    [House Hearing, 117 Congress]
    [From the U.S. Government Publishing Office]

                     THE FUTURE OF DIGITAL ASSET REGULATION

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

                                    HEARING

                                   BEFORE THE

            SUBCOMMITTEE ON COMMODITY EXCHANGES, ENERGY, AND CREDIT

                                     OF THE

                            COMMITTEE ON AGRICULTURE
                            HOUSE OF REPRESENTATIVES

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JUNE 23, 2022

                                   __________

                               Serial No. 117-36

    		   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Printed for the use of the Committee on Agriculture
                             agriculture.house.gov

                                   ________

    	           U.S. GOVERNMENT PUBLISHING OFFICE

    49-769 			    WASHINGTON : 2022

                            COMMITTEE ON AGRICULTURE

                         DAVID SCOTT, Georgia, Chairman

    JIM COSTA, California                GLENN THOMPSON, Pennsylvania,
    JAMES P. McGOVERN, Massachusetts     Ranking Minority Member
    ALMA S. ADAMS, North Carolina, Vice  AUSTIN SCOTT, Georgia
    Chair                                ERIC A. ``RICK'' CRAWFORD,
    ABIGAIL DAVIS SPANBERGER, Virginia   Arkansas
    JAHANA HAYES, Connecticut            SCOTT DesJARLAIS, Tennessee
    SHONTEL M. BROWN, Ohio               VICKY HARTZLER, Missouri
    BOBBY L. RUSH, Illinois              DOUG LaMALFA, California
    CHELLIE PINGREE, Maine               RODNEY DAVIS, Illinois
    GREGORIO KILILI CAMACHO SABLAN,      RICK W. ALLEN, Georgia
    Northern Mariana Islands             DAVID ROUZER, North Carolina
    ANN M. KUSTER, New Hampshire         TRENT KELLY, Mississippi
    CHERI BUSTOS, Illinois               DON BACON, Nebraska
    SEAN PATRICK MALONEY, New York       DUSTY JOHNSON, South Dakota
    STACEY E. PLASKETT, Virgin Islands   JAMES R. BAIRD, Indiana
    TOM O'HALLERAN, Arizona              CHRIS JACOBS, New York
    SALUD O. CARBAJAL, California        TROY BALDERSON, Ohio
    RO KHANNA, California                MICHAEL CLOUD, Texas
    AL LAWSON, Jr., Florida              TRACEY MANN, Kansas
    J. LUIS CORREA, California           RANDY FEENSTRA, Iowa
    ANGIE CRAIG, Minnesota               MARY E. MILLER, Illinois
    JOSH HARDER, California              BARRY MOORE, Alabama
    CYNTHIA AXNE, Iowa                   KAT CAMMACK, Florida
    KIM SCHRIER, Washington              MICHELLE FISCHBACH, Minnesota
    JIMMY PANETTA, California            MAYRA FLORES, Texas
    SANFORD D. BISHOP, Jr., Georgia      ------
    MARCY KAPTUR, Ohio
    SHARICE DAVIDS, Kansas

                                     ______

                          Anne Simmons, Staff Director

                     Parish Braden, Minority Staff Director

                                     ______

            Subcommittee on Commodity Exchanges, Energy, and Credit

                    SEAN PATRICK MALONEY, New York, Chairman

    STACEY E. PLASKETT, Virgin Islands   MICHELLE FISCHBACH, Minnesota,
    RO KHANNA, California                Ranking Minority Member
    CYNTHIA AXNE, Iowa                   AUSTIN SCOTT, Georgia
    BOBBY L. RUSH, Illinois              DOUG LaMALFA, California
    ANGIE CRAIG, Minnesota               RODNEY DAVIS, Illinois
    ANN M. KUSTER, New Hampshire         CHRIS JACOBS, New York
    CHERI BUSTOS, Illinois               TROY BALDERSON, Ohio
    ------                               MICHAEL CLOUD, Texas
    ------                               RANDY FEENSTRA, Iowa
                                         KAT CAMMACK, Florida

                   Emily German, Subcommittee Staff Director

                                      (ii)
                                 C O N T E N T S

                                  ----------
                                                                       Page
    Fischbach, Hon. Michelle, a Representative in Congress from
      Minnesota, opening statement...................................     4
    Kuster, Hon. Ann M., a Representative in Congress from New
      Hampshire, prepared statement..................................     6
    Maloney, Hon. Sean Patrick, a Representative in Congress from New
      York, opening statement........................................     1
        Prepared statement...........................................     3
    Thompson, Hon. Glenn, a Representative in Congress from
      Pennsylvania, opening statement................................     5

                                   Witnesses

    McGonagle, J.D., Vincent ``Vince'', Director, Division of Market
      Oversight, Commodity Futures Trading Commission, Washington,
      D.C............................................................     7
        Prepared statement...........................................     8
        Submitted questions..........................................   127
    Brummer, J.D., Ph.D., Chris, Agnes N. Williams Professor of Law,
      Georgetown University Law Center, Washington, D.C..............    12
        Prepared statement...........................................    13
    Levin, Jonathon, Co-Founder and Chief Strategy Officer,
      Chainalysis Inc., New York, NY.................................    19
        Prepared statement...........................................    20
    Hoskinson, Charles, Chief Executive Officer, Input Output Global,
      Inc., Singapore, SG............................................    39
        Prepared statement...........................................    41

                               Submitted Material

    Bankman-Fried, Samuel ``Sam'', Co-Founder and Chief Executive
      Officer, LedgerX LLC d/b/a FTX US Derivatives, submitted
      statement......................................................   103

                     THE FUTURE OF DIGITAL ASSET REGULATION

                                  ----------

                            THURSDAY, JUNE 23, 2022

                      House of Representatives,
       Subcommittee on Commodity Exchanges, Energy, and Credit,
                                      Committee on Agriculture,
                                                       Washington, D.C.
        The Subcommittee met, pursuant to call, at 10:31 a.m., in
    Room 1300 of the Longworth House Office Building, Hon. Sean
    Patrick Maloney [Chairman of the Subcommittee] presiding.
        Members present: Representatives Maloney, Plaskett, Khanna,
    Axne, Rush, Craig, Kuster, Fischbach, Austin Scott of Georgia,
    Balderson, Cloud, Feenstra, Cammack, Thompson (ex officio),
    Baird, and Mann.
        Staff present: Lyron Blum-Evitts, Carlton Bridgeforth,
    Emily German, Josh Lobert, Brian Robinson, Paul Balzano, Caleb
    Crosswhite, Kevin Webb, John Konya, and Dana Sandman.

           OPENING STATEMENT OF HON. SEAN PATRICK MALONEY, A
                REPRESENTATIVE IN CONGRESS FROM NEW YORK

        The Chairman. Good morning, everyone. This hearing of the
    Subcommittee on Commodity Exchanges, Energy, and Credit
    entitled, The Future of Digital Asset Regulation, will come to
    order.
        Welcome, and thank you for joining us at today's hearing.
    After brief opening remarks, Members will receive testimony
    from our witnesses today, and then the hearing will be open to
    questions. In consultation with the Ranking Member and pursuant
    to Rule XI(e), I want to make Members of the Subcommittee aware
    that other Members of the full Committee may join us today.
        Again, thank you all for joining me. I would like to thank
    our erstwhile colleague, Antonio Delgado, for chairing this
    Subcommittee, and for his service to the country and to New
    York. I am delighted to be stepping into this role, even if
    briefly. Thank you all for joining me today in that first
    hearing as Chairman of the Commodity Exchanges, Energy, and
    Credit Subcommittee, and welcome to the hearing we are calling,
    The Future of Digital Asset Regulation.
        Today's hearing is a good opportunity to engage market
    experts at the CFTC, digital asset stakeholders, and academics
    in a discussion on the effectiveness of current regulation of a
    continuously evolving digital assets market, and how to address
    regulatory concerns in any future framework.
        Since the launch of Bitcoin in 2009 and the creation of the
    Ethereum blockchain in 2013, there has been, to put it mildly,
    rapid and expansive growth and innovation in both the diversity
    and volume of digital asset products available.
        A digital asset can be a virtual currency, an investment
    opportunity, or traded on an exchange, and the novel nature of
    these assets, the complexity of them, and how investors and
    consumers use them should say a lot and will say a lot about
    how they should be regulated.
        As the Committee of jurisdiction over the CFTC, of primary
    importance to today's hearing is digital commodity products
    available for trade in the derivatives and underlying spot
    markets, a primary access point for investors to the digital
    asset market. Digital assets are popular, very popular, but
    volatile, very volatile. We see this reflected in the
    substantial decrease in combined digital asset market
    capitalization from its peak of approximately $3 trillion in
    November of last year, to its current level of approximately $1
    trillion: $3 trillion in November, $1 trillion today.
        Polling also reveals that approximately 20 percent of
    American adults have invested in, traded, or used
    cryptocurrencies. Providing Congressional direction to
    establish the rules of the road to ensure American retail
    investors are informed and protected is as important as ever.
        While the CFTC has dutifully exercised its role as a
    regulator and enforcement authority in digital asset markets,
    its authority is not unlimited. Indeed, its authority is
    specifically limited. When you couple the recent volatility
    with high retail participation in digital asset spot markets,
    it is concerning that there is a gap in oversight and
    regulation of these markets, and it is that gap that we are
    particularly focused on.
        The growth of the digital asset industry has centered on
    innovation, transparency, and security, and I believe in
    fostering that innovation here in the United States. In
    contrast to a traditional bank or financial institution, the
    most popular cryptocurrencies, Bitcoin and Ether, have entirely
    public ledgers. Anyone can view them and participate in
    recording and authenticating transactions on them.
        As we will hear from our witnesses today, the digital asset
    economy presents opportunities to support financial inclusion,
    but without strong customer protections, education, and
    regulatory certainty, participants in the industry may be at
    increased risk of financial loss and exposure to fraud.
        Digital assets are complicated, and retail participants may
    be tempted by the promise of quick returns without knowing how
    the digital asset functions, or without knowing who received
    early access to information. Regulation regarding disclosure to
    market participants may help retail investors understand the
    volatility of the assets and facilitate smart digital
    entrepreneurship, but how we do that matters, and it may
    require new ways of thinking.
        Today's hearing will help this Committee understand how
    Congressional action, if done right, can give the CFTC the
    tools it needs to protect investors while fostering innovation
    here in the U.S. I am especially focused on whether such action
    could be done in a fully bipartisan manner.
        Thank you again to the Members and witnesses joining us
    today as well as those who are following along online. I look
    forward to a productive conversation about the future of
    digital asset regulation.
        [The prepared statement of Mr. Maloney follows:]

     Prepared Statement of Hon. Sean Patrick Maloney, a Representative in
                             Congress from New York
        Again--Thank you all for joining me today in my inaugural hearing
    as Chairman of the Commodity Exchanges, Energy, and Credit
    Subcommittee, and welcome to today's hearing, The Future of Digital
    Asset Regulation.
        Today's hearing is an excellent and timely opportunity to engage
    market experts at the CFTC, digital asset stakeholders, and academics
    in discussion on the effectiveness of current regulation of a
    continuously evolving digital asset markets and how to address
    regulatory concerns in any future regulatory framework.
        Since the launch of Bitcoin in 2009 and the creation of the
    Ethereum blockchain in 2013, there has been rapid and expansive growth
    and innovation in both the diversity and volume of digital asset
    products available.
        A digital asset can be a virtual currency, an investment
    opportunity, or traded on an exchange--and how investors and consumers
    use these products will say a lot about how they should be regulated.
        As the Committee of jurisdiction over the CFTC, of primary
    importance to today's hearing is digital commodity products available
    for trade in the derivatives and underlying spot markets--a primary
    access point for investors to the digital asset market.
        Digital assets are popular, but volatile. We see this reflected in
    the substantial decrease in combined digital asset market
    capitalization from its peak of approximately $3 trillion in November
    2021, to current levels of approximately $1 trillion.
        Polling also reveals that approximately 20% of American adults have
    invested in, traded, or used cryptocurrencies.
        Providing Congressional direction to establish the rules of the
    road to ensure American retail investors are informed and protected is
    as important as ever.
        While the CFTC has dutifully exercised its role as a regulator and
    enforcement authority in digital asset markets, its authority is
    limited. When you couple the recent volatility with high retail
    participation in digital asset spot markets, it is concerning that
    there is a gap in oversight and regulation of these markets.
        The growth of the digital asset industry has centered on
    innovation, transparency, and security--and I believe in fostering that
    innovation here in the United States. In contrast to a traditional bank
    or financial institution, the most popular cryptocurrencies, Bitcoin
    and Ether, have entirely public ledgers. Anyone can view them and
    participate in recording and authenticating transactions on them.
        As we will hear from our witnesses today, the digital asset economy
    presents opportunities to support financial inclusion, but, without
    strong customer protections and regulatory certainty, participants in
    the industry may be at increased risk of financial loss and exposure to
    fraud.
        Digital assets are complicated, and retail participants may be
    tempted by the promise of quick returns without knowing how the digital
    asset functions, or without knowing who received early access to
    information.
        Regulation regarding disclosure to market participants may help
    retail investors understand the volatility of the assets and facilitate
    smart digital entrepreneurship.
        Today's hearing will help this Committee understand how
    Congressional action can give the CFTC the tools they need to protect
    investors while fostering innovation here in the United States.
        Thank you again to the Members and witnesses joining us today as
    well as those who are following along online. I look forward to a
    productive conversation about the future of digital asset regulation.
        With that, I'd now like to welcome the distinguished Ranking
    Member, Mrs. Fischbach from Minnesota, for any opening remarks she
    would like to give.

        The Chairman. With that, I am pleased to welcome the
    distinguished Ranking Member, Mrs. Fischbach from Minnesota,
    for any opening remarks she would like to give.

    OPENING STATEMENT OF HON. MICHELLE FISCHBACH, A REPRESENTATIVE
                       IN CONGRESS FROM MINNESOTA

        Mrs. Fischbach. Well, thank you, Mr. Chairman, and first of
    all, congratulations, and I am looking forward to working with
    you. But more immediately, thank you very much for holding this
    important hearing. I appreciate your comments on bipartisan
    work, so thank you so much for that.
        And there is no better time than the present to discuss how
    and why we regulate financial markets and consider how to best
    balance the need to protect customers with the desire to
    protect innovation. According to a recent survey, roughly half
    of American adults today own or have owned some sort of
    cryptocurrency. This brings digital assets on par with the
    number of Americans that own traditional securities. Of those
    Americans who own cryptocurrency, more than 74 percent bought
    them for the first time within the last 2 years.
        Since the creation of Bitcoin, thousands of cryptocurrency
    projects have been developed. Today, there are nearly 20,000
    cryptocurrencies in existence spread across numerous blockchain
    platforms. Unfortunately, these tokens do not always fall
    neatly into our current financial regulatory framework.
    Traditionally, we protect investors through disclosure
    requirements and the segregation of their assets, and we
    promote market integrity through regulatory oversight and
    intermediaries and enforcement actions. But what rules apply
    depend on the nature of the asset and the specific types of
    risk market participants face.
        Regulations have struggled to provide guidance to market
    participants on how and when their activities require
    registration and compliance. Market participants still do not
    know what rules apply and when. Real risk to market
    participants exist and we have an obligation to address them.
        Over the past several years, Members of this Committee have
    proposed legislation that would lay down clear parameters for
    the roles of both the SEC and the CFTC in digital asset
    markets. In April Republican leader Thompson and Congressman
    Khanna introduced the bipartisan Digital Commodity Exchange Act
    of 2022 (H.R. 7614). The DCEA would give the CFTC--lots of
    initials today--expanded oversight of the trading of those
    digital assets which are commodities, and it would bring
    certainty to market participants by doing what the regulators
    cannot--providing legal clarity to market intermediaries and
    participants.
        I appreciate the efforts of the CFTC and the SEC that they
    have made to try to fold digital assets into existing
    framework, but in some cases, particularly for spot digital
    commodity transactions, the existing laws simply lack the
    authorities necessary.
        As the popularity of digital assets continues to grow, it
    is incumbent upon Congress to speak clearly about how best to
    regulate. I am glad we have the opportunity to explore these
    issues and the way Congress can better create an environment
    where digital assets can become not only a valuable financial
    product, but an important conduit of innovation in our
    financial system.
        Thank you to each of our witnesses for their willingness to
    share their expertise with us, and I am looking forward to
    hearing your perspectives on how and why we regulate in
    financial markets, and where and when we might apply those
    lessons to the crypto markets and to the market participants.
        Thank you, Mr. Chairman, and I yield back.
        The Chairman. I thank the Ranking Member, and also would
    like to take this opportunity to recognize the leadership of
    Chairman David Scott on these issues. I don't see him present
    today, but we will be happy to yield to him for any opening
    remarks should he join us. I do note the presence of the
    Ranking Member of the full Committee, Mr. Thompson, and I would
    invite him to share any opening comments he may wish to make.

     OPENING STATEMENT OF HON. GLENN THOMPSON, A REPRESENTATIVE IN
                       CONGRESS FROM PENNSYLVANIA

        Mr. Thompson. Well, thank you, Mr. Chairman. Let me start
    by echoing the remarks of our Subcommittee Ranking Member, and
    congratulate you in your new role with leading the
    Subcommittee.
        I look forward to working with you, and I know that digital
    assets have been an area of interest for you for several years
    now.
        As you know, the House Agriculture Committee has a long
    history of fostering technology and innovation. Leading on
    digital assets is no exception. Given the Commodity Futures
    Trading Commission's role in regulated markets, the Agriculture
    Committee has an opportunity and responsibility to be at the
    table for these discussions. I appreciate you holding this
    hearing, and your commitment to continuing the Committee's
    education and examination of digital asset regulations and
    markets.
        As some may recall, this Committee held one of the first
    Congressional hearings to examine digital assets in 2018, which
    led to subsequent roundtables and conversations focused on how
    to regulate these novel assets. While these events provided
    ample education on blockchain and cryptocurrency, we still find
    ourselves debating foundational questions about how to
    integrate these markets into our financial system.
        Over the past month, the carnage in digital assets has
    filled our newsfeeds. Prices have fallen dramatically, projects
    have imploded, customer funds have been lost or frozen, and
    billions of dollars in value have been lost. For those who have
    lost significant sums of money, this sell-off has been a
    catastrophe. And yet, the promise of cryptocurrency remains.
    Despite losses, the public's interest in this technology has
    not diminished. Developers and investors continue to build new
    projects and refine the technology, and this is why this
    hearing on the regulation of digital assets is so timely.
        Clearly defined guardrails can provide more certainty to
    developers, investors, and the public. To provide these
    guardrails, I introduced H.R. 7614, the Digital Commodity
    Exchange Act, with Congressman Khanna. The DCEA offers a
    framework to bring regulatory clarity to digital asset markets.
    This legislation protects market participants and builds on the
    successful system of principles-based regulation already in
    place at the CFTC. It establishes clear jurisdictional lines
    between financial regulators, helping to reduce regulatory
    complexity, and clarify existing regulatory roles. And perhaps,
    most importantly, it provides a clear pathway to compliance for
    those hoping to build the next great innovation with digital
    assets.
        The DCEA will provide regulators with tools to hold bad
    actors accountable and help to protect market participants from
    fraud and market manipulation. Clearly defined core principles
    will also help establish a better understood and flexible
    framework to support the creation of new products and meet
    evolving market demands.
        We don't yet know all the ways digital assets will be used,
    but that should excite us, not intimidate us. America has
    always been a leader in technological innovation and the spirit
    of entrepreneurship, and we should continue to embrace that
    spirit. Our Committee must continue to put forward innovative
    ideas and sound proposals in these novel policy areas facing
    Congress. I hope we can implement smart bipartisan solutions
    like the Digital Commodity Exchange Act together.
        Again, thank you to our panelists for being here today, and
    thank you for taking the time to come and educate us. I look
    forward to today's discussion.
        With that, Mr. Chairman, I yield back.
        The Chairman. I thank the gentleman.
        The chair would request that other Members submit their
    opening statements for the record so that we may proceed
    directly to witness testimony.
        [The prepared statement of Ms. Kuster follows:]

    Prepared Statement of Hon. Ann M. Kuster, a Representative in Congress
                               from New Hampshire
        Thank you, Mr. Chairman. And thanks to our panel for being with us.
        We are in the midst of a brave new world of digital asset trading.
    Our Committee has given this issue worthwhile attention this Congress
    because of the role the Commodity Futures Trading Commission (CFTC) has
    and will continue to play in regulating this trade.
        As more and more Americans invest in these assets, it is imperative
    for Congress to keep up as we regulate and oversee the digital realm
    just as we do the more established marketplaces.
        As we all have seen recently, Bitcoin--the most popular
    cryptocurrency--has badly tumbled in the last few weeks and lost more
    than \1/2\ its value in 2022 so far.
        Clearly no marketplace is immune from severe vulnerability and
    uncertainty, be it Bitcoin or Wall Street. But we do need to assure
    digital markets are operating above-board and secure, and that
    investors have access to the information they need to fully understand
    the risks they are taking.
        With that in mind, I'd like to focus my questions on consumer
    protection as it relates to digital assets.

        The Chairman. Welcome, all of you. Our first witness today
    is Mr. Vincent McGonagle, the Director of the Division of
    Market Oversight at the Commodity Futures Trading Commission.
    Our second witness today is Dr. Christopher Brummer, Professor
    of Law at the Georgetown University Law Center. Our third
    witness is Mr. Jonathan Levin, the Co-Founder and Chief
    Strategy Officer of Chainalysis--am I saying that correctly?
    Okay, good. Let's get that right. Our fourth and--I mean, it is
    my first hearing. I don't want to screw it up.
        Mrs. Fischbach. You are doing a great job.
        The Chairman. Is it going all right? Okay, good. A lot of
    pressure up here. I have only been doing this for 10 years. I'm
    starting to get the swing of it.
        Our fourth and final witness is Mr. Charles Hoskinson, the
    Chief Executive Officer and Founder of Input Output Global.
        Thank you all for joining us today. We will now proceed to
    hearing your testimony. You will have 5 minutes. The timer
    should be visible to you all, so it will count down to zero, at
    which point there is no time left.
        Mr. McGonagle, please begin when you are ready. Thank you,
    sir.

            STATEMENT OF VINCENT ``VINCE'' McGONAGLE, J.D.,
       DIRECTOR, DIVISION OF MARKET OVERSIGHT, COMMODITY FUTURES
                  TRADING COMMISSION, WASHINGTON, D.C.

        Mr. McGonagle. Thank you. Good morning, Chairman Maloney,
    Ranking Member Fischbach, Ranking Member Thompson, and Members
    of the Subcommittee. Thank you for the opportunity to appear
    before you today.
        My views are mine alone, and do not reflect those of the
    Division of Market Oversight or the Commission.
        The CFTC is the primary regulator of the futures and
    options markets, and since 2010, the swaps market as well. The
    agency's mission is to promote the integrity, resilience, and
    vibrancy of the U.S. derivatives markets through sound
    regulation. We do that through a regulatory framework that
    seeks to ensure market integrity and the protection of customer
    funds, avoid systemic risk, and police derivatives markets for
    abuses, while fostering innovation and fair competition.
        A trading facility for market participants, including
    retail customers, interested in listing and trading futures
    must apply to the Commission to be designated as a contract
    market. That market must then comply with 23 statutory core
    principles. Those core principles require the market to ensure
    the protection of customer funds, protect market participants
    and the market from abusive practices, and promote fair and
    equitable trading in the contract market. The contract market
    must be able to detect and prevent manipulation, price
    distortion, and disruption of the contracts' cash settlement or
    delivery processes.
        To comply with the system safeguards core principle, the
    market must establish and maintain a program to identify and
    minimize sources of operational risk, including cybersecurity
    and disaster recovery.
        Designated contract markets are also self-regulatory
    organizations. That is, they must establish and maintain
    effective oversight programs, including monitoring and
    enforcing compliance with their rules. A market must submit to
    the Commission all new product terms and conditions, which must
    meet certain core principles, including the core principal that
    the designated contract market only lists contracts that are
    not readily susceptible to manipulation.
        To ensure compliance with the core principles, CFTC staff
    conduct rule enforcement reviews and system safeguards
    examinations, and at any time, Commission staff may ask a
    designated contract market for a detailed justification of its
    continued compliance with core principles. And the CFTC also
    conducts direct surveillance on trading on those markets.
        Digital assets are commodities, and the CFTC has broad
    regulatory oversight over any derivatives products listed by
    designated contract markets. In December 2017, three designated
    contract markets self-certified that they would list Bitcoin
    derivatives contracts for trading. Today, five contract markets
    list for trading futures and options contracts on Bitcoin,
    Ether, or both of those products.
        The CFTC does not have regulatory authority over cash
    markets. We do have anti-fraud, false reporting, and anti-
    manipulation enforcement authority over commodity cash markets
    and interstate commerce. Since 2014, the CFTC has brought more
    than 50 enforcement actions involving digital assets. We filed
    numerous cases charging retail fraud, as well as charging
    platforms with illegally offering off-exchange trading in
    digital assets. In all, the CFTC has filed 25 enforcement
    actions that have included digital asset-related allegations in
    the past 18 months.
        Through the CFTC's extensive experience overseeing the
    trading of digital asset-based derivatives on CFTC regulated
    exchanges, as well as our vigilant exercise of our enforcement
    authority, the CFTC has developed a keen understanding of
    digital assets and will continue to deliver on its commitment
    to protect customers to the fullest extent of its statutory
    authority.
        Thank you for the opportunity to appear before the
    Subcommittee. I look forward to answering any questions you may
    have.
        [The prepared statement of Mr. McGonagle follows:]

      Prepared Statement of Vincent ``Vince'' McGonagle, J.D., Director,
      Division of Market Oversight, Commodity Futures Trading Commission,
                                Washington, D.C.
        Chairman Maloney, Ranking Member Fischbach, and Members of the
    Subcommittee, thank you for the opportunity to appear before you today
    to share my views on digital asset regulation as the Director of the
    Division of Market Oversight at the Commodity Futures Trading
    Commission (CFTC, Agency or Commission).
    CFTC Mission
        As you know, the CFTC is the primary regulator of the futures,
    options, and swaps markets. The Agency's mission is to promote the
    integrity, resilience, and vibrancy of the U.S. derivatives markets
    through sound regulation.
        Our governing statute, the Commodity Exchange Act (CEA or Act),
    serves the public interest by mandating the establishment of a
    regulatory framework that allows the Agency to ensure market integrity,
    protect customer funds, avoid systemic risk, and police derivatives
    markets for manipulative activity, fraud and other abuses, while
    fostering innovation and fair competition.\1\ As the transactions
    within our jurisdiction ``are affected with a national public interest
    by providing a means for managing and assuming price risks, discovering
    prices, or disseminating pricing information through trading in liquid,
    fair and financially secure trading facilities,'' \2\ the CEA outlines
    ``a system of effective self-regulation of trading facilities, clearing
    systems, market participants and market professionals under the
    oversight of the Commission.'' \3\
    ---------------------------------------------------------------------------
        \1\ CEA  3(b) (7 U.S.C.  5(b)).
        \2\ CEA  3(a) (7 U.S.C.  5(a)).
        \3\ CEA  3(b) (7 U.S.C.  5(b)). This system provides multi-tiered
    protections to market participants trading on our regulated exchanges,
    including the elimination of the risk of counterparty default or
    bankruptcy (because a regulated clearinghouse takes the opposite side
    of customers' transactions). Further, entities that broker futures
    trades (called futures commission merchants) are required to register
    with the CFTC, establish safeguards to prevent conflicts of interest,
    and segregate customer assets to protect the assets from the risk of
    the broker's bankruptcy. See CEA  4d(a) and 4d(c) (7 U.S.C.  6d(a)
    and 6d(c)).
    ---------------------------------------------------------------------------
    Designated Contract Market Registration, Compliance Obligations, and
            Product Listing
        Generally, in order for an entity to provide a trading facility for
    market participants (including retail customers) to trade futures, the
    market must apply to the Commission to be designated as a contract
    market.\4\ To obtain and maintain designation, an entity must comply,
    on an initial and ongoing basis, with twenty-three Core Principles set
    forth in the CEA and CFTC regulations.\5\ By design, the designated
    contract market Core Principles ensure customer protections, establish
    guardrails that provide clarity regarding the risks and protections
    involved in trading derivatives products, and enhance transparency,
    without hindering the trading facilities' ability to innovate and
    compete fairly. This firm but flexible approach has allowed the CFTC,
    with authority from Congress, to evolve along with the derivatives
    markets.
    ---------------------------------------------------------------------------
        \4\ Such designation is required absent an applicable exemption or
    exclusion. Criteria, procedures, and requirements for designation as a
    designated contract market are set forth in Section 5 of the CEA (7
    U.S.C.  7) and Part 38 of the CFTC's regulations. Appendix A and B to
    Part 38 provide specific information on these requirements and guidance
    to applicants seeking to become designated contract markets. Similarly,
    absent any applicable exemption or exclusion, in order for an entity to
    operate a trading facility for the trading or processing of swaps by
    and between eligible contract participants, the entity must seek and
    obtain registration with the CFTC as a swap execution facility (SEF)
    through CEA Section 5h and Part 37 of the CFTC's regulations. For a
    definition of eligible contract participants, see CEA  1a(18) (7
    U.S.C.  1a(18)).
        \5\ See CEA  5(d) (7 U.S.C.  7(d)), with the implementing
    regulations under Part 38 of the CFTC's regulations.
    ---------------------------------------------------------------------------
        The CFTC oversees designated contract markets through various
    tools, including rule enforcement reviews and system safeguards
    examinations to ensure compliance with the Core Principles. The CFTC
    also conducts direct surveillance of trading on designated contract
    markets. Designated contract markets are separately required to serve
    as self-regulatory organizations,\6\ and must establish and maintain
    effective oversight programs, including monitoring and enforcing
    compliance with their rules. As self-regulatory organizations and
    designated contract markets, they play a key role in safeguarding the
    integrity of the derivatives markets by, among other things, ensuring
    that their members understand and meet their regulatory
    responsibilities.
    ---------------------------------------------------------------------------
        \6\ See CFTC Regulation 1.3.
    ---------------------------------------------------------------------------
        Among other things, the Core Principles require each designated
    contract market to establish and enforce rules to: ensure the
    protection of customer funds; \7\ protect market participants and
    markets from abusive practices; and promote fair and equitable trading
    on the contract market.\8\ The Core Principles also require each
    designated contract market to ensure that the contracts they list are
    not readily susceptible to manipulation, and require a designated
    contract market to have rules and resources in place to detect and
    prevent manipulation, price distortion, and disruptions of the cash-
    settlement or delivery process.\9\ The Core Principle addressing system
    safeguards requires each designated contract market to: establish and
    maintain a program of risk analysis and oversight to identify and
    minimize sources of operational risk, through the development of
    appropriate controls and procedures and the development of automated
    systems that are reliable, secure and have adequate scalable capacity;
    establish and maintain emergency procedures, backup facilities, and a
    plan for disaster recovery; and periodically conduct tests to verify
    that backup resources are sufficient to ensure continued order
    processing and trade matching, price reporting, market surveillance,
    and maintenance of a comprehensive and accurate audit trail.\10\
    ---------------------------------------------------------------------------
        \7\ Core Principle (CP) 11 at CEA  5(d)(11) (7 U.S.C.  7(d)(11)).
        \8\ CP 12 at CEA  5(d)(12) (7 U.S.C.  7(d)(12)).
        \9\ CPs 3 and 4 at CEA  5(d)(3)-(4) (7 U.S.C.  7(d)(3)-(4)).
        \10\ CP 20 at CEA  5(d)(20) (7 U.S.C.  7(d)(20)).
    ---------------------------------------------------------------------------
        Under the CEA and the Commission's contract review regulations,
    prior to listing any new product for trading, a designated contract
    market must submit to the Commission all new product terms and
    conditions, and subsequent associated amendments.\11\ In all such
    submissions and amendments, a designated contract market is legally
    obligated to meet certain Core Principles--including Core Principle 3,
    which requires that a designated contract market only list contracts
    for trading that are not readily susceptible to manipulation.\12\ Under
    the CEA, the designated contract market may file its new product
    submission under a process called ``self-certification'' by certifying
    that the product to be listed complies with the Act and CFTC
    regulations and providing a concise explanation and analysis of the
    product and its compliance.\13\
    ---------------------------------------------------------------------------
        \11\ CEA  5c(c) (7 U.S.C.  7a-2(c)) and CFTC Regulations 40.2 and
    40.3. These same processes also apply for products to be listed on
    SEFs, with compliance required with the corresponding SEF regulatory
    framework.
        \12\ The Commission has provided Guidance to designated contract
    markets and SEFs on meeting their Core Principle 3 obligations in
    Appendix C to Part 38 of the Commission's regulations. See 17 CFR pt.
    38, Appendix C. At any time, Commission staff may ask a designated
    contract market or SEF for a detailed justification of its continuing
    compliance with core principles, including information demonstrating
    that any contract listed for trading on the designated contract market
    or SEF meets the requirements of the Act and designated contract market
    or SEF Core Principle 3, as applicable. See CFTC Regulations 38.5 and
    37.5. Failure of a designated contract market or SEF to adopt and
    maintain practices that adhere to these requirements may lead to the
    Commission's initiation of proceedings to secure compliance.
        \13\ CEA  5c(c)(1)-(3) (7 U.S.C.  7a-2(c)(1)-(3)) and CFTC
    Regulation 40.2. Alternatively, the designated contract market or SEF
    may voluntarily request that the CFTC review the exchange's analysis of
    the product and its compliance with the CEA and CFTC regulations and
    approve the new product for listing (through CEA 5c(c)(4)-(5) (7 U.S.C.
     7a-2(c)(4)-(5)) and CFTC Regulation 40.3).
    ---------------------------------------------------------------------------
        Similarly, under the CEA and the Commission's rule review
    regulations, prior to implementing a new or amended rule, a designated
    contract market must submit to the Commission the text of the rule and
    note any substantive opposing views to the rule that were not
    incorporated into the rule.\14\ In all such submissions, a designated
    contract market is legally obligated to meet Core Principles. The
    designated contract market may file its new or amended rule submission
    through self-certification by certifying that the rule complies with
    the Act and CFTC regulations and providing a concise explanation and
    analysis of the operation, purpose and effect of the new or amended
    rule and its compliance.\15\
    ---------------------------------------------------------------------------
        \14\ CEA  5c(c) (7 U.S.C.  7a-2(c)) and CFTC Regulations 40.5 and
    40.6. These same processes also apply for products to be listed on
    SEFs, with compliance required with the corresponding SEF regulatory
    framework.
        \15\ CEA  5c(c)(1)-(3) (7 U.S.C.  7a-2(c)(1)-(3)) and CFTC
    Regulation 40.6. Alternatively, the designated contract market or SEF
    may voluntarily request that the CFTC review the exchange's analysis of
    the rule and its compliance with the CEA and CFTC regulations and
    approve the new rule (through CEA 5c(c)(4)-(5) (7 U.S.C.  7a-2(c)(4)-
    (5)) and CFTC Regulation 40.5).
    ---------------------------------------------------------------------------
    CFTC Regulatory Jurisdiction Involving Digital Assets
        Digital assets have been broadly determined by the CFTC and Federal
    courts to be commodities under the CEA.\16\ As discussed below, the
    CFTC has broad regulatory oversight over any futures, options, and
    swaps listed by designated contract markets.
    ---------------------------------------------------------------------------
        \16\ The CFTC first found that Bitcoin and other virtual currencies
    are commodities in 2015. See In re Coinflip, Inc., d/b/a Derivabit, and
    Francisco Riordan, CFTC No. 15-29 (Sept. 17, 2015), http://
    www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/
    legalplead
    ing/enfcoinfliprorder09172015.pdf. In 2017, the CFTC proposed guidance
    regarding its jurisdiction over certain types of retail transactions
    involving virtual currency. Following extensive industry engagement and
    public comment, the CFTC finalized this guidance in 2020. Retail
    Commodity Transactions Involving Certain Digital Assets, 85 Fed. Reg.
    37734 (June 24, 2020). In 2018, Federal courts affirmed the CFTC's
    jurisdiction over digital assets in two cases, CFTC v. McDonnell, 332
    F. Supp. 3d 641 (E.D.N.Y. 2018) and CFTC v. My Big Coin Pay Inc., 334
    F. Supp. 3d 492 (D. Mass. 2018). Certain digital assets may also be
    securities to which the securities laws apply. Whether or not a given
    digital asset is a security requires examination of the specific
    characteristics of that asset, as set forth in SEC v. W.J. Howey Co.,
    328 U.S. 293 (1946).
    ---------------------------------------------------------------------------
        The CFTC has regulated exchange listed futures contracts on digital
    assets since late 2017. By way of background, in 2017, three designated
    contract markets expressed interest to the CFTC in listing digital
    asset-based derivatives contracts for trading.\17\ These designated
    contract markets voluntarily provided the CFTC with advance draft
    contract terms and conditions for their proposed contracts.\18\ In
    December 2017, the three designated contract markets self-certified
    that they would list Bitcoin derivatives contracts for trading.\19\
    Though the Commission did not determine to stay the certifications or
    seek public comment at the time, the CFTC published two documents in
    connection with these self-certification submissions to provide the
    public with background information on the CFTC's oversight of, and
    approach to, virtual currency futures markets.\20\
    ---------------------------------------------------------------------------
        \17\ CFTC Backgrounder on Self-Certified Contracts for Bitcoin
    Products, Dec. 1, 2017, available at https://www.cftc.gov/sites/
    default/files/idc/groups/public/@newsroom/documents/file/bit
    coin_factsheet120117.pdf. Two designated contract markets intended to
    list futures contracts on Bitcoin and a third designated contract
    market intended to list a new contract for Bitcoin binary options.
        \18\ Id.
        \19\ Id.
        \20\ CEA  5c(c)(3) (7 U.S.C.  7a-2(c)(3)). See https://
    www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/
    file/bitcoin_factsheet120117.pdf and https://www.cftc.
    gov/sites/default/files/idc/groups/public/%40customerprotection/
    documents/file/background
    er_virtualcurrency01.pdf.
    ---------------------------------------------------------------------------
        A few months later in 2018, staff issued an advisory to encourage
    innovation and growth of digital asset derivatives products to be
    traded on designated contract markets and cleared by derivatives
    clearing organizations within an appropriate oversight framework under
    the Core Principles.\21\ Specifically, staff clarified their priorities
    and expectations when reviewing new virtual currency derivatives to be
    listed on a designated contract market or to be cleared by a
    derivatives clearing organization.\22\
    ---------------------------------------------------------------------------
        \21\ See CFTC Staff Advisory No 18-14, https://www.cftc.gov/
    LawRegulation/CFTCStaffLetters/index.htm.
        \22\ See Id.
    ---------------------------------------------------------------------------
        Since then, the trading of futures contracts in digital assets has
    grown notably. Today, of the sixteen designated contract markets that
    the CFTC oversees, five list for trading futures and options contracts
    on Bitcoin, ether, or both. Market participants are actively trading
    over a dozen different futures and options contracts on digital assets
    across these five designated contract markets. When market participants
    trade digital asset-based futures contracts on a designated contract
    market, they are afforded the same customer protections and
    transparency as when they trade in futures contracts on any other asset
    class--including certainty over custody of their margin and clarity
    regarding bankruptcy protections.
    CFTC Cash Market Enforcement Actions Involving Digital Assets
        While the CFTC does not have direct statutory authority to regulate
    cash markets, the CFTC maintains anti-fraud, false reporting,\23\ and
    anti-manipulation enforcement authority over commodity cash markets in
    interstate commerce (including digital asset cash markets). When the
    CFTC becomes aware of potential fraud or manipulation in an underlying
    market, we investigate and address misconduct through our enforcement
    authority. In the digital asset space, since 2014, the CFTC has
    aggressively exercised its enforcement authority bringing more than 50
    enforcement actions.
    ---------------------------------------------------------------------------
        \23\ In re Coinbase Inc., CFTC No. 21-03 (Mar. 19, 2021).
    ---------------------------------------------------------------------------
        Most recently, in FY 2021, the CFTC filed numerous cases charging
    retail fraud involving digital assets,\24\ and cases charging platforms
    with illegally offering off-exchange trading in digital assets.\25\ In
    all, the CFTC filed over 20 enforcement actions that included digital
    asset-related allegations of misconduct in FY 2021.
    ---------------------------------------------------------------------------
        \24\ Press Releases 8366-21, 8374-21, 8381-21, 8441-21, 8434-21,
    8434-21, and 8452-21.
        \25\ Press Releases 8374-21 and 8433-21.
    ---------------------------------------------------------------------------
        Thus far in FY 2022, the CFTC has filed several enforcement actions
    involving digital assets, including an action for making untrue or
    misleading statements and omissions of material fact in connection with
    the U.S. dollar tether token (USDT) stablecoin.\26\ In addition, the
    Commission recently filed a complaint involving allegations for making
    false or misleading statements of material facts or omitting to state
    material facts to the CFTC in connection with the self-certification of
    a Bitcoin futures product.\27\
    ---------------------------------------------------------------------------
        \26\ Press Release 8450-21.
        \27\ Press Release 8540-22.
    ---------------------------------------------------------------------------
    The Derivatives Markets the CFTC Oversees Work Well
        The CEA and the CFTC's regulatory framework have worked well for
    our futures markets for many decades. The CFTC's focus on customer
    protections, market integrity, price discovery and transparency has
    proven to be effective, even in times of volatility. The strength of
    our futures markets is why in 2010, Congress tasked the CFTC with
    creating an oversight system for the over-the-counter swaps markets
    after the 2008 financial crisis.
        Following enactment of the Dodd-Frank Act, the CFTC thoughtfully
    and quickly enacted regulations to register trading facilities for
    swaps as swap execution facilities and to regulate the trading of swaps
    on swaps execution facilities as well as customer protections for swaps
    traded bilaterally. Today, the swaps markets that the CFTC oversees
    exceed $300 trillion in gross notional outstanding. Of the swaps in the
    credit and interest rates markets (two of the largest swap asset
    classes in terms of volume and notional outstanding), a notable portion
    of the swaps positions are cleared at a derivatives clearing
    organization. By bringing the previously opaque over-the-counter swaps
    market under the CFTC's oversight, our extensive swaps markets now
    benefit from transparency, enhanced customer protections, and promoted
    competition.
    Conclusion
        Through the CFTC's extensive experience overseeing the trading of
    digital asset-based derivatives on CFTC-regulated exchanges as well as
    the CFTC's vigilant exercise of jurisdiction of its enforcement
    authority over commodity cash markets in interstate commerce, the CFTC
    has developed a keen understanding of digital assets, and will continue
    to deliver on its commitment to protect customers to the fullest extent
    of its statutory authority.
        Thank you for the opportunity to appear before the Subcommittee. I
    look forward to answering any questions you may have.

