay. I never made that reference, but thank you.
Chairwoman Waters. Okay. Thank you very much. We appreciate
your presence here today and your expertise in banking law.
Thank you.
The gentleman from Massachusetts, Mr. Lynch, who is also
the Chair of our Task Force on Financial Technology, is now
recognized for 5 minutes.
Mr. Lynch. Thank you, Madam Chairwoman.
Great hearing. I want to thank all our witnesses, as well.
Prior to the creation of the Subcommittee on National
Security, we had a terrorist financing task force that I
chaired for about 8 years. So, I am keenly sensitive to the
issues around Know Your Customer (KYC) and Anti-Money
Laundering (AML). And I have worked a lot, since then, with the
Financial Crimes Enforcement Network (FinCEN) on traditional
banking protections with regard to terrorist financing and
money laundering.
And I know that at the end of last year, FinCEN issued a
rulemaking proposal to require banks and money services
businesses to submit reports and verify the identity of
customers involved with wallets for virtual currency. So, this
particular rulemaking focused on those wallets that were hosted
in low-compliance jurisdictions and were identified by FinCEN
as wallets which were not hosted by a financial institution as,
``unhosted wallets.''
And the requirements that FinCEN came up with are sort of
similar to what we use now for money transmitters. Mr. Allaire,
your firm, in particular, was vocally opposed to that
rulemaking and I heard your responses to Mr. Foster and to
others regarding identity. And I just want to try to
understand--can you share why the transactions involving Virtue
Assets and payments involving those wallets that are quite
similar to Western Union transmissions or MoneyGrams, why you
objected to what looks like a fairly similar regulatory
approach?
Mr. Allaire. Thank you, Congressman Lynch, for the
question. It is a very important question.
First, I would simply start by saying that I think FinCEN
has done an excellent job of looking at the issues of money
laundering and terrorist financing in the context of virtual
assets, virtual currencies. They led the way as the first
Federal regulator to, in fact, put in place rules around that
back in 2013, that led firms like Circle, Coinbase, and many
others to put in place licensing and supervision around Bank
Secrecy Act (BSA), Anti-Money Laundering (AML) provisions and
the like.
I think the specific issue at hand, which you are correct,
we had some significant objections to, was really twofold. One
was, there was an introduction of an eleventh hour rulemaking
that did not have significant public comment. And I think at
the bottom of that issue is there are some really significant
things about the way digital assets and blockchains work, that
we want to make sure that if we are going to be introducing
rules around reporting, that they take account of the unique
things with public blockchain infrastructures, in particular.
Notably, public blockchain infrastructures are in some ways
like the public internet or the worldwide web or email; they
are open networks that anyone can connect to, join, and use.
And it is really one of the powerful things that has made
information exchange free and I think it is one of the things
that we believe with digital assets on blockchains, can make
value exchange much more frictionless for people around the
world.
Part of that is there is the ability for an individual to
self-custody assets with a piece of hardware or a piece of
software. That piece of software can be downloaded from an app
store. And they are self-custodying a stablecoin like a USDC or
a Bitcoin, that is, the software maker, itself, is not involved
in facilitating a customer transaction; they are really just a
software developer providing technology that end-users can use.
And I think the rule as it was outlined, would be kind of a
square peg/round hole or a bit of a blunt-force instrument. And
what we, and I think is hopefully going to bear fruit
significantly over the next year, is that what we really need
are ways to provide proof of digital identities. A firm like
Circle or a firm like FTX or Coinbase or Paxos can provide a
cryptographic proof that someone has been KYCed and that proof
could actually be carried around with them in a hardware wallet
or a software wallet and then you would have the ability to
know that you have legitimate actors, to be able to have the
right information about users, without having, essentially,
more personally identifiable information (PII) being
broadcasted really broadly.
And so, I think our view was to give the industry more time
to develop technology that can allow these forms of
transactions to happen, but still preserve privacy and take
advantage of the really significant security benefits that come
from cryptography.
Mr. Lynch. Okay. That is fair.
I know my time has expired, so thank you, Madam Chairwoman.
I yield back.
Chairwoman Waters. Thank you.
The gentleman from Tennessee, Mr. Kustoff, is now
recognized for 5 minutes.
Mr. Kustoff. Thank you, Madam Chairwoman, and thank you
also for convening today's hearing.
And thank you to the witnesses. I know we have been here
for some time, but it has been very informative, and I
appreciate it, and I know we all do.
Ms. Haas, could we talk about the Crypto Rating Council,
that I believe Coinbase and other industry players created to
determine what digital assets look more like securities and
which ones don't. Could you talk to me about how the Council
makes its determination and who is involved in the process?
Ms. Haas. Thank you for the question.
The Crypto Rating Council is an independent entity that
works to serve industry participants, such as Coinbase, with an
assessment of digital assets underneath the Howey Test. So, it
is looking at the White Papers that new asset projects put
forth and making a determination under the Howey Test whether
or not that new project is more likely than not to meet the
definition of a security under U.S. Federal securities laws.
Independent law firms are the ones who are doing this
assessment, who are U.S. securities laws experts and looking at
facts and circumstances to make an assessment.
Mr. Kustoff. Thank you.
You talked about securities, so can you talk about to what
degree, if any, the SEC and other stakeholders have been
involved in, what the discussions have been with them in terms
of the framework?
Ms. Haas. Thank you for the opportunity to address this.
At this point in time, the SEC has not provided a clear
definition about what is or is not a security. They have asked
us to rely on the Howey and Reves Tests. And we, companies like
Coinbase, companies like FTX, and others pay careful attention
to ongoing litigation that is existing in the space, and news
that we see. But we are left to interpret, based on our
interpretation of the law, what is and is not a security at
this time.
Mr. Kustoff. Thank you, Ms. Haas.
Mr. Brooks, thank you also for being here. I think there
are, obviously, people who believe that cryptocurrency is
difficult, maybe even impossible to track. Can you talk about
that as it relates to the blockchain?
And while we talk about alleged illicit activities
oftentimes being investigated by Federal authorities, could you
explain, maybe, the fallacy in that, as if you were talking to
our local police chiefs or our local sheriffs?
Mr. Brooks. Sure. Thank you for the question, Mr. Kustoff.
I actually do this talk at local rotary clubs and things around
the country all the time, so I think I can do that pretty well.
I think the easiest way to understand it is, let's contrast
blockchain transactions with normal banking transactions to see
how much easier it is to trace them on a blockchain than it is
in a banking transaction. So, let's imagine for a moment that--
I would never do this because it would be flagrantly illegal--
but let's say I bought you lunch, okay. And let's say that
afterwards, you wanted to Venmo me your payment back. So, you
hit your Venmo button on your iPhone and you send me money.
What many people don't understand is that there are seven
or eight different steps in the Venmo transaction. All Venmo
does is send an instruction to your bank. Your bank then
receives the instruction, they write it down in their books and
records, and then they send an instruction to an underlying
transfer network. It could be the automated clearinghouse, it
could be the Fed wire system, or something else. That system
then contacts my bank. It inquires whether my bank has enough
money to pay you. Once that has been done, then there is a
debit from my account. It is very complicated. And in any one
of those steps, information could be lost. There could be a
breach. Something bad could happen.
Versus in a blockchain, there are no intermediaries. I am
not sending instructions to a third party to send instructions
to another third party to eventually send you money. I've sent
you money. And when the block is valid, I can see that my
wallet address transferred that value to your wallet address;
it's as simple as that.
The easiest way for people to understand how easy this is,
because we have had a lot of talk about hacking and
cybersecurity issues, the reason that we found the bad guys in
the Colonial Pipeline hack was because they asked for Bitcoin.
If they had asked for diamonds, if they had asked for cash, if
they had asked for almost any other thing, we never would have
caught the bad guys. We caught the bad guys because--not in
spite of the fact--they used Bitcoin and we could tell exactly
where the money went.
Mr. Kustoff. So, because the blockchain was used, it was
traceable?
Mr. Brooks. Correct.
Mr. Kustoff. And just briefly, because my time is expiring,
again, as you are talking to rotary clubs, could you give
specific examples where the FBI and other Federal law
enforcement agencies use the blockchain, in fact, to help trace
and help determine?