        The Chairman. I thank the gentleman.
        Dr. Brummer, you may proceed when ready.

           STATEMENT OF CHRIS BRUMMER, J.D., Ph.D., AGNES N.
     WILLIAMS PROFESSOR OF LAW, GEORGETOWN UNIVERSITY LAW CENTER,
                            WASHINGTON, D.C.

        Dr. Brummer. Subcommittee Chairman Delgado and Chairman
    Maloney, Ranking Member Fischbach, and Members of the
    Subcommittee, it is a distinct pleasure to be here with you
    today. The Agriculture Committee is home to many of my favorite
    Members of Congress, which is saying something for a law
    professor.
        If there is one thing I would like you to remember from my
    remarks today, it is that the future of digital asset
    regulation will require much more than just placing various
    digital asset products into varying digital--excuse me--
    governmental organizational charts. It will also have to
    involve revisiting longstanding assumptions about market
    infrastructures and adapting the regulatory system in creative
    ways that reflect the best of our collective values and
    experience.
        As a securities law professor, I like to use disclosure as
    a simple example. All too often, carelessness, inaccuracies,
    and omissions of--social media posts, and blogs have plagued
    the retail investor experience and welfare. Something I noted
    in my testimony on ICOs with your colleagues in the House
    Financial Services Committee 4 years ago, and something that
    has only been highlighted in the last several weeks as
    investors and consumers have, too often, been caught unaware of
    the risks entailed when transacting with opaque intermediaries.
        Yet, deeming a digital asset a commodity or a security will
    not magically cure the problem. Commodities like gold, corn,
    and oil are subject to grading and quality requirements, but
    spot commodity transactions are not automatically subject to
    any particular disclosure regime. Meanwhile, calling a digital
    asset a security won't solve the problem either. U.S.
    securities law is simultaneously under- and over-inclusive. It
    asks for disclosure on things like corporate board governance
    but not blockchain governance. Furthermore, securities
    regulations are premised on the idea of disclosures being filed
    and not read, a posture that does little to help consumers and
    investors desperate for information as they navigate digital
    asset markets.
        So, irrespective of which regulator is in charge, that
    regulator will have to have a builders' mentality. Strong and
    rigorous enforcement is essential, but it is just one tool, and
    by definition, involves waiting for problems to arise instead
    of nipping them in the bud. You also need auditors of
    blockchain source code and better delivery systems for
    information and more.
        Now, with that said, there is the question for this
    Subcommittee as to whether the CFTC in particular is up to the
    task of regulating the spot market for those digital assets
    which are commodities and not securities. Fortunately, the
    United States enjoys not one, but two world-class regulators,
    the SEC and the CFTC, and I do believe that both regulators
    could do the job. But each would bring to the table very
    different comparative advantages. The CFTC has a deep well of
    experience substantively regulating digital asset
    infrastructures, from approving the first Bitcoin swaps and
    options traded on exchanges in 2014, to overseeing the first
    U.S. listed Bitcoin futures contract.
        Through its work, the CFTC has gained expertise overseeing
    the institutionalization of significant infrastructures
    intersecting directly with the digital asset commodities spot
    market, something the SEC has arguably only accomplished in
    attenuated fashion through Bitcoin futures ETS. The CFTC is
    also an important cop on the beat of Bitcoin spot markets.
        So, in many ways, extending oversight of cash digital asset
    commodity markets could be interpreted as a natural evolution
    or extension of its existing oversight.
        Where the CFTC is less developed than the SEC, however, is
    in the domain of disclosure, and the CFTC is well behind the
    SEC in terms of resources. The CFTC is but \1/4\ the size of
    the SEC, and enjoys a fraction of the SEC's budget.
        Where, however, I think the builders' mentality will be
    most critical for either agency will be in the context of
    financial inclusion. To its credit, the digital assets debate
    has opened up a long overdue dialogue on how overlooked
    communities, and especially minority communities, build wealth.
    But critics and proponents alike tend to miss the forest for
    the trees, and almost entirely on the wisdom of a particular
    asset class. Is Bitcoin good or bad for Black Americans, for
    example. Without tackling the larger, thornier issue head-on,
    how do we ensure communities traditionally left out of our
    capital markets participate in a meaningful and diversified way
    over the long-term and earlier in a sector's life and economic
    cycle when value and wealth is created?
        Moreover, focusing on digital assets as an investment also
    diverts attention from what is likely the far more relevant
    question, at least from the standpoint of financial inclusion.
    Namely, whether there are parts of the ecosystem's technology
    stack that can be leveraged to open opportunities for the
    underserved here in the United States, and in my testimony, I
    list some of those potential use cases.
        So, thank you very, very much for your time. I am really
    looking forward to this conversation, and I am looking forward
    to your questions.
        [The prepared statement of Dr. Brummer follows:]

      Prepared Statement of Chris Brummer, J.D., Ph.D., Agnes N. Williams
      Professor of Law, Georgetown University Law Center, Washington, D.C.
        Chairman Maloney, Ranking Member Fischbach, and Members of the
    Subcommittee:

        It is a distinct pleasure to be here with you today. The
    Agriculture Committee is home to many of my favorite Members of
    Congress--which is saying something for a law professor--and I've long
    been impressed, and thankful for the bipartisanship this Committee has
    long embraced. Today's hearing is yet another example.
        With financial markets experiencing enormous volatility, and global
    monetary practice reversing decades long trends in old and new markets
    alike, I've been asked to talk about how best to strategically think
    about the regulatory future of digital assets, and the implications of
    digital asset markets for financial inclusion.
        Either issue could be the subject of its own hearing, but they are
    not altogether unrelated. I'll try my best to connect the dots where I
    can.
    The Coming Work of Regulatory Agencies
        If there is one thing I would like you to remember from my remarks
    today, it is that the future of digital asset regulation will require
    much more than just defining agency jurisdiction and placing digital
    asset products into varying governmental organizational charts. It will
    also, necessarily, involve revisiting longstanding assumptions about
    market infrastructures embedded in securities and derivatives law and
    adapting the regulatory system in creative ways that reflect the best
    of our experience and collective values.
        Four years ago, near the height of the Initial Coin Offering (ICO)
    boom, I advised your colleagues in the Financial Services Committee
    that there would be significant work ahead for Congress and regulators
    seeking to tackle digital asset regulation, regardless as to how
    digital assets, ICOs or otherwise, were classified.\1\ Time has proven
    those comments correct, and given the limited advances regulatorily
    since then, they are as true today as ever. Irrespective of which
    agency is ultimately given more authority over digital assets markets,
    regulators need to undertake significant work with regards to upgrading
    systems to be mission ready. The jurisdictional question is but the tip
    of a much larger iceberg of issues confronting regulators and Congress
    today.
    ---------------------------------------------------------------------------
        \1\ See What Should Be Disclosed in an ICO White Paper?, Hearing
    Before the Subcomm. on Cap. Mkts., Sec. and Inv of H.R. Comm. on Fin.
    Servs., 115th Cong. (2018) (written testimony of Chris Brummer, Fac.
    Dir., Geo. U. L. Ctr.); See also an expanded analysis by Chris Brummer,
    Jai Messari & Trevor Kiviat in What Should be Disclosed in an ICO?,
    Digital Assets: Legal, Regulatory and Monetary Perspectives 157-202
    (2019).
    ---------------------------------------------------------------------------
        As a securities law professor, I like to use disclosure as a simple
    example. As some of you may recall, disclosure was the focus of my
    testimony when I spoke on ICOs.\2\ Today, the topic of disclosure has
    once again been highlighted as retail investors have been too often
    caught unaware of the risks entailed when engaging in digital asset
    transactions with lending firms, custodians and complex intermediaries
    and protocols.
    ---------------------------------------------------------------------------
        \2\ For an overview of shortcomings of white paper disclosures, see
    Shaanan Cohney, David A. Hoffman, Jeremy Sklaroff, & David Wishnick,
    Coin-Operated Capitalism, 119 Colum. L. Rev. 608 (2019). These
    shortcomings have particular salience given the complexity of some
    services; See also Hilary Allen, DeFi 2.0?, https://papers.ssrn.com/
    sol3/papers.cfm?abstract_id=4038788 (noting how complexity inherently
    makes risks harder to anticipate, and to understand, especially for
    retail participants). The FTC has attempted to, at least indirectly,
    quantify the extent of the problem, suggesting that losses from digital
    assets scams topped $1 billion in 2021. Lesley Fair, Reported digital
    assets scam losses since 2021 top $1 billion, says FTC Data Spotlight,
    FTC (June 3, 2022) available at https://www.ftc.gov/business-guidance/
    blog/2022/06/reported-crypto-scam-losses-2021-top-1-billion-says-ftc-
    data-spotlight.
    ---------------------------------------------------------------------------
        Yet deeming a digital asset a ``commodity'' or ``security'' will
    not magically passport digital assets to regimes ready built to provide
    proper or even efficient oversight or clarity. Financial futures on
    ``commodities'' like corn, gold, and oil may face grading and quality
    requirements, but spot commodity transactions are not automatically
    subject to any particular disclosure regime. Instead, the
    identification of a product as a commodity subjects those that transact
    on the spot market to a range of anti-fraud protections--effectively
    `negative' disclosure requirements prohibiting misleading statements
    and market manipulation--as opposed to any substantive, positive
    disclosure demands.\3\
    ---------------------------------------------------------------------------
        \3\ See 17 CFR  180.1.
    ---------------------------------------------------------------------------
        Calling a digital asset a ``security'' won't solve the problem,
    either. This is because the SEC's disclosure obligations largely fail
    to anticipate the particularities of blockchain infrastructures.
    Indeed, as I have consistently noted for lawmakers, even if one were to
    make the counterfactual assumption that all digital assets were
    securities, Regulation S-K, the disclosure template for Initial Public
    Offerings, is simultaneously under- and over-inclusive. As such, it
    fails in some instances to account for critical aspects of the digital
    assets ecosystem, and in others imposes obligations with little to no
    relevance, creating both a lack of clarity and inefficiency in
    compliance.
        Complicating things even further, the infrastructure supporting
    digital assets presents novel policy and strategic questions on the
    part of any regulator. Traditionally, U.S. disclosure regimes have
    rested on the assumption that the issuer is in possession of nonpublic
    material information that needs to be made broadly accessible to
    investors. This transparency is intended to allow investors to better
    understand the risks they face and to then respond to these dangers by
    appropriately pricing that risk or avoiding altogether by investing
    elsewhere. But in most digital asset contexts, particularly those
    involving more decentralized actors operating on public blockchains,
    much (although not all) information relevant to an investor or consumer
    is already visible to the public on chain--but it is accessible and
    understandable only to technologically sophisticated actors.
        This feature takes on special importance when contemplating the
    basic goals of a disclosure system for digital assets. With vast
    quantities of complex information already encoded on public blockchains
    for sophisticated actors, any disclosure regime for digital assets
    should be geared to speak to everyday retail customers and investors.
    Yet for those with even a passing familiarity with today's primary
    disclosure system, which applies to public companies, it is clear that
    disclosures are largely designed to be ``filed and not read.''
    Submissions are voluminous and dense. They are written in legalese and
    filed on the SEC's Edgar database, and often follow formats that
    respond to the demands of analysts at financial institutions, not
    retail investors.\4\
    ---------------------------------------------------------------------------
        \4\ See Zohar Goshen & Gideon Parchomovsky, The Essential Role of
    Securities Regulation, 55 Duke L. J. 711, 713 (2006) (``Any serious
    examination of the role and function of securities regulation must
    sidestep the widespread, yet misguided, belief that securities
    regulation aims at protecting the common investor. Securities
    regulation is not a consumer protection law.''); see also Troy Paredes,
    Blinded by the Light: Information Overload and Its Consequences for
    Securities Regulation 2 (St. Louis U., Faculty Working Paper Series,
    Paper No. 03-02-02, 2003) available at http://ssrn.com/abstract=413180
    (noting that ``[s]ecurities regulation is motivated, in large part, by
    the assumption that more information is better than less,'' but that it
    can create ``information overload'' for retail investors).
    ---------------------------------------------------------------------------
        To truly protect participants in digital asset markets, another
    model is likely to be better suited for the diverse interests and
    backgrounds represented by retail investors. I have argued that we need
    to look much more carefully at consumer protection law's focus on
    targeted, retail-friendly disclosures that are meant to be engaged with
    and digested by everyday participants, and not ignored because they are
    too inaccessible or overwhelming.\5\ Specifically, I've suggested
    building a better disclosure regime, one that could involve revamping
    Regulation S-K for the risks of digital asset applications and
    financial products--or a new regime that is developed from scratch
    employing the shorter, crisper disclosure approaches typically
    associated with consumer protection law. I've also drawn attention to
    the necessity of clarity and ``Plain English'' in disclosures for not
    just the business, but also the technology used to support different
    protocols.\6\
    ---------------------------------------------------------------------------
        \5\ Chris Brummer, Disclosure, Dapps and DeFi, Stan. J. of
    Blockchain Law & Policy (Mar. 27, 2022 forthcoming) available at
    https://papers.ssrn.com/sol3/papers.cfm?abstract_
    id=4065143.
        \6\ Notably, the SEC has implemented ``Plain English'' disclosure
    rules designed to reduce the jargon and difficulty often associated
    with reading registration statements. The most stringent requirements
    in Rule 421(d) articulate definitive prohibitions against ``legal
    jargon'' and ``technical terms'' in the summary, risk factors, and
    cover and back pages of a prospectus. Meanwhile, under Rule 421(b), the
    Commission has outlined a number of norms such as ``short sentences
    whenever possible,'' ``bullet points,'' and ``descriptive headers''
    while advising that prospectus drafters avoid ``legal and highly
    technical business terms,'' ``legalistic, overly complex
    presentations,'' ``vague boilerplate,'' ``excerpts from legal
    documents,'' and ``repetition.'' As such, the Plain English rules speak
    to the overly complex business narratives and communications that have
    traditionally made securities offerings indecipherable for everyday
    investors. Plain English disclosures apply, however, only to the front
    and back pages, and summary and risk factors, of prospectuses included
    in registration statements filed with the SEC. They do not relate to
    the disclosures consumers may need most, like the more in-depth
    descriptions of relevant tokens or supporting technologies that are
    often critical to understanding a dapp as an investment thesis. Id.
    ---------------------------------------------------------------------------
        I've also made the case that serious regulation, irrespective of
    which regulator is in charge, requires courageous creativity and a
    builder's mentality. Strong and rigorous enforcement is essential--
    particularly where rules are reasonably clear and bad actors ignore
    them or exploit ambiguities. But it's still just one tool--and by
    definition involves waiting for problems to arise instead of nipping
    them in the bud and preventing them before they happen.
        A safer, fairer, and more efficient system requires additional
    building blocks. Gatekeepers suited to the environment are an obvious
    starting point. Auditors of a blockchain or protocol's code will be as
    important in digital asset ecosystems as auditors of a public company's
    financial statements. Purpose-built operational systems will be
    critical as well. Just this month, an anonymous hacker was served with
    a restraining order via an NFT delivered to the perpetrator's
    wallet.\7\ In a similar guise, I've written about using NFTs for
    disclosure delivery in some DeFi settings, incentivizing investors to
    read disclosures (through rewards or whitelisting) in ways that improve
    their disclosure experience in meaningful ways that advance consumer
    protection.\8\ My point then, as now, is that a functioning system that
    safeguards consumers and investors will need more than just (re)drawing
    the regulatory perimeter, and punishing actors after the damage has
    been done. Proactive, creative steps will also be necessary to make the
    system work well for everyone--steps that acknowledge the strengths and
    weaknesses of not only emerging financial technologies, but also those
    of the legacy regulatory system.
    ---------------------------------------------------------------------------
        \7\ Sam Bourgi, Anonymous hacker served with restraining order via
    NFT, CoinTelegraph (June 9, 2022) available at https://
    cointelegraph.com/news/anonymous-hacker-served-with-restraining-order-
    via-nft.
        \8\ Brummer, supra note 5 at 35-37.
    ---------------------------------------------------------------------------
    CFTC as Crypto-Regulator
        With that said, there is the obvious question for this Subcommittee
    as to whether the CFTC in particular is up to the task of regulating
    digital asset markets. It is in many ways a surprising question--even
    with the work ahead, few doubt that the United States enjoys not one,
    but two world class markets regulators. The SEC can and should regulate
    digital asset securities. The question is whether the CFTC could--or
    should--regulate the spot market for those digital assets which are
    ``commodities'' and not securities. I believe both agencies could do
    the job. But each would bring to the table different comparative
    advantages.
        The CFTC's experience lies in effective and nimble deployment of
    its own limited authority, which has enabled it to be an important cop
    on the beat of Bitcoin spot markets. Although the agency does not have
    the power to set standards for digital asset commodity spot markets--or
    for that matter compel the registration of spot digital asset commodity
    exchanges--it does have the authority to police fraudulent and
    manipulative activities in digital asset commodity markets.\9\
    Additionally, CFTC jurisdiction covers digital asset commodity
    products, including products offered to retail investors and end-users,
    that provide for margin or leverage and is offered to retail
    customers.\10\ Thus to the extent that spot digital asset commodity
    trading relies on margin or leverage to U.S. persons, it already falls
    under the CFTC's broader and more comprehensive registration
    jurisdiction--and the agency enjoys the authority to declare that those
    products be traded on an exchange and/or through a registered FCM.\11\
    Extending oversight of cash digital asset commodity markets, from this
    perspective, could be interpreted as a natural evolution of existing
    oversight.
    ---------------------------------------------------------------------------
        \9\ Stephen M. Humenik, et. al., CFTC and SEC Perspectives on
    Cryptocurrency--Vol. 1: A Jurisdictional Overview, K&L Gates (May 6,
    2022) available at https://www.klgates.com/CFTC-and-SEC-Perspectives-
    on-Cryptocurrency-and-Digital-Assets-Volume-I-A-Jurisdictional-
    Overview-5-6-2022. Notably, in the past fiscal year, the CFTC filed 23
    digital asset-related enforcement actions, nearly half the total number
    of digital asset-related enforcement actions brought by the CFTC in the
    2015-2021 period. James Rubin, CFTC Chair Indicates Agency Will
    Increase Crypto Enforcement: Report, Coindesk (May 19. 2022) https://
    www.yahoo.com/video/cftc-chair-indicates-agency-increase-
    233028535.html.
        \10\ See Commodity Exchange Act, 7 U.S.C.  2(c)(2)(D).
        \11\ Id.
    ---------------------------------------------------------------------------
        The CFTC has also gained unique regulatory experience dealing with
    the risks entailed in substantively regulating digital asset
    infrastructures. As early as 2014, the CFTC granted under CFTC Chairman
    Timothy Massad approval for trading the first Bitcoin denominated
    swaps, options and NDFs on CFTC registered Swap Execution
    Facilities.\12\ Several years later in 2017, the CFTC under CFTC
    Chairman Chris Giancarlo permitted the first Bitcoin futures contract
    to be listed on CBOE Futures and CME.\13\ Similar to today's
    environment, critics panned the move, doubting both the asset and the
    CFTC's ability to oversee the market and arguing that the oversight
    would create a bubble. Subsequent studies by the San Francisco Fed
    would, however, confirm the opposite, that not only were the markets
    functioning properly--but that, if anything, the introduction of the
    futures market helped push Bitcoin's price down, not up. Through it
    all, the CFTC gained expertise in overseeing the institutionalization
    of significant infrastructures intersecting directly with the digital
    asset commodity spot market, something that the SEC, which has yet to
    approve a spot Bitcoin or digital asset commodity ETF, has arguably
    only accomplished in attenuated fashion through multiple Bitcoin
    Futures ETFs.\14\
    ---------------------------------------------------------------------------
        \12\ Joon Ian Wong, CFTC Chairman: We Have Oversight of Bitcoin
    Derivatives, Coindesk (Dec. 11, 2014) https://www.coindesk.com/markets/
    2014/12/11/cftc-chairman-we-have-oversight-of-bitcoin-derivatives/.
        \13\ Bitcoin makes debut on futures market, AP (Dec. 10, 2017)
    https://www.theguardian.com/technology/2017/dec/11/bitcoin-makes-debut-
    futures-market-cboe-chicago-board-options-exchange.
        \14\ Pressure on SEC to Approve First Bitcoin ETF Ratchet Up,
    PYMNTS (Apr. 25, 2022), https://www.pymnts.com/blockchain/bitcoin/2022/
    pressure-on-sec-to-approve-first-bitcoin-etf-ratchets-up.
    ---------------------------------------------------------------------------
        Where the CFTC's expertise is less developed than the SEC's is in
    the domain of disclosure. With nearly 90 years of history, the SEC has
    established itself as the nation's premier (but not sole) information
    regulator, with particular expertise where transactions involve an
    investment of money, in a common enterprise, with the expectation of
    profits, that is dependent on the efforts of others.\15\ But where the
    target of regulation is fully decentralized assets, even disclosure
    principles would, as noted above, need a fundamental rethink by any
    regulator, including the SEC, and a revamp of existing legal
    infrastructure. And the SEC would have to pivot to doing things in ways
    that speak to the challenge and the times--and to build the
    infrastructure to do it properly. The SEC would have a head start in
    this particular area, but given the kind of conceptual agility needed,
    its already packed agenda, and the comparatively higher hurdle of
    establishing its jurisdiction (e.g., the existence of a security),
    perhaps not as much as one would assume.
    ---------------------------------------------------------------------------
        \15\ SEC v. W.J. Howey Co., 328 U.S. 293 (1946); Securities Act
    1933  2(a)(1) Pub. L. No. 112-106, 48 Stat. 74 (codified as amended at
    15 U.S.C.  77a et seq.)
    ---------------------------------------------------------------------------
        The CFTC is also well behind the SEC in terms of resources. The
    CFTC is but a quarter of the size of the SEC (700 vs. 4,000 full time
    employees), and enjoys a fraction of the SEC's budget ($350 Million v.
    $2.5 Billion). To build an architecture for regulating digital assets
    comprehensively will require considerably more resources than are
    currently available,\16\ and unlike the SEC, which is able to move
    resources around the agency to meet staffing needs pertaining to
    digital asset regulation, the CFTC--an agency long under resourced--
    would presumably have little room to maneuver if proper resources were
    not allocated.\17\
    ---------------------------------------------------------------------------
        \16\ CFTC Chairman Rostin Benham has indicated that the CFTC would
    need about $100 Million in additional funding to handle regulating the
    spot Digital Asset commodities market, and varying proposals, and some
    Industry officials, have suggested a range of transaction taxes or fees
    to meet the challenge.
        \17\ What maneuverability the agency would have is hard to
    estimate. There is precedent suggesting that the CFTC's ability to make
    the most of the budget is considerable. Despite the staffing and
    funding differentials Congress ended up giving the CFTC, not the SEC,
    95% of the swaps market jurisdiction under Dodd Frank. And despite
    largely missing out on commensurate increases in funding, even when
    compared with the SEC, the CFTC is widely viewed as a successful
    regulator of that market, despite its hamstrung resources. However,
    stacking additional responsibilities on top of an already resource poor
    agency, without the necessary funding, could end up not only hampering
    supervision of digital asset markets, but also disrupting other
    critical agency functions.
    ---------------------------------------------------------------------------
    Financial Inclusion
        Where, however, I think the builder's mentality is most critical in
    the digital assets conversation is in the context of financial
    inclusion. Digital assets are, like most technologies, a tool whose
    benefits will depend on how the technology is used, and for whom.
    Skeptics have claimed that digital assets present no benefits for
    inclusion, or for that matter, anything else. Industry, meanwhile, has
    all too often touted inclusion without thinking seriously about what it
    means, or how to achieve it concretely.
        To its enormous credit, the digital assets debate has opened up a
    long overdue dialogue on just how much the legacy financial system
    continues to fail many communities--and how overlooked communities, and
    especially minority communities, build wealth. But critics and
    proponents alike tend to miss the forest for the trees, and dwell
    almost entirely on the wisdom of a particular asset class (``Is Bitcoin
    a good or bad investment for Black Americans?'') without tackling the
    larger, thornier issue head on: how do we ensure communities
    traditionally left out of our capital markets participate in a
    meaningful and diversified way, over the longer term, and earlier in
    sectors' life and economic cycles, when value is created? It's a
    question that digital assets prompt, but which is much larger than
    ``crypto.'' And when digital assets are the avatar through which the
    conversation takes place, policy debates are invariably fixated on
    daily or weekly price movements instead of on basic principles of
    investing and on reforms needed to address a sprawling wealth gap.\18\
    ---------------------------------------------------------------------------
        \18\ Instead of focusing on whether people of color invest in any
    particular digital asset, the healthy policy discussion would center on
    the appropriate portfolio of low, medium and high-risk investments
    investors should have in order to build their economic lives--and
    ideally, overcome historic and growing wealth inequality. From this
    standpoint, basic principles of investing dictate that most investors
    should try to have some (modest) exposure to a diversified slice high
    risk or alternative assets--whether it be digital assets, high end art,
    silver, private securities, etc.--alongside a much larger swath of
    medium and low risk assets, derisking the portfolio as a person nears
    retirement. Policy proposals should focus on whether or not the market,
    and regulatory policy, support enabling such longstanding, long proven,
    and nonpartisan insights. For communities of color that have long been
    under-invested in capital markets and have traditionally lacked access
    to the fastest growing parts of the economy and technology, this work
    is especially critical.
    ---------------------------------------------------------------------------
        Focusing on digital assets as an investment also diverts attention
    from what is likely the far more relevant question, at least from the
    standpoint of financial inclusion--namely whether there are parts of
    the ecosystem's technology stack that can be leveraged to open
    opportunities for the underserved here in the United States.
        I have been frank, at times painfully so, about the shortcomings in
    the digital assets and fintech ecosystem where I see them.\19\ But for
    all of the challenges, the core attributes of immutability,
    programmability, transparency, and publicness are truly novel--and
    position it in ways, if done well, to supplement, and positively
    disrupt, a payments and financial system long tilted towards the
    wealthy. And it is these features that present a unique opportunity to
    experiment and think seriously about how to upgrade our financial
    system in ways that can uplift non-coastal, rural and minority
    populations.
    ---------------------------------------------------------------------------
        \19\ See 99 Problems, Hearing Before the H.R. Comm. On Fin. Servs.,
    (July 17, 2018) (written testimony of Chris Brummer, Prof. of Law Geo.
    U. L. Ctr.); See also Chris Brummer, Fintech's Race Problem, Medium
    (June 9, 2020), https://chrisbrummer.medium.com/fintechs-race-problem-
    856df6351695.
    ---------------------------------------------------------------------------
        Remittances have long been highlighted in Congressional hearings as
    obvious use cases, especially for immigrant communities facing
    predatory fees for cross border payments. (They also helpfully
    distinguish the interest many people have in using digital assets vs.
    investing in them.) But there are many other digital asset and
    blockchain-related projects currently under development that target
    financial inclusion and the democratization of opportunity even more
    directly for the U.S. context, and with obvious relevance to working
    class people and communities of color:

       Opportunities like decentralized identity, which can enable
            individuals to collect verifiable credentials with any
            constellation of actors--like banks, schools, employers, post
            offices, and more--that can be mixed and matched to prove not
            only who you are for any range of governmental purposes from
            voting eligibility, jury duty, ``sophistication'' for
            accredited investor status, etc.).

       Opportunities to build new kinds of reputation to open the
            credit box through decentralized credit scoring, or leverage
            decentralized credit scoring alongside decentralized IDs and
            credentials (e.g., landlords and utility companies issuing
            credentials relating to a solid repayment history).

       Opportunities for using tokenized, real world assets as
            collateral for borrowing.

       Opportunities to not only reduce closing costs for home
            purchases and mortgage closing costs with portable credentials
            from mortgage agents, but to store title certificates as NFTs
            on blockchains.

       Opportunities to build a decentralized net for community
            banks and minority depositary institutions to process AML/KYC
            requirements associated with new bank accounts and in the
            process dramatically reduce their operational costs.

       Opportunities to escape predatory payments and banking fees,
            and access faster and cheaper financial rails via stablecoins
            (or CBDC) for quickly paying part time, remote and gig workers
            living check to check.

        These kinds of innovations and projects are being explored, and in
    some instances built, with blockchains and digital asset technology,
    and could end up being massively profitable as well as socially useful.
    But in a world of sensational Twitter posts, big personalities and mega
    deals, they don't get the attention they deserve, from industry or
    national media. Meanwhile, regulatory agencies aren't in the business
    of financial inclusion, either--indeed, the Fed, SEC and CFTC all lack
    a financial inclusion mandate--and there is little incentive to take
    the time to ask what reforms are possible that could help direct
    energies towards positive social uses, or to ensure that the industry
    reaches its espoused potential of democratizing economic opportunities
    for everyone.
        As I said 4 years ago, and at the outset of my remarks here today,
    the future of digital asset regulation will require much more than just
    defining agency jurisdiction and placing various digital assets into
    governmental organizational charts. More legal and regulatory
    brainpower will be needed, and lawmakers have a unique opportunity to
    step into the void, especially in periods of crisis or uncertainty, to
    make a real difference. But moving the dial, whether it be on consumer
    and investor protection, or financial inclusion, requires understanding
    the technology, its limitations, and opportunities. And having a
    builder's mentality.
        Thanks so much to you all for the invitation to speak to you today.
    I look forward to your questions.

        The Chairman. I thank the gentleman.
        Mr. Levin, you may begin.
        Mr. Levin. Thank you.
        The Chairman. I will say, sir, you are joining us from
    Australia?
        Mr. Levin. I am actually now in South Korea. I am in Seoul.
        The Chairman. South Korea. Well, thank you for staying up
    late or getting up early. I appreciate it.

      STATEMENT OF JONATHON LEVIN, CO-FOUNDER AND CHIEF STRATEGY
                OFFICER, CHAINALYSIS INC., NEW YORK, NY

        Mr. Levin. Thank you, Mr. Chairman. Yes, I like doing
    things for the first time, since this is the first time that I
    am testifying from South Korea.
        So, Chairman Maloney, Ranking Member Fischbach, Ranking
    Member Thompson, and distinguished Members of the Committee,
    thank you for inviting me here today on this important topic. I
    appreciate that this Committee is looking at how to approach
    market regulation for digital assets, and as has been said
    previously, this couldn't be more timely.
        My name is Jonathan Levin, and I co-founded Chainalysis in
    2014. I currently serve as our Chief Strategy Officer. I began
    studying cryptocurrencies 10 years ago through my research as
    an economist, but actually before that, my career started in
    commodities studying the impact that speculators have on the
    price of copper. Having visited the London Metal Exchange
    several times, I appreciate how an orderly and well-functioning
    market that sets reference prices of important commodities is
    critical to the functioning of our global economy. I think the
    stakes are as high in the regulation of digital assets.
        While the internet brought citizens much closer together in
    terms of global connectivity, it hasn't given everyone the same
    economic opportunities that were promised. The cryptocurrency
    industry provides a new way to conduct global commerce,
    creating these economic opportunities for people across the
    world. The entrepreneurial dynamism present in cryptocurrencies
    allows for innovators and builders to create universal access
    to financial products that better serve consumers and their
    data. This technology has the potential to be significant in
    the U.S. competitiveness in the global economy over the coming
    decades.
        An important point that I want to make to Members of this
    Committee is that the transparency of blockchains enhances the
    ability of policymakers and government agencies to detect,
    disrupt, and ultimately deter illicit activity and abuse in
    cryptocurrency markets. By examining a cryptocurrency payment
    made by a scammer, government agencies are actually able to
    look inside into the entire network that is behind this illicit
    activity, and the services that have relationship to that
    individual.
        In contrast, in a traditional criminal financial
    investigation, a similar tip linking an illicit actor to a bank
    account is just the beginning of a long, extensive process of
    legal requests and EMLA requests.
        As with any new technology, cryptocurrency can be used by
    both good and bad actors. In my written testimony, I outline
    some of the evidence that we have at Chainalysis about the
    scams, thefts, and types of manipulation that we have seen.
    Preventing cryptocurrency from being abused in this way is
    intricately connected to our ability to unlock its profound
    potential for our economy. We are in a unique position to help
    this industry mitigate the risks, and in turn, increase the
    potential for a vibrant economy built on this new
    infrastructure.
        The transparency provided by cryptocurrency enables unique
    insights into cryptocurrency markets, including an
    understanding of market risks that enables surveillance. There
    is a great deal of data and information available to government
    agencies looking to understand this space, whereas blockchain
    analytics companies like Chainalysis surveil and glean insights
    from transactions that are settled on the blockchain, there is
    also a lot of off chain data that can be used to understand
    market manipulation trends and market manipulation in order
    books, and allow typologies related to this type of abuse.
        I make a number of recommendations in my written testimony,
    but a key recommendation I would like to highlight for this
    Committee is that we should aim to create a stable, regulated
    market whereby the world looks to the United States for
    established asset reference cryptocurrency prices just as they
    do for many other types of commodities. If America wants to
    lead in this sector, we must lead cryptocurrency market
    regulation. The clarification of cryptocurrency market
    regulator responsibilities would be a very important step for
    this market and would lend a great degree of order to the
    market functioning.
        I appreciate your time and look forward to your questions.
        [The prepared statement of Mr. Levin follows:]

      Prepared Statement of Jonathon Levin, Co-Founder and Chief Strategy
                    Officer, Chainalysis Inc., New York, NY
        Chairman Maloney, Ranking Member Fischbach, and distinguished
    Members of the Committee. Thank you for inviting me to testify before
    you today on this important topic. I appreciate that this Committee is
    looking at how to approach market regulation of digital assets. The
    topic of market regulation is important for safeguarding digital
    assets, but also the financial system more generally.
        My name is Jonathan Levin and I co-founded Chainalysis Inc. with
    Michael Gronager, CEO of Chainalysis, in 2014. I currently serve as
    Chief Strategy Officer. I began studying cryptocurrencies 10 years ago
    through my research as an economist. I was interested in the way that
    the internet could create accessibility to markets and impact
    developing economies. While the internet brought citizens of the world
    closer together in terms of global connectivity, it did not give people
    the economic opportunities that were promised. The cryptocurrency
    industry provides a new way to conduct global commerce, creating
    economic opportunities for people across the world. The entrepreneurial
    dynamism that cryptocurrencies present allows for innovators and
    builders to create universal access to financial products that serve
    individuals and their data. This technology has the potential to be
    significant in global competition over coming decades.
        An important point I want to make to the Members of this Committee,
    is that the transparency of blockchains enhances the ability of
    policymakers and government agencies to detect, disrupt and,
    ultimately, deter illicit activity in cryptocurrency markets. By
    examining a cryptocurrency payment made to a scammer, government
    agencies unlock immediate insight into the network of wallet addresses
    and services (e.g., exchanges, mixers, etc.) that have a relationship
    with this entity. In contrast, in a traditional criminal financial
    investigation, a similar tip, linking an illicit actor to a bank
    account, is just the beginning of a long, extensive process to request
    and subpoena records that are manually reviewed and reconciled to
    generate a comparable amount of insight. Despite the success of many of
    these investigations, the significant time investment that is required
    may create opportunities for illicit actors to evade justice vs. the
    real-time monitoring capabilities of blockchain intelligence.
        As with any new technology, cryptocurrency can be used by both good
    and bad actors. As such, preventing cryptocurrency from being abused
    for illicit purposes is intricately connected to our ability to unlock
    its profound potential for the world. We are in a unique position to
    help this industry mitigate risks and, in turn, increase the potential
    for a vibrant economy to be built on this new infrastructure. The
    transparency provided by the blockchain enables unique insights into
    cryptocurrency markets, including an understanding of market risks,
    that can enable surveillance. There is a great deal of data and
    information available to government agencies looking to understand this
    space that is available for analysis. Whereas blockchain analytics
    companies like Chainalysis survey and glean insights from transactions
    settled on the blockchain, off-chain analytics companies offer trading
    insights into cryptocurrency firms' order books, and alert on
    typologies related to market price/volume manipulation. Off-chain
    analytics and market surveillance companies that we integrate with,
    provide alert capabilities to such typologies as pump and dumps,
    rugpulls, flash attack loans, spoofing, circular wash-trading as well
    as insider/employee trading. Where these datasets are found to be
    insufficient for market oversight, regulators may look to have a more
    complete understanding by combining on-chain data with off-chain data
    from other sources, or requiring additional reporting.
        American markets are the world's largest, most developed, and most
    influential. Many of the world's most important agricultural, mineral,
    and energy commodities are priced in U.S. dollars in the U.S.
    derivatives markets. Dollar pricing of the world's commodities provides
    a tremendous advantage to American producers in global commerce, an
    advantage well-recognized by competing economies abroad. There is a key
    opportunity for the United States to have the regulator that
    establishes the world's prices for cryptocurrencies.
        American markets are the best regulated in the world. The Commodity
    Futures Trading Commission (CFTC) has provided oversight of the U.S.
    exchange-traded derivatives markets for over 40 years. The CFTC is
    recognized for its principles-based regulatory framework and
    econometrically driven analysis. It also is recognized around the world
    for its level of expertise and breadth of capability. This combination
    of regulatory expertise and competency is one of the reasons why U.S.
    markets continue to serve participants' needs around the globe to hedge
    price and supply risk safely and efficiently. It is why well-regulated
    U.S. markets continue to serve a vital national interest--U.S. dollar
    pricing of important global commodities.
        If America wants to lead in this sector, we must lead
    cryptocurrency market regulation. The clarification of cryptocurrency
    market regulator responsibilities would be a very important step for
    this market and would help to lend a greater degree of order. We should
    aim to create a stable, regulated market whereby the world looks to the
    United States for established asset-reference cryptocurrency prices,
    just as they do for many types of commodities.
        I would also like to highlight that the cryptocurrency industry is
    working hard to ensure that there are the right protections for
    investors in this space. Two ways this is happening is through work
    conducted by trade associations made of cryptocurrency industry
    members, as well as initiatives like the Crypto Market Integrity
    Coalition,\1\ a group of cryptocurrency industry members who have taken
    a pledge to focus on cultivating a fair digital asset marketplace to
    combat market abuse and manipulation and promote public and regulatory
    confidence in the new asset class. The cryptocurrency industry has made
    enormous strides to improve market integrity in the past few years. At
    the same time, cryptocurrency businesses are keenly aware of the
    concerns that still need to be addressed, and are committed to engaging
    with regulators to advance solutions to cryptocurrency's unique
    challenges.
    ---------------------------------------------------------------------------
        \1\ https://www.cryptomarketintegrity.com/.
    ---------------------------------------------------------------------------
        In my testimony, I provide background on Chainalysis, outline how
    blockchain analysis can be leveraged by government agencies to provide
    greater insight into the cryptocurrency ecosystem, and describe risks
    we see to consumers, including contagion risks, scams, thefts, and
    manipulation in the cryptocurrency space and how they can be identified
    and mitigated using blockchain data. I also provide recommendations for
    how the government agencies, like the CFTC, can address potential risks
    in the market.
    Background on Chainalysis
        Chainalysis is the blockchain data platform. We provide data,
    software, services, and research to government agencies, exchanges,
    financial institutions, and insurance and cybersecurity companies.
    Chainalysis has over 750 customers in 70 countries. Our data platform
    powers investigations, compliance, and risk-management tools that have
    been used to solve many of the world's most high-profile cyber-crime
    cases and grow consumer access to cryptocurrency safely. We have worked
    closely with law enforcement and regulators as they have worked to
    disrupt and deter illicit uses of cryptocurrency.
        Chainalysis's partnerships with law enforcement and regulators are
    consistent with our corporate mission: to build trust in blockchains.
    Fundamentally, we believe in the potential of open, decentralized
    blockchain networks to drive new efficiencies, reduce barriers for
    innovators to create new financial and commercial products, encourage
    innovation, enhance financial inclusion, and unlock competitive forces
    across financial services and other markets. Our goal is to contribute
    our data, tools and expertise to drive illicit finance and other risks
    out of the cryptocurrency ecosystem, enabling the realization of the
    technology's potential.
        Chainalysis's data powers both investigative and compliance tools.
    Our investigative tool, Reactor, enables government agencies and
    investigative teams to trace the illicit uses of cryptocurrency,
    including money laundering, theft, scams, and other criminal
    activities. Our compliance tool, KYT (Know Your Transaction), provides
    cryptocurrency businesses and financial institutions the ability to
    screen their clients transactions and ensure that they are not
    attempting to interact with illicit entities. This transaction
    monitoring tool provides ongoing insights for cryptocurrency businesses
    so that they can protect their businesses and clients and ensure
    regulatory compliance.
        Another tool, Chainalysis Market Intel, provides the unique
    insights needed to conduct cryptocurrency research and make investment
    decisions. Chainalysis traces the funds flowing on the blockchain and
    tracks the cryptocurrency activity of over 3,300 businesses. This
    translates into intelligence on over 95% of the cryptocurrencies traded
    on the market. As all transfers are recorded on the blockchain in real-
    time, on-chain data, once mapped to real-world entities, this is a
    powerful dataset. It is a complete and real-time description of how
    cryptocurrency is being used and held. This means our metrics describe
    tangible, real-world activity rather than technical blockchain metrics.
    This offers new ways to value cryptocurrencies, and understand the
    market and the broader crypto-economy, as we can see how assets move in
    response, or to cause, events.
        Chainalysis also leverages our data to conduct research into the
    cryptocurrency ecosystem, including the illicit use of cryptocurrency.
    We publish a number of reports, including our annual Crypto Crime
    Report. Based on this research, we reported in our 2022 Crypto Crime
    Report \2\ that cryptocurrency-based crime hit a new all-time high in
    2021, with illicit addresses receiving $14 billion over the course of
    the year, up from $7.8 billion in 2020. Top categories include scams,
    stolen funds, darknet markets, and--pertinent to this hearing--
    ransomware.
    ---------------------------------------------------------------------------
        \2\ https://go.chainalysis.com/2022-Crypto-Crime-Report.html.
    ---------------------------------------------------------------------------
    Total cryptocurrency value received by illicit addresses, 2017-2021

    		[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Despite this large increase in illicit transaction volume, illicit
    activity as a percentage of total volume has actually fallen
    dramatically since 2019. In 2019, the illicit share was about 3%, in
    2020 it was just over 0.5%, and in 2021 it was 0.15%. The reason for
    this is that cryptocurrency usage is growing faster than ever before,
    so while cryptocurrency-related crime is definitely increasing, the
    legitimate use of cryptocurrency is far outpacing its use by illicit
    actors. This is good news for the cryptocurrency ecosystem, but the
    government and industry are still faced with putting in place and
    implementing the appropriate controls to mitigate risks in the system.
    How Blockchain Data Can be Leveraged to Gain Insights into the
            Cryptocurrency Ecosystem
        It is a common misconception that cryptocurrency is completely
    anonymous and untraceable. In fact, the transparency provided by many
    cryptocurrencies' public ledgers is much greater than that of other
    traditional forms of value transfer. Cryptocurrencies like Bitcoin
    operate on public, immutable ledgers known as blockchains. Anyone with
    an internet connection can look up the entire history of transactions
    on these blockchains. The ledger shows a string of numbers and letters
    that transact with another string of numbers and letters. Chainalysis
    maps these numbers and letters--or cryptocurrency addresses--to their
    real-world entities. For example, in Chainalysis products, we are able
    to see that a given transaction was between a customer at a specific
    exchange, with a customer at another exchange, between a customer at an
    exchange and a sanctioned entity, or any other illicit or legitimate
    service using cryptocurrency. Our data set and investigative tools are
    invaluable in empowering government and private sector investigators to
    trace cryptocurrency transactions, identify patterns, and, crucially,
    see where cryptocurrency users are exchanging cryptocurrency for fiat
    currency.
        Using blockchain analysis tools, law enforcement can trace
    cryptocurrency addresses to identify the origination and/or cash-out
    points at cryptocurrency exchanges. Law enforcement can serve subpoenas
    to these cryptocurrency exchanges, which are required to register as
    money services businesses (MSBs) here in the United States and collect
    know-your-customer (KYC) information from their customers. In response
    to a subpoena, the exchange will provide law enforcement with any
    identifying information that it has related to the cryptocurrency
    transaction(s) in question, such as name, address, and government
    identification documentation, allowing the authorities to further their
    investigation.
        Blockchain analytics and market surveillance are two pillars for
    effective crypto risk monitoring and compliance programs. Chainalysis
    KYT addresses the need for insights across blockchain-based
    transactions and anti-money laundering (AML) compliance, while market
    surveillance tools detect manipulative trading behavior across order
    books and venues. Combined, these capabilities give exchanges,
    brokerages, regulators and other market participants a powerful view
    across both the external and internal risk landscapes of crypto
    trading. This takes market integrity to the next level, bringing us
    closer to addressing regulatory concerns associated with consumer and
    investor protections, for example.
        There are many private sector tools that enable oversight of the
    cryptocurrency markets and detecting market abuse and manipulation in
    cryptocurrency trading. Our tools can be paired with these tools,
    including those focused on analysis of orderbook data, to enable
    broader insight into the ecosystem. We are working with regulatory
    agencies to incorporate our on-chain data alongside off-chain data from
    other sources in order to allow for better market surveillance. This
    will better enable agencies to identify market manipulation and
    malicious activity on the blockchain, including front and back running,
    rug pulls, and initial coin offering (ICO) scams, among other things.
        The amount of transparency that exists in the market enables an
    understanding of the systemic risks that can be used to provide
    appropriate oversight of this space. There is a great deal of data and
    information that are readily available for analysis. Agencies can
    identify where there may be information gaps and implement additional
    reporting requirements or additional data sources to gain a more
    complete picture.
    Risks in the Digital Asset Space
        While Chainalysis tracks the illicit use of cryptocurrency in a
    number of different categories, for the purposes of this Committee and
    the agencies over which they have jurisdiction, I will focus on scams,
    thefts, and manipulation in this testimony. Here I will explain what we
    see in each of these categories.
    Contagion Risks
        One risk that has been highlighted by recent cryptocurrency news is
    the potential broader contagion of risks in this market. We are
    currently in a bear market across financial assets, including
    cryptocurrency. In fact, cryptocurrency prices are now more correlated
    to tech stocks than ever before. This means, when the broader financial
    markets slump, cryptocurrency prices do as well.
        But there's one important difference between cryptocurrency and
    traditional finance: transparency. Due to the open nature of
    decentralized finance (DeFi) protocols, the market can often see where
    large, well-known players placed their bets and if those positions are
    facing liquidation. Furthermore, market participants can use this
    transparency to assess the stability of the core protocols that power
    the DeFi ecosystem. However, this transparency has not stopped large,
    centralized companies from making bets on the price of various
    cryptocurrencies, both using open DeFi protocols and by lending funds
    to one another. This creates potential contagion risks, as various
    centralized market participants are financially exposed to one another.
    While the transparent DeFi protocols continue to function as designed
    because they are simply code running on the blockchain, some highly
    leveraged businesses have struggled to unwind complex financial
    positions in a hostile macroeconomic environment.
        This transparency and the fall in cryptocurrency prices is also
    exposing projects with fundamental design flaws or unsustainable
    economic models. Some projects that were hastily built or didn't
    properly manage risk will fail, and that's a natural process for any
    new technology or industry. This is an opportunity for the industry to
    leverage blockchains' transparency to analyze systemic risk and build
    better systems and design better rules for the next bull market.
        It is important for regulators to understand both the decentralized
    and centralized parts of the cryptocurrency market and how they may
    impact each other. For example, centralized players investing in
    decentralized finance may find themselves over-leveraged if they have
    not appropriately calculated the risks, in particular in a bear market.
    The decentralized projects in which centralized entities have invested
    may also fall victim to code exploits or hacks and lose their value
    precipitously. Being able to adequately oversee centralized players
    will require understanding the entire ecosystem.
    Scams
        There has been an evolution of scamming activity in the
    cryptocurrency space over the past few years. Several years ago, scams
    mostly presented themselves as centralized platforms where you could
    invest in new cryptocurrencies. OneCoin \3\ is an example of this type
    of scam. As law enforcement has become better at identifying and
    investigating these sorts of scams, and as consumers have become wise
    to them, we are seeing a new trend in this space, where scammers will
    impersonate high-profile people \4\ and make claims such as offering to
    double any cryptocurrency sent to them. Others will impersonate
    legitimate cryptocurrency projects on social media \5\ platforms like
    Telegram, Discord, or Twitter in order to trick would-be investors into
    sending the scammers their funds, rather than sending them to the real
    platform. We also see an increase in romance scams, where the scammer
    develops a relationship with a victim over time and convinces them to
    invest in a scam website, or send them funds directly. This type of
    scam is also conducted using other financial assets, but it's becoming
    prevalent \6\ in the cryptocurrency space, with a focus on elderly
    individuals. Another type of scam we now increasingly see are rug
    pulls. As is the case with much of the emerging terminology in
    cryptocurrency, the definition of ``rug pull'' isn't set in stone, but
    we generally use it to refer to cases in which developers build out
    what appear to be legitimate cryptocurrency projects, for example
    create ``legitimate'' ERC-20 tokens or non-fungible tokens (NFTs) that
    work technically on-chain. However, the real intention of the project
    is to accumulate as much funds as possible and disappear abruptly.
    Usually they try to drum up as much hype as possible (potentially
    hiring celebrities to endorse the product) before taking investors'
    money and disappearing.
    ---------------------------------------------------------------------------
        \3\ https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-
    announces-charges-against-leaders-onecoin-multibillion-dollar.
        \4\ https://www.cnbc.com/2020/07/15/hackers-appear-to-target-
    twitter-accounts-of-elon-musk-bill-gates-others-in-digital-currency-
    scam.html.
        \5\ https://coinmarketcap.com/alexandria/article/3-minute-tips-
    avoiding-common-crypto-scams-on-telegram.
        \6\ https://www.cftc.gov/PressRoom/PressReleases/8545-22.
    ---------------------------------------------------------------------------
        In 2021, scams were once again the largest form of cryptocurrency-
    based crime by transaction volume, with over $7.7 billion worth of
    cryptocurrency taken from victims worldwide.
    Total yearly cryptocurrency value received by scammers, 2017-2021

    		[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        That represents a rise of 81% compared to 2020, a year in which
    scamming activity dropped significantly compared to 2019, in large part
    due to the absence of any large-scale Ponzi schemes. That changed in
    2021 with Finiko, a Ponzi scheme primarily targeting Russian speakers
    throughout Eastern Europe, netting more than $1.1 billion from victims.
        Another change that contributed to 2021's increase in scam revenue:
    the emergence of rug pulls, a relatively new scam type particularly
    common in the DeFi [1] ecosystem, in which the developers of
    a cryptocurrency project--typically a new token--abandon it
    unexpectedly, taking users' funds with them. We'll look at both rug
    pulls and the Finiko Ponzi scheme in more detail later in this
    testimony.
    ---------------------------------------------------------------------------
        \[1]\ Also known as decentralized finance, ``DeFi'' offers peer-to-
    peer financial services without the need of intermediaries such as
    banks, exchanges, or brokerages (who typically charge for their
    services). DeFi services are built and run on a blockchain through the
    use of smart contracts which defines the logic and rules for the
    service being used.
    ---------------------------------------------------------------------------
        As the largest form of cryptocurrency-based crime and one uniquely
    targeted toward new users, scamming poses one of the biggest threats to
    cryptocurrency's continued adoption. However, cryptocurrency businesses
    are taking innovative steps to leverage blockchain data to protect
    their users and nip scams in the bud before potential victims make
    deposits.
    Investment scams in 2021: More scams, shorter lifespans
        While total scam revenue increased significantly in 2021, it stayed
    flat if we remove rug pulls and limit our analysis to financial scams--
    even with the emergence of Finiko. At the same time though, the number
    of deposits to scam addresses fell from just under 10.7 million to 4.1
    million, which we can assume means there were fewer individual scam
    victims.
    Total yearly cryptocurrency value received by investment scams, 2017-
            2021

            	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        This also tells us that the average amount taken from each victim
    increased.
        Scammers' money laundering strategies haven't changed all that
    much. As was the case in previous years, most cryptocurrency sent from
    scam wallets ended up at mainstream exchanges.
    Destination of funds leaving investment scam addresses by year, 2017-
            2021

            	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Exchanges using Chainalysis KYT for transaction monitoring and
    other transaction monitoring solutions can see this activity in real
    time, and take action to prevent scammers from cashing out.
        The number of financial scams active at any point in the year--
    active meaning their addresses were receiving funds--also rose
    significantly in 2021, from 2,052 in 2020 to 3,300.
    Total number of unique active investment scams by year, 2017-2021

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        This goes hand in hand with another trend we've observed over the
    last few years: The average lifespan of a financial scam is getting
    shorter and shorter.
    Lifespan of average scam by year, 2013-2021

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The average financial scam was active for just 70 days in 2021,
    down from 192 in 2020. Looking back further, the average cryptocurrency
    scam was active for 2,369 days, and the figure has trended steadily
    downwards since then.
        One reason for this could be that investigators are getting better
    at investigating and prosecuting scams. For instance, in September
    2021, the CFTC filed charges \7\ against 14 investment scams touting
    themselves as providing compliant cryptocurrency derivative trading
    services--a common scam typology in the space--whereas in reality they
    had failed to register with the CFTC as futures commission merchants.
    In October 2021, the CFTC charged \8\ an El Paso resident and his firm
    in ongoing $3.9 million forex and cryptocurrency fraud and
    misappropriation scheme. In March 2022, the CFTC charged \9\ four
    people with fraud for operating Ponzi schemes involving Bitcoin. In
    April 2022, the CFTC settled a case \10\ against Florida-based
    companies and their owner for fraudulently soliciting customers to
    purchase a digital asset they falsely promised would allow customers to
    gain access to a proprietary foreign currency (forex) trading
    algorithm.
    ---------------------------------------------------------------------------
        \7\ https://www.cftc.gov/PressRoom/PressReleases/8434-21.
        \8\ https://www.cftc.gov/PressRoom/PressReleases/8452-21.
        \9\ https://www.cftc.gov/PressRoom/PressReleases/8498-22.
        \10\ https://www.cftc.gov/PressRoom/PressReleases/8510-22.
    ---------------------------------------------------------------------------
        Previously, these scams may have been able to continue operating
    for longer. As scammers become aware of these actions, they may feel
    more pressure to close up shop before drawing the attention of
    regulators and law enforcement.
        Rug pulls have emerged as the go-to scam of the DeFi ecosystem,
    accounting for 37% of all cryptocurrency scam revenue in 2021, versus
    just 1% in 2020. All in all, rug pulls took in more than $2.8 billion
    worth of cryptocurrency from victims in 2021.
        Most DeFi projects entail developers creating new tokens and
    promoting them to investors, who purchase the new token in order to
    access the utility that the cryptocurrency network provides, or with
    the hope it will rise in value. These actions also provide liquidity to
    the project. In rug pulls, however, the developers eventually drain the
    funds from the liquidity pool, sending the token's value to zero, and
    disappear. Rug pulls are prevalent in DeFi because, with the right
    technical know-how, it's cheap and easy to create new tokens on the
    Ethereum blockchain or others and get them listed on decentralized
    exchanges (DEXes).
        The chart below shows 2021's top 15 rug pulls in order of value
    stolen.
    2021 top 15 rug pulls by cryptocurrency value stolen

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        It's important to remember that not all rug pulls start as DeFi
    projects. In fact, the biggest rug pull of the year centered on
    Thodex,\11\ a large Turkish centralized exchange whose CEO disappeared
    soon after the exchange halted users' ability to withdraw funds. In
    all, users lost over $2 billion worth of cryptocurrency, which
    represents nearly 90% of all value stolen in rug pulls. However, all
    the other rug pulls in 2021 began as DeFi projects.
    ---------------------------------------------------------------------------
        \11\ https://decrypt.co/68894/thodex-ceo-denies-rug-pull-discloses-
    cyberattacks-says-funds-are-safe.
    ---------------------------------------------------------------------------
    Finiko: 2021's billion dollar Ponzi scheme
        Finiko was a Russia-based Ponzi scheme that operated from December
    2019 until July 2021, at which point it collapsed after users found
    they could no longer withdraw funds from their accounts with the
    company. Finiko invited users to invest with either Bitcoin or Tether,
    promising monthly returns of up to 30%, and eventually launched its own
    token that traded on several exchanges.

    		[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        According to the Moscow Times,\12\ Finiko was headed up by Kirill
    Doronin, a popular Instagram influencer who has been associated with
    other Ponzi schemes. The article notes that Finiko was able to take
    advantage of difficult economic conditions in Russia exacerbated by the
    [COVID] pandemic, attracting users desperate to make extra money.
    Chainalysis Reactor \13\ shows us how prolific the scam was.
    ---------------------------------------------------------------------------
        \12\ https://www.themoscowtimes.com/2021/07/30/as-incomes-fall-
    russians-are-once-again-falling-for-pyramid-schemes-a74654.
        \13\ https://www.chainalysis.com/chainalysis-reactor/.

        	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        During the roughly 19 months it remained active, Finiko received
    over $1.5 billion worth of Bitcoin in over 800,000 separate deposits.
    While it's unclear how many individual victims were responsible for
    those deposits or how much of that $1.5 billion was paid out to
    investors to keep the Ponzi scheme going, it's clear that Finiko
    represents a massive fraud perpetrated against Eastern European
    cryptocurrency users, predominantly in Russia and Ukraine.
        As is the case with most scams, Finiko primarily received funds
    from victims' addresses at mainstream exchanges. However, we can also
    see that Finiko received funds from what we've identified as a Russia-
    based money launderer.

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        This launderer received millions of dollars' worth of
    cryptocurrency from addresses associated with ransomware, exchange
    hacks, and other forms of cryptocurrency-based crime. While the amount
    the service has sent to Finiko is quite small--under 1 Bitcoin (BTC)
    total--it serves as an example of how a scam can also be used to
    launder funds derived from other criminal schemes. It's also possible
    that Finiko received funds from other laundering services we've yet to
    identify.
        Finiko sent most of its more than $1.5 billion worth of
    cryptocurrency to mainstream exchanges, high-risk exchanges, a hosted
    wallet service, and a peer-to-peer (P2P) exchange. However, we don't
    know what share of those transfers represent payments to victims in
    order to give the appearance of successful investments.

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Finiko also sent $34 million to a DeFi protocol designed for cross-
    chain transactions via a series of intermediary wallets, where it was
    likely converted into ERC-20 tokens and sent elsewhere. It also sent
    roughly $3.9 million worth of cryptocurrency to a few popular mixing
    services. Most interesting of all, perhaps, is Finiko's transaction
    history with Suex, an over-the-counter (OTC) broker that was sanctioned
    \14\ by U.S. Department of Treasury's Office of Foreign Assets Control
    (OFAC) for its role in laundering funds associated with scams,
    ransomware attacks, and other forms of cryptocurrency-based crime.
    ---------------------------------------------------------------------------
        \14\ https://blog.chainalysis.com/reports/ofac-sanction-suex-
    september-2021/.

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        Between March and July of 2020, Finiko sent over $9 million worth
    of Bitcoin to an address that now appears as an identifier on Suex's
    entry into the Specially Designated Nationals (SDN) List. This
    connection underlines the prolificness of Suex as a money laundering
    service, as well as the crucial role of such services generally in
    allowing large-scale cybercriminal operations, like Finiko, to
    victimize cryptocurrency users.
        Soon after Finiko's collapse in July 2021, Russian authorities
    arrested Doronin,\15\ and later also nabbed Ilgiz Shakirov, one of his
    key partners in running the Ponzi scheme. Both men remain in custody,
    and arrest warrants have reportedly been issued for the rest of
    Finiko's founding team.
    ---------------------------------------------------------------------------
        \15\ https://news.bitcoin.com/court-extends-detention-of-finiko-
    pyramid-founder-doronin-and-his-right-hand-man/.
    ---------------------------------------------------------------------------
    How one cryptocurrency platform is saving users from scams
        Mainstream cryptocurrency platforms, like exchanges, are in the
    perfect position to fight back against scams and instill more trust in
    cryptocurrency by warning users or even preventing them from executing
    those transactions. One popular platform did just that in 2021, and the
    results were extremely promising.
        Luno is a leading cryptocurrency platform operating in over 40
    countries, with an especially heavy presence in South Africa. In 2020,
    a major scam was targeting South African cryptocurrency users,
    promising outlandishly large investment returns. Knowing that its users
    were at risk, Luno decided to take action, in part by leveraging
    Chainalysis tools and services.
        The first step was a warning and education campaign. Using in-app
    messages, help center articles, emails, webinars, social media posts,
    YouTube videos, and even one-on-one conversations, Luno showed users
    how to spot the red flags that indicate an investment opportunity is
    likely a scam, and taught them to avoid pitches that appear too good to
    be true.
        Luno then went a step further and began preventing users from
    sending funds to addresses it knew belonged to scammers. That's where
    Chainalysis came in. As the leading blockchain data platform, we have
    an entire team dedicated to unearthing cryptocurrency scams and tagging
    their addresses in our compliance products. With that data, Luno was
    able to halt users' transfers to scams before they were processed. It
    was a drastic strategy in many ways--cryptocurrency has historically
    been built on an ethos of financial freedom, and some users were likely
    to chafe at a perceived limitation on their ability to transact. But
    thanks to Chainalysis' best in class cryptocurrency address
    attributions, Luno was able to establish the trust necessary to sell
    customers on the strategy.
        Luno first began blocking scam payments for South African users
    only in November 2020, and then rolled the feature out worldwide in
    January 2021. The plan worked, and transfers from Luno wallets to scams
    fell drastically over the course of 2021.
    Daily value received by scams from Luno, 30 day moving average

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Orig Sheets link \16\
    ---------------------------------------------------------------------------
        \16\ https://docs.google.com/spreadsheets/d/
    16qcyOn8EBz8KLQ6aRGmE1WObaBy0tRO8v
    1gMCGUBNTg/edit#gid=1289181670&range=E8.
    ---------------------------------------------------------------------------
        The moving 30 day average daily transaction volume of transfers to
    scams fell 88% from $730,000 at its peak in September 2020, to just
    $90,000 by November. One customer summed up the results perfectly,
    saying, ``Thank you, Luno. I was about to lose my pension and
    savings.''
        Scams represent a huge barrier to successful cryptocurrency
    adoption, and fighting them can't be left only to law enforcement and
    regulators. Cryptocurrency businesses, financial institutions, and, of
    course, Chainalysis have an important role to play as well. With this
    strategy, Luno took an important step towards establishing greater
    trust and safety in cryptocurrency, which we hope to continue to see
    grow in the industry.
    Theft
        Throughout 2021, $3.2 billion in cryptocurrency was stolen from
    individuals and services--almost 6x the amount stolen in 2020.
    Approximately $2.3 billion of those funds were stolen from DeFi
    platforms in particular, and the value stolen from these protocols
    catapulted 1,330%.
    Total value stolen and total number of thefts, 2015-2021

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        This shift toward DeFi-centric attacks doesn't just sound
    pronounced--it looks like it, too. In every year prior to 2021,
    centralized exchanges lost the most cryptocurrency to theft by a large
    margin. But this year, DeFi platform thefts dwarfed exchange thefts.
    The biggest cryptocurrency thefts of 2021
    Top ten cryptocurrency theft incidents by amount stolen, 2021-2022 Q1

    		[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        As is the case most years, the ten largest hacks of 2021 and Q1
    2022 accounted for a majority of the funds stolen at $2.2 billion.
    Eight of these ten attacks targeted DeFi platforms in particular.
    Code exploits are a prominent feature in 2021's cryptocurrency theft
            landscape
        Historically, cryptocurrency thefts have largely been the result of
    security breaches in which hackers gain access to victims' private
    keys--the crypto-equivalent of pickpocketing. These keys could be
    acquired through phishing, keylogging, social engineering, or other
    techniques. From 2019 to 2021, almost 30% of all value was stolen from
    just this type of hack.
        With the rise of DeFi and the extensive smart contract capabilities
    that power those platforms, deeper vulnerabilities have begun to emerge
    around the software underpinning these services. While these services
    are decentralized, these sorts of exploits can lead to contagion in the
    centralized parts of the cryptocurrency market, so it is important for
    regulators to understand these exploits and their broader impacts.
        In 2021, code exploits and flash loan attacks--a type of exploit
    involving price manipulation--accounted for a near-majority of total
    value stolen across all services, weighing in at 49.8%. And when
    examining only hacks on DeFi platforms, that figure increases to 69.3%.
    Annual total cryptocurrency stolen by victim type, 2019-2021

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        These exploits occur for a variety of reasons. For one, in keeping
    with DeFi's faith in decentralization and transparency, open-source
    development is a staple of DeFi applications. This is an important and
    broadly positive trend: since many DeFi protocols move funds without
    human intervention, users need to be able to audit the underlying code
    in order to trust the platform. But this also stands to benefit
    cybercriminals, who can analyze the scripts for vulnerabilities and
    plan exploits in advance.
        Another potential point of failure is DeFi platforms' reliance on
    price oracles.\17\ Price oracles are tasked with maintaining accurate
    asset pricing data for all cryptocurrencies on a platform, and the job
    isn't easy. Secure but slow oracles are vulnerable to arbitrage; fast
    but insecure oracles are vulnerable to price manipulation. The latter
    type often leads to flash loan attacks, which extracted a massive $364
    million from DeFi platforms in 2021. In the hack of Cream Finance, for
    example, a series of flash loans exploiting a vulnerability \18\ in the
    way Cream calculated yUSD's ``pricePerShare'' variable enabled
    attackers to inflate yUSD price to double its true value, sell their
    shares, and make off with $130 million in just one night.
    ---------------------------------------------------------------------------
        \17\ https://cointelegraph.com/explained/defi-oracles-explained.
        \18\ https://medium.com/cream-finance/post-mortem-exploit-oct-27-
    507b12bb6f8e.
    ---------------------------------------------------------------------------
        These two dangers--inaccurate oracles and exploitable code--
    underscore the need for the security of both. Fortunately, there are
    solutions. To ensure pricing accuracy, decentralized price oracles like
    Chainlink \19\ can protect platforms against price manipulation
    attacks. To ensure the security of smart contracts, code audits can
    steel programs against common hacks \20\ like reentrancy, unhandled
    exceptions, and transaction order dependency.
    ---------------------------------------------------------------------------
        \19\ https://chain.link/.
        \20\ https://www.usenix.org/system/files/sec21summer_perez.pdf.
    ---------------------------------------------------------------------------
        But code audits aren't infallible. Nearly 30% of code exploits
    occurred on platforms audited within the last year, as well as a
    surprising 73% of flash loan attacks. This highlights two potential
    shortfalls of code audits:

      1.  They may patch smart contract vulnerabilities in some cases, but
                not all;

      2.  They seldom guarantee that platforms' price oracles are tamper-
                proof.\21\
    ---------------------------------------------------------------------------
        \21\ https://blog.chain.link/flash-loans-and-the-importance-of-
    tamper-proof-oracles/.

        So while code audits can certainly help, DeFi protocols managing
    millions of users and billions of dollars must adopt a more robust
    approach to platform security.
    Following the money: the final destinations of stolen cryptocurrencies
        In the aftermath of cryptocurrency thefts, more stolen funds flowed
    to DeFi platforms (51%) and risky services (25%) this year than ever
    before. Centralized exchanges, once a top destination for stolen funds,
    fell out of favor in 2021, receiving less than 15% of the funds. This
    is likely due to the embrace of AML and KYC \22\ procedures among major
    exchanges--an existential threat to the anonymity of cybercriminals.
    ---------------------------------------------------------------------------
        \22\ https://blog.chainalysis.com/reports/what-is-aml-and-kyc-for-
    crypto/.
    ---------------------------------------------------------------------------
    Destination of stolen funds, 2015-2021

    		[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Note: ``Risky'' refers to services like mixers, high-risk
            exchanges,[2] and services based in high-risk
            jurisdictions.[3]
    ---------------------------------------------------------------------------
        \[2]\ A high risk exchange is an exchange that meets one of the
    following criteria:

           No KYC: The exchange requires absolutely no customer
    information before allowing any
          level of deposit or withdrawal. Or they require a name, phone
    number, or email address
          but make no attempt to verify this information.

           Criminal ties: The exchange has criminal convictions of
    the corporate entity in relation
          to AML/Combating the Financing of Terrorism (CFT) violations.