Mr. Brooks. When I used to work at Coinbase, I ran a group
that facilitated those customers; they were our clients. We did
work for them.
Mr. Kustoff. Thank you very much. I yield back.
Chairwoman Waters. Thank you.
The gentlewoman from North Carolina, Ms. Adams, is now
recognized for 5 minutes.
Ms. Adams. Thank you, Chairwoman Waters, and Ranking Member
McHenry, for hosting the hearing.
Mr. Cascarilla, I want to touch briefly on the risks that
stablecoins might pose to our broader financial system. The
President's Working Group report, which we spent plenty of time
talking about today, expressed concern that any perceived
instability could trigger a run on that stablecoin. In 2008, we
saw the dangers of instability in prime lending market funds,
and now rating agencies are saying that.
So, how do you respond to the assertion by the President's
Working Group that a run on stablecoins could cause systemic
instability?
Mr. Cascarilla. Thank you for the question.
I think this is a crucial topic when it comes to
stablecoins. I think the key point here is to define
stablecoin. And depending on how you define it, it creates
different risks. If a stablecoin is backed by only cash and a
cash equivalence--essentially, money that is sitting in an
FDIC-insured bank account or sitting in T-Bills that mature in
3 months--there is no risk of a run; it is liquid cash. You
have simply taken a dollar and you have tokenized it.
And there are very good uses for that, and there are really
good reasons to set it up that way. Of course, you could decide
to back your stablecoin with other assets and certain issuers
do. It could be loans. It could be CDs. It also could be other
types of securities.
And in that case, you start to have not really a
stablecoin, but you have something that looks more like maybe a
bank deposit. In that case, it would make a lot of sense, I
think, for a banking regulatory regime to oversee it.
And, also, it could be that it looks more like a money
market fund because it is backed by certain securities and it
would make sense for the SEC to oversee it. So [inaudible] or a
trust company.
Ms. Adams. Okay. I was going to ask how stablecoins are not
similar to money market funds, but I think you have made some
clarification there.
Ms. Haas, in October of this year, Coinbase released an
operational framework of the digital assets policy proposal in
which you advocate for the creation of a new self-regulatory
organization (SRO). You indicate that incorporating an SRO into
the regulatory supervision of marketplaces will speed the
development and enforcement of an appropriately-tailored
digital asset industry rule.
In your view, how can Congress and industry best come
together to begin laying the foundation for a successful
regulatory framework for digital asset trading platforms such
as yours?
Ms. Haas. Thank you so much for this question.
I want to clarify that first, in our proposal, we are
seeking one single Federal regulator. It could be an existing
Federal regulator. We are not asking for the creation of a new
Federal regulator.
And the value that we think having an SRO would be--this is
complex. There is no innovation happening in crypto every
single day. We haven't even touched on non-fungible tokens
(NFTs) or decentralized autonomous organizations (DAOs) in this
committee hearing today. And we think it is important that
there is a nimble group that is constantly looking at the
changes in crypto. And so, that is why we recommended having an
SRO in addition to a single Federal regulator.
The way we would love to work with you all is we think this
is an important step in the process. We think this hearing is
important, but we really believe that having policymakers
deeply understand the technology, getting input from the
industry, understanding the use cases will help craft prudent
regulation here.
We believe that we agree with you all on first principles
of regulation, but how we get there is going to look very
different in crypto than it has in our traditional financial
markets, the relied-on intermediaries.
I think many of the testimonies on this panel have spoken
very similarly about the challenges we have seen and we would
love to work with you in partnership.
Ms. Adams. Thank you, ma'am.
This is to all of the witnesses, and it can be a yes-or-no
answer, would you commit to--as a two-time graduate of
Historically Black Colleges and Universities (HBCUs), I care
deeply about making sure that your companies reflect the
diversity of our country. So, yes or no, would you commit to
sharing data about the racial and gender makeup of your
companies?
I want everyone, if you can, to answer quickly, yes or no,
are you committed to doing that?
Mr. Allaire. Yes.
Mr. Bankman-Fried. Yes.
Ms. Adams. Okay.
Ms. Haas. We would be happy to follow up with your office.
Ms. Adams. Great. We would appreciate that very much. It is
a concern of not only this committee, but certainly of one of
our Co-Chairs, Joyce Beatty, and myself and some others. So,
thank you for your responses.
And Madam Chairwoman, I am going to yield back.
Chairwoman Waters. Thank you.
The gentleman from Indiana, Mr. Hollingsworth, is now
recognized for 5 minutes.
Mr. Hollingsworth. Good afternoon.
I appreciate everyone being here, and I certainly
appreciate the dialogue that has been engendered thus far. I
will admit to you that my erudition on such matters is very,
very low, and so I am on a genuine fact-finding mission, not on
a confirmation of my preconceived notions about how this could
be used or, alternatively, how it should be treated by
regulators.
I think, specifically to Mr. Allaire to start with, would
you define stablecoin for me?
Mr. Allaire. Sure. Thank you for the question, Congressman.
There are many types of stablecoins. There are stablecoins
that are called stablecoins because they are intended to hold a
stable value, thus the name.
Mr. Hollingsworth. Can you clarify and be more specific? A
stable value relative to what?
Mr. Allaire. Relative to some underlying reference asset.
Mr. Hollingsworth. Right. But that reference asset, in and
of itself, may, in fact, be volatile, right? If I said this had
a 100 percent correlation with one ounce of gold, that should
be stable relative to gold--
Mr. Allaire. That is right.
Mr. Hollingsworth. --but not stable relative in an absolute
sense, I should say.
Mr. Allaire. That is exactly right.
Mr. Hollingsworth. Okay.
Mr. Allaire. So, say, the purchasing power of a dollar is
changing rapidly with inflation and so, or in other countries,
hyperinflation or there are deflationary assets and so on. So,
the reference asset obviously has a huge impact.
Mr. Hollingsworth. You brought this up, and I wanted to
delve further into that and I appreciate that. So, a lot--not a
lot, maybe not even the majority, some non-trivial portion of
stablecoins--are backed by U.S. dollars and are transferable to
and from dollars, right? So, in essence, explain to me the
value proposition to me owning a stablecoin that I can convert
into dollars, as opposed to owning the dollars themselves?
What is the value proposition to a consumer?
Mr. Allaire. Yes, that is a really great question, and I
think it is good to use analogies sometimes on this.
Mr. Hollingsworth. Right.
Mr. Allaire. It is sort of like the difference between
having a postal letter versus an email. A digital version of a
letter can move at the speed of the internet for free.
Mr. Hollingsworth. Right.
Mr. Allaire. That is really an upgrade to the functionality
of a letter, for example.
Mr. Hollingsworth. Right.
Mr. Allaire. And, digital music, the same kind of
attribute. So, digital currency dollars inherit the kind of
super powers of the internet: the speed; the reach; the
interoperability; and so forth.
Mr. Hollingsworth. The net summary of that is that it is no
different as a store of value than owning dollars, because it
is convertible to and from dollars, but is different in its
transaction characteristics? It can move faster and presumably
at a cheaper cost of transaction than, perhaps, transacting in
dollars? Is that a fair way to say that?
Mr. Allaire. I think that is basically correct, although I
would say that well-designed stablecoins are safer than bank
deposits because with bank deposits, you are taking a risk on
the lending book of the underlying bank. And so, you have run
risks. You have default risks of all of the deposits and loans
that might sit in a bank.
A full reserve form of money, which is what a dollar
digital currency such as USDC represents, is actually a safer
form to hold, not just store value, but as a transactional
medium, as well.
Mr. Hollingsworth. Right. Assuming that you hold your
dollars in a bank account.
Mr. Allaire. That is right.
Mr. Hollingsworth. Yes, there is some level of counterparty
risk. We have worked hard, frankly, in this country and through
a regulatory environment of minimizing that and through Federal
Government guarantees, but that remains non-zero, if trivial.
So, walk me through the transaction value of owning a
stablecoin. And here is my view just outside of this. I
understand the notion that if I go to a retailer that accepts
that stablecoin, then I can transact with them, presumably at a
lower cost to that retailer. Hopefully, my prices are lower on
account of that and I can transact faster with them.