           High risky exposure: The exchange has high amounts of
    exposure to risky services such
          as darknet markets, other high risk exchanges, or mixing. We
    examine if the exchange's
          exposure to illicit activity is an outlier compared to other
    exchanges. A service with direct
          high risk exposure one standard deviation away from the average
    across all exchanges
          identified by Chainalysis over a 12 month period is considered a
    high risk exchange.

        \[3]\ High-risk jurisdictions consist of jurisdictions subject to
    OFAC comprehensive sanctions, which includes Iran, Cuba, Syria, North
    Korea, the Crimea, Donetsk, and Luhansk regions of Ukraine, as well as
    Venezuela due to broad government-based sanctions.
    ---------------------------------------------------------------------------
    Manipulation
        In 2021 and the first half of 2022, Chainalysis tracked \23\ a
    minimum $83 billion worth of cryptocurrency sent to ERC-721 and ERC-
    1155 contracts--the two types of Ethereum smart contracts associated
    with NFT marketplaces and collections--up from just $106 million in
    2020.
    ---------------------------------------------------------------------------
        \23\ https://go.chainalysis.com/nft-market-report.html.
    ---------------------------------------------------------------------------
    Weekly total cryptocurrency value and average value per transaction
            sent to NFT platforms, 2021-2022 YTD

            	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        However, as is the case with any new technology, NFTs offer
    potential for abuse. It's important that, as our industry considers all
    the ways this new asset class can change how we link the blockchain to
    the physical world, we also build products that make NFT investment as
    safe and secure as possible. There have been several forms of illicit
    activity in NFTs: wash trading to artificially increase the value of
    NFTs, money laundering through the purchase of NFTs, and insider
    trading \24\ on NFT marketplaces. Here I will outline what we have seen
    in relation to wash trading.
    ---------------------------------------------------------------------------
        \24\ https://www.justice.gov/usao-sdny/pr/former-employee-nft-
    marketplace-charged-first-ever-digital-asset-insider-trading-scheme.
    ---------------------------------------------------------------------------
        Wash trading, meaning executing a transaction in which the seller
    is on both sides of the trade in order to paint a misleading picture of
    an asset's value and liquidity, is another area of concern for NFTs.
    Wash trading has been a concern in the past with cryptocurrency
    exchanges attempting to make their trading volumes appear greater than
    they are. In the case of NFT wash trading, the goal would be to make
    one's NFT appear more valuable than it really is by ``selling it'' to a
    new wallet the original owner also controls. In theory, this would be
    relatively easy with NFTs, as many NFT trading platforms allow users to
    trade by simply connecting their wallet to the platform, with no need
    to identify themselves.
        With blockchain analysis, however, we can track NFT wash trading by
    analyzing sales of NFTs to addresses that were self-financed, meaning
    they were funded either by the selling address or by the address that
    initially funded the selling address. Analysis of NFT sales to self-
    financed addresses shows that some NFT sellers have conducted hundreds
    of wash trades.
    NFT sellers by number of sales to self-financed addresses, 2021

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Let's look more closely at Seller 1, the most prolific NFT wash
    trader on the chart above, who has made 830 sales to addresses they've
    self-financed. The Etherscan screenshot below shows a transaction in
    which that seller, using the address beginning 0x828, sold an NFT to
    the address beginning 0x084 for 0.4 Ethereum via an NFT marketplace.

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Everything looks normal at first glance. However, the Chainalysis
    Reactor graph below shows that address 0x828 sent 0.45 Ethereum to that
    address 0x084 shortly before that sale.

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        This activity fits a pattern for Seller 1. The Reactor graph below
    shows similar relationships between Seller 1 and hundreds of other
    addresses to which they've sold NFTs.

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Seller 1 is the address in the middle. All other addresses on this
    graph received funds from Seller 1's main address prior to buying an
    NFT from that address. So far though, Seller 1 doesn't seem to have
    profited from their prolific wash trading. If we calculate the amount
    Seller 1 has made from NFT sales to addresses they themselves did not
    fund--whom we can assume are victims unaware that the NFTs they're
    buying have been wash traded--it doesn't make up for the amount they've
    had to spend on gas fees during wash trading transactions.

    ------------------------------------------------------------------------
                                            Revenue from
                       Spent on gas fees    sales of wash
         Address        in wash trading    traded NFTs to        Profits
                          transactions         victims
    ------------------------------------------------------------------------
             0x828           ^$35,642            $27,258           ^$8,383
    ------------------------------------------------------------------------

        While wash trading is prohibited in conventional securities,
    futures, and other derivatives, wash trading involving NFTs has yet to
    be the subject of an enforcement action. Wash trading in NFTs can
    create an unfair marketplace for those who purchase artificially
    inflated tokens, and its existence can undermine trust in the NFT
    ecosystem, inhibiting future growth. Blockchain data and analysis makes
    it easy to spot users who sell NFTs to addresses they've self-financed,
    so marketplaces may want to consider bans or other penalties for the
    worst offenders.
    Recommendations
        Provide regulatory clarity to market participants.

        While cryptocurrency businesses have been subject to anti-money
    laundering laws since at least 2013, there are other aspects of the
    market that still require additional clarification, including direction
    from Congress. One of these areas is the cryptocurrency spot market,
    over and above fraud and manipulation. While the CFTC oversees
    derivatives markets such as Bitcoin and ether futures, and the
    Securities and Exchange Commission provides oversight over those tokens
    that are securities, cryptocurrency spot markets are largely regulated
    at the state-level. Clarifying these responsibilities at the Federal
    level, likely through legislation, would bolster anti-fraud and
    manipulation protections. It is also important to provide clarity about
    different tokens--for example, which tokens fall under the securities
    framework and which fall under the commodities framework. Having this
    guidance will help to make the perimeters very clear and will also make
    clear what falls outside of an agency's specific jurisdiction.

        Providing market clarity will also support the goals of economic
    growth and leadership in the U.S. If America wants to lead in the
    cryptocurrency sector, we must lead cryptocurrency market regulation.
    Clarifying roles around cryptocurrency market regulation at the Federal
    level would be a very important step for this market and would help to
    lend a greater degree of order. We should aim to create a market in
    which the world looks to the United States for established asset-
    reference cryptocurrency prices, just as they do for many types of
    commodities.

        Ensure adequate funding, resources, and training for government
    agencies charged with investigating fraud, manipulation, and abusive
    practices in this space.

        As this asset class grows and is increasingly adopted, the U.S.
    government must do their best to root out fraud, manipulation, and
    abusive practices. Governments that have already embraced blockchain
    analysis have seized millions of dollars in cryptocurrency and stopped
    a number of illicit actors exploiting cryptocurrency. Many government
    agencies, including the CFTC, have limited or inconsistent personnel
    dedicated to investigating the illicit use of cryptocurrency because of
    a lack of training resources and a lack of funding for new personnel,
    tools, and training. Allocating appropriate financial and personnel
    resources to these efforts would ensure that agencies can address
    illicit activity in this space.

        Leverage the unique and transparent nature of cryptocurrency in
    market surveillance and in the development of policies and regulations.

        The information that is available to government agencies due to the
    transparent nature of blockchain technology provides an opportunity for
    policy makers and regulators to think differently about regulatory
    requirements in this space. For example, regulators can leverage this
    data to gain insights into the ecosystem and inform where the greatest
    risks are as they build their capacity to provide market surveillance.
    This will allow them to prioritize regulatory requirements that fill in
    information gaps. For example, reporting requirements may be different
    in this space given the on-chain data made available to regulators
    because of the transparent nature of the technology. It may not be
    necessary to require the same level of reporting because of the ease of
    availability of that on-chain data. Instead, regulators can focus
    reporting requirements on the parts of the market where there may be
    incomplete data or other gaps.

        Understand and monitor systemic risks in the cryptocurrency
    ecosystem.

        Regulators need to understand and monitor systemic risks in the
    whole cryptocurrency ecosystem--not just those market participants they
    have oversight of--to better understand the contagion risks that may be
    present. For example, it is important that regulators understand DeFi
    and DeFi products to understand the potential contagion risks.
    Understanding the broader market structures will better enable market
    surveillance and inform regulatory decisions.

        Prioritize public education to ensure consumers understand
    cryptocurrencies and have the information they need to make educated
    decisions.

        As with any new asset class, there is sometimes confusion among the
    general public about what cryptocurrencies are and how they work. It is
    important that the U.S. government engage in educational efforts
    related to cryptocurrency to better enable consumers to understand this
    asset class and avoid scams and fraudulent activity in the
    cryptocurrency ecosystem. The CFTC and others should consider
    partnering with the private-sector in addition to conducting agency--
    lead initiatives to broaden the access, breadth, and depth of public
    education and ensure its impact.

        Leverage public-private partnerships.

        It is important that the U.S. Government work together with private
    industry to address issues related to fraud, abuse, and manipulation in
    the cryptocurrency ecosystem. Establishing and improving upon
    coordination and collaboration mechanisms between countries can help to
    streamline investigations and improve oversight of the markets. These
    partnerships can provide additional insights into what is happening in
    the market to better inform policy decisions and guide discussions
    about how best to improve regulation.
    Conclusion
        Cryptocurrency has a variety of applications which contribute to
    the public good. Of particular interest to this Committee these
    contributions include job creation, fast cross-border payments, global
    leadership opportunities, and technological innovation. The U.S. is
    well-positioned to bring to bear our decades of innovation in cutting-
    edge technologies to this fast growing industry and be a key player in
    regulating the industry. As regulators approach this new asset class,
    they can leverage its technology and transparency to glean important
    insights and assess risks. Congress must do its part to ensure that the
    government agencies charged with oversight of this space are equipped
    to understand and address fraud, abuse, and manipulation in
    cryptocurrency markets. By providing the resources necessary, the U.S.
    government as a whole will be better equipped to mitigate risks and
    investigate and disrupt illicit activity when it does occur in the
    cryptocurrency markets. Thank you for your time, and attention to this
    very important issue.

        The Chairman. I thank the gentleman.
        Chainalysis rolls right off the tongue. Thank you, sir.
        Mr. Hoskinson, you may proceed.

    STATEMENT OF CHARLES HOSKINSON, CHIEF EXECUTIVE OFFICER, INPUT
                   OUTPUT GLOBAL, INC., SINGAPORE, SG

        Mr. Hoskinson. Hi, everybody. Chairman Maloney, Ranking
    Member Fischbach, Members of the Subcommittee, and
    Congressional staffers who work so hard, thank you for inviting
    me to testify at this hearing. I applaud the work of this
    Subcommittee, and I appreciate you all taking the time to
    provide a forum for the blockchain industry.
        The blockchain industry has grown over the past decade from
    a small group of uncommercialized volunteer developers--and it
    was very small, believe me--to a trillion dollar global economy
    encapsulating sophisticated engineering, scientific research,
    publicly traded companies, and millions of users.
        While our remarkable growth yields significant
    opportunities ranging from infrastructure security to entirely
    new economies like metaverses and NFTs, it also has presented
    new challenges and amplified the existing problems. Our legacy
    systems cannot handle the rapid movement of value without
    counterparty risk and require centralized middlemen. Our
    regulatory tools, risk management systems, and oversight
    processes were never designed for such speed, scale, and rapid
    evolution. For example, in just 4 years, our industry has
    touched concepts ranging from IPOs to intellectual property to
    completely new business structures called DOWs that are
    effectively leaderless and jurisdiction free.
        Reflecting upon the 20th century, the dominance of the
    United States has rested upon three pillars: our financial
    services, our technology companies, and our manufacturing
    capabilities. These industries are rapidly transforming under
    the demands of globalization, increased competition, new
    technologies, and our desire to define ESG rules to ensure a
    sustainable, values driven global economy. At our core, our
    industries technology is about creating distributive ledgers to
    store information that needs to be transparent, auditable,
    time-stamped, and immutable. This process enables records of
    social and economic concerns to be reliable and programmable.
        For example, as a rancher, I have to deal with water
    rights, grazing leases, BLM land, and numerous other
    agreements, contracts, and economic events. Many of these are
    not digitized, nor are they shared in ways to provide emergent
    value to policymakers, regulators, and researchers. The
    consequences of this fragmentation and lack of digitization are
    a large amount of inefficiency, replication of work, and a lack
    of access for entrepreneurs and innovators who could build new
    products and services that would dramatically reduce costs and
    improve efficiency for all stakeholders. The power of
    blockchain technology is its universality and permissionless
    model for innovation. Our company, Input Output, has never had
    to pay a royalty, file a patent application, or acquire a
    license to pursue business in countries as diverse as Ethiopia
    to Mongolia. Thus, we have to understand that categories-based
    regulation that is segregated to the borders of a particular
    jurisdiction and relies upon centralized actors for reporting a
    disclosure is unlikely to be effective, and frankly, will
    inhibit regulation.
        Furthermore, the internet's governance, evolution, and
    innovation are not controlled by the ITU or some other
    transnational body, but rather, by thousands of interconnected
    and interdependent agencies and private companies working
    towards the self-emerging common goals of increased
    connectivity, capacity, and utility.
        If we are to discuss how to regulate our industry, protect
    consumers, and align growth with the realities of modern
    society, then we ought to have the humility to admit innovation
    makes specifics difficult. We should focus on principles
    instead.
        Blockchains enable the liquidity of value, thought and
    commerce at a scale and speed society has never enjoyed before.
    Instead of predicting the outcome of these new capabilities, we
    ought to decide on what risks we must guard against, what
    fundamental rights consumers should have, and how to use new
    tools for the greatest possible good. It seems prudent to focus
    on concepts like measuring decentralization, information
    asymmetries, accessibility of data, and access rather than
    arguing about jurisdictional bodies or asset categorization.
    Cryptocurrencies are financial stem cells at their core. They
    can be nearly any asset and can change over time. Principles
    don't change.
        For example, the notion of measuring consolidation and its
    risks has been an endeavor the United States has pursued and
    is, frankly, good at since the Sherman Anti-trust Act of 1890.*
    While none of us are personally familiar with life in the
    1890s, we would certainly be comfortable with the intent and
    concepts behind the Sherman Antitrust Act. Centralization of
    markets and power seldom leads to good outcomes. I hope we can
    engage in a fruitful and ongoing dialogue throughout the coming
    months as the United States debates the regulatory future of
    the American blockchain and cryptocurrency industry. Like the
    prior Congresses in the 1990s discussing the regulatory
    framework for the internet that led to the rise of trillion
    dollar companies, I believe this Congress can achieve great
    results by working with our industry at a principles-based
    legislative approach, and leveraging our capabilities to
    innovate and adapt.
    ---------------------------------------------------------------------------
        * Editor's note: Enacted July 2, 1890; 26 Stat. 209, Public Law No.
    51-109.
    ---------------------------------------------------------------------------
        Thank you all for your time, and I look forward to your
    questions.
        [The prepared statement of Mr. Hoskinson follows:]

    Prepared Statement of Charles Hoskinson, Chief Executive Officer, Input
                       Output Global, Inc., Singapore, SG
    I. Introduction
        Chairman Maloney, Ranking Member [Fischbach], Members of the
    Subcommittee and distinguished guests, thank you for inviting me to
    testify at this hearing. My name is Charles Hoskinson and I sincerely
    applaud the work of this Subcommittee and appreciate you all taking the
    time to provide a forum for the blockchain industry. I am pleased to
    provide you with as much information as you need in order to ensure a
    fully informed and robust conversation on the future of digital asset
    regulation.
    II. Background on Input Output Global
        I am one of the founders of the Ethereum blockchain, founder of the
    Cardano blockchain and CEO of Input Output Global (IOG), which is a
    research and engineering company focused on the development of
    blockchain and other cutting-edge technologies. IOG is an American
    company that has helped to build the Cardano blockchain as well as
    other products on top of the blockchain such as Atala Prism,\1\ a
    blockchain-based self-sovereign identity solution that provides digital
    identity to individuals and Lace light wallet,\2\ a digital portal that
    provides individuals access to a variety of financial services. IOG's
    research team has published more than 140 academic research papers
    relating to blockchain technology and has relationships with academic
    institutions such as the University of Wyoming, Carnegie Mellon
    University, Stanford University and the University of Edinburgh. Beyond
    the United States, the company is working across Africa (particularly
    in Ethiopia, Tanzania, Kenya and Burundi) to help expand broadband
    service in rural areas, increase financial inclusion through
    microfinance and lending marketplaces and provide students and teachers
    with digital identities and verifiable credentials--all on the Cardano
    blockchain.
    ---------------------------------------------------------------------------
        \1\ https://atalaprism.io/.
        \2\ https://www.lace.io/.
    ---------------------------------------------------------------------------
    III. Using Blockchain Technology to Solve Real-World Problems
        Distributed ledgers (i.e., blockchains) store information that
    needs to be transparent, auditable, timestamped, and immutable. This
    process enables records of social and economic concerns to be reliable
    and programmable.
        Public blockchains, just like many commodities, are intrinsically
    decentralized and permissionless. For example, I grow hay on my farm in
    Colorado. I did not ask for permission to plant and harvest my hay, and
    now I am a member of a global, dynamic marketplace. There are
    regulations and controls in all of these markets, but we do not assume
    there is a centralized hay agency to ensure somehow this market works.
    Such absurdities were reserved for the Soviet central planners of old,
    not modern economies. Blockchain projects operate and embody this
    decentralized ethos and would fail under the weight of a heavy-handed
    and outdated regulatory structure.
        As a rancher, I have to deal with water rights, grazing leases,
    public land authorities, and numerous other agreements, covenants, and
    economic events. The management and oversight of much of these
    activities are not digitized, nor are they shared in ways to provide
    emergent value to policymakers, regulators, and researchers. When these
    activities are conducted and managed, and the resulting information is
    shared, on a blockchain they are transparent and auditable.
        Looking, for example, at the beef industry, blockchain technology
    can be used in many ways including creating significant value for the
    industry's end-to-end supply chain and more over sustainability and
    safety, such as grass-fed assurance, trade finance, consumer
    engagement, consumer feedback, certification and end-to-end
    traceability. With regards to traceability, BeefChain is a blockchain
    startup that allows consumers to trace their beef product. BeefChain is
    built on the Cardano blockchain and utilizes IOG's Atala Trace
    solution. In 2019 the company achieved USDA Certification with the
    Process Verified Program.\3\ This means that certain characteristics,
    such as being hormone free, are treated as audited and certified in
    line with U.S. food safety regulations. By enabling unique animal
    identification and ensuring origin, BeefChain allows the rancher to
    receive premium pricing for premium beef and provides consumers with
    greater confidence in the meat they consume. Digitizing animal branding
    rules and procedures, such as those in Wyoming, could save thousands of
    hours waiting for inspectors, speed up livestock sales, and enable more
    data collection for supply chain management scored against
    environmental and conservation goals. Livestock branding takes on a new
    meaning when a record of the event is immutably fixed in a blockchain.
    ---------------------------------------------------------------------------
        \3\ https://www.ledgerinsights.com/proof-of-steak-blockchain-food-
    beef-traceability/.
    ---------------------------------------------------------------------------
        As for some of the work that my company is doing, IOG is working
    with Ethiopia's Ministry of Education to create a blockchain-based
    digital identity and verifiable academic credentials for five million
    students and teachers in the country. The goal of this vital project is
    to enable data-driven policy-making and simultaneously allow students
    to prove their educational achievements internally and across borders
    to universities and the job market by reducing the risk of fraud. IOG's
    partnership with World Mobile \4\ will lay the foundations for a
    totally connected Africa by utilizing the Cardano blockchain to help
    empower remote and hard to reach areas across the continent so that
    everyone gets an equal chance to access services and opportunities.
    World Mobile's mesh network model leveraging the Cardano blockchain
    enables scalable, shared infrastructure, security, transparency and
    self-sovereignty, which can lower the costs and barrier for people to
    access connectivity. The sharing economy gives every participant of the
    network a mutual stake in its success.
    ---------------------------------------------------------------------------
        \4\ https://worldmobile.io/.
    ---------------------------------------------------------------------------
        In Kenya and Ghana, in order to tackle the financing gap through an
    ecosystem of products that remove the frictions between crypto
    liquidity and real-world economic activities to offer cheaper financial
    products, IOG has partnered with Pezesha Africa Limited to facilitate
    loans to small and medium sized businesses looking for short term loans
    for working capital. The goal is to build simple friction-free tools
    that enable seamless lending.
        Another use case here in America that I would like to highlight is
    a loyalty program powered by blockchain technology, which is currently
    being developed through a strategic collaboration between IOG and DISH
    Network Corporation.\5\ The two companies are working to create a
    backend token-based loyalty system supported by the Cardano blockchain.
    Cardano tracks the balance of loyalty coins or BoostcoinsTM
    accrued by customers, and mints or burns the loyalty tokens based on
    customer rewards and reward redemptions. The loyalty token balance is
    adjusted in a nightly batch operation, using a DISH-controlled digital
    wallet. IOG's Atala Prism is leveraged to ensure no personally
    identifiable customer information is included in the process. This
    first step of the collaboration enables blockchain capabilities in
    DISH's infrastructure through Atala PRISM's identity services and
    Cardano's native asset features allowing DISH to better serve and
    securely connect with its customers.
    ---------------------------------------------------------------------------
        \5\ https://www.dish.com/.
    ---------------------------------------------------------------------------
        These use cases and projects exemplify the kind of economic
    development and growth that blockchain technology can bring to America,
    especially to rural and remote regions of the country.
    IV. Principles for the Blockchain Industry
        If we are to discuss how to regulate digital assets, protect
    consumers, and align growth with the realities of modern society, then
    we ought to have the humility to admit that innovation makes specifics
    difficult and thus focus on principles instead. Although the concept of
    freedom of speech is ever challenged by new technology, we can
    recognize that the constitutional notions of free speech remain the
    same. We have a desire to express ourselves in a free society without
    fear of government interference or retribution. What are the principles
    that should guide thinking coming out of the blockchain industry in its
    interaction with the U.S. Government?
        Looking at another American creation, the internet, the governance,
    evolution, and innovation of the internet are not controlled by the
    International Telecommunication Union (ITU) or some other transnational
    body, but rather by thousands of interconnected and interdependent
    agencies and private companies working together towards the self-
    emerging common goals of increased connectivity, capacity, and utility.
    The United States embraced the public-private partnership that allowed
    the internet to flourish and for the United States to play and maintain
    a primary role in internet technology. Similarly, it will take many
    different agencies working together with the private sector to ensure
    the American blockchain industry flourishes and reaches its full
    potential.
        Like the prior Congresses in the 1990s discussing the regulatory
    framework for the internet that led to the rise of trillion dollar
    companies, I believe this Congress can achieve great results by working
    with the blockchain industry towards a principles-based approach that
    leverages our countries' remarkable capabilities to innovate and adapt.
        It is of the utmost importance to acknowledge that category-based
    regulation, which is segregated to the borders of a particular
    jurisdiction and relies solely upon centralized actors for reporting
    and disclosure, is unlikely to be effective in a blockchain-based
    decentralized ecosystem and will inhibit innovation. Whereas,
    principles-based regulation, which is more flexible, can adapt and
    evolve alongside the nascent technology without strangling an industry
    that has only started and forcing companies abroad.
    V. Values in Support of American Industry
        Reflecting upon the 20th century, the dominance of the United
    States has rested upon three pillars: financial services, technology
    companies, and manufacturing capabilities. These industries are rapidly
    transforming under the demands of globalization, increased competition,
    new technologies, and the desire to define environmental, social
    governance (ESG) rules to ensure a sustainable, values-driven global
    economy. I believe that the blockchain industry is building the
    foundational technology that will enable trust, compliance, and
    competitiveness for these industries throughout the 21st century,
    thereby ensuring another American century.
        Transparent, immutable, always objective ledgers--provided by
    blockchain technology--are phenomenal tools for record-keeping,
    reporting, and oversight. In other words, blockchain technology itself
    provides many of the tools that can be deployed for safeguarding
    consumers and protecting market integrity. The same concepts that
    protect a decentralized exchange from front running or security
    breaches can also be used by regtech companies like Chainalysis to
    provide unprecedented information to government agencies, regulators,
    economists, and financial engineers about an exchange. The collection
    of this data is permissionless and royalty-free. No more dark pools. No
    more centralized brokers.
        The power of blockchain technology is its universality and
    permissionless model for innovation. True competition exists when
    everyone has equal access to markets. My company, Input Output Global,
    has never had to pay a royalty, file a patent application, or acquire a
    license to pursue blockchain-related business development in countries
    as diverse as Ethiopia to Mongolia. The same tools that would enable a
    rancher to register a brand could be reused for land deeds, a credit
    score, or issuing a non-fungible token (NFT) to represent a musical
    composition, assuring its artist of receiving fair compensation.
        Blockchains enable the liquidity of value, thought, and commerce at
    a scale and speed society has never experienced before. Instead of
    predicting the outcome of these new capabilities, we ought to decide on
    what consumer and market risks we need to guard against, what
    fundamental rights consumers should have, and how to use these new
    tools for the greatest possible good. Compliance with regulation and
    legislation coming out of the United States must be a guiding value for
    the blockchain industry, nation and world, as speed of development
    without any control whatsoever will lead to rampant fraud, waste, and
    abuse.
    VI. The Importance of Appropriate & Responsible Regulation
        IOG, myself and many others in the industry are in favor of and
    support appropriate and responsible regulation of digital assets and
    blockchain technology. However, this is a new technology and a
    radically new asset class that can not readily fit within the confines
    of the laws and tests created almost a century ago.
        Cryptocurrencies are financial stem cells--programmable software
    that can be nearly any asset and can change over time. In fact, no two
    cryptocurrencies are alike and the uses, functions and features of
    cryptocurrencies can vary depending on who is holding the
    cryptocurrency, why and where. Cryptocurrency can be used to verify
    data, transfer information or value, purchase goods, provide access to
    services, serve as a reward or membership program, act as a store of
    value or as an investment, all at the same time or at different times
    over the life of the cryptocurrency.
        The United States legislature has never tried to regulate something
    that could be so many different things at the same time. Yes, some
    cryptocurrencies may be securities, some may be commodities, some may
    be both, but many may not be either. Regardless of how a cryptocurrency
    is labeled, three things should be kept in mind: (i) the existing U.S.
    regulatory regimes never contemplated such an asset, (ii) without
    cryptocurrencies, most blockchain technologies simply will not function
    and (iii) any regulatory goals should be to promote appropriate
    consumer protections and assure market integrity. The last can be
    achieved through regulatory approaches that do not necessarily require
    labeling a cryptocurrency as either a security or commodity.
        U.S. securities laws achieve investor and market protections based
    on the assumption that there is and will always be a centralized entity
    (e.g., a corporation who is identifiable and can permanently assume the
    role of providing financial and other data to the holders of its
    equity). Some blockchain technologies, and thus cryptocurrencies may
    initially be created or backed by a somewhat centralized entity similar
    to a corporation but many times that is not the case and over time,
    virtually all cryptocurrencies and blockchains exist without any
    centralized entity that can be identified as the party supporting such
    technology. The existing laws and regulations that assume the existence
    of such centralized and responsible parties simply and logically cannot
    work in the case of blockchain technology and the cryptocurrencies that
    drive such technologies.
        Responsible regulation should start with an understanding as to the
    critical role blockchain technologies can play for assuring American
    competitiveness, America's security, particularly digital
    infrastructure, financial inclusion for Americans and promotion of
    economic development and growth.
    VII. Conclusion
        Cryptocurrencies and the broader blockchain industry, which relies
    on cryptocurrencies to operate and function, have grown over the past
    decade from a small group of uncommercialized, volunteer developers to
    a trillion dollar, global ecosystem encapsulating sophisticated
    engineering, scientific research, publicly traded companies and tens of
    millions of people using these technologies throughout the world.
        The great growth of blockchain technology rivals only the internet
    and arguably yields more significant opportunities ranging from cheaper
    and more efficient payment systems, cryptographically enhanced
    infrastructure security, new forms of governance, self-sovereign
    identity and so much more. However, this new technology has also
    presented new challenges and amplified the existing problems of many
    legacy systems. The instantaneous movement of information and value
    without counterpart risk nor the need for centralized middlemen
    combined with reducing complex business processes and structures to
    open source software that can be rapidly upgraded means that commercial
    activity can now proceed at the speed of thought on a global scale.
        I am grateful to have the opportunity to present these real-world
    use cases, my opinions on the guiding values of the industry and
    thoughts regarding the promise of the blockchain industry. My knowledge
    and network are always available to this Subcommittee to aid and assist
    in the legislative process. In conclusion, I hope we can engage in a
    fruitful and ongoing dialogue throughout the coming months as the
    United States debates the regulatory future of the American Blockchain
    and Cryptocurrency industry. I sincerely appreciate your time and look
    forward to your questions.
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        The Chairman. Thank you, Mr. Hoskinson.
        At this time, Members will be recognized for questions in
    order of seniority, alternating between Majority and Minority
    Members. Members will be recognized for 5 minutes each in order
    to allow us to get to as many questions as possible. Please
    keep your microphones muted until you are recognized,
    especially on the Zoom, in order to minimize background noise.
        I will now recognize myself for 5 minutes.
        Mr. Brummer, should CFTC have direct statutory authority to
    regulate cash markets?
        Dr. Brummer. Well, the CFTC, as I said, is certainly up to
    the job under a certain number of circumstances.
        Number one, obviously it has to be financed and resourced
    properly. Second, and this is really the point of the
    conversation, all the regulatory agencies have to really have a
    change in their mindset. I think what you have heard from
    almost all the witnesses is that the underlying infrastructure
    is very different from the infrastructure upon which many of
    our both securities and derivatives laws are based, and to
    really adequately oversee these markets, some degree of
    familiarity with those markets is going to be necessary. So,
    whether or not the SEC or the CFTC, but the CFTC is certainly
    up to the job. It has certain kinds of comparative advantages,
    and it is those advantages that should be leveraged and to
    build upon those areas like disclosure where it has not
    traditionally wielded its authority.
        The Chairman. Right. I am struck by the line in your
    testimony where you said it will necessarily involve revisiting
    longstanding assumptions about market infrastructures embedded
    in securities and derivatives law and adapting the regulatory
    system in creative ways that reflect the best of our experience
    and collective values.
        What does that mean?
        Dr. Brummer. Yes, it means, for example, in the securities
    law context, our entire disclosure system is based of an
    assumption that issuers have non-public information that other
    expert actors don't have, and so, therefore, to make sure that
    that information is available to them and it kind of trickles
    down to your retail investor. So, it is based--the evolution
    part disclosure system, even in securities law, is for
    information to be filed but not really read.
        When you go and you operate on a blockchain, it is
    completely different context. In part, because much of the
    material, not all, but much of the material information that
    you would need is already available on chain, but is only
    accessible to the expert actors. It is the retail folks who
    would not have the ability to read and understand the source
    code. So, that gets you into a question as to what should the
    disclosure system look like? It should probably have more
    consumer protection principles and to think about how do you
    get that information to those people in that system?
        The Chairman. Yes, it is a great question, but the one
    before it is the one I am most interested in, which is who is
    best to do that? That brings me back to my first question,
    because I listened closely to your answer. I understand it is
    complicated and I understand the concerns about how it be done,
    which is actually very, very important. Is CFTC up to that?
        Dr. Brummer. CFTC is up to the job. It has the experience,
    in some ways, more direct experience in some ways dealing with
    these issues than any other agency in the government. It is up
    to the job, but again, not to be too law professory, but
    context matters and it has to be properly resourced to do the
    job.
        The Chairman. Right. Mr. McGonagle, good news. The
    professor says you are up to the job. Can you shed any light on
    my question, sir, because I think the thing where, at least
    that I am very interested in, is it seems clear we need to
    legislate in this area, and we need to understand the follow-on
    consequences of that. So, help me understand if we were to give
    direct statutory authority to CFTC for the cash, spot markets,
    what should that look like?
        Mr. McGonagle. Thank you, Mr. Chairman, I appreciate the
    question.
        At the CFTC, we are a market regulator. We think about how
    individual market participants from all aspects of, say, the
    production and user chain might access our markets in order to
    hedge risk or manage risk exposure. So, interesting compared to
    the professor who is definitely spending some time thinking
    about, like, how the commodity could be used. The CFTC thinks
    about how individuals are interested in the change and value of
    that commodity or digital asset, and how that transaction and
    that interest in that change in value can be regulated. That is
    what our system of regulation is meant to accomplish. We look
    at market participants that are interested in trading value and
    they are doing that in a centralized marketplace where there is
    price transparency and where they have execution certainty.
    They are able to get the product, the interest that they want,
    and they are able to do that in a safe and secure manner.
        The Chairman. Isn't the critical wrinkle here that there is
    more speculation in the spot market with digital assets than
    there would be with the traditional commodity, and are you guys
    better set up for that?
        Mr. McGonagle. So, for sure when you see in the commodity--
    in the spot market, there is significant speculative interest
    also on a leveraged basis, so putting a little money down----
        The Chairman. At the retail level?
        Mr. McGonagle. Exactly, and trading significant funds with
    significant risks. In a regulated market space, we have the
    opportunity--again, talking about disclosure obligations--to
    help inform those customers about this is the type of
    transaction that you are getting into, and making sure to the
    best that we are able to facilitate customer protection so that
    they understand the risks and they are prepared to accept those
    risks. We also have safeguards in place to protect those assets
    to be more stable.
        The Chairman. All right. Well, I thank the gentleman. If we
    have time for a second round, I would be particularly
    interested in the subject Dr. Brummer opened in terms of the
    innovative ways we have to think about this, given the
    differences between this and what we have traditionally dealt
    with.
        I am pleased to recognize the Ranking Member and to extend
    her the same time allotment that I consumed.
        Mrs. Fischbach. Thank you very much, Mr. Chairman, and I
    can't not comment on Dr. Brummer saying it is hard for him not
    to be too law professory. So, I was a law student. There is a
    lot of law professory stuff going on. So, I appreciate it.
        But----
        The Chairman. I was more struck by the fact that he said we
    are his favorite Members of Congress----
        Mrs. Fischbach. There you go.
        The Chairman. And this Committee.
        Dr. Brummer. I am a kid from Arkansas.
        Mrs. Fischbach. But turning back to a little bit--the chair
    was asking a little bit about the CFTC, and I just wanted to
    ask, Mr. McGonagle, the CFTC is often referred to as a
    principle-based regulator. Could you tell us a little bit about
    what that means generally in your experience with that approach
    as it has been applied?
        Mr. McGonagle. Yes, thank you.
        The question around principle-based articulates that there
    are 23 core principles for designated contract markets that
    basically sets up the system of obligations that the entity has
    to comply with in order to list products for trading on our
    designated contract markets. And so, they will cover grounds
    including system safeguard, for example. Core principles also
    require that products that are listed not be readily
    susceptible to manipulation, and that there be customer
    protections available. Core principals also provide for the
    certainty of execution, for example, of the transaction, that
    you are able to have a counterparty that minimizes the risk,
    and we do that through a clearing system. Each market will have
    one clearing organization that will be the counterparty for all
    the market's transaction.
        So, we are looking at a program of responsibility that not
    only is the CFTC administering the law through application
    review, compliance, and surveillance. These designated contract
    markets also have responsibility on the self-regulatory basis
    to make sure that their market participants are complying with
    the rules. And the CFTC has broad enforcement authority to make
    sure that those market participants comply with the Commodity
    Exchange Act and the regulations.
        Mrs. Fischbach. Thank you, and maybe just, I have heard
    criticism about the CFTC, that it is a permissive light touch
    regulator, and would you agree with that, and if not, could you
    tell us some of your personal experiences why that criticism is
    unfounded?
        Mr. McGonagle. Absolutely. So, at the CFTC, we strongly
    value our enforcement program, and a strong enforcement program
    supports market integrity and customer protection. If people
    know that the rules of the road are supposed to be followed and
    that there is going to be a swift and strong response, that
    encourages compliance activity. So, while we have a
    comprehensive regulatory framework, we also have a very strong
    enforcement program.
        As I mentioned in my opening remarks, we filed 50 cases on
    digital assets. We brought those cases starting in 2014. We are
    looking at fraud, pump and dump manipulation, illegal contracts
    that are being offered to U.S. customers, not only within the
    U.S., but also from entities outside of the U.S. If there is a
    violation of the Act or our regulations, the CFTC is a strong
    enforcement authority to deter that misconduct. If it involves
    a criminal violation, we work closely with our cooperative
    enforcement partners at the Department of Justice as well as
    the U.S. Attorney Offices.
        Mrs. Fischbach. Thank you very much. I appreciate the
    information.
        Mr. Hoskinson--did I say that--I am trying here.
        Mr. Hoskinson. Yes.
        Mrs. Fischbach. Thank you very much, and I know we just
    have a few seconds left, but there is a lot of discussion about
    whether we should regulate certain cryptocurrency as
    commodities or securities.
        What do you think are the benefits, and maybe you could
    talk just a little bit about that, what are the drawbacks,
    things like that?
        Mr. Hoskinson. Well, with 37 seconds----
        Mrs. Fischbach. I know. I am sorry. Yes.
        The Chairman. The gentleman can take as much time as he
    requires.
        Mrs. Fischbach. Oh, thank you, Mr. Chairman. There you go.
        Mr. Hoskinson. Thank you.
        The Chairman. I mean, don't push it, but----
        Mrs. Fischbach. It is a fine line here.
        Mr. Hoskinson. You got to be careful. I am Italian.
        So, when you look at cryptocurrencies in general, I have
    always viewed them like financial stem cells. They are kind of
    more fundamental than a particular category like a currency or
    a commodity. And really, it depends on the markets they are
    traded on and the use and utility that they have. But at the
    end of the day, you have to ask yourself what public policy
    considerations are you attempting to satisfy? Is it sanctions
    compliance? Is it consumer protection? Is it market stability?
    What we do as an industry is we are all about transparency. So,
    it is kind of funny that we are talking and debating about
    disclosure regimes. There is no other financial asset in the
    world that really is as transparent as a cryptocurrency. Every
    transaction from the very beginning--for Bitcoin, for example,
    from January 3, 2009, is known. Every single one. The holdings
    of the founder are known because all of these things are
    publicly available to everybody.
        So, it is more about, in my view, understandability and the
    tooling required to make this work on a global basis. So, I
    don't think it would be wise to say, well, is it a security or
    a commodity, or fall into this temptation of who is the more
    permissive regulator or what is the regulatory arbitrage, but
    rather, just take a step back and say what things do we want to
    guard against? And we now have 13 years of history as an
    industry of six or seven collapses, a whole bunch of
    interesting new things like NFTs that have always pushed the
    limit, and a global marketplace with more than 100 million
    people floating around that we can draw from and we can look on
    a case-by-case basis, and build a framework that makes sense.
        What is encouraging to me as an entrepreneur, briefly, is
    that there is a lot of great legislation that has been proposed
    recently, like the DCEA, the FIA, there are Executive Orders
    that have come through that are trying to force clarity amongst
    the Executive Branch. So, these things together create global
    dialogue, and if we are clever about it, I think we can
    converge to a reasonable compromise that we as an industry can
    live with and continue to be competitive with.
        Mrs. Fischbach. Thank you very much. I appreciate that, and
    thank you, Mr. Chairman, for your indulgence.
        The Chairman. I thank the gentlelady.
        I would like to yield to the Ranking Member if he has any
    questions, Mr. Thompson.
        Mr. Thompson. Mr. Chairman, thank you so much.
        Mr. McGonagle, first of all, thank you for your dedicated
    service, and your experience at CFTC, it is much appreciated.
        Earlier this year, as noted a number of times, I introduced
    the Digital Commodity Exchange Act (H.R. 7614), DCEA, along
    with Mr. Khanna, Mr. Emmer, and Mr. Soto. Among other things,
    the DCEA creates a new registered entity, a digital commodity
    exchange, DCE, that is subject to a registration and compliance
    regime. This is similar to the existing registered futures
    exchanges and swap execution facilities under the Commodity
    Exchange Act.
        Can you please tell us generally about the requirements
    CFTC imposes on futures exchanges and the SEFs?
        Mr. McGonagle. I am sorry, Ranking Member. The door opened
    and I missed the last phrase. If you could just restate that
    for me?
        Mr. Thompson. I just noted that under the DCEA, what we
    have done with DCEA and there was a similar--it was very
    similar to the existing registered futures exchange and swap
    execution facilities under the current Commodity Exchange Act.
    And so, the question was can you tell us generally about the
    requirements the CFTC imposes on future exchanges and SEFs?
        Mr. McGonagle. Great, thank you, Ranking Member, and I
    appreciate you indulging me with following up.
        With respect to designated contract markets and swap
    execution facilities, those entities are responsible to
    establish and set up. They are self-regulatory organizations.
    So the rules that they implement on their platforms are the
    rules that they also have to ensure that there is compliance
    with. So, for example, they will establish trading protocols
    and they will establish prohibitions concerning market abuse.
    That self-regulatory organization responsibility is to make
    sure then that those market participants follow the rules of
    the road.
        At the same time, the self-regulatory organization has
    responsibilities to the Commission and to Congress as part of
    the 23 core principles. So, for example, they need to make sure
    that their trading platforms are cyber resilient. That is, they
    must have the ability to operate in the event that someone
    attempts to breach their system, that they have capacity to
    roll over, for example, to another trading platform to allow
    trading to continue. It is incredibly important that our
    markets be able to operate efficiently at all times for our
    market participants who are trading in the markets who have
    risk exposure that they need to manage.
        Mr. Thompson. Thank you for that.
        Dr. Brummer, as Ranking Member Fischbach alluded to, there
    is some uncertainty about when and if an asset is a commodity
    or a security, and some argue that the vast majority of digital
    assets are just securities. Is the law clear on this?
        Dr. Brummer. No, and if it was, all of my students would be
    getting an A in my securities law class. I mean, by definition,
    I mean, the Howie test, leads to some clarity in some
    instances, but in others, obviously, there is ambiguity, in
    part because each of the prongs of the Howie test, the SEC case
    that sort of defines when you have a security, are very much
    intended to be sort of contextually based. And, whether or not
    you may know that there is an investment of money, but when are
    you relying on the efforts of others? What does that actually
    mean in the digital context? What does a common enterprise mean
    when you are operating on a platform? Certainly, when is money,
    money, which is a little bit more established under securities
    law, but in financial regulation at large, it can and often is
    subject to considerable debate.
        But what is clear is that it is not the case that all
    digital assets are securities, even under established
    longstanding principles, and there have been various
    declarations made by leaders of both the SEC and the CFTC that
    some of those digital assets with the largest market cap are,
    in fact, commodities.
        Mr. Thompson. In your testimony, you noted the CFTC and SEC
    have different regulatory strengths and that there are benefits
    to each. In many ways, this is what Mr. Khanna and I recognized
    in the DCEA. For example, we proposed the SEC would continue to
    regulate capital raising activities with their associated
    disclosures for investors, and the CFTC would govern the
    trading of any token which is a digital commodity using
    registered exchanges to fulfill the role of a gatekeeper for
    market participants.
        As we continue to think about how we should structure this
    regulatory regime, what else should Congress consider?
        Dr. Brummer. I think it is important, and some of the more
    recent cases have, particularly in the last 2 weeks, have sort
    of highlighted is that as this technology grows, as this
    technology scales, you are going to have different kinds of
    actors that can also be operating on chain. And, when we get to
    these very important questions like what is decentralized and
    what is a decentralized actor, what happens when you have more
    centralized actors who, by definition, may have off-chain
    operations that are more opaque? What does it mean when these
    digital markets intersect with the larger off-chain economy?
    And I think that that is going to be a critical question. There
    is a disclosure aspect to it. There is a market infrastructure
    question to that, and it is going to be something that
    lawmakers and regulators are going to have to think through.
        Mr. Thompson. Very good. Well, thank you. Thank you to all
    of our witnesses, and thank you, Mr. Chairman.
        The Chairman. I thank the gentleman.
        The chair now recognizes the gentleman from Illinois, Mr.
    Rush.
        Mr. Rush. Thank you, Mr. Chairman, for today's hearing.
        The timing of today's hearing is very apt. Cryptocurrency
    markets have been on a roller coaster in recent months, and the
    last 2 weeks have been an absolute and horrible meltdown as
    Bitcoin has lost over half of its value. As such coins melted
    down so horrifically to cause concern for the rest of the
    industry. Frankly, Mr. Chairman, I am concerned. I am concerned
    that this industry does not adequately expose its risks and
    volatility as it tries to lure in a new and unsuspecting money
    as it deals with multiple crypto exchanges showing ads during
    this year's Super Bowl. I am concerned about the lack of
    transparency for some of the cryptocurrencies, such as so-
    called stable coins, some of which have been recently
    collapsing and those could potentially cause harm to the rest
    of the global economy. As the Chairman of the Subcommittee on
    Energy within the Energy and Commerce Committee, I am concerned
    with the stress that cryptocurrency mining facilities are
    putting on our electric grid in the summer where there are
    blackouts in south Texas, California, and some of the
    Midwestern states are already receiving warnings.
        Finally, Mr. Chairman, as someone who cares deeply about
    this country, I am concerned about the growing political power
    of cryptocurrency companies and worried about the potential for
    regulatory capture by the industry and its new [inaudible] into
    dark money investment into political races, including my local
    race here in Chicago for my replacement in Congress.
        Now, I understand that technology does not flow within the
    jurisdiction of the Agriculture Committee or the CFTC, and that
    certainly is not the subject of today's hearing.
        Dr. Brummer, I would appreciate your testimony on financial
    inclusion, ensuring that communities like mine on the south
    side of Chicago that have been traditionally excluded from
    generating wealth are not excluded from the potential explosion
    of wealth that blockchain technologies could create. However, I
    am deeply concerned about this disruption of wealth that we are
    seeing in crypto markets this year. How do we prevent these
    markets from preying on overlooked and vulnerable communities,
    Dr. Brummer, and prevent those communities that have been
    robbed of so much from having their wealth further stripped by
    financial markets that illuminate overhead?
        Dr. Brummer. Yes, that is an excellent question, and like
    you, this is something I have shared with many of the country's
    regulators, particularly with the state regulators around the
    country.
        One of the primary challenges with the question of
    disclosure and the degree to which Black and Brown communities
    are preyed upon is that the degree of complexity in any kind of
    financial instrument, whether or not it be cryptocurrency or
    CDAs from 2008, complexity introduces the opportunity for
    vulnerability. And the question that all of our regulatory
    agencies are going to have to face--and this is getting back to
    this mindset question--is understanding that disclosure,
    particularly where you have large numbers of retail investors,
    the way in which you think about disclosure is going to have to
    be rethought, both because of the complexity of the financial
    instrument, and the kinds of assumptions that our regulatory
    space has traditionally made.
        I do think that the industry itself is going to have to
    face some challenges as well, as this industry scales and it
    seeks both new customers, but also new kinds of ideas, it is
    going to have to have inputs from much broader sources of
    society, people from between the coasts, minority communities
    are all going to have to participate more. I think it is good
    on a number of levels. Number one, I think to the degree to
    which you have more sort of different kinds of people
    participating in the product design, you are going to be able
    to reach use cases that are much more applicable to a slice of
    the public. I think that when you have people from different
    backgrounds largely helping to think through the technology,
    there is a natural dream chute that comes from the consumer
    protection space. People sort of talk about what is required,
    frankly, for a real democratization of finance, and if you want
    to get some of the benefits that watching technology professes,
    opportunities like decentralized identity or opening up the
    credit box or decentralized credit scoring, closing the costs
    or reducing costs on mortgages, or figuring out new kinds of
    compliance systems for MDIs and minority depositary
    institutions. You have to have more brainpower involved in
    different kinds of perspectives.
        And I think, again, when you have those people
    participating in the room and in the design and in the strategy
    sessions for these companies that are still figuring out how
    they diversify their operations, that is going to be a critical
    piece to really speaking to the very real threats and
    challenges that are out there when vulnerable communities
    intersect with anything that is inherently complex.
        The Chairman. The gentleman's time has expired.
        The chair now recognizes Mr. Balderson from Ohio.
        Mr. Balderson. Thank you, Mr. Chairman, and thank you to
    all the witnesses for being here today.
        A common theme that I have heard when meeting with
    stakeholders in this space is that they believe the CFTC is the
    best position to assume oversight of spot markets for digital
    assets. Chairman Maloney touched on this, but I would like for
    you all to expand on it.
        I will start with you, Mr. McGonagle, but if any witnesses
    have thoughts, please feel free to share them. Do you agree
    that the CFTC is well-suited to oversee spot markets for the
    digital assets, and what authorities, if any, does the CFTC
    need to assume regulatory authority over digital spot markets?
        Mr. McGonagle. Thank you, Congressman. Certainly, the way
    that digital assets are being traded in the cash market today
    very strongly resembles how digital assets are traded as a
    derivative. What I mean by that is where there is an interest
    in the change in the price of a particular commodity, and so,
    there is trading around that interest. That is an area that the
    CFTC----
        The Chairman. The gentleman will suspend.
        The chair just reminds Members to mute, please, if you are
    not on camera or speaking. Thank you.
        The gentleman may proceed.
        Mr. McGonagle. Thank you.
        So, the CFTC has a comprehensive oversight with respect to
    applications for contract markets, compliance by contract
    markets, and surveillance of activities on those contract
    markets. And I think all of those concepts, as well as the
    enforcement piece that I spoke about earlier, relate to trading
    that is occurring in digital asset spot markets.
        With respect to the regulatory authority, I understand and
    appreciate that there is a lot of thinking around possible
    regulatory structures. I will point out just quickly that
    following Dodd-Frank, the CFTC received statutory authority
    with respect to swap execution facilities, and there was a
    determination by Congress to articulate 15 core principles,
    that are similar in scope and kind to the core principles that
    we have for designated contract markets. The Commission then
    entered into an extensive public comment period where we took
    the guidance that we had from Congress with respect to
    implementation of those core principles and set forth our
    proposed rules concerning trading on these platforms that are
    focused on market transparency, as well as clearing obligations
    and some dealer responsibility. So, not intermediary oversight
    like we have currently in DCM space, but that would be
    something that would be important to evaluate in the digital
    asset spot complex.
        Mr. Balderson. Thank you for that answer. Would anybody
    else like to add on to the question? Okay.
        Mr. Hoskinson. I will take a bite at it.
        Mr. Balderson. All right, thank you.
        Mr. Hoskinson. I am not a securities lawyer or an expert on
    regulation, so take it with a grain of salt.
        But I don't think it is a question of, as I mentioned
    before, who is more permissive or who is less restrictive. It
    is more of a question of efficacy, and when you look at
    commodities, commodities are intrinsically decentralized. So, I
    grow hay on one of my farms, and I didn't have to ask
    permission. There is no central hay agency. We are not the
    Soviet Union. We do not regulate things that way. And then
    suddenly when I cut it and I sell it, it enters into a global
    marketplace. Now, that marketplace has rules and principles and
    protections, and there is a retail component. People feed
    horses, and there is certainly an industrial component.
        So, if cryptocurrencies are truly decentralized and that
    actually is a real thing, then it does make sense to embed that
    into a framework that is designed for things that are
    intrinsically this way.
        You have to look out for cartels, market manipulation. You
    have to look out for where global actors try to come in, like
    China or others, and take over our market like they are trying
    to do the lithium markets. But that is a very different type of
    notion than a security in that respect.
        So, in my view, the most effective thing that can be done
    over the next 12, 24 months is to have a really good notion of
    what is decentralization, and what are the factors that produce
    that? And if it gets past a certain threshold, it makes a lot
    of natural sense to regulate things like a commodity as opposed
    to a security. And if they don't, well then it is very obvious
    who has the disclosure requirement.
        Mr. Balderson. Well done. So, thank you for your answer.
        Mr. Chairman, with lack of remaining time, I will yield
    back. Thank you.
        The Chairman. I thank the gentleman.
        The chair recognizes Ms. Craig.
        Ms. Craig. Thank you so much, Mr. Chairman, and thank you
    to Ranking Member Fischbach for today's hearing on digital
    asset regulation. Thanks so much to the witnesses for your
    expert testimony. Obviously, this is clearly a space with
    complex policy considerations and a great deal of public and
    private interest.
        One of the things that I have been tracking today during
    this hearing and over the course of the 117th Congress is how
    many of these conversations about regulatory authority will
    impact many of the retail investors that have moved into the
    crypto space over the last few years.
        With that in mind, I know we are giving you a bit of a
    workout today, but Director McGonagle, I am coming to you with
    my first question. Director McGonagle, can you speak about how
    Federal regulation of crypto trading platforms under the
    Commodity Exchange Act is related to market transparency, and
    ultimately to ensuring that retail investors have access to the
    information they need to properly weigh the risk involved?
        Mr. McGonagle. Thank you, Congresswoman. I appreciate the
    question.
        In thinking about spot markets, say, in particular the
    overlap of spot and derivatives markets, an issue that we are
    focused on for derivatives products deals with the concept of
    the prospect around leverage, and the understanding by the
    individual investor, particularly where that individual
    investor is a retail participant, that they know and appreciate
    the risk of trading. And while there may be good upside for
    putting, say, 50 down and having a dollar's worth of a
    position, there is incredible downside if the market moves
    against your position.
        So, at the CFTC, we are focused not only on market
    integrity and having centralization or a place where market
    participants can come together and understand what the pricing
    is, but we also look to have a system of intermediary oversight
    that focuses on retail market participants, say, in particular
    with a disclosure regime that informs those market participants
    sort of based on who they are dealing with. So, for example, if
    it is a commodity trading advisor or commodity pool operator,
    the risk of that trading strategy is disclosed as well as
    associated fees add--those are disclosed. That individual
    market participant understands how their funds are being
    protected or utilized at a futures commission merchant, for
    example, that those funds are segregated, and how those funds
    can also be protected, for example, in the event of a
    bankruptcy.
        So, we do look for execution certainty, as well as customer
    protection as part of our regulatory regime, and I think that
    is helpful to the dialogue here.
        Ms. Craig. I don't want to take up too much more time, but
    I have been listening here for quite a while, and I hear you
    saying that your agency has the capacity and the expertise to
    take on any additional regulatory role in this digital asset
    space. Is that what I am hearing from you today?
        Mr. McGonagle. So, we definitely have the intellectual
    expertise, and we have ongoing responsibility now to implement
    and ensure regulatory compliance by new market participants
    that are currently seeking applications for designation as
    contract markets, for example, as well as ensuring that those
    entities continue compliance. So, we are able to take that
    skillset to the extent that we are dealing with like to like,
    similar types of core principles. We are able to transition
    that work, and I used earlier the example with respect to
    swaps. But that also involves, certainly, a resource
    determination, and depending on the number of applicants, for
    example, or the scope of the responsibility, from my
    perspective, that is a conversation that DMO has with the
    Chairman about priorities.
        But at the same time, the Chairman has initiated an effort
    to accurately quantify the resources that would be needed in
    the event that there is some additional grant of authority.
        Ms. Craig. Thank you so much.
        I don't have time to ask the whole panel, but I wanted to
    ask Dr. Brummer here. In the time I have remaining, can you
    give me your assessment about how the principles-based approach
    of the CFTC does or doesn't fit with the dynamic nature of the
    digital asset space now?
        Dr. Brummer. That is an extraordinarily good [inaudible].
    Thank you. I am a technology expert, but I just need to press
    the red button.
        So, I think that is an important and critical question in
    part because one of the comparative advantages, one of the
    really interesting features of the derivatives regulatory
    framework is precisely because of the special relationship
    between the exchanges, the DCMs and the Commission whereby you
    can exercise various levels of granularity in terms of
    oversight, while at the same time leveraging the self-
    regulatory capacity of these exchanges to keep up with the
    innovation.
        And so, I do think that is one interesting and important
    feature, particularly in a space that is constantly evolving
    and where the rulemaking is going to have to be very agile. So,
    that is something that I look to as a potential comparative
    advantage.
        Ms. Craig. Thank you so much, Dr. Brummer, and seeing that
    I have exceeded my time, I thank the Chairman and yield back.
        The Chairman. I thank the gentlelady.
        The gentlewoman from Florida, Mrs. Cammack.
        Mrs. Cammack. Well, thank you, Mr. Chairman and Ranking
    Member Fischbach. I appreciate all our witnesses for being here
    today, and has been discussed, since 2014 the CFTC has been
    regulating crypto derivatives, and has also been exercising its
    anti-fraud and anti-manipulation enforcement authority over
    digital asset sport markets. The agency clearly has extensive
    experience overseeing digital assets, including futures, which
    retail users have been trading through a direct access model.
        Now, Dr. Brummer, isn't it the case that several exchanges
    registered with the CFTC today offer retail traders the ability
    to directly access exchanges without a broker, including
    through ICE, ARIS, and Kalishi exchanges?
        Dr. Brummer. It is true to my knowledge that yes, there are
    some direct--I know [inaudible]. I am not entirely sure about
    the others, but yes.
        Mrs. Cammack. Okay, and this is for you again, Dr. Brummer,
    and Mr. McGonagle.
        I am going--I messed that up. I am so sorry. I would like
    to ask each of you, do you agree that Federal regulation of
    crypto trading platforms under the Commodity Exchange Act would
    raise the floor rather than establish a ceiling of required
    reporting and investor protections above that currently
    provided by the existing state-by-state money transmitters
    licensing regime?
        Mr. McGonagle. Yes. Thank you, Congresswoman.
        Certainly, as a market regulator, it would establish a
    floor. We have a different purpose than the money exchange
    state licensing, and so, I wouldn't be in a position
    necessarily to compare how those state-by-state provisions may
    overlap in some instances. But to the extent that we are
    talking, again, about managing risk, CFTC has a system of
    regulation in place.
        Mrs. Cammack. Dr. Brummer?
        Dr. Brummer. That is right. The purposes of the money
    transmitter laws are different. They tend to be, at the state
    level, somewhat less resourced, but the entire focus is a
    little bit different. So, there would be some overlap, but it
    is a little bit of apples to oranges.
        Mrs. Cammack. I know. I know, I am pushing you to try to
    get to a point here, but thank you both for your responses.
        Mr. McGonagle, how does the CFTC's expertise and experience
    regulating complex derivatives markets translate to crypto
    markets?
        Mr. McGonagle. Thank you again, Congresswoman.
        The CFTC offers the opportunity for multiple market
    participants to come together to execute transactions where
    there is price transparency. Individuals who are trading in the
    market understand the product that they are trading and they
    understand the price and volume for how they are trading that
    product. There are also rules in place with respect to how
    those customers possibly are entering their transactions on the
    market. And when I mean possibly--and you alluded to this
    earlier--to the extent that they are going through an
    intermediary, there are additional protections available to a
    retail market participant, including the types of risk
    disclosure, segregation and protection of assets.
        And then ultimately, the transactions go to a clearing
    facility. Centralizing that clearing facility minimizes the
    risk that you may see currently for transactions on spot
    platforms, for example, who do not have centralized clearing
    and instead are exposed to individual counterparties' credit
    risk.
        Mrs. Cammack. Thank you for that. I appreciate it.
        One last question, since I have about a minute left. I
    understand that you all have been working closely with the SEC
    on exchange regulation in this space. A day doesn't go by that
    I don't catch an article about this. Regarding this
    coordination and cooperation, how productive are these
    discussions to coordinate going--how are they going, and do you
    see any concerns or gaps in the current conversations with SEC
    that still need to be addressed?
        Mr. McGonagle. So, thank you, Congresswoman. I was
    reflecting on----
        Mrs. Cammack. Are you sure you want to say thank you?
        Mr. McGonagle. I was reflecting on 25 years with the CFTC.
    In my experience, we have a longstanding relationship,
    particularly on enforcement, but also on regulatory matters. We
    talk all the time. We need to talk and those conversations are
    always productive.
        Mrs. Cammack. Are there any gaps that you see?
        Mr. McGonagle. As between the two agencies, we understand
    where our jurisdictions come together. We discuss when they
    overlap. In physical digital assets, we currently don't have
    regulatory authority over those products.
        Mrs. Cammack. Thank you.
        The Chairman. The gentlewoman's time has expired.
        Ms. Kuster--and I will remind the Members that we do have a
    fourth witness who is up in the middle of the night in Asia. I
    haven't forgotten about you, Mr. Levin. The perils of being on
    Zoom.
        Ms. Kuster?
        Ms. Kuster. Thank you so much, Mr. Chairman, and thank you
    for our panel being with us, especially you, Mr. Levin, joining
    us from South Korea. I will have a question for you.
        We are in the midst of a brave new world of digital asset
    trading. Our Committee has given this issue worthwhile
    attention because of the role that the Commodity Futures
    Trading Commission has and will continue to play in regulating
    this trade. As more and more Americans invest in these assets,
    it is imperative for Congress to keep up as we regulate and
    oversee the digital realm, just as we do with more established
    markets.
        As we have all seen recently, Bitcoin, the most popular
    cryptocurrency, has badly tumbled in the last few weeks and
    lost more than \1/2\ its value in 2022 so far. Clearly, no
    marketplace is immune from severe vulnerability and
    uncertainty, be it Bitcoin or Wall Street, but we do need to
    assure digital markets are operating above board and that they
    are secure, and that investors have access to the information
    they need to fully understand the risks they are undertaking.
        With that in mind, I am going to focus my questions on
    consumer protection as it relates to digital assets, and going
    to you first, Mr. Levin. Thank you for being with us from South
    Korea. Could you speak to how prevalent risky cryptocurrency
    exchanges are, such as those that lack know your customer
    rules, may have criminal ties, or may be connected to the dark
    web?
        Mr. Levin. Thank you, Congresswoman, and yes, this is
    exactly what Chainalysis focuses on is mapping all of the
    different participants that actually facilitate transactions in
    cryptocurrencies. And to your point, we have seen over the last
    few years exchanges in offshore jurisdictions actually used to
    facilitate the laundering of proceeds from things like
    ransomware. And so, OFAC has taken action to designate certain
    of these exchanges like SUEX and TRAVEX as cryptocurrency
    exchanges that have facilitated that.
        I think that does speak, though, to the ability for us to
    focus the discussion here on how do we appropriately equip a
    market regulator with overseeing the venues that we think
    should form the reference prices for these commodities and
    ensure the orderly functioning of markets. And also, we have
    seen Treasury take necessary action to enforce rules around AML
    across the board internationally as well, and that has been
    very clear in sort of the actions the Treasury has taken.
        Ms. Kuster. So, let's delve into that.
        Director McGonagle, you mentioned in your testimony since
    2014, the CFTC has brought more than 50 enforcement actions
    against digital asset markets for issues like fraud,
    manipulation, and false reporting. Could you speak to how the
    investigation process works at CFTC, and do you feel there is
    more authority or certainly financial support that you may need
    from Congress to strengthen CFTC's enforcement role?
        Mr. McGonagle. Thank you, Congresswoman. I appreciate the
    question.
        When it comes to enforcement authority, the CFTC has very
    broad and strong authority. Our anti-fraud and anti-
    manipulation authority, as you mentioned, extends into the
    physical markets, where we have brought cases that involve all
    manner of misrepresentations, including pump and dump schemes
    that are manipulating prices. There was a comment about the
    Bank Secrecy Act and money laundering. We brought cases where
    entities have a registration obligation with the CFTC because
    of the products they were offering, did not seek registration
    and also violated AML provisions. We also look at fraud in the
    context of illegal contracts. So, for example, if it is a
    leverage contract that doesn't result in the delivery of the
    actual physical currency within a period of time, that falls
    within CFTC's anti-fraud authority and it is treated as if it
    is a futures contract.
        Ms. Kuster. Can you elaborate on how these crimes work? You
    have given an example, but what you all have identified as
    emerging trends in illicit activity related to digital assets
    that you are on the lookout for. I know I do a lot of work in
    the addiction and opioid space, but also sex trafficking. It
    looks like my time is up, so we will have to see if we can beg
    the Chairman's indulgence for your response.
        The Chairman. The gentleman may proceed.
        Mr. McGonagle. Yes, thank you.
        And say, in particular, the attraction to leverage, so that
    sort of get rich quick because individual investors are at 50
    to 1 leverage, for example. Like that is a significant risk
    concern.
        We also see digital assets where they may not be the
    subject of the fraud, but they are the payment mechanism in
    connection with other fraud schemes, like for example, FOREX
    fraud that CFTC has jurisdiction over.
        Ms. Kuster. Excellent, thank you. Thank you, Mr. Chairman.
    I yield back.
        The Chairman. The gentlewoman's time has expired.
        Mr. Feenstra--excuse me, Mr. Scott.
        Mr. Austin Scott of Georgia. I----
        The Chairman. Am I right, Mr. Scott? Okay.
        Mr. Austin Scott of Georgia. I apologize, I had to step
    out. I had a meeting in my office with constituents.
        But I am going to start with you, Mr. McGonagle. This
    isn't--it is not corn; it is not gold. It is certainly not
    dollars, and there are a lot of questions here. One is if the
    U.S. is going to regulate, then it is CFTC versus SEC. Some
    have suggested even a new agency. Then there is the how if you
    do that, and then there is the who do you regulate?
        So, my understanding is there are 20,000 approximately
    cryptocurrencies in the world worth about $3 trillion. Is that
    close, give or take a trillion on a day on the values? Is it
    somewhere around 20,000 currencies?
        I mean, the question I have, 20,000 currencies, CFTC--how
    many people work at the CFTC today?
        Mr. McGonagle. Thank you, Congressman. Several hundred.
        Mr. Austin Scott of Georgia. Several hundred. So, you would
    be talking about--if they gave up everything that they are
    currently doing, you would be talking about 100
    cryptocurrencies a person?
        My point is, it is not possible to regulate all of these
    currencies. It is just not. And so, then the question becomes
    who, and I mean, is it that we are going to have a value if the
    currency reaches a certain dollar figure that all of a sudden
    we are going to regulate it? I am interested in any comments
    that any of you may have on of the 20,000 cryptos, how you
    determine who should be regulated?
        Mr. Hoskinson. Well, one of the powers of our industry is
    the fact that regulation can become algorithmic. So, you don't
    have to think, well, which person is going to sit down and look
    at this big pile? Think of the IRS and tax returns. We could
    quadruple the size of the IRS, but we still couldn't audit
    every single American. It is just not possible. And so, what
    you have to do is say what tools do we have at our capability,
    and what is magical about cryptocurrencies is that in the
    transactions themselves, they can carry metadata. They can
    carry identity. Rule makers and policy makers can take a step
    back and say, ``Well, these are the things that we care about
    and we can make sure inside the systems that those things don't
    settle and clear until those things are present.''
        So, it is really more of a conversation of what do you care
    about, and then what we can do as technologists is create a
    self-certification system, and then what can happen is when
    there are anomalies or special cases, which often would be
    rare, then the CFTC or another regulatory body could look
    through and say, ``Well, let's investigate that.'' That is
    generally how we do law enforcement. We don't break into
    everybody's house. We wait until we get a warrant and you have
    to have some cause for it, so there has to be some social
    infrastructure.
        Mr. Austin Scott of Georgia. So, self-certification is
    different than an agency regulating?
        Mr. Hoskinson. Well, they are interconnected. So, you have
    SROs, you have market standards, you have principles, and in
    many cases, financial regulation is mostly done by SROs or
    private organizations.
        If you look at, for example, compliance, it is not the SEC
    or the CFTC going out there and doing KYC and AML, it is banks
    that are doing these types of things. So, it is a public-
    private partnership, and what needs to be done is to establish
    those boundaries. And then what we can do as innovators is
    write software to help make that happen, and literally, that is
    what Chainalysis is doing right now, and their competitors.
        Mr. Austin Scott of Georgia. I think--I mean, I don't see a
    way for us to regulate them all. I do think there has got--if
    it is going to happen, there has to be some type of self-
    certification.
        What I do fear--because I don't think that crypto should be
    a significant portion of the average investor's portfolio. I
    don't. I mean, and I do fear that if we all of a sudden are
    regulating it, then the average investor feels like there is
    more security and stability in the value of it, and I think
    that is a dangerous thing for the investors. And I will tell
    you, I would be very concerned about the average American
    citizen having more than five percent of their investments in
    the crypto markets. I am not talking about guys like you who
    know it inside and out, but I just--I have expressed my
    concerns. I appreciate your comments on the self-certification.
    I do think that is a path that we need to be considering.
        And with that, Mr. Chairman, I will yield the remainder of
    my time.
        The Chairman. I appreciate the gentleman yielding his 3
    seconds.
        Mr. Feenstra is recognized.
        Mr. Feenstra. Thank you so much, Chairman Maloney and
    Ranking Member Fischbach. It is great that we have having this
    discussion today, and it is so important. Digital asset market
    regulation is critical.
        Mr. McGonagle, in addition to requirements that apply to
    all CFTC regulated futures and derivative exchanges, would the
    CFTC require additional authority from Congress to promulgate
    additional crypto specific requirements if the CFTC were to be
    given primary regulatory authority over digital asset trading
    platforms by Congress?
        Mr. McGonagle. Yes, Congressman, we would need additional
    regulatory authority.
        Mr. Feenstra. And what--going down that path, what are you
    looking for?
        Mr. McGonagle. Currently for both designated contract
    markets and for swap execution facilities, there is a system of
    core principles that the agency has. More recently, with
    respect to the swaps implementation, we engaged in extensive
    public comment around the establishment of setting up the
    operation of the facilities, trading facilities, clearing, as
    well as any other regulated or registered entity like swap
    dealers, for example.
        Mr. Feenstra. So, do you agree that evolution or maturation
    of a digital asset and its underlying network has the potential
    to remove security-like characteristics over time for assets to
    become fully decentralized, or----
        Mr. McGonagle. Right.
        Mr. Feenstra. Is there a parallel in that regard?
        Mr. McGonagle. Totally appreciate that question, and that
    is an interesting topic.
        Digital assets are broadly defined to be commodities. If
    there is a determination under current law that the SEC
    determines that it is a security, then it takes it outside of
    CFTC jurisdiction, and there isn't currently a framework that
    would allow evolution of the product to put it back into CFTC
    jurisdiction.
        Mr. Feenstra. That is correct, then that would be a
    problem.
        So, is there a parallel there with regard to that
    evolution, then, of swaps?
        Mr. McGonagle. I think how we handled swaps is we divided
    the market, right, and so, characteristics of certain swaps
    that were more closely aligned with the SEC were at SEC. The
    SEC and the CFTC maintained a dialogue and worked together on
    rules that impacted both of our jurisdictions, so that is
    something that is available to the agencies.
        Mr. Feenstra. So, one more question.
        How do you think the notion of fully decentralized should
    be defined or determined, and at what point or what triggering
    event should that determination be made, and through what
    process? I know this is a tangled web here.
        Mr. McGonagle. Right, it is a tangled web, and I guess from
    the CFTC's vantage, I don't consider or look at how the thing
    presents whether it is so-called decentralized as opposed to is
    it something where there is a trading interest? There are many
    market participants that are interested in trading and
    understanding how it trades.
        So, from our perspective, we probably would be encouraging
    not so much a definition of what is decentralized, but whether
    the underlying digital asset is something that should fall
    within regulation of the CFTC, under our structure as opposed
    to defining this other structure.
        Mr. Feenstra. Yes. Right, and we do need more Congressional
    intent to go down that rabbit hole, that path?
        Mr. McGonagle. So, certainly if Congress wanted to further
    clarify the extent of CFTC's jurisdiction as it applied to any
    further legislation that would be appropriate. But as I
    mentioned, we currently have digital assets as a defined
    commodity.
        Mr. Feenstra. Right. Right, okay. Thank you for your
    information. This is a great area, and we have to embrace it,
    and I appreciate your comments. Thank you.
        The Chairman. I thank the gentleman.
        Mr. Cloud?
        Mr. Cloud. Thank you, Mr. Chairman, and thank you all for
    being here, and thank you, Ranking Member, for hosting this.
        I carry some of the concerns, I guess, about regulation
    that some of the former Members have carried, just because a
    lot of times the government will see mission creed. And so, one
    of the great appeals of cryptocurrencies when I talk to people
    who kind of dabble in it is the fact that there is not an
    intermediary at this point. And so, I also had the question
    about who and how and those sorts of things. How do we keep
    this limited? What is the current market failure we are trying
    to fix, basically, and how do we keep it--any sort of
    regulation narrowed to that and in such a way that over time it
    doesn't become very much invasive?
        And if you can answer that, Mr. McGonagle, but I will point
    out Mr. Hoskinson mentioned the banks as an example of how this
    is done well. If you talk to the bankers, a lot of them will
    talk about how this is not done very well in the fact that they
    have to be the authoritarian arm of the Federal Government in a
    lot of different ways.
        So, anyway, your thoughts on that, and feel free to chime
    in.
        Mr. McGonagle. Yes, thank you, Congressman, for the
    opportunity to address that particular issue around the
    certification of products. Currently, the CFTC is in a
    situation where an exchange can willy-nilly certify a product
    and allow that for trading. All core principles apply, but in
    particular, is the core principal that an exchange may only
    certify a contract that is not readily susceptible to
    manipulation. So, what we are getting at--is who is interested
    in trading this product, and why, and is there sufficient
    liquidity, for example, or sufficient interest by market
    participants that there actually is a market value to exchange
    or trade risks?
        Certainly in our markets, we think about why individuals
    would want to hedge. They are producers, farmers, and users,
    and they have an interest in the actual underlying commodity,
    but we also see interest in past-settled contracts, these
    financially settled obligations. And I think that under our
    current system of regulation, we have an ability to winnow out
    activity or contracts that don't provide a market value.
        Mr. Cloud. Any of you want to speak to that, or--I have
    another question to move on to.
        Mr. Hoskinson. Sure. Can I comment on the KYC AML, sir?
        I don't think anyone is doing KYC AML very well, and nobody
    wants to be a data broker. It is pretty crazy what is going on
    right now. I am a big believer that you have to understand what
    private industry has been doing over the last century or so. If
    you look at Google, you look at Facebook, you look at these
    companies, they are more than companies. They don't just go and
    make sprockets in cars or something and they compete in a fair
    market. They are ending up getting a lot of control and power
    over foundational resources.
        So, if we look at the prior centuries like Standard Oil, it
    got control over the energy industry, and then we said, ``Boy,
    that is probably not a good idea. We should do something about
    it.'' Now when we look at Google, Facebook, and these other
    companies, they have gained so much control over information,
    thought, speech, and other foundational resources, hosting.
    They actually can define an entire marketplace and decide who
    gets to compete and who doesn't. It is relevant to
    cryptocurrencies and the blockchain industry because at the end
    of the day, it is deliberation of those resources. That is what
    we are really doing here to separate the wheat from the chaff.
    We are talking about a resource-based economy. The point of
    decentralization is saying that maybe nobody should be in
    control of our freedom of expression or commerce or
    association.
        So, that requires a fundamentally different way of
    interfacing with those marketplaces, different way of handling
    identity and compliance----
        Mr. Cloud. I only have a minute, so if I can jump in here.
        Mr. Hoskinson. Sure.
        Mr. Cloud. The fact that you are talking about big tech I
    think is very interesting in this, because you also mentioned
    that one of the features of regulation is that we can use
    algorithms now.
        Mr. Hoskinson. That is right.
        Mr. Cloud. We have seen them use algorithms to limit
    people's freedom of speech and to do all of these other
    nefarious things. So, if we give the government that power,
    especially as the Federal Reserve is looking toward creating a
    digital currency potentially and we already have banks being
    thrust upon them to enforce ESG scores, and in China, we see
    where there ESG scores simply become personal scores on
    individuals. It is not a far step technologically and in the
    way we see some of the agencies working right now to begin to
    target those algorithms toward people and their personal
    habits, and their spending.
        So, how do we compete economically on the world stage
    without threatening the privacy rights of Americans, going
    forward? This is a very dangerous slope if not handled
    correctly.
        Mr. Hoskinson. Yes, I couldn't agree more. I am deeply
    concerned by social credit, deeply concerned by some of the
    proposals for CBDCs because you can have transactional
    discrimination against any ethnic group you want, or any
    political philosophy you want.
        So, the point is the algorithms out to be built out in an
    open-source process, transparent and available to all, and
    people have to have the ability to opt in instead of opt out.
    So, the power of our industry is we didn't have a governing
    agency or some central actor say oh, here is cryptocurrency. It
    was the tireless work of millions of people, many of which
    never met each other, around the world coming together
    voluntarily and building a new economy worth trillions of
    dollars. That is the way we ought to think about it, not how do
    we create some government agency or how do we create some
    central bank or central algorithm that will control everything.
    And then you ask yourself about the outcomes you desire.
        So, it is clear that there have been some problems over the
    past 13 years, and we are working our way through that, but at
    the same time, we have created value for millions of people,
    and we shouldn't lose sight of that.
        The Chairman. The gentleman's time has expired. I thank the
    gentleman.
        That concludes our initial round of questions. Seeing no
    other Members in the room, I am going to extend an opportunity
    for a selective round of additional questions, if the Ranking
    Member has anything, I am happy to yield to her.
        Mrs. Fischbach. If we are prepared to, and I don't see any
    others, but I just wanted to express another thank you to
    everybody because this has been an incredible informational
    kind of hearing that we have been able to have, and I, again,
    thank the chair for bringing us together. But thank you to all
    of the witnesses.
        The Chairman. Well, I thank the gentlewoman. I take it that
    those are your closing remarks. I appreciate that.
        Thank you to all of today's witnesses. I want to be
    respectful of your time.
        Let me just say in closing, given this Committee's
    jurisdiction over the Commodity Futures Trading Commission,
    market volatility and continued growth of this industry, it is
    important we remain active and engaged as a participant and
    have these conversations to consider and determine appropriate
    and necessary legislation and regulation in this industry.
        As you know, since Bitcoin was released in 2009, the
    digital asset market has experienced explosive growth and
    innovation and evolution, and the testimony we have heard today
    certainly highlights those market evolutions and indicate that
    that will be a key characteristic of the digital asset industry
    for the foreseeable future. And of course, as recent
    developments have shown, we also understand the volatility of
    these markets and the risks that come with that.
        The potential solutions this technology can offer are
    worthy of a regulatory regime that will allow for continued
    innovation while also establishing and requiring platforms
    adhere to a uniform set of standards and guidelines, and will
    protect those who choose to participate. While there are many
    more conversations to be had, I am certainly glad that our
    Committee is remaining active in this discussion regarding the
    future of the digital asset regulation. Also, I want to stress
    the importance we all put on the United States having a
    leadership role in this space.
        I would like to thank the Committee Chairman, Mr. Scott,
    for the opportunity to chair the Subcommittee. I am also very
    proud to take this leadership role at this critical time, and I
    look forward to conducting additional hearings. We are just
    getting started, and of course, we will be eager to hear
    additional relevant testimony here at the Commodity Exchanges,
    Energy, and Credit Subcommittee. I want to thank the Ranking
    Member, Mrs. Fischbach, for joining me today. I want to thank
    particularly our witness in Asia for getting up late.
        And with that, the Committee stands adjourned. Excuse me, I
    have to do one other piece of housekeeping, I believe, which is
    to tell you that under the Rules of the Committee, the record
    of today's hearing will remain open for 10 calendar days to
    receive additional material and supplementary written responses
    from the witnesses to any questions posed by a Member.
        And with that, this hearing of the Subcommittee on
    Commodity Exchanges, Energy, and Credit is adjourned.
        [Whereupon, at 12:18 p.m., the Subcommittee was adjourned.]
        [Material submitted for inclusion in the record follows:]
      Submitted Statement by Samuel ``Sam'' Bankman-Fried, Co-Founder and
         Chief Executive Officer, LedgerX LLC d/b/a FTX US Derivatives
    Introduction
        Chairman Maloney, Ranking Member Fischbach, and other distinguished
    Members of the House Agriculture Committee's Subcommittee on Commodity
    Exchange, Energy, and Credit (the ``Committee''), FTX appreciates the
    opportunity to provide this statement to the record for the hearing on
    ``The Future of Digital Asset Regulation.'' We applaud the Committee
    for assembling an excellent panel of experts to discuss this topic of
    critical importance for the future of the digital asset industry and
    U.S. capital markets. FTX largely agrees with many of the statements
    made in the hearing that the Commodity Futures Trading Commission
    (CFTC) is well-situated to exercise more oversight of non-security
    digital assets. In the statement below, we offer a vision for the
    expanded role the CFTC could play in overseeing digital assets markets.
    Going forward, FTX is pleased to provide the Committee and its Members
    with as much information needed to ensure a fully informed and robust
    conversation around whether and how this Committee could address key
    issues involved with regulating the digital asset space.
    Background on FTX
        FTX was established by three American citizens, Samuel Bankman-
    Fried, Gary (Zixiao) Wang and Nishad Singh, (FTX Founders) with
    international operations commencing in May 2019 and the U.S. exchange
    starting in 2020. The FTX Founders sought to build a digital asset
    trading platform and exchange with a better user experience, customer
    protection, and innovative products, and to provide a trading platform
    robust enough for professional trading firms and intuitive enough for
    first-time users.
        Today, FTX is the parent company of several entities across the
    globe, including a U.S.-based digital asset spot market exchange
    (FTX.us) and a derivatives exchange and clearinghouse (FTX US
    Derivatives). FTX.us is registered with the Department of Treasury (via
    FinCEN, as a money services business) and holds a series of state money
    transmission licenses. FTX.us is also a registered broker dealer with
    the Financial Industry Regulatory Authority (FINRA). FTX US Derivatives
    is licensed by the U.S. Commodity Futures Trading Commission (CFTC) as
    an exchange and clearinghouse. FTX's international exchange, which is
    not available to U.S. users, holds a series of marketplace licenses and
    registrations in many non-U.S. jurisdictions. For additional
    information regarding FTX's business operations and licensing, please
    refer to the Exhibit A of this statement.
    Discussion
        This statement covers the following topics: (1) an overview of the
    products offered by FTX; (2) the current U.S. regulatory landscape and
    existing regulatory gaps; and (3) a vision for the CFTC as a digital-
    assets market regulator for the U.S. Throughout this discussion we use
    `digital assets' generally to refer to digital asset tokens that are
    generally considered to be a commodity rather than a security.
    1. FTX Products and Their Role in the Digital-Asset Economy
        Core Product: Digital Asset Exchange. FTX's core products are its
    digital asset exchanges, FTX.com, FTX.us and FTX US Derivatives
    (https://derivs.ftx.
    us/)--FTX.us and FTX US Derivatives are being integrated into one user-
    experience platform and web site. While FTX.com offers both spot market
    and derivatives trading, those two categories are separated in the
    United States, with spot market trading on FTX.us and derivatives
    trading offered through FTX US Derivatives.
        On FTX.com and FTX.us, users can trade digital assets with other
    users for cash, stablecoins and other digital assets. On the spot
    markets, users can set a variety of different order types on a central
    limit order book (CLOB). Users are able to offer orders at a specific
    price (limit order) or trade on the book at the best price shown. A
    robust price and time priority matching engine sits in between these
    orders to connect buyers and sellers and display the best available
    prices.
        Futures and volatility contracts related to digital assets also are
    listed on the platforms as well, with or without leverage. On FTX.com,
    leverage is limited to a maximum of 20x (i.e., minimum margin of 5%),
    and is much less in most cases; as of now leveraged trading is not
    available to users of FTX.us (although there is facilitation of other
    forms of credit to Eligible Contract Participants--see below). The
    FTX.com platforms have listed quarterly-settled (as well as perpetual)
    futures contracts that are cash settled. Additionally, MOVE volatility
    contracts are offered on FTX.com and are similar to futures except,
    instead of expiring to the price of a digital asset, they expire to the
    USD amount that the price of Bitcoin (BTC) has moved in a day, week or
    quarter. FTX.com also offers BTC options for trading. Finally, FTX US
    Derivatives offers to U.S. users both Bitcoin (BTC) and Ethereum (ETH)
    derivatives.
        To cover initial and maintenance margins, derivatives and
    leveraged-product users can post collateral in the form of cash,
    stablecoins or other digital assets held in their account. The
    exchanges also have integrated risk-management and back-office systems
    to perform clearing and settlement of trades, which includes updating
    records of ownership of the digital asset or digital asset futures and
    options contracts traded (clearing), and transferring value between
    users' accounts (settlement), using either delivery versus payment or
    delivery versus delivery. Importantly, FTX's risk model avoids the
    systemic warehousing of such risks over a weekend or other period of
    market closure, and instead addresses at-risk positions and accounts
    immediately, in real time, 24/7/365.
        Off-exchange Portal for Arranging and Matching User Orders. FTX
    also offers an off-exchange portal that enables users to connect with
    other, large users, enabling them to request quotes for spot digital
    assets and trade directly. This facility forwards requests for quotes
    to large users, returning prices offered and enabling users to then
    place an order. The portal is similar to other facilities found in
    traditional markets where a central limit order book is not used to
    match trades.
        Third-Party Lending. FTX platform users can lend their digital
    assets to those who seek them for spot trading. Users (including
    eligible users on FTX.us) wishing to trade digital assets they do not
    have may borrow them from users willing to lend them by posting
    collateral in the form of cash, stablecoins or other digital assets
    held in their account. The FTX platform maintains a borrow/lending book
    and matches users wanting to borrow with those willing to lend.
        NFT Marketplace. FTX operates a marketplace for users to mint, buy
    and sell non-fungible tokens (NFTs). NFTs are tokens that are not
    fungible with any other tokens. They can take a number of forms and,
    for example, can be redeemed for a physical object, or an experience
    (such as a movie or phone call), or can be linked to a digital image,
    etc. FTX's NFT marketplace is conducted through an auction system.
    Alternatively, users can purchase directly at the prevailing selling
    price set by the seller. Users can choose to display their NFT
    collection on the FTX NFT marketplace portal, and/or to continue to buy
    or sell on the NFT marketplace.
        FTX Pay. FTX Pay is a service offered to merchants to accept
    payments in digital assets or fiat. Users have the option to top up
    their FTX accounts with ACH or credit cards, which are then used to
    make payments to enrolled merchants. For digital asset payments, the
    relevant user's FTX account would be debited by an amount in the chosen
    digital asset that is equivalent to the amount that is payable to the
    merchant. FTX facilitates the payments to the merchant by providing the
    payment infrastructure. This allows merchants to accept digital asset
    payments, without having to assume any volatility risk for the assets.
        Staking. FTX.com offers the ability for users to ``stake'' certain
    supported digital assets on the platform. By staking such digital
    assets, users can earn staking rewards; in addition, for some tokens,
    users can receive and unlock certain benefits on FTX, such as reduced
    trading fees, withdrawal fees, as well as other rewards. Generally,
    users can ``unstake'' their digital assets at any time, subject to an
    unstaking or unbonding period.
        Types of Digital Assets on FTX Platforms. FTX has developed listing
    standards and a framework for determining which digital assets to list
    on the platforms. Part of that framework entails evaluating the assets
    to assess factors such as security, compliance risk, legal risk,
    technological risk and other factors. On FTX.com, which again is
    unavailable to U.S. users, FTX has listed approximately 100 stablecoins
    and other digital assets on its spot exchange. Digital assets include
    tokens such as Bitcoin (BTC), Ether (ETH), Uniswap Protocol Token
    (UNI), Chain Link token (LINK), Solana (SOL), and Aave (AAVE).
        On FTX.us, the company has taken what we believe to be a
    conservative approach to listing digital assets for trading.
    Consequently, there are far fewer tokens listed for trading on FTX.us
    due to much stricter listing standards for this platform. Care has been
    taken to avoid listing assets with features viewed to be similar to
    securities in the U.S. The assets and tokens listed more closely
    resemble BTC and ETH, two tokens expressly addressed by the CFTC to be
    commodities subject to its jurisdiction.
        On FTX US Derivatives, users can trade a Bitcoin Mini Option or
    Ethereum Deci Option, a Next-Day Bitcoin Mini Swap or Next-Day Ethereum
    Deci Swap, and a Bitcoin Mini Future. All of these contracts are fully
    collateralized. FTX is in discussions with the CFTC about expanding our
    derivatives offerings to U.S. customers.
        In sum, the products available now in the digital-asset economy and
    on the FTX platforms are very similar to ones found in the traditional
    finance space. A key differentiator from traditional finance is that
    investors can get access to all of them without going through multiple
    intermediaries. FTX believes the market structure for digital-asset
    platforms is risk reducing compared to others because it facilitates
    more effective risk management and eliminates unnecessary points of
    failure. In addition, all market data is made public and free--all
    users are given full knowledge of the orderbook and trades. Easy access
    to financial products and solutions on one, easy-to-use platform is a
    powerful feature that empowers investors, consumers and entrepreneurs.
    By simplifying access to these tools, users of the products can focus
    more on the core of their everyday financial goals and needs while
    making more informed decisions--ultimately this is what FTX believes
    will promote financial inclusion and economic security for more people.
    2. Current Regulatory Landscape for Digital Assets and the Role of the
            CFTC
        The current U.S. landscape for the regulation of the trading of
    digital assets is a patchwork of Federal market regulations and state-
    level money-transmission laws. As explained above, FTX US offers
    ``cash'' or ``spot'' markets and FTX US Derivatives offers access to
    derivatives markets,\1\ but the regulatory treatment of each type of
    market is different. For cash markets in the U.S., if a digital asset
    is a security as defined by the Securities Act of 1933, then the
    digital asset is subject to the jurisdiction of the SEC, and the asset
    as well as any platform that lists it for trading generally must be
    registered with the SEC. A digital asset that does not meet the
    definition of a security under U.S. law would generally still meet the
    definition of a ``commodity'' under the Commodity Exchange Act
    (CEA).\2\ * Historically, the CFTC generally has not exercised
    jurisdiction over the operation of spot markets for commodities (with
    few exceptions), but FTX believes the CFTC could assert jurisdiction
    over digital-asset spot markets under certain circumstances,\3\ even
    where the agency has not done so to date--more on this below.
    ---------------------------------------------------------------------------
        \1\ Cash or spot markets are markets where the asset being
    purchased is delivered immediately. Derivatives markets are ones where
    contracts or agreements between two parties are traded, and the
    contract's value is based upon an agreed-upon referenced asset or set
    of assets, like an index.
        \2\ ``The term `commodity' means . . . all . . . goods and
    articles, except onions (as provided by section 13-1 of this title) and
    motion picture box office receipts (or any index, measure, value, or
    data related to such receipts), and all services, rights, and interests
    (except motion picture box office receipts, or any index, measure,
    value or data related to such receipts) in which contracts for future
    delivery are presently or in the future dealt in.'' See CEA section
    1a(9).
        * Editor's note: footnotes annotated with  are retained in
    Committee file.
        \3\ See Retail Commodity Transactions Involving Certain Digital
    Assets  (``Actual Delivery Guidance''), 85 Fed. Reg. 37734 (June 24,
    2020), https://www.cftc.gov/sites/default/files/2020/06/2020-
    11827a.pdf.
    ---------------------------------------------------------------------------
        In any case, there are no U.S. platform operators of only cash
    markets for digital assets supervised by the SEC or the CFTC today.
    Many states have taken the view that their money-transmission laws
    apply to digital-asset platforms that have customers in their states,
    which requires state licensure, but these laws do not possess the
    hallmarks of Federal market regulation and its market-integrity and
    investor-protection principles.\4\ At the time of this writing, FTX US
    and the other largest U.S. digital-asset platforms offering cash
    markets have many state money-transmission licenses and continue to
    pursue others. A money-transmission business also implicates the U.S.
    Bank Secrecy Act and by doing so must register with the U.S. Department
    of Treasury via FinCEN, unless otherwise exempted; FTX US is so
    registered.
    ---------------------------------------------------------------------------
        \4\ FinCen defines money transmission as ``the acceptance of
    currency, funds, or other value that substitutes for currency from one
    person and the transmission of currency, funds, or other value that
    substitutes for currency to another location or person by any means.''
    See 31 CFR  1010.100(ff)(5)(i)(A).
    ---------------------------------------------------------------------------
        For derivatives markets in the U.S., if the digital asset
    referenced in the contract is a commodity and not a security, the
    trading of derivatives on that digital asset is subject to the
    jurisdiction of the CFTC. The CFTC today oversees the trading of BTC
    and ETH derivatives on multiple U.S. trading platforms, including FTX
    US Derivatives, which as mentioned lists futures, swaps and options on
    these digital assets. FTX believes that there are many other digital
    assets that are not securities, and so derivatives on those digital
    assets would fall under the CFTC's jurisdictions as well and could be
    listed by appropriately registered platforms such as FTX US
    Derivatives.
        This patchwork of regulations increases the operational complexity
    of digital-asset platform operators, decreases capital efficiencies for
    customers, and hampers the ability of platform operators to optimize
    their risk-management programs. It also reveals gaps in Federal market
    oversight due to the interplay of the CFTC and SEC regimes:

       First, the scope of the CFTC's jurisdiction does not
            indisputably apply to all cash markets for (non-security)
            digital assets, and consequently U.S. customers of the
            operators of these markets do not have the benefit of legally
            enforceable, market-integrity and investor-protection
            requirements of those markets enforced by a Federal market
            regulator; and

       Second, not all digital assets indisputably meet the
            definition of a security under U.S. law, and consequently there
            are not clear, consistent and enforceable disclosure standards
            to inform investors about key information to assess risk
            relating to those digital assets.

        As such, there is no clear market oversight for spot trading of
    (non-security) digital [assets].
        Additionally, along with the unclear application of the
    ``securities'' definition as it applies to some digital assets, these
    gaps to date have discouraged participation by many in the U.S.
    digital-asset markets, including entrepreneurs, institutional market
    participants and other investors. In part due to these points, the vast
    majority of trading volumes in digital-assets markets (which FTX
    estimates to be roughly 95% of global volume) takes place on non-U.S.
    trading platforms, even though much of the human and intellectual
    capital driving the industry comes from U.S. persons--many of whom have
    left the U.S. to build and grow their businesses.\5\ FTX believes this
    current state is harmful to U.S. competitiveness and is denying our
    country many of the benefits from the growing digital-asset industry,
    including attracting to the U.S. more capital formation, the best of
    the global workforce, intellectual property and tax revenue. In
    addition, hundreds of billions of dollars of digital asset stablecoins
    are currently backed by the USD dollar, a state that clear and
    consistent regulatory guidelines could help maintain.
    ---------------------------------------------------------------------------
        \5\ See https://ftx.com/volume-monitor for data on trading volume
    on offshore versus U.S. platforms.
    ---------------------------------------------------------------------------
        U.S. Retail Commodity Transactions and the CFTC's Actual Delivery
    Guidance. Another piece of the U.S. regulatory patchwork for digital
    assets is the CFTC's treatment of retail commodity transactions. The
    CEA provides that a commodity transaction (including one involving a
    digital asset) must be listed on a CFTC-registered market, and is
    subject to CFTC's anti-fraud authority, if (1) it involves a retail
    participant, and (2) leverage, financing or margin is offered or used,
    unless the sale ``results in actual delivery within 28 days''.\6\ The
    CFTC provided guidance to the public about how to interpret ``actual
    delivery'' under the statute--thus, there are circumstances when a
    retail, digital-asset transaction would fall under the CFTC's
    jurisdiction, and others when it would not.\7\ Below we discuss FTX's
    views about how bringing all retail commodity transactions involving
    (non-security) digital assets under CFTC jurisdiction would be
    beneficial to the public.
    ---------------------------------------------------------------------------
        \6\ See CEA section 2(c)(2)(D).
        \7\ See id. at n. 5.
    ---------------------------------------------------------------------------
        The Regulation of Stablecoins. Another important part of the
    digital-asset ecosystem globally and in the U.S. are stablecoins, which
    are frequently used as a means to transfer collateral to and from
    digital-asset platforms and used as collateral once on the platform.
    Their regulatory treatment is also part of the overall patchwork of
    regulations that apply to the digital-asset ecosystem. There are
    several stablecoins used on U.S.-based digital-asset platforms that
    have been issued by U.S. state-regulated trust companies, and thus have
    the benefit of state-level prudential supervision.\8\ Other
    stablecoins, some widely used, are not issued by a U.S. institution
    licensed at the Federal or state level. The President's Working Group
    on Financial Markets' recently released ``Report on Stablecoins''
    (``PWG Report'') provided a number of recommendations for the
    regulatory treatment of stablecoins, and FTX has shared its own
    recommendations for how to ensure the safety and soundness of
    stablecoins (included here as an exhibit), the core of which is a
    robust auditing and registration framework overseen by a Federal
    agency.\9\
    ---------------------------------------------------------------------------
        \8\ Paxos Standard (``PAX''), issued by Paxos Trust Company, and
    the Gemini Dollar (``GUSD''), issued by Gemini Trust Company, are
    issued by Trust companies regulated by the New York State Department of
    Financial Services (``NYDFS'').
        \9\ See Exhibit B to this statement; FTX's recommendations also can
    be found at https://www.ftxpolicy.com/stablecoins.
    ---------------------------------------------------------------------------
        There are other regulatory issues affecting the digital-asset
    industry in the U.S., but the foregoing are the most relevant to this
    Committee. Next, we address how this Committee, the Congress and the
    CFTC could rationalize the regulatory framework for digital assets and
    pursue policies that would better protect investors and increase U.S.
    competitiveness.
    3. A Vision for the CFTC as a Digital-Asset Supervisor
        The CFTC already has considerable experience and expertise in the
    regulation of digital assets, and FTX believes Congress would be wise
    to leverage that expertise for the benefit of the public as well as the
    digital-asset industry. The CFTC authorized the first BTC-derivative-
    contract listing in 2014, nearly 8 years ago,\10\ and the FTX US
    Derivatives business--the first crypto-native platform approved by the
    CFTC--has been licensed and supervised by the CFTC for nearly 5
    years.\11\ The CFTC-licensed, more traditional exchanges with some of
    the largest global volumes of derivatives-trading activity have had
    digital-asset derivatives trading on their platforms for more than 4
    years, all under active supervision by the exchanges themselves as
    self-regulatory organizations, in addition to the oversight of the
    CFTC.
    ---------------------------------------------------------------------------
        \10\ See TeraExchange, LLC's Filing under CFTC Regulation 40.2,
    Certification of BTC Swaption Contract, April 24, 2014; https://
    teraexchange.com/style/images/rnd/instr/Tera%2040.2%20Filing%20-
    %202014-22%20Listing%20of%20Swaption.pdf.
        \11\ See CFTC Orders Granting DCO, SEF and DCM licenses to LedgerX.
    ---------------------------------------------------------------------------
        These facts show that there has been substantial capacity building
    at the CFTC over the years regarding digital assets. No other market
    regulator from a mature, major global economy can make this claim of
    experience and expertise about the digital-asset ecosystem, and
    Congress should actively consider how the agency can build on this to
    better deliver market-integrity and investor-protections goals to the
    public and ensure the benefits of the industry's growth can be
    maximized in the U.S. The following are recommendations for this
    Committee that would achieve those goals.
        Expand the CFTC's Jurisdiction over Digital-Asset Spot
    Transactions. FTX recommends broadening the CFTC's jurisdiction to
    include, at a minimum, all spot transactions in (non-security) digital
    assets involving retail investors, regardless of whether the
    transactions currently fall within CFTC's jurisdiction under CEA
    section 2(c)(2)(D). This recommendation is consistent with relatively
    recent steps Congress has taken to expand the CFTC's jurisdiction over
    retail cash markets, including through the passage of the Dodd-Frank
    Wall Street Reform and Consumer Protection Act in 2010. This could be
    accomplished in several specific ways.
        First, Congress should encourage the CFTC to work with industry to
    permit retail commodity transaction contracts related to digital assets
    to be listed on boards of trade registered with the CFTC, pursuant to
    the agency's existing authority over these transactions as established
    by CEA section 2(c)(2)(D) and as affirmed in the 2020 Actual Delivery
    Guidance. This would clearly promote the public interest and would not
    require further legislation, being consistent with the current
    authority of the CFTC.
        Second, Congress could eliminate the 28 day ``actual delivery''
    period in the CEA as it relates to digital-asset transactions, on the
    basis that doing so would clearly bring to more of these retail
    transactions the full panoply of protections from the CEA, which FTX
    believes also would clearly promote the public interest.\12\
    ---------------------------------------------------------------------------
        \12\ This approach would encompass those crypto transactions that,
    per the 2020 Actual Delivery Guidance, are not offset in any way, and
    whose proceeds are fully withdrawn to external, customer-controlled
    wallets within 28 days.
    ---------------------------------------------------------------------------
        Third, Congress could more broadly amend the CEA so that the CFTC
    has jurisdiction over all (non-security) digital-asset spot trading
    activity, not just retail commodity transactions under CEA section
    2(c)(2)(D), and derivatives involving (non-security) digital assets.
    Such a step also should involve a consideration of the appropriate
    disclosure regime for digital assets that ensures investors are
    adequately informed of their risks.\13\ In the meanwhile, Congress in
    general should actively encourage the CFTC to appropriately broaden its
    interpretation of its authority over digital-asset spot transactions to
    better rationalize and condense the patchwork of regulations governing
    U.S. digital-asset activity, facilitating the offering of both market
    types on one platform.
    ---------------------------------------------------------------------------
        \13\ See `Token Issuances' at https://www.ftxpolicy.com/areas-for-
    crypto-regulation for a sketch of a possible disclosure regime for
    digital asset issuances.
    ---------------------------------------------------------------------------
        In FTX's Key Principles for the Market Regulation of Crypto-Trading
    Platforms (Market Regulation Key Principles), we outlined the benefits
    to offering these two market types under one unified system, with one
    rule book and one technology platform to manage risks related to all
    trading activity in customer accounts.\14\ This approach facilitates
    one collateral and risk-margin program for customer accounts holding
    both cash and derivatives positions, allowing the platform to better
    manage market risk, and reducing operational risk owing to a single
    technology stack for the front end (the user interface) to the back end
    (settling and risk managing positions). Public policy should permit
    this one-rule-book model due to its risk-reducing and customer-
    protection attributes.
    ---------------------------------------------------------------------------
        \14\ See Exhibit C to this statement, and https://
    www.ftxpolicy.com/.
    ---------------------------------------------------------------------------
        Fourth, as recommended in FTX's Market Regulation Key Principles,
    Congress, the CFTC and the SEC should pursue a scheme where a digital-
    asset platform operator could opt into a program of joint supervision
    by the CFTC and SEC when there is joint jurisdiction over digital
    assets listed on the platform (e.g., when listings include non-security
    digital assets as well as digital assets that are securities). Under
    these circumstances, FTX recommends that one of the market regulators
    serve as the primary regulator, and the other as the secondary
    regulator, for market oversight. This type of paradigm is familiar to
    market regulators globally and could include the accommodation of one
    rule book, one matching engine and risk engine supported by one
    technology stack. FTX believes this approach could largely be created
    under existing CFTC and SEC authorities, but Congress should encourage
    the agencies to leverage their authorities today with these goals in
    mind and consider legislating such an approach when feasible.
        Embrace the Direct-Membership Market Structure of Digital-Asset
    Platforms. The CFTC should continue to permit and embrace a market
    structure that allows investors to become direct members of the CFTC-
    licensed exchanges and clearinghouses that offer digital assets,
    without the need for intermediation. FTX's CFTC-regulated business has
    been operating with this type of market structure for nearly 5 years,
    without any loss of customer funds or significant platform outages, and
    has demonstrated that such a business model can comply with the CEA and
    continue to deliver on important investor protections embodied by the
    CEA. U.S. policy should remain market-structure neutral and allow non-
    intermediated markets for digital-asset products, so long as key
    investor protections can be adequately ensured. Every major incumbent
    U.S. derivatives trading venue offers a direct member clearing
    solution, and certain incumbent platforms have the majority of their
    users as direct members--this is not a new concept for the CFTC and its
    surveillance and risk teams.
        FTX also published FTX's Key Principles for Ensuring Investor
    Protections on Digital-Asset Platforms (``Investor Protection Key
    Principles''), where we identified the most important components of an
    investor-protection regime (which the CEA and CFTC rules also reflect),
    and how FTX offers those protections today with the direct-membership
    model.\15\ These components include:
    ---------------------------------------------------------------------------
        \15\ See Exhibit D to this statement, and https://
    www.ftxpolicy.com/investor-protections.

       maintaining adequate liquid resources to ensure the platform
    ---------------------------------------------------------------------------
            can return the customer's assets upon request;

       ensuring the environment where customer assets are
            custodied, including digital wallets, are kept secure;

       ensuring appropriate bookkeeping or ledgering of assets and
            disclosures to protect against misuse or misallocation of
            customer assets;

       ensuring appropriate management of risks including market,
            credit/counterparty, and operational risks; and

       avoiding or managing conflicts of interest.

    While the CFTC's rules reflect these important principles today, they
    often contemplate an intermediary such as a ``futures commission
    merchant'' (FCM) bearing the responsibility of those protections to the
    investor. The CFTC wisely has allowed a direct membership market
    structure so long as those investor protections are ensured and
    enforced.
        The Investor Protection Key Principles touch on two key points that
    the CFTC has recognized. First, technology advances have enabled a non-
    intermediated market structure that, combined with effective platform
    operations, can provide the above-identified protections more
    effectively, ultimately leading to an overall risk-reducing market
    structure, for the benefit of investors. Second, to the extent that
    legacy regulations or policies would assume or require an intermediary
    to provide these protections, that approach often imposes unnecessary
    burdens and costs (including fees and both capital and operational
    inefficiency) on investors and markets and obscures market-data without
    corresponding benefit. The CFTC and Congress should address and update
    any such rules through continued, appropriate interpretations in the
    case of the CFTC, and refinements to corresponding legislation in the
    case of Congress, to ensure equitable access to financial markets.
        Ensure the Safety and Soundness of Stablecoins. Stablecoins have
    become a critical component of the digital-asset ecosystem, and policy
    makers have raised concerns about their growing market size and whether
    the lack of uniform Federal oversight presents systemic concerns. While
    the PWG Report investigated bank-like supervision for all stablecoin
    issuers, such an approach might not be necessary so long as the core
    requirements of stablecoin oversight are met. These include:

       Daily attestations of what assets (cash, bonds, etc.) are
            backing a stablecoin;

       Periodic audits to confirm the asset backing is as claimed;

       Federal oversight and ability to inspect the assets;

       Haircuts for assets with moderate risk; and

       An open line for law enforcement to blacklist addresses and
            persons associated with financial crimes.

    The CFTC could play an important role in creating a workable framework
    with these requirements.
        First, the Congress could give the CFTC authority to license
    stablecoin issuers and subject them to these core requirements, perhaps
    by creating and authorizing a new registration scheme for stablecoin
    issuers or by otherwise allowing them to seek an existing CFTC license
    with new commiserate authorities, such as a DCO license. Indeed, a DCO
    is well accustomed to taking custody of assets, providing relevant
    reports to ensure their safekeeping, undergoing related audits (see
    FTX's Investor Protection Key Principles), and managing risks through
    appropriate collateral management and marking to market. The
    appropriate duties and responsibilities of a stablecoin issuer are much
    the same.
        Second, the CFTC without any new legislation could require DCOs
    providing settlement and clearing services for digital-asset platforms
    to condition the acceptance of stablecoins as collateral by the DCO on
    the stablecoin issuer meeting these same core requirements, and the
    stablecoin issuer providing the needed attestations and audits to
    verify they are being met. The CFTC could require this through review
    and enforcement of DCO policies and procedures related to the DCO's
    approved risk-management program. To be sure, considerable public
    policy could be made through creative use of the CFTC's existing
    authorities as suggested, leading to standardized practices for
    stablecoin issuers that would protect the safety and soundness of the
    broader financial system.
        We believe there is some urgency to create a practical regulatory
    solution that promotes disclosure and transparency, but that does not
    inhibit the value that stablecoins provide to markets and market
    participants. All aspects of digital asset regulation will be iterative
    and done in phases. For stablecoins, getting a general principles-based
    disclosure and transparency requirement in place now (perhaps via CFTC
    guidance, as a follow-on to certain CFTC stablecoin enforcement
    initiatives), while deferring a decision on the approach to some of the
    broader questions (such as whether ``registration'' is required and
    which agency should oversee that registration), would deliver a
    substantial amount of regulatory value.
        Adequately Fund the CFTC to Ensure Resources to Protect Digital-
    Asset Investors. Finally, the successful implementation of most of the
    foregoing recommendations would depend on the CFTC having adequate
    resources to do so. FTX supports reasonable steps to provide those
    resources, including by contributing its own fair share of funds for
    use by the CFTC to expand its purview over digital assets. A program
    for generating and conveying such resources to the CFTC could be
    designed in a variety of different ways, and FTX stands ready to engage
    with this Committee and the Congress more broadly to assist in
    designing and contributing to such a program.
    Conclusion
        FTX is grateful to this Committee for the opportunity to share
    information about the digital-asset industry, our business, as well as
    the recommendations for how the CFTC in particular can contribute to
    the industry's growth. FTX believes the CFTC and this Committee could
    play an even more prominent role in the digital-asset ecosystem and
    bring greater investor protections by closing some of the regulatory
    gaps identified in this statement. FTX believes that such efforts would
    combine the best aspects of traditional finance and digital-asset
    innovations, one of our primary goals, and further empower investors
    and consumers by consolidating access to the tools they seek for
    economic security, all in one place, and from a singular, risk-reducing
    platform.
                Sincerely,

    Sam Bankman-Fried,
    Co-Founder and CEO of FTX.
                                   exhibit a
        The FTX group of companies (FTX Group or FTX) was established by
    three American citizens, Samuel Bankman-Fried, Gary (Zixiao) Wang and
    Nishad Singh, with international operations commencing in May 2019 and
    the U.S. exchange starting in 2020. The business was established in
    order to build a digital-asset trading platform and exchange with a
    better user experience, customer protection, and innovative products,
    and to provide a trading platform robust enough for professional
    trading firms and intuitive enough for first-time users. In the U.S.,
    the company operates a federally regulated spot exchange that is
    registered with the Department of Treasury (via FinCEN, as a money
    services business) and also holds a series of state money transmission
    licenses. Our U.S. derivatives business is licensed by the U.S.
    Commodity Futures Trading Commission (CFTC) as an exchange and
    clearinghouse. FTX US also holds a FINRA broker dealer license. FTX's
    international exchange, which is not available to U.S. users, holds a
    series of marketplace licenses and registrations in many non-U.S.
    jurisdictions.
        The core founding team had unique experience to develop an exchange
    given their experiences in scaling large engineering systems at premier
    technology companies, combined with trading experience on Wall Street.
    This brought to the effort an understanding of how to build the best
    platform from scratch, as well as what that platform should look like,
    unencumbered by legacy technology or market structure. FTX has aimed to
    combine the best practices of the traditional financial system with the
    best from the digital-asset ecosystem.
        Early International Success. The international FTX.com exchange has
    been extremely successful since its launch. This year around $15
    billion of assets are traded daily on the platform, which now
    represents approximately 10% of global volume for crypto trading. The
    FTX team has grown to over 200 globally, the majority of whom are
    responsible for compliance and customer support. The FTX Group's
    primary international headquarters and base of operations is in the
    Bahamas, where the company is registered as a digital asset business
    under The Bahamas' Digital Assets and Registered Exchanges Act, 2020
    (DARE).
    FTX % Global Volume, 15d