But there is a non-zero transaction cost associated with
getting into that stablecoin, so, I have kind of traded this
notion of accelerating my pace of transaction, lowering the
costs once I get into the system, but there are costs to get
into that system, right? I have to buy whatever that stablecoin
is from dollars, right?
Mr. Allaire. Yes, and I can speak in the case of USDC.
Mr. Hollingsworth. Please.
Mr. Allaire. So, if an institution wants to transfer
dollars into USDC, we don't charge a fee for that.
Mr. Hollingsworth. You might have to get set up to do so.
Mr. Allaire. You need an account.
Mr. Hollingsworth. I can't just go and get a debit card,
and use my debit card out of my bank account. I have to set up
an account. Presumably, you have some process by which I do
that.
Once I get over that hurdle, then I can transact, or
something like that.
Mr. Allaire. That is correct. And I think many users of
stablecoins keep their value in stablecoins because they are
now able to use a very, very efficient payment and settlement
medium. The high growth that you are seeing is partially
attributed to that.
Mr. Hollingsworth. So, is the value proposition that this
network of those that accept this is going to expand some more,
and people are going to keep that in stablecoins?
And then my second question is going to be, why can't the
same technology that runs stablecoins eventually run the
payment system in dollars? Won't we eventually cut out the
middle step of having to convert to a stablecoin, and then
transact in this frictionless and speedier environment? Won't
we eventually figure out how to run that through the existing
payment system?
Mr. Allaire. I think there are two points here. One is that
dollar digital currencies like USDC are both kind of protocols
and are a form, a representation, a form factor for a dollar.
And there are network effects there, just like there are
network effects in other internet protocols that we use for
things, and I think that is significant.
To the second question, I think in some ways it is a
question of semantics. When I use the IOU settlement system of
a Visa card, I am not actually spending dollars, per se. There
are a bunch of IOUs that are on a centralized ledger that are
keeping track of things, and then, ultimately, underneath,
there is a Fedwire that goes from one bank to another. We
experience it as, well, that is just this card and there is a
whole elaborate kind of system underneath that, that charges
fees.
I think well-regulated stablecoins are an upgrade to those
kinds of payment systems to be ready for the internet therein.
Mr. Hollingsworth. I appreciate the Chair's indulgence.
Chairwoman Waters. Thank you. The gentleman's time has
expired.
The gentlewoman from New York, Ms. Ocasio-Cortez, is now
recognized for 5 minutes.
Ms. Ocasio-Cortez. Thank you, Madam Chairwoman, and thank
you to all of our witnesses who are here today at this hearing.
Before I get into the heart of my questions today, there
was a slight discrepancy in some of the testimony and
questioning from earlier today that I wanted Ms. Haas to
clarify very quickly. Earlier in the hearing, Representative
Velazquez asked about proprietary trading on the Coinbase
platform, and in that moment, I believe you told her that,
``Coinbase does not engage in proprietary trading on our
platform. All prices are established, et cetera.''
However, in looking at the Coinbase rules under Section
3.21 of Coinbase corporate ops, it says that Coinbase, Inc.,
which owns and operates Coinbase Pro and Exchange, also trades
its own corporate funds on Coinbase Pro and Exchange, and I
just wanted to give you, briefly, the opportunity to clarify.
Ms. Haas. Thank you so much for the opportunity to clarify.
There are a few things that we do in our business. One is, we
do have a corporate investment portfolio that every month we
make an investment in crypto and add to our balance sheet. We
have not sold that. We don't trade it actively, but we do
increase the investment on a monthly basis on pre-established
investment protocols. We do buy those on our exchange.
Ms. Ocasio-Cortez. Got it. Understood. Thank you very much.
So, to the heart of the matter, crypto, as we know, is a
growing industry. It is rising in market value from $500
billion last year to more than $3 trillion as of November of
this year, 2021. There are a lot of advocates, proponents of
the cryptocurrency industry who discuss the creation of new
digital currencies, I should say, and then building safer, more
inclusive systems, outside of the traditional financial sector.
But I kind of want to explore this assertion a little bit
more. Mr. Allaire, a substantial portion of the buying and
selling of cryptocurrencies is done with stablecoins, correct?
Mr. Allaire. A significant amount is traded with
stablecoins, yes.
Ms. Ocasio-Cortez. It is about 75 percent. Does that sound
about right to you?
Mr. Allaire. I don't have the data in front of me, but it
does sound roughly correct.
Ms. Ocasio-Cortez. Okay. And these stablecoins are designed
to be backed by certain reserve assets, whether they are
primarily USD or safe, highly-liquid cash substitutes;
essentially, a coin to be stable in value so that people can
kind of use it in a larger world of crypto where other coins
could perhaps be a little more volatile in their value.
Mr. Allaire. I can certainly speak to the design of USDC. I
can't really speak to others. So, yes, USDC is designed as a
payment instrument under electronic money law in the United
States. So, it is cash and short-duration U.S. Government
Treasuries, which are the underlying instruments for the stored
value.
Ms. Ocasio-Cortez. And, in fact, your firm recently
announced a transition to 1:1 backing in dollars of USD coin
after it was found that only 60 percent of the coin was backed
by cash or cash substitutes. So, if the cryptocurrency
industry, hypothetically, lost its ability to use stablecoins
as a bridge to trade in and out of dollars tomorrow, would that
cause a significant shift? It seems as though it would not be
able to work the way that it does currently, correct?
Mr. Allaire. I think a primary reason why stablecoins are
so powerful is that they are a superior form of settlement. And
the existing banking system moves slowly. Funds take several
days to move, and there are significant fees and the access to
that can be limited, whereas, blockchains operate continuously
and settlement happens at the speed of the internet.
And so, I think it is important that payments and
settlement in these new forms of internet financial products
and services can operate at the speed of the internet. So, I
think it is essential.
Ms. Ocasio-Cortez. I see. Thank you.
Lastly, what would you say to some of the folks who are
listening today, not just here on this panel, but in the larger
world? What do you say to the folks who say, basically, this
doesn't seem like a new financial system, per se, but really an
extension or perhaps expansion of our present one?
Mr. Allaire. I would disagree with that. I think what I
believe we are seeing is a new open infrastructure layer on the
internet, a missing infrastructure layer of the internet that
is designed around value exchange and economic coordination
that is rooted in immutable data, the ability to interact with
counterparties in a very, very safe way that hasn't existed
before on the internet. And, really, many of the efficiencies
that the internet brings in terms of moving information brought
into moving value, but also with greater degrees of security
than are often offered to the existing financial system.
So, I really do believe we are building a new global
economic infrastructure layer and we are--
Ms. Ocasio-Cortez. And you would argue that that is
distinct, and not an expansion or an increase in the
sophistication of our current financial system?
Mr. Allaire. I believe that for this to take hold, it needs
to be well-integrated with our existing financial system, and
we have long believed in a kind of hybrid model that does that.
Ms. Ocasio-Cortez. Thank you very much.
Chairwoman Waters. Thank you. The gentlelady's time has
expired.
The gentleman from Ohio, Mr. Gonzalez, is now recognized
for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. I truly
appreciate this hearing. It is a great hearing.
I want to start with Mr. Brooks. I am going to attempt to
respond to some of the objections, which I believe demonstrate
a complete and utter misunderstanding of what we are even doing
here today. One contention is that the vibe of crypto is a,
``stick-it-to-the-man'' vibe, but in actuality, it is dominated
and controlled by Big Tech and Wall Street.
While the culture may be somewhat accurately described, the
notion that a handful of big tech leaders and Wall Street banks
somehow created and now control crypto is absurd on its face
and, frankly, anyone who would make such a claim, I believe,
should be ignored on this topic.
My contention is that Web3 crypto blockchain, et cetera, by
its very structure has the ability to solve some of the most
difficult and frustrating problems that the current version of
the internet and the financial system have, where a narrow set
of platforms control what we see, how we interact, and what we
buy, while millions of Americans remain completely disconnected
from the financial system. Web3 can turn this entire thing on
its head in a very empowering way.
So, my question is simple: How, specifically, could you see
Web3 solving some of these bigger challenges associated with
the current version of the internet and the financial system?
Mr. Brooks. Congressman Gonzalez, thanks for the question.