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        In addition to offering competitive products, the FTX platforms
    have built a reputation as being highly performant and reliable
    exchanges. Even during bouts of high volatility in the overall digital-
    asset markets, the FTX.com exchange has experienced negligible downtime
    and technological performance issues when compared to its main
    competitors. We believe the dual-track focus on customers and
    reliability, plus compliance and regulation, are key reasons why FTX
    has also experienced the fastest relative volume growth of all
    exchanges since January 2020.
        The core product consists of the FTX.com web site that provides
    access to a marketplace for digital assets and tokens, and derivatives
    on those assets. Platform users also can access the market through a
    mobile device with an FTX app. The core product also consists of a
    vertically integrated, singular technology stack that supports a
    matching engine for orders, an application programming interface or
    API, a custody service and wallet for users, and a settlement, clearing
    and risk-engine system. In a typical transaction, the only players
    involved are the buyers, sellers, and the exchange, without any other
    intermediaries.
        The FTX Group has operations in and licenses from dozens of
    jurisdictions around the world, including here in the U.S. and in
    Europe. At the time of this writing the FTX platforms have millions of
    registered users, and the FTX US platform has around one million users.
    For FTX.com, roughly 45 percent of users and customers come from Asia,
    25 percent from the European Union (EU), with the remainder coming from
    other regions (but not the U.S. or sanctioned countries, which are
    blocked). In comparison to the international exchange, nearly all users
    of FTX.us are from the U.S.
        U.S. Operations. FTX services U.S. customers through the FTX US
    businesses, which includes the spot exchange, FTX US Derivatives, the
    NFT marketplace, and a soon-to-go-live FINRA broker dealer (FTX Capital
    Markets). FTX US is housed under a separate corporate entity from FTX
    international and is headquartered in Chicago, IL. It has a similar
    governance and capital structure to the overall corporate family, and
    also has its own web site, FTX.us, and mobile app. As with FTX.com, the
    core product is an exchange for both a spot market for digital assets
    as well as a market for derivatives on digital assets. Like other
    crypto-platforms in the U.S., the spot market is primarily regulated
    through state money-transmitter laws.
        The U.S.-derivatives-market product is provided by FTX US
    Derivatives, which was formed through the acquisition and re-branding
    of LedgerX and is being integrated with the overall FTX US platform.
    The product offers futures and options contracts on digital assets (or
    commodities) to both U.S. and non-U.S. persons. FTX US Derivatives
    operates with three primary licenses from the U.S. Commodity Futures
    Trading Commission (CFTC): a Designated Contract Market (DCM) license,
    a Swap Execution Facility (SEF) license, and a Designated Clearing
    Organization (DCO) license. Prior to its acquisition, this business was
    the first crypto-native platform issued a DCO license by the CFTC in
    2017, which was a milestone for the agency and the digital-asset
    industry. That license was later amended in 2019 to permit the clearing
    of futures contracts on all commodity classes and not just digital
    assets.
        Commitment to a Diverse Workforce. We are proud of our workforce at
    FTX and believe that one of our key strengths is a culture of mutual
    respect and cooperation. This type of culture is borne from the
    diversity of our team, which necessitates a spirit of empathy,
    understanding and humility. These traits in our workforce are good for
    business and are much of the reason we have been successful at
    understanding our customers and their needs, and executing on products
    that meet their needs. FTX has employees from all over the world with
    diverse ethnic backgrounds, and 60 percent of women in our workforce
    are in senior management positions. The majority of our global
    leadership comes from diverse backgrounds.
        Commitment to Mitigating Climate Impacts. FTX is very serious about
    minimizing our impact on the global environment where we live and work,
    and as a company we have taken several important steps to ensure this.
    Here, I would like to share several key points to explain why FTX's
    environmental impact is de minimis, but nonetheless explain the
    additional steps the company has taken to reduce even further this
    impact. First, FTX has no factories or physical products and therefore
    does not leverage global shipment networks, a substantial source of
    energy consumption. FTX has a small workforce with a small physical-
    office footprint, renting only a few small offices spread out around
    the world, and operates online. FTX corporate operations, therefore, do
    not have direct impacts on climate change at a globally relevant scale.
        Second, while digital asset deposits to and withdrawals from FTX
    platforms unavoidably require some energy consumption as public
    blockchains facilitate and record those transactions, on FTX over 80
    percent of deposits and withdrawals use low-cost, carbon-efficient
    Proof of Stake (PoS) blockchains. These PoS networks contrast with
    Proof of Work (PoW) blockchains such as the Bitcoin (BTC) blockchain,
    which consume significant amounts of energy to maintain the network. By
    using PoS blockchains for the vast majority of FTX deposits and
    withdrawals, FTX massively reduces the overall climate impact of
    blockchains. To facilitate the remaining approximately 20 percent of
    deposits and withdrawals, energy consumption is relatively small, but
    FTX subsidizes the blockchain network fees to share in paying the costs
    of that energy consumption. Separate from deposits and withdrawals,
    transactions and transfers on the FTX exchanges themselves (which is
    the overwhelming majority of our user activity--100% of our $15 billion
    in average daily trading volume occurs on the exchange itself) do not
    require public blockchain activity and require only the amount of
    energy needed to run a cloud-based trading venue.
        Third, FTX also has endeavored to take ownership of our portion of
    the environmental costs of mining associated with public blockchains
    and has purchased carbon offsets to neutralize those costs. Estimating
    the costs of energy consumption and carbon output associated with
    blockchain mining is difficult because mining is decentralized, and
    discerning how much energy is coming from which source is elusive.
    Nonetheless, FTX estimates that it costs $1 million per year to take
    ownership of those costs, and has purchased a total of 100,000 tons of
    carbon offsets through two providers for $1,016,000. Additionally, FTX
    through its affiliated arm, FTX Climate, created a comprehensive
    program to focus on the most impactful solutions to climate change
    possible. In addition to achieving carbon neutrality, our initial
    program funds research that we believe can have an outsized impact, as
    well as supports other special projects and carbon-removal solutions.
    FTX plans to spend at least $1 million per year through FTX Climate.
    Those interested in learning more about these initiatives can find more
    information at https://www.ftx-climate.com.
        Fourth, FTX believes energy consumption by PoW blockchains and its
    impacts should be assessed within the appropriate context, which we
    believe should include consideration of their benefits, an
    understanding of their differences with PoS networks and how each type
    of network is being leveraged and growing, as well as a comparison to
    other energy-consuming activities or even industries. For example, BTC
    has delivered benefits to many as measured by access to financial
    products, asset transmission, and wealth creation, which should be
    weighed against the network's energy costs.\16\
    ---------------------------------------------------------------------------
        \16\ See ``Everything We Want Costs Energy, Including Bitcoin,'' by
    Benjamin Powers, Coindesk, Apr. 22, 2021; https://www.coindesk.com/
    tech/2021/04/22/everything-we-want-costs-energy-including-bitcoin/; see
    also ``The Bitcoin Mining Network: Trends, Average Creation Costs,
    Electricity Consumption & Sources,'' CoinShares Research, June 2019
    Update, https://coinshares.com/assets/resources/Research/bitcoin-
    mining-network-june-2019-fidelity-foreword.pdf.
    ---------------------------------------------------------------------------
        Additionally, while PoW networks attract attention for their energy
    consumption, transactional activity on PoS networks is growing
    substantially due to their ability to process a greater number of
    transactions in a shorter period of time at a lower cost. FTX believes
    these PoS networks will become increasingly important over time, which
    will continue to minimize the overall climate impact of blockchains.
    And finally, the energy consumption by PoW blockchains is relatively
    small when compared to other industries to which the BTC network in
    particular is often compared.\17\ Of assets whose futures trade on
    CFTC-regulated venues, BTC actually ranks fairly low in terms of
    environmental impact, relative to traditional, physically mined
    commodities, oil, livestock and other environmentally impactful assets.
    ---------------------------------------------------------------------------
        \17\ See ``On Bitcoin's Energy Consumption: A Quantitative Approach
    to a Subjective Question,'' Galaxy Digital Mining, May 2021, Rachel
    Rybarcyzk, Drew Armstrong, Amanda Fabiano. https://docsend.com/view/
    adwmdeeyfvqwecj2.
    ---------------------------------------------------------------------------
        Commitment to Giving Back. FTX is committed to improving the lives
    not just of our customers through superior products, but also the lives
    of those in the broader global community. Toward this end, FTX created
    the FTX Foundation, which was founded with the goal of donating to the
    world's most effective charities. FTX has pledged to donate one percent
    of net revenue from fees to the foundation, and its founders have
    pledged to donate the majority of what they make. FTX, its affiliates,
    and its employees so far have donated over $50 million to help save
    lives, prevent [suffering and] ensure a brighter future.
                                   exhibit b
    Stablecoin Regulation
    Context on stablecoin regulation
        As the cryptocurrency industry matures, it's vital that a robust
    regulatory regime grows alongside it which takes seriously its duty to
    protect consumers, ensure transparency, and prevent illicit activity,
    while still allowing for innovation and growth.
        Stablecoins play a crucial role in the cryptocurrency ecosystem;
    the majority of all transactions in crypto are settled via stablecoins,
    and they are one of the most promising payment tools for the broader
    financial sector. It is also, as of now, unclear exactly what
    regulatory regime stablecoins will end up being placed in.
    What is a stablecoin?
        Let's start with the core question: what exactly is a stablecoin?
        There are a wide variety of stablecoin designs that have been
    utilized in the cryptocurrency ecosystem. For illustrative purposes, in
    this article we will assume a stablecoin on the U.S. Dollar, although
    parallel assets do exist on EUR, GBP, and other currencies. We will
    also imagine that it is 1:1; that is, 1 token represents 1 U.S. Dollar.
    We will imagine that the token's ticker to be STBC.
        In this construct, this imaginary stablecoin, STBC, is a
    blockchain-based asset that can be exchanged for a U.S. Dollar. That
    would typically be accomplished through the following mechanics and
    arrangements:
        Reserves: Typically, a stablecoin is backed by one or more USD
    accounts or other similar assets, generally held at a bank, in an
    account under the name of the stablecoin sponsor, issuer, or other
    similar body. The USD value of the assets should be at least the supply
    of the stablecoin.
        Token: A blockchain-based token, STBC, where one token represents
    $1 (as supported by the creation / redemption process, described
    below). These could be issued by a private company, a central bank, or
    a decentralized protocol.
        Creation/Redemption: In order to create 1 STBC token, an eligible
    user must send $1 to the reserve account. In return, the protocol mints
    1 new STBC token and sends it to the user.
        Similarly, an eligible user may send 1 STBC token back to the
    protocol to redeem it for $1. The protocol destroys the token and sends
    $1 back to the user.
    What are the benefits of stablecoins?
        We believe that stablecoins are one of the most important
    innovations of the cryptocurrency industry.
        Let's say you want to send $20 to a friend. What are your options?

      (a)  You could hope that both you and your friend use the same peer-
                to-peer transfer app (e.g., Venmo), and then separately
                each of you figure out how to send money to/from that app.

      (b)  You could send a $20 wire transfer to your friend. This would
                likely take a day and cost $5+ in fees; and if it's
                international, it might take a week and cost substantially
                more in fees.

      (c)  You could send $20 via ACH, if both you and your friend use
                U.S.-based USD bank accounts. Then, the transfer would not
                fully settle for months, exposing both parties to
                ``chargeback risk''.

      (d)  You could go to an ATM, withdraw $23 paying a $3 fee, and hand
                $20 to your friend, who would then have to find a way to
                use the physical dollar bills.

      (e)  You could send 20 STBC to your friend's cryptocurrency wallet;
                if you use an efficient blockchain (or both use the same
                exchange), it will arrive in less than a minute, costing a
                tiny fraction of a penny in fees.

        Option (e), the stablecoin, has a compelling case here as an
    efficient means of transfer.
        Taking our real-world use case a step further, consider that a user
    wants to build a blockchain-based application. How should the
    application's users contribute and withdraw assets?
        Here, the users face the same potential options and cost structures
    as before; once again, stablecoins are the cheapest, safest, and
    fastest way for a user to engage with that application.
    What are the risks of stablecoins?
        There are three major intertwined risks associated with
    stablecoins.
    Reserve volatility risk
        If the stablecoin is backed by something other than U.S. Dollars in
    a bank account, the asset might depreciate against USD. If, for
    instance, you were to back a stablecoin with 1,000,000 tokens issued
    with $1,000,000 of the SPY (S&P500) ETF, and stock markets decreased 5%
    in price, you would be left with only $950,000 backing 1,000,000
    stablecoins--meaning that the ``stable'' token had in fact fallen in
    value, at least in regards to the reserves it is purported to be
    redeemable for!
        Unlike investment products where customers gain from appreciation
    in the assets backing the product, there is generally no way for a
    stablecoin to be worth more than $1, as customers can always create
    more for $1 each. This means that the core philosophy behind the assets
    backing a stablecoin should be to focus on assets with low volatility
    which are very similar to USD. U.S. Treasury bonds may be an
    appropriate asset for a stablecoin's reserves; if Bitcoin is used, it
    has to be over-collateralized to an extent that there is very little
    risk of loss to the stablecoin holders. Backing 100 stablecoins with
    $101 of BTC is untenably risky: a mere 2% decrease in Bitcoin markets
    would cause the stablecoin to be under-backed and no longer fully
    redeemable for $1. Backing 100 stablecoins with $400 of BTC, on the
    other hand, is substantially more defensible, as there is very little
    risk of a 75% move before the reserves would have a chance to de-risk.
    Any stablecoin issuer or designer must have a transparent, robust risk
    model to mitigate the volatility of its reserves, including determining
    which assets are appropriate for its reserves.
    Redemption risk
        A related worry is that a user might own 1,000 STBC, go to the
    issuer to redeem their STBC, and be denied.
        This might happen if the reserves had in fact run out of dollars
    and so there was nothing left to redeem STBC for; this would likely
    imply the reserves had not been in USD, and had fallen in value.
        Alternatively, this could happen if the issuer arbitrarily decides
    to block your redemption, possibly to try to keep more impressive
    metrics for STBC.
        Either way, the lack of ability to redeem (or a lack of
    transparency related to redemption process and requirements) presents a
    risk to the user.
    Financial crimes
        One final risk of stablecoins is that they could be used for
    financial crimes, or to finance illicit activities.
        Any stablecoin issuer or designer must include creation,
    redemption, and use mechanics that, in harmonization with regulation,
    address and avoid this use case.
    What is a sensible stablecoin regulator framework?
        As noted above, we believe that stablecoins have presented a
    significant positive use case to the world, and they continue to hold
    the potential to revolutionize the payments and remittances industry.
    Stablecoins could in the future revolutionize the payments industry,
    drastically reducing friction and transaction costs, delivering to many
    around the world the benefits that come with having access to reliable
    and usable value transmission. As such, we think it is important to
    ensure that the ongoing regulatory discussions around the approach to a
    framework for stablecoins be based on a practical structure that solves
    equally for usability, reliability, transparency, consumer protection,
    and the identification and prevention of financial crimes.
        We look forward to engaging with regulators on examples of what
    such a framework might look like. There are many different approaches
    and we remain open and excited for feedback and engagement from
    regulators and from other participants in the cryptocurrency industry.
        As outlined above, there are real risks associated with
    stablecoins, and any framework should work to mitigate those.
        As such, while we look forward to continuing dialogue on the
    details, we would be in favor of a proposal for a transparency-based
    reporting and registration regime for stablecoins.
        A proposed framework might look like the following:

      (a)  All stablecoins issued to U.S. users must be registered on an
                official list of ``regulated stablecoins'' under the
                oversight of one or more U.S. regulatory department(s).

      (b)  The registration itself would be focused on transparency and
                reporting, on a notice filing basis, coupled with clear
                obligations on recordkeeping, reporting, and regular
                examination. The regulatory departments authorizing the
                program would have the ability to decertify registered
                stablecoins.

      (c)  The registration would involve publishing a daily Reserves List
                which details what the total net value of the stablecoin's
                reserves are, and breaks that down into exact quantities of
                specific categories (e.g., ``100 USD in Bank XYZ; $95 of
                short-term U.S. treasury bills; $50 of Tier-1 commercial
                paper of U.S. companies; $30 of Tier-1+ commercial paper of
                European companies; $10 of [other suitable assets as
                permitted by the regulation and by that stablecoin's
                registration document]'')[.]

      (d)  The registration would require that the issuer maintain
                ``sufficient'' reserves. This could be defined by a set of
                haircuts on various types of reserves. E.g., perhaps a
                0.10% haircut on USD in an FDIC insured bank account; a 1%
                haircut on short-term U.S. treasury bills; a 10% haircut on
                Tier-1+ commercial paper; a 15% discount on Tier-1
                commercial paper; a 20% haircut on EUR, GBP, JPY, CHF, CAD,
                AUD, SGD, HKD, etc.; and a 50% haircut on Bitcoin.

      (e)  The registration would require semi-annual audits by an
                accounting firm to confirm that the reserves are as
                represented.

      (f)  The registration would require stablecoins to have clear and
                transparent redemption requirements (e.g., based on Know
                Your Customer documentation) and a clear customer complaint
                process if a redemption is denied.

      (g)  To address financial crimes, all registered stablecoins would
                have to be on a public ledger, and the creation and
                redemption process must be sufficiently structured in order
                to ensure that stablecoins associated with illegal activity
                (as observed via on-chain surveillance and analytics tools,
                via a suite of standard blockchain surveillance software)
                cannot be redeemed.

        As noted above, this is a basic strawman framework for how the key
    components of a potential stablecoin registration program might look.
    Each of these points are designed to preserve the usability of
    stablecoins while solving for regulatory considerations that need
    addressing. If designed in the right way, this framework could enhance
    the ultimate usability of stablecoins. We very much look forward to
    engaging with policymakers, regulators, and market participants on
    these concepts.
                                   exhibit c
    FTX's Key Principles for Market Regulation of Crypto-Trading Platforms
              In this piece we identify a series of ten principles (and in
            some instances, proposals) that should guide policy makers and
            regulators as they build the regulatory framework for spot and
            derivatives crypto markets. FTX does not propose specific
            legislation here but rather principles and proposals that could
            be reflected in policy making, whether in the form of
            legislation, rulemaking, or other regulatory action. Many of
            these principles are familiar to traditional securities and
            derivatives markets, but some of the principles reflect market-
            structure choices made by FTX and other crypto-platform
            operators that we believe lead to superior outcomes for
            investors and, indeed, the public. FTX therefore believes
            public policy should not only permit these choices but promote
            those that lead to such outcomes. Some of the discussion here
            focuses on the U.S. marketplace, but the principles and
            proposals are applicable in any jurisdiction globally. FTX
            appreciates being able to engage in this dialogue with policy
            makers and regulators, and we are always happy to pursue
            follow-up discussions with interested parties. See our prior
            policy blog posts at https://www.ftxpolicy.com.
    1. Proposing One Primary Market Regulator with One Rule Book for Spot
            and Derivatives Listings
        In the U.S. regulatory ecosystem, spot markets and derivatives
    markets are subject to different regulatory programs, and this can lead
    to inefficient and non-optimized market structures. In this post we
    propose as a solution an alternative regulatory approach that would
    provide market operators the ability to opt in to a unified regulatory
    regime for spot and derivatives marketplaces, through a primary
    regulator model.
        As many know, the CFTC is the primary regulator of commodity
    derivatives marketplaces, while the SEC is the primary regulator of
    cash securities marketplaces, and the two agencies share oversight
    responsibility for certain aspects of security derivatives
    marketplaces.
        In parallel, there is a further regulatory split for spot markets
    (sometimes called ``cash markets'' in the traditional commodities or
    securities context), where the applicable regulatory program depends on
    whether the product being traded is categorized as a security (where
    the SEC regulates) or a commodity that is not a security (where the
    states largely regulate, via money transmitter or money services
    business licensing).
        Against that backdrop, and particularly outside of the U.S., we
    observe that many crypto-native trading-market operators offer for
    trading both spot transactions on crypto assets as well as derivatives
    on those assets, under a unified rule book, one collateral and risk-
    margin program, and a single technology stack. This model is generally
    not found in the U.S. given the jurisdiction's historically fragmented
    approach to market regulation. Nonetheless, we believe that for traded
    crypto markets, the key principles for market regulation (customer and
    investor protection, market integrity, preventing financial crimes, and
    system safety and soundness) generally apply equally across spot and
    derivatives markets, and commodities and securities markets. That is,
    the regulatory label on a given product or market need not change the
    core goals of regulation, and the same rulesets should generally apply
    across all markets. For that reason, we strongly support offering a
    single unified regulatory program for crypto market operators.
        Specifically, in jurisdictions where there is a primary
    derivatives-market regulator separate and distinct from a primary cash-
    markets regulator (such as in the U.S.), policy makers and regulators
    should seek to permit qualified crypto markets operators to run a
    single rule book, risk program, and technology stack, approved and
    overseen by a primary regulator (perhaps chosen by the marketplace on
    an opt-in basis and supported thereafter by inter-regulator cooperation
    and information sharing, with the possibility of the primary regulator
    shifting if the underlying product mix evolves in a certain way), that
    governs the listing and trading of both spot cash transactions in
    crypto assets as well as derivatives on crypto assets.
        Much of this can be achieved today under existing statutory
    authority and with creativity and cooperation by and among market
    regulators. With some specific issues, however, clarity might be needed
    from legislation. Under the current U.S. paradigm, for example, we
    acknowledge that it is unlikely to be absolutely clear at any given
    moment, absent legislation, whether all of the crypto products listed
    on such a venue are definitively ``within'' or ``without'' the
    jurisdiction of either of the market regulators. However, between two
    possible regulatory solutions under this paradigm--which are (1) that
    regulators can prohibit the marketplace altogether (via indecision,
    decree, or a combination of the two), or (2) that regulators can
    innovate and cooperate to ensure that key regulatory and policy goals
    are met in a clear and robust way while also permitting the marketplace
    to operate--we think the second approach offers a compelling option.
        Said more explicitly, in jurisdictions where there are two mature
    market regulators, FTX proposes the permissibility and adoption of a
    reasonable and rigorous framework that would allow a crypto-markets
    platform operator to elect one market regulator as its primary
    regulator for a unified spot and derivatives trading book, subject to
    adherence to a cooperative framework in which the other market
    regulator acts a secondary regulator while maintaining appropriate
    visibility into the platform's operations, but not day-to-day
    supervisory responsibilities. (Indeed, a similar approach is used today
    when a market regulator from one jurisdiction ``recognizes'' the
    framework of a different jurisdiction where a primary, ``home''
    regulator resides, and then defers to that primary regulator's
    regulations and rulesets so long as they are sufficiently comparable.)
        We propose a functional-based approach, where the regulation and
    the trading venue rule books that comply with that regulation should be
    largely modeled after existing market regulations for securities and
    derivatives markets, on the basis that most jurisdictions will follow
    this same approach. FTX believes that there is a unique current
    opportunity for U.S. regulators to take a leadership position in the
    global crypto markets regulatory discussion, and we believe that
    modeling a primary regulator model on existing market regulation will
    foster standardization and harmonization of regulation globally, paving
    the way for international adoption and reciprocal jurisdictional
    recognition.
        To underscore why we are so focused on these regulatory issues--it
    is because we believe that getting crypto market regulation
    appropriately calibrated is critical for the continued development of
    healthy, transparent, and well-functioning global crypto markets, which
    we believe will deliver knock-on positive effects to the global economy
    as a whole. And we think our proposed approach, in addition to solving
    for regulatory uncertainty and fragmentation, would also reduce
    operational complexity by allowing matching engines for both spot and
    derivatives transactions to operate on the same platform with the same
    user interface. This in turn would reduce operational risk to the
    platform, and promote capital efficiency by allowing collateral in
    support of both order books to rest on the same platform. In the rest
    of this piece, we discuss in more detail various additional practical
    benefits of crypto marketplace operators being subject to unified
    primary regulator oversight.
    2. Full-Stack Infrastructure Providers and Maintaining Market-Structure
            Neutrality
        Regulation should be market-structure agnostic, provided that the
    core regulatory issues (identified above as customer and investor
    protection, market integrity, preventing financial crimes, and system
    safety and soundness) are addressed. Technology has enabled any capable
    entity to perform the various functions involved with the pre-trade,
    execution, and post-trade phases of the lifecycle of an asset trade or
    transaction in a single regulatory stack--in fact, to split up those
    functions, from a technology perspective and when building a market
    from the ground up, would require a forced and artificial
    deconstruction.
        However, one of the things that prohibits an entity from taking on
    any or all of these functions can be the specifications of a
    regulation. To say it another way, much of current market structure is
    a creation of regulatory artifact rather than a reflection of a
    thoughtful and holistic approach to marketplace design, efficiency,
    transparency, and risk management. FTX built and continues to evolve
    its trading ecosystem with the latter approach in mind.
        We believe that so long as the various needed functions necessary
    to the lifecycle of a transaction are being met, policy makers would do
    well to remain otherwise neutral on how a market is structured (so long
    as appropriate customer protections also are in place, discussed
    below). For one example, most market regulation today envisions an
    intermediated marketplace where an intermediary such as a broker
    interfaces directly with a customer (think back to calling in, or
    mailing in, your order to a broker that had access to the physical
    exchange floor). In contrast, crypto-asset platforms largely dispense
    with this mode in favor of a direct-membership market structure, where
    end investors onboard directly to the platform for trading, and not
    through an intermediary or broker (although service providers such as
    internet and data-center providers are involved).
        A non-intermediated market allows all users to get the same access
    to market data (consider that FTX's data is free, globally, versus much
    of the global trading venue industry where data fees are a material
    commercial component of the business), connectivity, and key features
    related to functionality and risk management, regardless of the
    sophistication of the user. The positive implications of this are
    potentially enormous, and are only just beginning to be seen,
    interestingly, around the direct-to-consumer crypto marketplace models.
    The public is better served if the barrier to entry to transact
    competitively with global markets is an internet connection, rather
    than a $100,000 (or more) data-subscription fee and a costly fee- or
    commission-based relationship with a broker that merely plugs you into
    the trading venue's technology. Non-intermediated markets create a more
    level playing field that's often lacking in many traditional financial
    systems, whose market structures have created a number of challenges
    including real and perceived conflicts of interests between
    intermediaries and their customers.

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Consequently, a direct membership market structure should be
    expressly permitted (not required, but permitted) so long as the
    relevant customer protections continue to be afforded, in this case by
    the platform provider.
    3. Custody of Crypto Assets--Key Functional and Disclosure Requirements
        For crypto assets, the asset is safekept in a wallet, where custody
    can be performed by the asset owner or by a wallet holder on the
    customer's behalf. Where custody is performed on a customer's behalf by
    a platform operator or intermediary, appropriate safeguards should be
    disclosed in policies and procedures of the custodian. Key areas of
    focus and disclosure should include: wallet architecture; whether
    insurance is provided by the custodian; how private keys are kept
    secure, managed and transferred; managing risks related to insider
    collusion or fraud; and physical security of data centers.
        Importantly, in the case of platform operators, consideration
    should be given to the increasingly common practice of using third-
    party providers for data centers (i.e., cloud-service providers) as
    well as custodial services. In these instances, the platform operator
    will not itself perform these functions but nonetheless will be held
    responsible by users for them, and users should be given visibility
    into how third parties will address the aforementioned issues. Market
    supervisors should require regulated platform operators to perform
    regular diligence on their vendors and to have sufficient business
    continuity and disaster-and-recovery programs in place in connection
    with their vendor suite.
    4. Full-Stack Market Infrastructure Providers and the Lifecycle of a
            Trade--Addressing Risk Related to Token Issuance and Asset
            Servicing, Orderly Markets and Settlement of Trades, Cross
            Margining and Risk Management of Positions
        Again, native crypto-trading platforms integrate into a whole the
    system for custody, issuing tokens, settlement of trades, and risk
    managing positions with one technology stack. In creating or fine-
    tuning a regulatory framework for these platforms, policy makers should
    ensure that market supervisors understand this system through well
    developed and clear policies and procedures disclosed by the platform
    operator. The framework should address the following key issues related
    to the lifecycle of a spot or derivatives trade.
    Token Issuance and Asset Servicing
        Token issuers who have access to the platform for purposes of
    issuing a token should be governed by disclosed policies and procedures
    that explain the listing standards for tokens. In some cases, existing
    securities laws will apply, in which case the policies and procedures
    should explain how such laws are complied with by the platform as it
    relates to issuing the security tokens.
        This document does not address whether existing securities laws
    should be amended to account for distributed-ledger technologies and
    new methods of issuing securities in tokenized form. Suffice it to say
    here that some of the traditional requirements for central securities
    depositories might not be appropriate for platforms that offer these
    services, but others will be.
        To the extent a token is not a security but has some security-like
    features at some point in time, and policy makers otherwise have not
    addressed whether such tokens should be treated as securities, a
    platform operator in any case should be required to disclose, or
    otherwise facilitate disclosure of (i.e., most material information for
    a token can be easily found on the Web, and a platform could direct a
    platform user to this information), key material information about the
    token issuer as part of the platform's listing standards.
        Likewise, in the case of all tokens, the platform operator should
    develop and disclose policies and procedures for how a token issuer
    will interact with the platform for purposes of facilitating asset
    servicing, so that supervisors and platform users both can understand
    and assess the risks to the platform posed by token-issuance
    functionality. This would be especially relevant in the case of
    security tokens, where dividend payments and changes in ownership, for
    example, would impact the token and the owner of the token.
    Market Surveillance
        Good public policy would require that a crypto-platform operator
    has policies and procedures concerning the practices and technology
    used to perform market surveillance of the platform's trading
    environments in order to curb market manipulation and promote orderly
    markets. This is standard policy for traditional supervised markets and
    should be carried over to supervised crypto markets as well.
    Settlement
        With regard to settlement, our recommended policy would require the
    platform operator to have clear and transparent policies and procedures
    that explain when settlement of a transaction becomes final, and the
    conditions and circumstances under which the platform provider would
    reverse settlement due to errors, etc. By and large, regulated venues
    do this today in their terms of service, etc., and we think it is
    important they continue to do so.
        One of the hallmarks of the FTX trading experience is to allow
    users to pair in a transaction nearly any combination of assets for
    purposes of settlement--for example, a user could exchange BTC for USDC
    or for SOL. Sound policy would allow the platform to settle
    transactions by pairing the assets with any of the others listed on the
    platform, including stablecoins or cash fiat currencies (see below for
    discussion of stablecoins) but also other crypto assets, so long as the
    platform otherwise made clear how and when settlement becomes final.
        Another hallmark of full stack trading experiences is access to
    credit to ensure and promote liquidity on the platform. Public policy
    should allow platform operators to facilitate the provisioning of
    credit to platform users so long as this service and function are well
    documented and explained to the supervisor and market participants on
    the platform. This is a clear example of where services previously
    provided by intermediaries can be solved by the trading venue itself.
        Because crypto platforms have led the way in exchange innovation,
    public policy should anticipate that crypto firms will become more and
    more integrated with traditional payment rails and similar systems.
    Policy makers should consider whether and when to expressly delineate
    under what circumstances these platforms could access government-
    sponsored payment systems created for the settlement of securities, for
    example. Other policy initiatives will address whether and under what
    circumstances securities, including government-issued securities, can
    be reflected in tokenized form, but if such tokenization is permitted,
    an otherwise properly supervised platform operator should be allowed to
    access existing payment systems to facilitate settlement of such
    securities, even if interaction with that system is not on a real-time
    basis. Such a policy is recommended because otherwise access to this
    payment system would involve an intermediary, introducing various types
    of counterparty, operational, and credit risks to the platform that
    would not be in the interests of the participants on the platform
    (which itself would be highly supervised under our proposed framework).
    Cross Margining and Risk Management
        The regulatory framework for crypto should clearly allow for the
    cross-margining of both derivatives and spot positions on the platform
    with any and all assets permitted in the customer wallet and account,
    subject to appropriate risk weights and haircuts, as applicable. For
    the settling and risk management of crypto asset transactions on a
    crypto platform, the settlement and risk systems are automated and the
    relevant software interacts with the wallet and account that contain
    customer assets.
        A well-designed regulatory framework would allow a single platform
    to perform all risk functions, and require the appropriate standards on
    those functions. For example, in addition to the custody requirements
    mentioned above, the settlement and risk-management systems should be
    appropriately explained to the market supervisor through the platform's
    rule book, and the regulator should be made aware of major changes to
    the system.
        Sound policy also should ensure that risk-management systems used
    by a platform operator are configured to prevent customer accounts from
    going net negative across positions. A risk-management system that
    effectively performs this function with this goal, including through
    liquidations of customer positions, should not be allowed to do so in
    an arbitrary manner. Instead, the rules, risk parameters and business
    logic that trigger any actions taken by the customer platform as it
    relates to customer assets should be clearly disclosed and
    appropriately explained to the supervisor as well as the platform users
    in the platform's rule book, which should be approved by the primary
    market supervisor.
        In permissioning the use of a risk-management system for clearance
    and settlement, policy makers should take care to remain technology and
    methodology neutral, so long as the platform operator can effectively
    demonstrate its responsibilities can be adequately met.
    5. Trading Platform Providers--Ensuring Regulatory and Market Reporting
        Regulatory reporting of transactional activity should be required
    in order to provide market supervisors appropriate visibility into the
    trading platform, and to better allow supervisors to police for market
    manipulation and other unfair trade practices.
        Policy makers should consider carefully how best to provide this
    data--a requirement should be considered that would mandate that
    trading platforms create an API for the beneficial use of market
    supervisors to directly ingest data from the platform itself, rather
    than require a separate entity to undertake reporting responsibilities.
        With respect to market reporting, a hallmark of the crypto-asset
    industry (as previewed above) is the provisioning of market data to
    users free of charge. Policy makers should carefully consider the
    standards under which platforms are permitted to charge users a fee for
    the provisioning or use of market data related to trading that takes
    place on said platform along with the implications of that activity for
    market access, transparency, and fairness policy initiatives. The right
    standards could incentivize the platform operators to focus on risk
    management, user experience, and product innovation for competitive
    advantage rather than fees based on trading activity brought to the
    platform by the user.
    6. Ensuring Customer Protections
        As suggested, crypto-asset platforms have ushered in an evolution
    of market structure in favor of anon-intermediated model, where
    entities separate from the platform are not needed in order to access
    the platform and the trading environment.
        In this market structure, however, key customer protections should
    remain in place. From a policy perspective, one approach could be a
    very general and non-prescriptive one that requires that platform
    providers or intermediaries develop and disclose policies and
    procedures to ensure the best interests of all customers are protected
    at all times, and leave it to the entity's discretion. This would allow
    investors to choose a platform provider based on the robustness of
    those policies and procedures.
        If a more detailed or prescriptive approach is favored, such an
    approach should consider whether specific requirements related to
    practices impacting platform customers such as front-running trading
    activity, market manipulation, general risk disclosures related to the
    assets and instruments listed for trading, appropriate and non-
    misleading communications with customers, and avoidance of entering
    into conflicts of interest with customers. Again, appropriate customer-
    protection requirements can be borrowed from the traditional finance
    space--the key is to ensure that the platform provider can provide them
    rather than insisting that an intermediary perform the function. FTX
    believes that marketplace operators are properly positioned (perhaps
    best positioned) to deliver these types of disclosures and materials to
    users in a way that can be built directly into the trading venue user
    interface/user experience.
    7. Ensuring Financial Responsibilities are Met
        As with traditional markets, ensuring that customer assets are
    protected to the maximum extent possible should be a principle for
    regulating crypto-asset markets.
        Again, the prominence of the wallet as a tool for storing assets is
    key to the crypto-asset space, and apart from requirements to ensure
    that the wallet itself is safely maintained and secured, policy makers
    should ensure that customers have access to real-time information about
    their account levels at all times (and redundant access paths, in the
    event of disruptions on one access path), particularly if and when a
    platform operator commingles customers' assets in an omnibus manner. If
    a platform provider elects to provide this infrastructure, operational
    complexity can be substantially reduced while customer assets are
    meaningfully protected.
        In the case of a platform operator or an intermediary, policy
    makers should consider whether to adopt a minimum capital requirement
    (or other financial wherewithal condition) to ensure there are adequate
    resources to address operational and other types of risks that could
    jeopardize customer assets in custody. For platform operators, this
    could take the form of ensuring operational resiliency but in addition
    also ensuring adequate resources to address defaults and liquidations
    performed by a risk-management system (see above discussion on platform
    risk management). The goal should be to ensure platform operators need
    not depend on off-platform resources for settlement and risk
    management.
        With respect to margining customer accounts, there should be a
    policy that expressly allows portfolio margining of all customer
    positions in all assets on the platform. This risk-management approach
    promotes capital efficiency and reduces operational risks to the
    platform or intermediary managing the customer account.
    8. Ensuring Stablecoins Used on Platform Meet Appropriate Standards
        A platform operator that permits the use of stablecoins for
    settlement of transactions should be required to explain the standards
    the platform operator uses in deciding which stablecoins it permits for
    such purposes. FTX has articulated and explained its policy
    recommendations for stablecoin issuers (see https://blog.ftx.com/
    policy/context-stablecoin-regulation/).
        The reason such a policy is recommended is that stablecoins are
    exposed to reserve-volatility as well as redemption risk, and platform
    users should be entitled to some understanding of whether and to what
    extent those risks could impact their activity on the platform,
    including their impact on settlement of transactions (which might not
    be direct, but nonetheless indirect).
        For example, a stablecoin backed by risky and volatile assets and
    not transparently backed by an adequate amount of such assets with
    appropriate haircuts, could become exposed to price risk. This price
    risk could interfere with settlement finality on the platform, insofar
    as the value of the stablecoin delivered as payment for the crypto
    assets in a transaction on the platform are suddenly not equal.
    Ensuring that stablecoins allowed for use on the platform meet adequate
    standards set by the platform operator (or by public policy makers if
    applicable) mitigates this risk, and should better protect the users of
    the platform.
    9. Full-Stack Infrastructure Providers--Ensuring Appropriate
            Cybersecurity Safeguards are Kept
        Market regulators in recent years have developed comprehensive
    cybersecurity requirements for market infrastructure providers. Policy
    makers should either apply the relevant safeguards already in place for
    exchanges, or otherwise require that the platform provider develop and
    disclose to market participants its policies and procedures regarding
    cybersecurity safeguards. In the case of platform operators already
    licensed by a market regulator, system-safeguard requirements already
    will be in place. In the case of platform operators not already
    licensed, one consideration for policy makers is to adopt a policy that
    helps facilitate standardization of these safeguards domestically as
    well as globally.
    10. Full-Stack Infrastructure Providers--Ensuring Anti-Money Laundering
            and Know Your Customer Compliance
        Platform operators must perform appropriate KYC as part of user
    onboarding and must conduct regular anti-money laundering surveillance
    of user activity (both on the trading venue and via the scrutiny of
    related on-chain transfers in and withdrawals out). Many platforms,
    including FTX, use a combination of vendors and internal compliance
    personnel to assist with these functions today. However accomplished,
    it is critical that crypto marketplace regulation continues to require
    significant focus on the performance of KYC and AML obligations. To
    ensure this, marketplace operators should be performing periodic self-
    audits and should also be subject to regular review and exam by their
    primary regulator on these requirements.
                                   exhibit d
    FTX's Key Principles for Ensuring Investor Protections on Digital-Asset
            Platforms
    Introduction
        FTX strongly believes that ensuring investor protections is
    critical to the successful operations of digital-asset platforms,
    including our own, as well as to ensuring a positive user experience
    for our customers. FTX also believes that non-intermediated ``direct
    access'' markets, such as the FTX exchanges, can and do provide a level
    of investor protection that meets and exceeds the policy goals and
    purposes of traditional investor protection regulation (notwithstanding
    the absence of an intermediary or ``broker''). Technology continues to
    displace the need for an investor to rely on intermediaries and brokers
    to access certain markets or asset classes, and one of the most
    important innovations of the digital-asset industry is a simplified
    market structure that does not need to rely on intermediaries for
    access to markets. From this observation, this paper addresses the key
    investor protection principles (described below) applicable to any
    market and the ways in which non-intermediated ``direct access''
    digital-asset platforms can and do provide these protections for their
    users.
        The goal of this paper is to support two critical propositions:

       The investor protection principles we describe in this paper
            can be provided directly by a digital-asset exchange or
            platform, using a non-intermediated market model, at an
            effectiveness level that exceeds relying on a series of
            intermediaries to provide similar protections and that
            ultimately leads to what FTX believes will be an overall risk-
            reducing market structure, for the benefit of investors.