When I go back to the criticisms that you just were
recounting, the only part of it that I heard was hip. I am
going with hip. The rest of it, we can come to.
But in terms of the problems being solved, I think the
first issue is that the biggest critics of cryptocurrency have
been the biggest banks. Those are the people who are the most
concerned about the entry of stablecoins into the payment
system, about the ability of crypto assets to build networks
that are away from the clearinghouse. Those are the biggest
critics, so I think that tells you a lot of what you need to
know.
And the reason is because the way that Web3 solves a lot of
problems is really twofold. First of all, it eliminates the
toll-collector role of traditional banks and traditional
broker-dealers. The main thing that they do is they employ
large numbers of human beings maintaining ledgers of account
and allocating credit for a fee. Bitcoin and other
cryptocurrencies do that without human beings and with no fee
and the elimination of minimum account balance fees, the $25
wire transfer fees that your bank charges to give you 3 days to
send money; those are gone.
Mr. Gonzalez of Ohio. Thank you.
Mr. Brooks. That is what is important, but the last part is
it unlocks value. The traditional economic structures don't
unlock the creator economy, play to earn in the gaming system.
Those don't exist.
Mr. Gonzalez of Ohio. I want to go to Ms. Haas on that.
Building off of this, in your testimony, you mentioned use
cases for Web3 in the creator and gaming economies. Could you
please outline a specific-use case and discuss how Web3 can
empower creators and artists over mega-tech platforms, which
was implied earlier, and quickly, please, if you could?
Ms. Haas. Okay. Let's talk really quickly. I will cite the
one that we just talked about earlier, which is in the month of
November, play to earn, so these are where video games, one can
play a video game and earn non-fungible tokens (NFTs). Those
NFTs are in-game experiences. So, if anyone here has young kids
who are playing with Roblox, playing Minecraft, playing with
these, there are in-game experiences where you can buy avatars,
and you can buy various things. These can become NFTs.
These NFTs, then, can be sold for value. And so, what we
have here is this kind of concept of play-to-earn. You can play
a video game. You can earn money. You can then monetize that
back into fiat, and you can create these new economies and
these new communities that have increasing value.
Mr. Gonzalez of Ohio. Thank you.
Mr. Bankman-Fried, I believe you live in Hong Kong; is that
correct?
Mr. Bankman-Fried. I'm sorry, can you repeat that?
Mr. Gonzalez of Ohio. You live in Hong Kong; is that
correct?
Mr. Bankman-Fried. I do not anymore.
Mr. Gonzalez of Ohio. Oh, okay. Well, let me ask the
question differently.
Mr. Bankman-Fried. I did, at one point.
Mr. Gonzalez of Ohio. So, 10 years ago, certainly 20, 30
years ago, if you wanted to start a major internet company, you
probably wanted to do it in the United States. You probably
wanted to do it where you grew up in Stanford, on the coast of
Silicon Valley, for a whole host of reasons, one of which being
a very, very conducive, innovative environment.
When I look at Web3, I see a lot of projects moving
overseas. To what degree is the current regulatory environment
in the United States contributing to this change where projects
are now being built and domiciled in other nations, not the
United States, whereas, in the previous versions of the
internet, they were.
Mr. Bankman-Fried. I do think it has contributed to that. I
am optimistic that we are going to see changes to the framework
over the next few years that will bring us into a world that
can make the United States the source of the deepest and most
liquid markets in the cryptocurrency ecosystem. I don't think
we have seen that historically.
And if you look at the difference between the volume
distribution of crypto and digital assets versus most other
industries, you can see that.
Mr. Gonzalez of Ohio. Mr. Brooks, do you have any thoughts
on that?
Mr. Brooks. Congressman, as I said earlier, there are
certain activities that our G20 partners seem to think are
perfectly appropriate, legitimate, and subject to regulation
that we keep resisting. Those have moved abroad.
Mr. Gonzalez of Ohio. Thank you.
And thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. Thank you.
The gentlewoman from Michigan, Ms. Tlaib, is now recognized
for 5 minutes.
Ms. Tlaib. Thank you, Madam Chairwoman, and thank you so
much to everyone who has been coming forward in regards to this
important issue.
Cryptocurrency like Bitcoin currently consumes enough
energy to power a small nation, and that is something that
continues to be missed in the debate around this issue. The
University of Cambridge's analysis estimated that Bitcoin
mining consumes 121 terawatts hours a year. To put that in
perspective for everyone, that is more electricity than the
entire country of Argentina consumes. That is more than the
consumption of Google, Apple, Facebook, and Microsoft combined.
One Bitcoin transaction, a single purchase, sale, or
transfer uses the same amount of electricity as the typical
U.S. household uses in more than a month. This is really
astounding to me, and many folks do not know this, many
Americans and folks who are talking about this issue.
Ms. Dixon, can you explain why for a cryptocurrency like
Bitcoin that relies on a proof-of-work model, mining is such an
energy-intensive process?
Ms. Dixon. Thank you for the question.
This is a really important area, obviously, in terms of
sustainability and the focus on what we do in this space. We
should always be trying to do it better and much more
efficiently.
Bitcoin is the proof--the way that Bitcoin consensus is
achieved is through really complicated math equations, and so
there is a lot of energy that is needed to be used to make that
happen. I know best about the consensus mechanism on Stellar,
which is the Stellar consensus protocol, which can be done on a
very small computer, like any of the ones that you have in
front of you.
The University of London did a study on the Stellar
Network, itself, and the network is low in terms of energy
consumption. It is around .00022 kilowatts per hour for each
transaction. That is less than a transaction for Visa. That is
a really important comparison for us all to think about. So,
not every consensus mechanism is proof of work or proof of
stake; again, there are many different ones out there and
depending on the mechanism, it depends on the energy
consumption. But it is definitely important for us to be able
to try to do this better, more efficiently, and to consider the
sustainability concerns around it.
Ms. Tlaib. No, I am so glad you talked about a model to
potentially shrink cryptocurrency's enormous carbon footprint.
I am particularly alarmed that previously-idled, shut-down coal
plants like the one operated by Greenidge Generation in Seneca
Falls, New York, are now being brought back online to aid in
cryptocurrency mining.
And I don't know if the chairwoman knows this, but in
Montana, a coal-fired generating station is now providing 100
percent of its energy to Marathon Digital Holdings for Bitcoin
mining under the power purchase agreement. Prior to the
crackdown in China, it was estimated that nearly two-thirds of
all Bitcoin mining took place in China, included in regions
with very heavy power generation sets in Mongolia and other
areas.
Ms. Dixon, should the world central banks and governments
be taking a more active role in monitoring and regulating
cryptocurrency in order to bring energy consumption and carbon
emissions in line with our own targets here in our country, the
Paris Agreement, and what would that look like?
Ms. Dixon. I think it is really important for us, as an
industry, to really focus on this issue even without
regulation. I think it is something that you need to always
balance the value of what you receive in terms of the harm that
is actually created to the environment. So, we constantly have
to be doing that kind of analysis.
I think we all need to focus on minimizing the energy
consumption as much as possible and then think about how we can
work with governments to be able to consider the best way to
achieve the carbon-neutral status that I think a lot of folks
want us to get to.
So, I encourage constant discussion. I encourage us to be
innovative. This is one of the wonderful things about
blockchain and just innovation generally; you look and you use
technology to help to solve problems just like this.
Ms. Tlaib. Yes, and the proof-of-work model, fundamentally,
is incompatible with the environmental-neutral future. You are
saying we have to move in this direction, Ms. Dixon, so what
tools can policymakers like ourselves look at to incentivize,
to move us away from that model? How can policymakers
accelerate that transition away from carbon-intensive mining?
We know our planet is burning. The climate crisis is here.
And I just want to get the cryptocurrency community to become
part of the solution and not make this crisis even worse. So,
can you talk about things that you would suggest for us to be
working on in regards to this issue?
Ms. Dixon. I think it is really important. We have actually
engaged a third party to be able to look at the additional
energy consumption, not just for what, as I mentioned, the
University of London did with respect to the work that they
did, but I do think it is important to be able, and we are
engaging a third party to look at all of the different
transactions and how the network actually can even be better
and better with this, with respect to Stellar.
I think that same kind of work can be done with all of the
different types of consensus mechanisms out there. So, I think
research and more focus on what we can do to achieve
sustainability and our sustainability goals is an important
mechanism, and I think it would be really good to continue that
conversation with you.
Ms. Tlaib. Thank you.
And I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from Tennessee, Mr. Rose, is now recognized
for 5 minutes.
Mr. Rose. Thank you, Chairwoman Waters, and thanks to
Ranking Member McHenry for holding this hearing.
And thanks to our witnesses for hanging in with us for such
a long period of time. Your testimony and participation today
is very important to helping us understand this area and craft
the appropriate policies going forward.
Mr. Bankman-Fried, FTX and FTX US have grown substantially
over the past several years. Can you tell us about the economic
impact, from your perspective, that FTX US has in this country?
Mr. Bankman-Fried. Yes, thank you for the question,
Congressman.
In addition to, obviously, the impact in terms of the
hiring that we are doing and the support of a number of
initiatives in the country related to job training and
education, we are also hoping that we can help provide
financial services to people who have not had easy access to
those before. If you think about the number of intermediaries
that are involved in the traditional financial transaction,
whether it is using a bank or whether it is investing your
assets, that is a lot of points that can be very difficult to
navigate for a number of people, both in this country and
around the world.
We aim to be able to provide services to everyone here, all
easy to access on a mobile phone, giving inclusive and
equitable access to financial markets that have been missing to
a number of people.
Mr. Rose. Obviously, you have described a great many
benefits to the U.S. economy. So, in your view, how do we keep
this innovation happening in the United States?
Mr. Bankman-Fried. I think I am optimistic that on the
regulatory side, we are not that far from that point, and I
think that there are a few clarifications that could go a very
long way here. I think that on the market side, having a
framework with a single regulatory structure, and it might have
multiple regulators involved in it. The CFTC and the SEC are
both likely to be involved to some extent, but having a single,
unified framework for futures and spot digital assets could go
a long way towards providing the sort of experience that you
can offer in a lot of jurisdictions today.
I think that giving clarity on the stablecoin side of audit
requirements for the reserves, but without sort of squashing
innovation by requiring only a very limited number of
institutions to be able to issue them, could go a long way on
that side.
And then, the last thing I would say is that moving away,
hopefully, from a binary distinction of what asset class you
are part of, where one is very much close to the sentence and
moving towards a structure where we identify the necessary
disclosures for certain digital assets related to the issuance
related to the supply related to antifraud measures so that
they can all be part of our financial system with appropriate
disclosures and antifraud mechanisms and regulatory oversight
would be really valuable.
Mr. Rose. I want to turn to you, and thank you for a
moment, Mr. Brooks. If you were king for a day and you were
going to tell us, here is what you need to do to structure the
regulatory framework, in a minute and 39 seconds, tell us what
that would look like?
Mr. Brooks. I can barely introduce myself in a minute and
39 seconds, Congressman.
I come back to the concept of parity. I don't know why we
believe that incumbent institutions are risk-free and anything
new is highly risky. So, if I have a platform built on a
blockchain that is doing lending, I don't know why it is so
hard for us to say that it can participate in our banking
system. If I decide that XRP is a security, why won't we let it
list on a U.S. exchange?
The problem is that we treat crypto assets differently from
all other assets, and the answer is to just recognize them for
what they are. These are assets that represent some underlying
activity. It could be a network. It could be an application.
They have a value that people are willing to buy and sell at.
Let them in. That would be my message: Let them in.
Mr. Rose. Okay. I am going to ask this question, and then
ask you all to respond afor the record. I recently read an
article entitled, ``The Bitcoin Boom and the Quantum Threat.''
I bet most of you have read this article by Arthur Herman, who
is a senior fellow at the Hudson Institute. The article
discussed the fact that quantum computing could pose a security
risk to the blockchain technology.
My friend, Mr. Perlmutter, asked Mr. Bankman-Fried about
this topic earlier, but I think it is worth revisiting, and I
would open this question up to all of you and ask you to
respond in writing. Do any of you worry that in the future,
quantum computing could be used to compromise the security of
blockchain technology?
And I see my time is expiring, so I will just go ahead and
yield back, Madam Chairwoman. Thank you.
Chairwoman Waters. Thank you very much.
The gentlewoman from Pennsylvania, Ms. Dean, is now
recognized for 5 minutes.
Ms. Dean. I thank the chairwoman, and I thank all of you
for being here today and testifying before us.
I want to start in a general way, and I am thinking, Mr.
Brooks, of what you said about the practice of law with the
advent of emails. I was a younger lawyer then and I remember
all of the fears around it. And so, it has been said, and this
is really a follow-up to what Mr. Greene asked long ago, hours
ago, it is obviously, clearly, a fast-growing and a bit
mysterious market. Looking at the total cryptocurrency market
cap over the last year, as some here have reported, it exploded
from about $500 billion a year ago to now almost $3 trillion as
of last month.
But it is also, clearly, a volatile, fast-moving market. As
of last night, the total market cap is back down closer to $2.4
trillion. Another example of volatility is Bitcoin, which lost
half of its value over just 2 days in March before rebounding.
So, to that notion, to the people who find all of this a bit
mysterious, are we at risk? Do we see warning signs of a bubble
in this marketplace, if I am allowed to call it that, and what
do we do to make sure that the industry does not threaten the
overall stability of our financial system?
Mr. Brooks, I will start with you.
Mr. Brooks. Thank you, Congresswoman. It is good to see you
again.
I will just give you a very quick anecdote. When I was
practicing law, I represented one of the largest mutual fund
complexes in the United States, and in their market room, they
had a chart, a physical chart showing the U.S. equity market
from 1792 to the present. What I remember about this room is it
was a full city block long, and if you stood at the end of that
room and looked at that chart, it was a straight line and up to
the right. But if you walked right up close to the chart, you
could very clearly see the Civil War and the panic of 1907 and
the Great Depression and all kinds of other volatility along
the way.
What I would tell you is in the beginning of a fundamental,
technological revolution like this, the early days are going to
see turbulence, but the long chart of crypto in only its 11-
year history is up to the right, just like the U.S. equity
market. So, what I would say is there are risks. There are
disclosures that ought to be had. There is framework regulation
that should be adopted. But the fact that the price goes up and
down doesn't make it any different from U.S. equity markets in
the first 100 years of the country's existence.
Ms. Dean. That is a great comparison and probably a
metaphor for other things that we are struggling with in our
democracy. Hopefully, the upward trend is the trend. Let's pray
that that is so.
A little more specifically, digital assets clearly don't
fit into our current fiscal regulatory frameworks, and so we
are here to try to learn what are the right policies to make
sure that this is appropriately regulated.
Do we need to start from scratch and create an entirely new
framework for crypto with a new regulator, such as has been
suggested by Coinbase? Ms. Haas, can you talk about Coinbase's
view that Congress should regulate digital assets under a new
framework, with a single regulator?
Ms. Haas. Thank you for the opportunity to clarify. So,
yes, we do believe that there are benefits to having a single
regulator that can address the broad strokes of crypto,
generally. I share a lot of the views that Mr. Bankman-Fried
had in his written testimony. I also share the views of Mr.
Brooks that if it is a security token, then it is going to fall
under the SEC. If it is a commodity token, then it will fall
under the CFTC. But we also have new tokens here, and when you
think about NFTs and an NFT marketplace, when you think about
Bitcoin, itself, when you think about these new protocols where
all you are doing is getting a right to governance in a
protocol, they do not fit under the contours of existing
frameworks and meet definitions.
So, I think that we benefit from definition taxonomy. I
think we benefit from clarity on who we go to, to kind of walk
through these issues and find one voice. And I think we benefit
from an SRO that can really get into the weeds of these issues
and help us move with speed in the regulatory speed to keep up
with the pace of the innovation of the industry.
Ms. Dean. Thank you very much. I appreciate that.
Mr. Cascarilla, you also said in your testimony that, ``a
primary prudential State or Federal regulator should regulate
digital asset companies and their products.'' Could you
elaborate on that?
Mr. Cascarilla. Yes, thank you.
Paxos was the first company in the entire country to become
regulated. We operate using a trust company status and the
reason we do that is because we don't make loans or take
deposits, so a trust company is actually safer than a bank. And
so, that is an example of using State regulator authority in
order to oversee our business.
And I think having either a primary regulator that is on
the State basis or on the Federal basis is what will allow
there to be a consistent application of AML/KYC rules, reserve
rules, customer-protection rules. And there isn't a clear way
to be able to do that right now. We feel this, even ourselves
as a trust company, where we don't have explicit reciprocity on
a State-by-State basis.
I think creating a clear parity across-the-board, as Mr.
Brooks was saying, is very important for the industry.
Ms. Dean. I thank you, and my time has expired.
I yield back.
Chairwoman Waters. Thank you.
The gentleman from Wisconsin, Mr. Steil, is now recognized
for 5 minutes.
Mr. Steil. Thank you very much, Madam Chairwoman.
As you may know, I serve as the ranking member on the
Select Committee on Economic Disparity & Fairness in Growth,
along with Chairman Himes, both of us also members of this
committee. And we are holding the first of two roundtables
tomorrow on financial inclusion and access to banking for
underserved communities, a topic we talk a lot about also in
this committee, and an issue that is front of mind for many
underserved communities around the United States.
And so, Mr. Brooks, I would love to get your thoughts on
the relevance of today's topic for financial inclusion and how
the growth in digital assets and decentralized finance can
actually drive inclusion, and how can underserved communities
benefit from these developments?
Mr. Brooks. I love that question and thank you for giving
me a chance to address it.
A couple of things, first of all, let's ask, why do we have
so many underbanked people in the United States, and the answer
is a combination of minimum-balance fees, monthly account-
maintenance fees, and all kinds of other things that are a
hallmark of the money-center model that banking is built on.
If you talk to Mr. Allaire about his product, he would tell
you they don't have any minimum-balance fees. They don't have
any monthly maintenance fees. You can keep your assets in a
tokenized bank deposit for free.
So, that is the first answer, that there are ten-dollar-a-
month fees. There are twenty-five-dollar wire charges. Those
things don't exist, that eat away at your life savings, A. And,
B, the next most important thing about crypto is here you have
an early-stage asset which, unlike the IPO boom, and unlike
venture capital, doesn't require that you know a guy or that
you be well-connected or that you be an accredited investor to
participate.
This is a chance for underrepresented communities to be in
on the wealth-creation stage of some new thing, as opposed to
coming in at the end. So, what I always say is that is the way
you solve underrepresentation is through wealth creation. This
is an opportunity and that is why there are more minority
investors than White investors in crypto in the United States
is because--
Mr. Steil. I appreciate your comments.
I'm just thinking general technology is one of the key
aspects that we have to really address some of the underserved
communities in the United States, and I agree with your
comments. You may enjoy our hearing tomorrow on the Select
Committee on Economic Disparity & Fairness in Growth.
To build further, what do you see as the main regulatory
impediments to further innovation in this space that we think
is really going to help us on the inclusionary aspect?
Mr. Brooks. It is all incumbency protection. The big banks
don't like this. The big banks have been slow to adopt because
they make a lot of money on those fees that I just mentioned.
Mr. Steil. Okay. So, let me keep going with you, Mr.
Brooks, in the time that we have. In your opening testimony,
you talked about the, ``do no harm'' approach, and that
approach helped bring in a period of tremendous growth and
opportunity in, really, Web1. You mentioned some of the
countries that U.S. crypto businesses are moving to. What are
some of the examples of the positive approaches to digital-
asset regulation that you see in those countries, if you had to
put your finger on it?
Mr. Brooks. For example, responding to market demand. If a
whole bunch of customers want to buy a Bitcoin ETF, why is it
our business to say they can't do it? You see this domestically
in New York versus the rest of the United States. Lots of
investors like to buy certain tokens. New York won't let New
Yorkers buy tokens. So, they are safe in Nebraska, but not safe
in New York. Why would that be?
Mr. Steil. Thank you very much.
I want to shift gears to you, Ms. Haas, if I can. I want to
ask you about your firm's interactions with the SEC. As you
know, the SEC blocked Coinbase from launching its lend protect
earlier this year. Your CEO, Brian Armstrong, has been very
vocal about his concerns with the SEC's decision and the
process by which it reached that decision. I think it is
important that regulators apply standards consistently, and so
I want to better understand how this played out, to the extent
you can help us here.
Has Coinbase had further conversations with the SEC about
why it was not allowed to offer the lend product?
Ms. Haas. We have, and we still do not have clarity as to
why our product was not able to proceed.
Mr. Steil. How would you characterize the discussions you
have had with the SEC? Is it a little bit of a black box? I
don't want to put words in your mouth.
Ms. Haas. At this time, we have provided a lot of
information, but not had clarity as to why or why not we can
offer a product.
Mr. Steil. Okay. That is helpful. I think it is something
that this committee needs to consider and look into as to how
we assist technology being developed here in the United States,
rather than abroad, and I appreciate your comments there.
If I can, in my final 1 minute, Mr. Cascarilla, earlier in
today's hearing you talked about how people around the world
want the stability of U.S. dollars. We all know of countries
with out-of-control inflation and autocratic governments. Can
you talk, just briefly, about how digital assets in Web3 will
help people dealing with these challenges?
Mr. Cascarilla. I think it is really important to recognize
that in the U.S., we have a sophisticated financial system. It
certainly can be better, but it is sophisticated and relatively
stable, certainly compared to most places in the world.
And when you look at the developing world, it is access to
financial services that is a real problem. And I think in
significant ways, they want access to U.S. dollars, but they
also want access to crypto. They want to have the ability to
protect themselves when they are in either politically unstable
environments or economically unstable environments or both. And
this technology creates the capacity to create a global,
interconnected way of being able to operate on an economic
basis that hasn't existed before, and that is very powerful and
the U.S. should take advantage of it.
Mr. Steil. Thank you very much, Mr. Cascarilla.
I appreciate all of our witnesses here today.
Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you.
The gentlewoman from Texas, Ms. Garcia, who is also the
Vice Chair of our Subcommittee on Diversity and Inclusion, is
now recognized for 5 minutes.
Ms. Garcia of Texas. Thank you, Madam Chairwoman, and thank
you so much for this hearing on such a fascinating and critical
topic. Blockchain technology has the potential to change how we
transact around the world, not just in the financial sector,
but across multiple industries.
Indeed, digital assets have expanded the financial
marketplace in unprecedented ways already. The Bank for
International Settlements recently found that decentralized
finance has grown to an estimated $250 billion worldwide.
I want to zero in on one part of these transactions that
has already been talked about a little bit, but I want to build
on it, and that is the cross-border transactions.
Ms. Dixon, your company is a nonprofit clearing network
designed to facilitate financial transactions worldwide. In
your testimony, you say that your primary focus is to
facilitate cross-border remittance transactions for over 800
million people supported by funds by migrant workers. In Texas,
an estimated 3.1 million immigrant workers comprise about 22
percent of our labor force. And in my district, in particular,
we are 77-percent Latino. So, this is of great interest to me
and to them.
Many of these workers, however, face the same financial
struggles, not only the financial struggles, but access to the
financial-services industry and it is multiplied by cultural
and language barriers. So, specifically, what is it that you
think that this sector now will be able to do to be able to
provide better access to wealth, better access to the financial
services industry, considering the economic and language
barriers that many migrants face?
Ms. Dixon. Thank you so much for the question. This is
another one of those areas that I love to talk about, because I
think it is actually--
Ms. Garcia of Texas. We have limited time.
Ms. Dixon. There are a lot of important pieces here. The
interoperability with the existing financial infrastructure
means that individuals who don't actually have bank accounts,
but something like a MoneyGram relationship, which is based in
Texas, that we have on the Stellar Network, allows these
individuals who have cash, but they might not have a bank
account, to walk into MoneyGram, convert their cash into a
digital asset and then send that asset to their family, to
their friends, or to anyone they choose, using the blockchain.
And then, those individuals that they sent it to, could send
those digital assets to a MoneyGram location outside the
country in those regions that are participating, and then they
could remove those assets from the blockchain. This is getting
to the unbanked and the underbanked all over the world.
Ms. Garcia of Texas. At the receiving end, how do they then
convert the MoneyGram or, I forget what you called it, into
their local currency? And is there a fee involved there for the
conversion, much like there is for traveler's checks?
Ms. Dixon. It is very important that we--on the network
layer, the fees are very, very low, but we have pricing
pressure, created by the fact that these network fees are low.
So, there is going to be a fee when you have feet on the ground
and you have an ability to make that transaction.
The end user who wants to go pick up their fiat at the
local MoneyGram, for example, will pay a fee, but there are no
other intermediaries that are layered on top of that, and the
fees are much lower than those that you see in the traditional
financial infrastructure. So, I feel like with this particular
relationship, and also just with this technology generally,
what it opens up is a world for those users, as Mr. Brooks
indicated earlier, where they get access to all of the ability
to hold these assets, to be able to create value for themselves
Ms. Garcia of Texas. I will follow up in writing with just
how you are planning to reach those communities, because I can
imagine many remote villages, many remote rural areas, even in
the Great State of Texas, where you are not going to have
access to the place you are supposed to pick up the money at
the receiving end. So, I have a lot of serious concerns about
that, but I know that you have reached out to my office and we
can talk.
I want to now move on to--I am glad that you all are
sharing a lot of data and posting things on your webpage. So,
from each one of you, will you commit to providing transparent
information not only on your employment numbers--I know that
Ms. Adams asked about that--but in terms of your leadership,
your board of directors, and salaries and wages. Because I know
at least one of you has already had a New York Times review
that was not very good. And I am not going to pick on anybody.
I just want a commitment from everyone on diversity and
inclusion and transparency, and just a yes or no, please.
Ms. Dixon. We can commit to that.
Mr. Allaire. Yes.
Mr. Bankman-Fried. Yes.
Mr. Brooks. Yes.
Ms. Haas. As a public company, our data is available.
Ms. Garcia of Texas. I'm sorry, I can't hear you, ma'am.
Ms. Haas. As a public company, our leadership and our board
data is available.
Ms. Garcia of Texas. I didn't hear from Mr. Cascarilla.
Mr. Cascarilla. Yes.
Ms. Garcia of Texas. Thank you. Thank you so much. And I
have 15 seconds.
The other thing that I would like to see, and I can follow
up in writing, is demographic data on your users: how many are
Latino; how many are African American; and also by income,
because I want to make sure, again, that the users are diverse
and that your leadership reflects that. Thank you.
Chairwoman Waters. Thank you.
The gentleman from South Carolina, Mr. Timmons, is now
recognized for 5 minutes.
Mr. Timmons. Thank you, Madam Chairwoman.
I want to talk about ransomware. Obviously, we have seen an
exponential increase in the number of attacks in the last
months and years and it seems to only be getting worse. I know
the crypto industry believes it can, and currently does play a
critical role in preventing illicit finance, including
ransomware.
Could you, maybe Ms. Haas or Mr. Bankman-Fried, describe
for us how your firms take an active role, such as working with
law enforcement and other market participants when these
ransomware attacks occur? I would just like to get a better
sense of the role that centralized exchanges play with the flow
of funds. For example, how do you keep track of tokens,
transactions, and wallets, and maybe include in your
explanation, discuss the Colonial Pipeline attack and how the
FBI was able to retrieve a substantial portion of the
ransomware payments made.
Whomever wants to go first?
Mr. Bankman-Fried. Yes, I will jump in. We work really
actively on this. And in addition to all of the standard
procedures that we have around surveillance of deposits, of
withdrawals, and of our customer information, we are responsive
to law enforcement inquiries constantly around this. We are
helpful whenever we can be, both in terms of information
related to FTX and our users, but also, we can extend that out
to blockchain histories. Because it is a public ledger, we can
trace these assets through and say, hey, you should go talk to
this place next. This is where it seems like the assets
probably ended up.
We have assisted in, I think, somewhere north of $10
million of successful seizures so far, in cooperation with law
enforcement, related to this.
Mr. Timmons. A quick follow-up, if you can get a percentage
back, why can't you get all of it back?
Mr. Bankman-Fried. If you can get a certain percentage of?
Mr. Timmons. Again, with the Colonial Pipeline attack, 70,
80 percent of the ransom was retrieved, so what is the
difference in the Bitcoin that was successfully retrieved as to
the one that was not?
Mr. Bankman-Fried. We can follow up with specifics on that
case, but I will say in general that any assets which are on
our platform, we can retrieve. And, often, you might see a case
where some of the people involved would send in one direction.
Others would send it in another direction and those others
might not be in a trackable way. But anything that is on our
platform, we can retrieve.
Mr. Timmons. Sure. Thank you.
Maybe a follow-up question, do you have any tools that we
could help put in your toolbox, Congress, legislation that
would facilitate greater recovery percentages?
Mr. Bankman-Fried. I think that speed is, frankly, one of
the more important things here. I think like in any
investigation, the faster that law enforcement can act on this,
the greater the chances of recovery are. So, I think that we
would love to just have standardized open lines with law
enforcement where they know exactly how to reach out to us. We
could have phone numbers available because, yes, the faster
that action can be taken, the greater the odds that the assets
are retrievable.
Mr. Timmons. Sure. Thank you.
Mr. Allaire, one curious statistic regarding the
cryptocurrency ecosystem I have noticed is its popularity with
a younger and more diverse demographic. According to P
research, among African Americans, 18 percent have some level
of experience with cryptocurrency while among White Americans,
the comparable figure in the survey was 13 percent; Hispanic,
21 percent; Asian, 23 percent; and additionally, 43 percent of
men between the ages of 18 and 29 have invested and traded or
used cryptocurrency. These numbers are incredibly divergent
from what we see for traditional finance.
Why do you believe that to be the case?
Mr. Allaire. Thank you for the question, Congressman. I
think what we see with the crypto assets and digital assets
more broadly is it is a form of finance that makes sense to
young people. A lot of younger people have grown up with the
internet. They were born with the internet in their crib, so to
speak, and I think have an expectation of value being able to
be used the same way that they can share a JPEG photo or react
to something. And so, I think there is just a familiarity and
an expectation that, of course, everything is going to be
digital.
And so, I think the expectations are different. I think
that a component of digital-asset markets is this concept of
democratizing access to financial markets and digital-asset
markets do that. There is more democratized access. There are
fewer barriers to entry for individuals and I think that
affects the adoption rates in minority communities. It affects
the adoption rates, more generally, on some of those other
demographics.
So, I think those are some of the key contributors.
Mr. Timmons. Sure. Thank you.
Madam Chairwoman, I want to thank you for holding this
hearing. It has been productive, and I think this is a good
example of how this committee should learn about important
issues that are facing the American people and we need to
regulate carefully.
Thank you, ma'am.
Chairwoman Waters. You're welcome, and thank you for your
participation.
The gentleman from Massachusetts, Mr. Auchincloss, who is
also the Vice Chair of the committee, is now recognized for 5
minutes.
Mr. Auchincloss. Thank you, Madam Chairwoman.
I appreciate the written and oral testimony from our expert
witnesses. It is timely.
The current regime of regulation by enforcement in which
entrepreneurs must negotiate with the SEC or the CFTC on a one-
off basis is not fair. It is not efficient or conducive to
U.S.-based innovation. Congress needs to provide clarity and
predictability by statute and I am ready to work with both my
Democratic and my Republican colleagues to provide that. The
rules of the road for Web3 can be a bipartisan initiative.
The United States needs a primary crypto regulator that is
tech- and market-structure neutral, and that has three
imperatives: it compels disclosure and transparency; it
prevents fraud and abuse; and it promotes the efficiency and
the resilience of the market. And this primary regulator should
work with a self-regulatory organization as a counterpart in
the private sector to establish one light-touch rule book for
spot and derivatives listings, custody requirements, token
issuance, asset-servicing and cross-margining settlement, Know
Your Customer and anti-money laundering disclosure and
auditing, and, of course, stablecoin standards.
Mr. Bankman-Fried, on that final point, stablecoin
standards, which you have identified as perhaps the most
important crypto innovation--in a recent interview on the,
``Invest Like the Best'' Podcast, you identified stablecoin
regulation as a, ``substantial step forward for persisting
dollar dominance globally.'' And to quote you further, you
said, ``There are going to be stablecoins in the world, and if
you ban U.S. Dollar stablecoins, then it is going to be Euro
coins or it is going to be one stablecoins.''
And in your written testimony, you propose a seven-part
framework for stablecoin regulation and I want to thank you for
the thoughtfulness behind that. Within this framework, can you
identify the single-most important thing that Congress could do
right now to regulate stablecoins in order to persist dollar
dominance?
Mr. Bankman-Fried. Yes, thank you for the questions.
I think the single-biggest thing is just to ensure the
reserves are what they say they are. That is the fundamental
large portion of the risk that could be posed by them is from
both, a consumer protection and a systemic-risk perspective is,
what if there is a trillion-dollar stablecoin with only a
billion dollars actually backing it?
And so, I think having daily attestations and periodic
third-party audits to confirm that the stablecoins are backed
1:1, with regulatory oversight of that process is by far the
single-most important piece of that.
Mr. Auchincloss. Do any of the other members of the panel
disagree or want to expound on that statement?
Mr. Allaire?
Mr. Allaire. Yes, I would like to jump in. I think what Sam
has outlined is a really productive framework. I think clarity
on this, on the disclosure and reporting requirements and I
think also on the reserve and liquidity requirements, and
having that be a focused set of statutes, could be extremely
valuable to providing confidence to the market, providing
confidence to market participants, and allowing dollar digital
currencies to flourish on the internet.
Mr. Auchincloss. So, if you say that this stablecoin is
tethered to the value of the U.S. dollar, you have to disclose
on a regular basis that you have the liquidity and the reserves
to match that to reduce run risk, and you have to be willing to
be audited by a primary regulator.
Mr. Allaire. Absolutely.
Mr. Auchincloss. Mr. Bankman-Fried, you have said that you
think that is the single-most important regulatory step the
United States could take to persist dollar dominance. And I
don't want to put words in your mouth, but it struck me from
the interview you had on, ``Invest Like the Best,'' that it may
be the most important thing we could do, period, for crypto
innovation.
Does anybody on the panel want to expound on that or
disagree with that statement?
Mr. Cascarilla. I will add some thoughts here. I completely
agree that this is the most important thing that the U.S. can
do. At the moment, it is not clear exactly how you can trust a
dollar stablecoin, and that is unfortunate. Money is ultimately
a product, and the way money is working today for people leaves
a lot to be desired. Being able to put a dollar into a
blockchain environment would solve so many problems that we
have been talking about all day, today here and I think that it
is crucial for us to be able to set a clear regulatory plan in
place that creates parity across all of these different
products.
And so, I think it is really simple, if you have a primary
regulator, you have clear reserves, you have made sure that you
have backed them by cash or cash equivalents. That creates a
very level playing field for all different dollar-backed
stablecoins, and then they will really be stable.
Mr. Auchincloss. I appreciate that.
And this, to me, is an example of why these hearings, Madam
Chairwoman, are so useful. And I feel like we really have a
pretty clear path forward for one step that we could take,
which is Congress should designate a regulator, at least
initially, the primary regulator, and task them with disclosure
and auditing requirements for the stablecoin.
I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you.
The gentleman from Texas, Mr. Taylor, is now recognized for
5 minutes.
Mr. Taylor. Thank you, Madam Chairwoman. I appreciate this
hearing.
Ms. Dixon, I have a question for you. As you know, my home
State of Texas earlier this year created a more friendly
jurisdiction for crypto and blockchain in an effort to be a
leader in that space. And I saw that you have developed a
partnership with MoneyGram, which has many employees in my
district, and is headquartered right outside my district, and I
was just wondering if you could go into further detail about
what you are doing with MoneyGram?
And for those who don't know, MoneyGram is one of the
premier money-transfer operations in the world. There are
countries where, literally, 20 percent of their GDP is
transferred in by MoneyGram. So, it is a pretty important
product for a lot of the world. I was just wondering if you
could tell us what you are doing with them?
Ms. Dixon. Yes, thank you so much for the question, and it
is an important part of what--it demonstrates not just the
interoperability that blockchain has with the existing
financial infrastructure, but it also demonstrates that you can
actually offer services to traditionally unbanked or
underbanked folks all over the world by leveraging this kind of
technology.
And, finally, and I think importantly, from the MoneyGram
standpoint and from a remitter's standpoint, it actually
provides instantaneous settlement. So, they don't have IOUs out
there. They actually have the money in their bank account when
they are using the stablecoins, which is very important for us
to be able to get right.
So, the MoneyGram relationship, which is in pilot right now
in the United States, allows folks--you don't need to have a
bank account to be able to get assets put on the blockchain.
Right now, the hardest part about blockchain is the onramp and
the offramp. We actually haven't done that exceptionally well
because it is very, very hard--unless you have a bank account,
it is very, very hard to be able to get assets into, to get
money into digital assets.
The MoneyGram relationship could be one of many that
actually demonstrates the ease of use that you can have. The
beautiful thing about this is that MoneyGram, which acted very
quickly, and in less than 2 months, was able to help to develop
this technology and this integration with Stellar, but the
other part of it is, all you have to have is a wallet that is
Stellar-enabled. So, a wallet anywhere in the world, it doesn't
have to be a specific wallet, to be able to then walk into
MoneyGram, and get assets onto the blockchain using your fiat,
your local fiat. It will convert into USDC, which is Mr.
Allaire's coin, and then you can have that in your wallet. You
can generate yield on that. You can do lots of other things
with respect to the assets that you have.
You could then send them to family in a different country,
for example, and once this is global, which will be next year,
you could then go into participating MoneyGram locations and
have those assets converted into your local currency, which is
very important. So, it works very well with the cash economy
and cash ecosystems and it demonstrates the true
interoperability with blockchain and the traditional financial
infrastructure, because that is what MoneyGram is and has done
exceptionally well, and it demonstrates the value that these
traditional players bring, because they have created this
really important ecosystem and network of folks all over the
world who have feet on the ground, who really work with cash,
the individuals who have cash to be able to deliver value to
them, whether to be able to get it from family outside of their
country or just to be able to convert these into digital
assets.
So, it is a really exciting and transformational
opportunity, in my opinion, for blockchain because of the speed
of use and the ease at which you can get money on and off of
the blockchain.
Mr. Taylor. And just to follow up on my earlier statement
about Texas and its role, I think all of you have testified
that you have different State regulatory licensure. Everybody
here has State licenses and multiple State licenses, right?
Some of you have licenses in almost every State.
And so, on some level, you are seeing States, sometimes
referred to as the laboratories of democracy, come up with
their own policy sets.
Ms. Dixon, do you think that is working? Is that effective?
Ms. Dixon. I think that we actually don't have to have the
licenses because we are the infrastructure, but I will tell you
working with companies that have to have that, it is
complicated for them, to have the individualized different
licensing structures all over, but I think that folks are doing
it very well. Many of the individuals on this panel have been
able to be successful at getting those licenses at the State
level.
Mr. Taylor. And one final comment, because it seems to me
that there is sort of a drive to say you are unregulated. I was
actually kind of surprised, reading the memo from the committee
staff saying that this is an unregulated industry. Do any of
you feel unregulated?
Ms. Dixon. I think that is an important distinction is that
the activity, itself, is already regulated. And I think that
when we focus on activity versus focus on the technology stack,
you'll see that there is already a tremendous amount of
regulation here and a lot of protections and we should just be
looking for those gaps instead of actually trying to create a
new regulatory framework.
Mr. Taylor. Yes, I just think it is funny that when I
asked, ``Are you unregulated?'', everybody laughed. That,
literally, the concept, almost the memo, unfortunately, is
almost laughable, at least to the people who are regulated, the
people who live it every day to say, hey, you guys are a bunch
of unregulated yahoos, do whatever you want. Like, that is not
the world that we live in.
Madam Chairwoman, I really appreciate the opportunity for
this discussion. Thank you for having us here. I yield back.
Chairwoman Waters. You are so welcome. Thank you.
I would like to thank our witnesses for their testimony
today.
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.
And with that, this hearing is adjourned.
[Whereupon, at 2:49 p.m. the hearing was adjourned.]
A P P E N D I X
December 8, 2021
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