       To the extent that legacy regulations or policies would
            assume or require an intermediary to provide these protections,
            we believe that approach often imposes unnecessary burdens and
            costs (including fees and both capital and operational
            inefficiency) on investors and markets without any
            corresponding benefit--and any such rules should be updated and
            modernized.

        If market structure policy is truly to be technology neutral (which
    is an important and often stated principle expressed by policy makers),
    market regulators must acknowledge that intermediated market structures
    are due, in many instances, to the fact that technology was less robust
    when those markets were first developed. While intermediaries
    previously were helpful because the cost and complexity of accessing
    (1) a market for trading assets or (2) the assets themselves
    (especially when securities, for example, were in material or paper
    form) were substantial enough that it was economically efficient for an
    investor, especially an individual investor, to rely on an intermediary
    to provide such access and attendant services. However, intermediated
    market access is not an a priori first principle of market structure
    design, and technology has meaningfully changed what is possible.
        Today, the only tools necessary to access a centralized marketplace
    for assets directly are (1) a computer or mobile device; (2) relevant
    ``trading'' software accessible on that hardware; (3) access to
    broadband services to transfer data over the internet, and (4) an
    application programming interface (API) to allow the trading software
    to be built and integrate with the trading platform's software. As a
    result, while investors might elect to use intermediaries for various
    reasons, those intermediaries are no longer indispensable for gaining
    access to financial products if the investor has the aforementioned
    tools.
        We believe this has led to the possibility of the reduction of many
    types of risks, as explained in FTX's Key Principles for Market
    Regulation of Crypto-Trading Platforms (hereinafter ``Market Regulation
    Key Principles''; see https://www.ftxpolicy.com/). Combined with other
    best practices and enhanced risk-management techniques utilized by FTX,
    this simplified market structure forms the basis for our argument that
    a well-designed and operated non-intermediated ``direct access''
    digital-asset platform can be risk reducing relative to traditional
    market infrastructure. Building on FTX's Market Regulation Key
    Principles, this paper continues the discussion about critical investor
    protections and our view that platform operators should be allowed to
    provide these protections, and be held accountable for them, rather
    than insisting that they be fulfilled by intermediaries on the
    platform.
        While not the core goal of this paper, we also note that
    intermediation can reduce transparency and information available to the
    customer. Traditionally, most users are not given full market data;
    neither are they allowed full access to exchanges, preventing equitable
    access. FTX's disintermediated structure ensures that all users have
    equal access to its information and markets.
    Key Investor-Protection Principles
        Ultimately, all policies affecting the operation of a digital-asset
    market ensure the protection of the investor on the platform, and FTX's
    Market Regulation Key Principles paper addresses those.\18\ Here we
    focus on specific principles related to the core of protecting
    customers' interests and their assets kept on a digital-asset platform.
    These include (1) maintaining adequate liquid resources to ensure the
    platform can return the customer's assets upon request; (2) ensuring
    the environment where customer assets are custodied, including digital
    wallets, is kept secure; (3) ensuring appropriate bookkeeping or
    ledgering of assets and disclosures to protect against misuse or
    misallocation of customer assets; (4) ensuring appropriate management
    of risks including market, credit/counterparty, and operational risks;
    and (5) avoiding or managing conflicts of interest. Each of these is
    addressed in turn.
    ---------------------------------------------------------------------------
        \18\ See https://www.ftxpolicy.com/.
    ---------------------------------------------------------------------------
    1. Maintaining Adequate Resources to Return a Customer's Assets
        A hallmark of the investor-protection regimes for markets globally
    and in the U.S. are requirements to ensure that the intermediary
    holding a customer's assets has adequate liquid resources available at
    all times to ensure that the customer can redeem her assets when she
    chooses. Often these policies are designed to ensure that there is (1)
    no delay in returning customer securities upon request, or (2) no
    shortfall, where an amount lesser than the value of the customer's
    assets can be returned to the customer.\19\ This principle often
    involves other restrictions on the custodian, including, for example, a
    restriction of the use of customer assets to finance other business
    expenses or initiatives.\20\ To ensure adequate liquid assets, familiar
    policies require a reserve of funds or qualified securities that is at
    least equal in value to the net cash owed to customers.\21\ U.S.
    derivatives policy is very similar and also requires a cushion of
    resources to be held by the entity managing a customer's derivatives
    positions to ensure timely return of customer assets.\22\
    ---------------------------------------------------------------------------
        \19\ See, e.g., SEC Rule 15c3-1, Rule 15c3-3 Adopting Release,
    Exch. Rel. No. 9775, 1972 WL 125434, at *1 (Sept. 14, 1972). See also
    FINRA Rule 2150.
        \20\ Id.
        \21\ The amount of net cash owed to customers is computed pursuant
    to a formula provided by the rule. While the formula itself is somewhat
    complex, it embodies a basic concept for the responsible stewardship of
    customer cash: if a broker-dealer owes more to its customers than its
    customers owe to it, the broker-dealer must set aside at least an
    amount equal to that difference so that it is readily available to
    repay customers. See also https://www.sec.gov/divisions/enforce/
    customer-protection-rule-initiative.shtml.
        \22\ See, e.g., CEA Sections 4d(a)(2), 4d(f), and 30.7. The CFTC's
    customer-protection rules for FCMs are very similar, and the rules
    embody, inter alia, the concepts of ``segregation of customer assets''
    as well as ``targeted residual interest,'' which like the SEC's
    requirements require that adequate resources provided by the FCM
    itself, in this case, are included in the customer's segregated account
    to ensure there is efficient and adequate return of customer assets
    upon request.
    ---------------------------------------------------------------------------
        FTX recommends policy makers consider a policy embodying this
    principle for digital-asset platform operators: fashioning a
    requirement, to be reflected in the platform's policies and procedures
    or otherwise, where the platform operator is accountable for keeping
    adequate liquid resources to ensure it can deliver customer assets back
    to the customer upon their request. This principle is sound for all
    asset types, and while the policy today tends to fall on
    intermediaries, it can just as easily be applied to the platform
    operator; in general, it should apply to whichever entity is custodying
    customer assets. Such a policy as applied to digital-asset platform
    operators would be independent of other requirements to ensure adequate
    capital to cushion losses (see discussion below).
        To the extent existing regulations have implemented this principle
    by fashioning restrictions on intermediaries, most market supervisors--
    including those in the U.S.--have other authorities that would permit
    appropriate or conditional application of such a duty on a market
    operator. The fact that customer assets include digital assets and
    tokens in principle need not alter the basic policy of ensuring there
    is the availability of liquid assets.
        FTX has policies and procedures for its platforms today that
    reflect this basic principle by maintaining liquid assets for customers
    withdrawals, including a sufficient balance of digital assets funded by
    the company for its non-U.S. platform. The resources are funded to
    provide sufficient cover against user losses under certain events and
    extreme scenarios in order to, among other purposes, ensure a customer
    without losses can redeem its assets from the platform on demand.
    2. Securing Environment Where Customer Assets Are Custodied
        Another key customer-protection principle is making sure that the
    environment itself, where customer assets are kept, is safe and secure.
    Existing market regulation often looks to the requirements of other
    financial custodians and intermediaries that also custody assets as a
    proxy for safety and security. For example, U.S. policy has the concept
    of requiring the use of a ``qualified custodian'' for the custody of
    customer cash and securities,\23\ which in many instances is another
    intermediary that is also supervised and otherwise equipped to ledger
    and track a specific customer's funds.\24\ Interestingly, the CFTC
    explicitly recognizes that a clearinghouse is subject to sufficiently
    rigorous standards and supervision that it can be entrusted with
    safekeeping customer assets.\25\ In any case, this principle mandates
    that appropriate arrangements to safeguard the clients' rights in
    client assets and minimize the risk of loss and misuse are in place,
    which can be accomplished by ensuring that the custodian of the assets
    maintains adequate levels of financial integrity, physical and cyber
    security, as well as transparency to customers about the locus and
    availability of their assets.\26\
    ---------------------------------------------------------------------------
        \23\ Under the SEC's framework, ``qualified custodians'' typically
    include banks, broker-dealers, and futures commission merchants. See
    SEC Rule 206(4)-2(c)(3).
        \24\ See, e.g., Securities Exchange Act of 1934 Rule 15c3-3. The
    CFTC's rules mandate that customer assets held at an FCM be segregated
    and clearly identified as customer assets, and be custodied by a bank
    or trust company, a registered clearing house, or another FCM. See CEA
    Sections 4d(a) and 4d(b) and CFTC Regulation 1.11.
        \25\ In the United States, some CFTC regulated clearinghouses
    already have direct clearing relationships with traders and are
    therefore holding customer funds without using intermediaries.
        \26\ See IOSCO Final Report on Recommendations Regarding the
    Protection of Client Assets (``IOSCO--Protection of Assets''),
    Principle 3 (Jan. 2014) http://www.iosco.org/library/pubdocs/pdf/
    IOSCOPD436.pdf.
    ---------------------------------------------------------------------------
        Regarding a digital-asset platform operator, the assessment of
    whether the environment delivers on this principle is different from
    that for traditional assets because the ecosystem often involves
    traditional fiat currencies as well as digital assets and tokens
    related to public blockchains. For digital assets, the digital wallet
    is central to the custody arrangements. For fiat currency, FTX and
    other platform operators will necessarily rely on licensed banking
    institutions to custody a customer's fiat currency; for traditional,
    non-tokenized securities, the custody function will follow the lines of
    the traditional market structure, unless some exemption is provided to
    allow some other arrangement--in the U.S., for example, existing
    regulations would require that custody be performed by a licensed
    intermediary legally permitted to custody such securities. (It
    certainly would be interesting, however, for policy makers to consider
    permissioning platform operators with the proven resources to custody
    these assets as well--again, derivatives regulation allows
    clearinghouses to custody assets.)
        For digital assets, however, where policy is much less developed,
    custody involves control of private keys to digital wallets, and
    physical security involves the safekeeping of those private keys. When
    digital assets are left in the custody of platform operators such as
    FTX, safekeeping private keys can be performed in-house by the platform
    operator, or by the platform operator contracting with a third-party
    (the platform operator would remain accountable for regulatory
    requirements under this arrangement). Notably, both approaches have
    been permitted by market regulators and embraced by market
    participants.
        Multiple architectures exist for the storage of private keys, which
    can be accomplished through use of a ``hot wallet,'' cold storage,
    multi-signature wallet, or even by a smart-contract wallet. To be sure,
    policy makers could decide if a particular approach should be allowed
    or prohibited based on a particular policy emphasis--each approach has
    tradeoffs related to security and efficiency--but at this time, the
    best policy approach is likely allowing market participants to decide
    their preferred custody approach by electing to transact with the
    platform operator that offers it. This approach necessarily would
    require that a platform operator adequately disclose its wallet
    architecture and security practices. In any case, limiting access to
    the private keys under custody through appropriate permissioning, and
    ensuring adequate cyber-security protections, are critical to
    discharging this principle regarding securing the environment where
    assets are kept.
        Some have suggested that allowing the platform operator to serve as
    the digital-asset custodian might present a conflict of interest for
    the platform operator, presenting more opportunities for misuse or
    misallocation of customer assets. It is far from clear to FTX that
    contracting with a third party for custody would in every instance
    lower the risks of misuse or misallocation of a customer asset,
    particularly when the platform operator would presumably remain
    accountable and, indeed, liable in every case; and each additional
    party added to a customer's experience adds another potential point of
    failure. We believe that rather than focus on any perceived conflict,
    policy makers should instead focus on the first principles described
    above for asset safekeeping (i.e., regular auditing of the
    cybersecurity aspects of the custody plan along with auditing the
    actual assets held in custody), and perhaps consider requiring the
    platform operator to disclose any remaining potential conflicts while
    developing policies and procedures to address them.
        FTX uses both approaches, using a third-party custodian in part for
    the U.S. derivatives platform and a proprietary in-house custody
    solution for the other platforms. For its in-house wallet solution and
    to maximize security, FTX leverages best-practice, hot- and cold-wallet
    standards whereby only a small proportion of assets held are exposed to
    the internet and the rest are stored offline. FTX policies and
    procedures also address and dictate other key components to the
    security of private keys, including applicable multi-signature
    arrangements, as well as the storage of relevant backup information.
    FTX's custody solutions comply with all relevant regulations, including
    those of the U.S. CFTC, and the company takes pride in the confidence
    in our security measures our customers have given to us.
    3. Ensuring Appropriate Ledgering and Disclosures of Assets to Protect
            Against Misuse
        Another key investor-protection principle is making sure there is
    adequate bookkeeping (and related records) to track the customer's
    assets, combined with appropriate disclosure and reporting.\27\ This is
    to ensure that whoever is in control of a customer's assets is not
    misallocating or misusing those assets, particularly in furtherance to
    their own purposes at the expense of the customer's best interests. The
    basic concept here is that there should be controls in place to ensure
    the custodian has books and records that keep track of and identify
    which customer owns what, and there is adequate regulatory and customer
    reporting, as well as independent auditing, to verify the same.
    ---------------------------------------------------------------------------
        \27\ See IOSCO--Protection of Assets, Principles 1 through 3.
    ---------------------------------------------------------------------------
        In keeping with this principle, FTX provides a user experience that
    enables any user to easily view account balances for all assets, for
    all of its platforms, in real time. By logging in to the customer's
    account at FTX, the customer can immediately view the types of assets
    they own held in custody by FTX. The assets are ledgered and easily
    identifiable to the user (but held in an omnibus wallet in the case of
    the customer's tokens in order to better promote liquidity on the
    platform) pursuant to internal policies and procedures, and FTX
    regularly reconciles customers' trading balances against cash and
    digital assets held by FTX. Additionally, as a general principle FTX
    segregates customer assets from its own assets across our platforms.
        Relatedly, and previewing the risk management discussion below, FTX
    ensures redundancy, resiliency, and disaster-recovery preparedness by
    using multiple geographically dispersed cloud and data service vendors
    and facilities to ensure industry-leading 24/7 service.
    4. Conducting Adequate Risk Management to Protect Digital Assets
        The next key principle is ensuring that any market participant in
    possession of customer assets is performing adequate risk management to
    protect those assets, regardless of their particular role in the
    ecosystem. There are multiple types of relevant risks that are inherent
    to any market structure, including but not limited to credit or
    counterparty risk, market risk, funding liquidity risk, and operational
    risk. (All of these in turn have a bearing on or contribute to systemic
    risk within the overall ecosystem.)
        Credit and counterparty risk refers to the risk that a counterparty
    will fail to perform its obligations. Market risk is defined as the
    potential for losses arising from the change in value of an asset.
    Liquidity risk is the potential that a position in an asset cannot be
    unwound due to a lack of depth or a disruption in the market for the
    asset. Operational risk includes a risk of loss from a failure of
    internal processes at an organization, which can be caused by human
    error, technology-system breakdowns, or communication-network failures;
    they also can include losses caused by external factors such as ``acts
    of God'' or other naturally occurring events.\28\
    ---------------------------------------------------------------------------
        \28\ For source of definitions, see The Joint Forum of the Basel
    Committee on Banking Supervision, the International Organization of
    Securities Commissions, and the International Association of Insurance
    Supervisors, Risk Management Practices and Regulatory Capital, November
    2001, p. 15, at https://www.iosco.org/library/pubdocs/pdf/
    IOSCOPD122.pdf.
    ---------------------------------------------------------------------------
        Market participants in any market, including digital-asset market
    operators, must address each of these risks to ensure against
    substantial or catastrophic losses that could lead to existential
    threats against their own firm, thereby imperiling the assets of their
    customers. In general, policy makers that develop market regulation
    have required that both market operators as well as intermediaries
    manage risk by developing appropriate policies and procedures to
    address them, which contemplate the use of quantitative methods to
    measure risk, pricing products according to their risks, establishing
    risk limits, active management of risks through hedging and other
    techniques, and the building of cushions to absorb losses.\29\
    ---------------------------------------------------------------------------
        \29\ See id..
    ---------------------------------------------------------------------------
        FTX is a full-stack infrastructure provider, combining the matching
    engine and the clearing function on the same platform, providing a
    unified user experience for the trading of assets as well as the
    clearing and settlement of those assets. FTX's Market Regulation Key
    Principles addressed other risk-management considerations for the
    trading venue itself, but here we focus particularly on risk management
    embedded in the clearing and settlement functions that relate to
    investor protections.
        Clearinghouses in traditional markets again are subjected to
    substantial regulatory rigor and are required to develop written
    policies, procedures, and controls that establish an appropriate risk-
    management framework which, at a minimum, clearly identifies and
    documents the range of the aforementioned risks and more to which the
    DCO is exposed, addresses the monitoring and management of the entirety
    of those risks, and provides a mechanism for internal audit.\30\ Public
    policy typically provides clearinghouses discretion in setting,
    modeling, validating, reviewing and back-testing margin requirements
    that build the cushion to absorb potential losses, but must develop
    such requirements nonetheless; those models are then evaluated by
    appropriate regulators.\31\ Clearinghouses are required by regulation
    to frequently check the adequacy of initial-margin requirements, value
    initial margin assets, back test products that are experiencing
    significant market volatility, and conduct stress tests with respect to
    each large trader who poses significant risk.
    ---------------------------------------------------------------------------
        \30\ See, e.g., Derivatives Clearing Organization General
    Provisions and Core Principles (``DCO Final Rule''), 76 Fed. Reg.
    69334, 69335 (Nov. 8, 2011); see also Standards for Risk Management and
    Operations of Clearing Agencies (``Clearing Agency Rule''), SEC Rule
    17Ad-22, 17 CFR Part 240.
        \31\ See id..
    ---------------------------------------------------------------------------
        FTX platforms improve upon these requirements today in a number of
    material respects, and indeed the FTX US derivatives platform complies
    with the specific requirements of U.S. policy. First, the FTX
    international exchange imposes on its users a dynamic maximum leverage
    limit depending on their absolute position, which is limited to maximum
    leverage of 20 times the notional value of the user's account, and
    substantially lower in the case of larger positions. The limit is
    calculated as a function of market liquidity and volatility, along with
    the positions and collateral that the user holds. Second, FTX platforms
    check customer-account levels and asset amounts, including those used
    to collateralize positions, multiple times per minute as opposed to
    once per day, as standard policy requires today. Third, customer
    positions are liquidated if the net balance of all of a customer's
    positions becomes negative, or positions fall below the maintenance-
    margin threshold, and the FTX risk engine performs this function
    automatically. FTX uses an advanced and user-friendly liquidation
    process that gradually reduces a user's position to bring it to
    solvency, instead of closing the entire position. Fourth, FTX's risk-
    management program requires that digital-asset collateral be placed on
    the platform itself, rather than pledged but not delivered to the
    platform, to ensure the platform has immediate access to the collateral
    for purposes of managing market risks. And fifth, FTX's markets are
    open 24 hours a day, 7 days a week, which protects against delayed
    management of customer positions or market conditions, and the
    consequent build-up of market risk.
        FTX undertakes this risk-management program without any reliance on
    intermediaries, depending only on its own systems and personnel.
    Historically, in traditional market structures, intermediaries provided
    a first or outer layer of risk management, as the entity typically
    responsible for onboarding customers and maintaining the customer
    relationship, and thereby exposing that intermediary to all of the
    attendant risks from that relationship. Market operators and
    clearinghouses are beneath or within that outer layer and, as explained
    above, also engage in management of the risks outlined above.
    Intermediated versus Non-Intermediated

    	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        In traditional market structure, any type of breakdown in the risk
    management at the outer layer of the intermediated market structure
    exposes the inner layer to consequent risks. This is so because those
    intermediaries are members of the trading platform as well, and the
    effects of a risk-management breakdown can be transferred to the
    trading platform as well as to the other members of the trading
    platform. Policy makers refer to this concept as interconnection risk.
    Arguably, the existence of this outer layer created through
    intermediation increases the opportunities for risk-management failure
    because there are so many more points of potential lapses or failure.
    Many of these can be inconsequential to the overall ecosystem, but some
    or many can be consequential.
        The simplified market structure native to the digital-asset
    ecosystem poses fewer interconnection risks within the system because
    the outer layer of participants is folded into the inner layer--
    investors access the digital-asset platform directly. Likewise, without
    intermediaries bringing their customers to the trading platform, the
    trading platform is not exposed to risk-management failures by an
    intermediary, and can focus instead on its own risk-management program.
    This in turn simplifies the role of the supervisory community
    overseeing such platforms, who by focusing on the risk management of
    the platform operator can dispense with concerns about the platform's
    members who are not intermediaries. Again, this concept is key to FTX's
    view that the market structure for our platforms is risk reducing
    compared to those found in traditional markets.
        One corollary to this concept is that involving intermediaries in
    the market structure does not by definition lead to greater investor
    protections, as some have argued. Instead, greater protections would
    depend entirely on the risk-management resources and capabilities
    (operational and financial) of the intermediary and whether they are
    delivering on other key investor protections, which in part depends on
    the level of supervision of the intermediary vis a vis the level of
    supervision of the platform. As a general matter, the supervision of
    clearinghouses as it relates to risk management in particular is equal
    to or greater than that for intermediaries, with heightened financial
    integrity and reporting standards. And as explained above, FTX risk
    management is designed and has been implemented to improve upon those
    standards in multiple ways.
        Fewer interconnections, combined with superior risk-management
    practices at the platform level, while delivering on core investor
    protections, leads to a superior and risk-reducing market structure
    that better protects investors.
    5. Avoiding Conflicts of Interest
        The final principle is that in order to ensure the investor's
    interests are protected, conflicts of interest between the investor and
    the entity offering the products should be eliminated, mitigated and/or
    managed appropriately. Once again, in traditional capital markets the
    policy focus has been on intermediaries who offer access to investment
    products or otherwise sell the products to their customers directly,
    and today there are considerable requirements directed at
    intermediaries. Although not all existing regulations related to
    conflicts will apply, to the extent that policy makers wish to apply
    the relevant measures to the digital-asset space, this could be
    accomplished rather smoothly by shifting the burden of those measures
    from intermediaries to the platform operator as needed.
        Policy governing traditional markets generally takes two approaches
    to addressing conflicts of interest: expressly prohibiting certain
    types of conduct, and requiring policies and procedures that involve
    affirmative steps to identify areas of risk for conflicts, and measures
    to mitigate or eliminate those conflicts. As an example of the former,
    most securities regimes, including in the U.S., expressly prohibit
    misstatements or misleading omissions of material facts, and fraudulent
    or manipulative acts and practices, related to the purchase or sale of
    investment products.\32\
    ---------------------------------------------------------------------------
        \32\ See, e.g., Section 15(c) of the Exchange Act.
    ---------------------------------------------------------------------------
        An example of the latter approach is a ``best interest'' or
    ``suitability'' requirement for entities offering investment products
    to their customers, again typically intermediaries in the case of
    traditional markets. This type of policy seeks to discourage entities
    from offering or recommending products that the investor does not
    sufficiently understand or possess the resources to use properly.\33\
    Other regimes are less prescriptive and generally focus on the
    financial wherewithal of a customer seeking access to a trading market,
    on the premise of ensuring creditworthiness and an ability to meet
    financial obligations on the platform,\34\ along with risk-related
    disclosures.\35\
    ---------------------------------------------------------------------------
        \33\ See, e.g., SEC Regulation Best Interest (BI), FINRA Rule 2111.
    This type of policy seeks to discourage entities from offering or
    recommending products that the investor does not sufficiently
    understand or possess the resources to use properly. To accomplish
    this, some policy regimes require the intermediary to collect relevant
    information about the customer/investor in order to ascertain the
    customer's investment profile, and then have policies and procedures
    for assessing suitability based on that information.
        \34\ See, e.g., CFTC Rule 38.602, Rule 38.604, Rule 39.12, all of
    which speak to financial fitness and wherewithal.
        \35\ See, e.g., CFTC Rule 1.55 and 33.7.
    ---------------------------------------------------------------------------
        FTX favors an approach that provides equal access to all investors,
    and follows sufficiently robust listing standards that ensure adequate
    information about the listing is provided to the customer. But if
    policy makers preferred to impose a heightened standard more similar to
    what is found in securities markets, for example, they would need to
    impose that responsibility on the platform operator, which again could
    easily be accomplished.
        In any case, whether intermediaries are involved in the market or
    not, conflicts inevitably arise when each actor is pursuing its
    commercial or economic interests. The key point for this particular
    principle is that when they do, there are familiar methods for
    eliminating or mitigating those conflicts, even as they apply to
    platform operators. FTX conducts its business with a goal of maximizing
    our customer's interest, but supports reasonable policy measures to
    eliminate or mitigate conflicts that impose those responsibilities
    directly on the platform.
                                     ______

                              Submitted Questions
    Response from Vincent ``Vince'' McGonagle, J.D., Director, Division of
            Market Oversight, Commodity Futures Trading Commission
    Questions Submitted by Hon. Ann M. Kuster, a Representative in Congress
            from New Hampshire
        Question 1. Director McGonagle, you mentioned in your testimony
    that since 2014 CFTC has brought more than 50 enforcement actions
    against digital asset markets for issues like fraud, manipulation, and
    false reporting.
        Could you speak to how the investigation process works at CFTC, and
    do you feel there is more authority or support you need from Congress
    to strengthen CFTC's enforcement role?
        Answer. The CFTC's Division of Enforcements (``DOE'') receives
    information concerning possible enforcement matters from many different
    sources.\1\ As part of DOE's process of assessing potential violations
    of the Commodity Exchange Act and CFTC regulations, DOE identifies: the
    necessary documents and information; the means available to obtain such
    documents and information (and the timing thereof); and any legal
    issues, including any statute of limitations issues. Generally, sources
    of information used by the CFTC to investigate include testimony and
    documents the CFTC may subpoena \2\ * as well as books, records, and
    other information on the commodity interest-related activities that
    registrants, registered entities, and reportable traders are required
    to keep and make readily available to DOE.
    ---------------------------------------------------------------------------
        \1\ These sources include customer complaints, market surveillance,
    Bank Secrecy Act Information, whistleblowers, self-reports, other
    Federal, state, or local government agencies, our self-regulatory
    organizations, such as the National Futures Association, designated
    contract markets, and swap execution facilities.
        \2\ The CFTC's power to subpoena testimony and documents in
    connection with its investigatory proceedings derives from Section
    6(c)(5) of the CEA, 7 U.S.C.  9(5).
        * Editor's note: footnotes annotated with  are retained in
    Committee file.
    ---------------------------------------------------------------------------
        For entities that only offer so-called ``spot'' digital commodity
    transactions, the CFTC does not have similar regulatory authority to
    require maintenance and production or inspection of required records.
    As a result, the CFTC must rely on voluntary cooperation and use its
    subpoena authority to obtain testimony, information and records
    relating to ``spot'' digital commodities. Thus, in order to strengthen
    the CFTC's enforcement tools with respect to enforcement against fraud
    and manipulative activity involving spot digital commodity
    transactions, the CFTC would need more authority and support from
    Congress, which have been thoughtfully provided in many of the proposed
    bills.
        To that end, the CFTC continues to provide technical assistance to
    Members of Congress in support of a comprehensive Federal regulatory
    regime that, among other things, strengthens the CFTC's enforcement
    role with respect to spot digital commodity transactions.

        Question 2. Director McGonagle, you also noted a number of recent
    cases involving retail fraud of digital assets and illegal off-exchange
    trading.
        Could you elaborate on how these crimes work and what you all have
    identified as emerging trends in illicit activity related to digital
    assets that you are on the lookout for?
        I know there has been a lot of focus lately on fully decentralized
    blockchains, where there is no central association acting as a
    supervisor, and as such there is also less trust between actors within
    that market.
        Answer. Illicit activity in digital asset markets has become more
    sophisticated. One current trend DOE has observed is for bad actors to
    direct customers to transfer their own fiat currency into digital
    assets and then contribute those digital assets directly to the scheme.
    For example, a fraudster may ask a victim to open an account with a
    well-known cryptocurrency platform, convert his or her fiat currency
    into the platform to purchase digital assets, and then transfer those
    digital assets directly to the fraudster's digital asset wallet.
    Fraudsters then use a variety of tools and methods to move victim funds
    in ways that make it very difficult to track both the flow of funds and
    the identity of the responsible individuals, particularly because the
    fraudster's illicit activity rarely flows through a traditional bank
    account or an account hosted by a reputable platform that has a robust
    customer identification program or know-your-customer program.
        Another common category of fraudulent and manipulative activity
    involving digital assets--known as the ``rug pull''--typically involves
    enticing victims to purchase what is held out as a soon-to-be listed
    digital asset token by misrepresenting its potential value and failing
    to disclose the fraudsters' own interest. Then, after the digital
    asset's price increases, the fraudsters sell their holdings at the
    inflated price, abscond with the purchasers' funds, and disappear.
        Additionally, DOE has observed the continuing trend of ``pump and
    dump'' activities where promoters of certain digital assets use social
    platforms to quickly and artificially ``pump up'' the value of a
    digital asset they hold and then sell off their (often undisclosed)
    ownership of those assets at increasingly higher prices, often with a
    correlating ``dump'' of the assets once their artificially inflated
    price becomes known.
        Finally, traditional Ponzi schemes are common in digital asset
    fraud cases, where fraudster often promise large returns to be derived
    from digital asset trading activity.

        Question 3. Director McGonagle, could you talk about how you see
    consumer protections being enforced in decentralized environments like
    that, and as a precursor, what factors you believe are most critical to
    objectively determining when a digital asset or token is indeed ``fully
    decentralized''?
        Answer. From the CFTC's vantage point, we evaluate whether persons
    are engaged in activity that falls within the jurisdiction of the
    Commodity Exchange Act or CFTC regulations or are otherwise engaging in
    activity that violates those provisions (including our anti-fraud and
    anti-manipulation requirements).
        Even under the CFTC's current limited jurisdiction over the digital
    commodity markets, the CFTC has been committed to protecting customers.
    For example, the Commission recently filed an enforcement action
    against a decentralized autonomous organization, for illegally offering
    leveraged and margined retail commodity transactions in digital assets;
    engaging in activities only registered futures commission merchants
    (``FCMs'') (which are subject to various customer protection
    requirements) can perform; and failing to adopt a customer
    identification program as part of a Bank Secrecy Act compliance
    program, as required of FCMs.\3\
    ---------------------------------------------------------------------------
        \3\ CFTC Imposes $250,000 Penalty Against bZeroX, LLC and Its
    Founders and Charges Successor Ooki DAO for Offering Illegal, Off-
    Exchange Digital-Asset Trading, Registration Violations, and Failing to
    Comply with Bank Secrecy Act, available at https://www.cftc.gov/
    PressRoom/PressReleases/8590-22.
    ---------------------------------------------------------------------------
        However, to best address consumer and investor protections, digital
    asset spot markets must be subject to a comprehensive Federal
    regulatory regime similar to those financial markets currently
    regulated by the CFTC. By way of example, in the futures markets that
    are currently under CFTC jurisdiction, the Commodity Exchange Act
    provides for a regulatory framework that applies to any trading
    facility that lists and offers futures contracts for trading to retail
    customers on commodities, including futures contracts on digital
    assets. Under this framework, the trading facility must apply to the
    CFTC to be designated as a contract market and then comply with 23
    statutory core principles. Those core principles require the designated
    contract market (``DCM'') to, among other things: ensure the protection
    of customer funds; \4\ protect market participants and the markets from
    abusive practices; \5\ and promote fair and equitable trading in the
    DCM.\6\ Furthermore, the core principles also require that the DCM:
    only list products for trading that are not readily susceptible to
    manipulation; \7\ be able to detect and prevent manipulation, price
    distortion, and disruption of the contract's settlement process; \8\
    and establish system safeguards, which include cybersecurity
    protections and disaster recovery.\9\
    ---------------------------------------------------------------------------
        \4\ 7 U.S.C.  7(d)(11).
        \5\ 7 U.S.C.  7(d)(12).
        \6\ Id.
        \7\ U.S.C.  7(d)(3).
        \8\ 7 U.S.C.  7(d)(4).
        \9\ 7 U.S.C.  7(d)(20) and 17 CFR  38.1051.
    ---------------------------------------------------------------------------
        In addition, under the current regulatory regime for futures
    markets, DCMs also have the responsibility, on a self-regulatory basis,
    to make sure their market participants are complying with the
    rules.\10\ Additionally, the CFTC has broad enforcement authority to
    make sure those market participants comply with the Commodity Exchange
    Act and CFTC regulations.
    ---------------------------------------------------------------------------
        \10\ 7 U.S.C.  7(d)(2).
    ---------------------------------------------------------------------------
        The Commodity Exchange Act and CFTC regulations also provide for a
    system of intermediary oversight that focuses on retail market
    participants, which includes a disclosure regime that ensures those
    market participants are informed of the risks of trading strategies and
    fees involved for their trades.\11\ These market participants are also
    informed of how their funds are being segregated and protected in the
    event of bankruptcy, as well as how such funds may be utilized.\12\
    ---------------------------------------------------------------------------
        \11\ E.g., 17 CFR  4.24 and 4.34.
        \12\ E.g., 17 CFR  1.55.
    ---------------------------------------------------------------------------
        The CFTC would be well positioned to adopt a similar regulatory
    framework for spot digital commodity markets if Congress were to direct
    the CFTC to do so.
    Questions Submitted by Hon. Stacey E. Plaskett, a Delegate in Congress
            from Virgin Islands
        Question 1. Some observers have questioned how consumer protections
    will be enforced against a fully decentralized blockchain.
        Do you believe adequate consumer protections could be achieved by
    regulating the exchanges and platforms on which most digital assets are
    bought and sold under the Commodity Exchange Act?
        Answer. Yes. By way of example, in the futures markets that are
    currently under CFTC jurisdiction, the Commodity Exchange Act provides
    for a regulatory framework that applies to any trading facility that
    lists and offers futures contracts for trading to retail customers on
    commodities, including futures contracts on digital assets. Under this
    framework, the trading facility must apply to the CFTC to be designated
    as a contract market and then comply with 23 statutory core principles.
    Those core principles require the designated contract market (``DCM'')
    to, among other things: ensure the protection of customer funds; \13\
    protect market participants and the markets from abusive practices;
    \14\ and promote fair and equitable trading in the DCM.\15\
    Furthermore, the core principles also require that the DCM: only list
    products for trading that are not readily susceptible to manipulation;
    \16\ be able to detect and prevent manipulation, price distortion, and
    disruption of the contract's settlement process; \17\ and establish
    system safeguards, which include cybersecurity protections and disaster
    recovery.\18\
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        \13\ 7 U.S.C.  7(d)(11).
        \14\ 7 U.S.C.  7(d)(12).
        \15\ Id.
        \16\ 7 U.S.C.  7(d)(3).
        \17\ 7 U.S.C.  7(d)(4).
        \18\ 7 U.S.C.  7(d)(20) and 17 CFR  38.1051.
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        In addition, under the current regulatory regime for futures
    markets, DCMs also have the responsibility, on a self-regulatory basis,
    to make sure their market participants are complying with the
    rules.\19\ Additionally, the CFTC has broad enforcement authority to
    make sure those market participants comply with the Commodity Exchange
    Act and CFTC regulations.
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        \19\ 7 U.S.C.  7(d)(2).
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        The Commodity Exchange Act and CFTC regulations also provide for a
    system of intermediary oversight that focuses on retail market
    participants, which includes a disclosure regime that ensures those
    market participants are informed of the risks of trading strategies and
    fees involved for their trades.\20\ These market participants are also
    informed of how their funds are being segregated and protected in the
    event of bankruptcy, as well as how such funds may be utilized.\21\
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        \20\ E.g., 17 CFR  4.24 and 4.34.
        \21\ E.g., 17 CFR  1.55.
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        The CFTC would be well positioned to adopt a similar regulatory
    framework for spot digital commodity markets if Congress were to direct
    the CFTC to do so.

        Question 2. Could regulation of platforms under the Commodity
    Exchange Act in this manner achieve price and volume transparency,
    order flow, segregation of client assets, bankruptcy protections,
    cybersecurity, and Know Your Customer and Anti-Money Laundering
    requirements?
        Answer. Yes. The Commodity Exchange Act grants the CFTC the
    authority to address all of the topics identified in your question
    through our core principles framework applicable to designated contract
    markets today. For example, DCMs provide centralized marketplaces that
    provide market participants with price transparency and the ability to
    trade these products in a safe and secure manner, with their assets
    segregated \22\ and with bankruptcy protections \23\ built into the
    system. There are also cybersecurity,\24\ know-your-customer,\25\ and
    anti-money laundering requirements \26\ built into this regulatory
    framework. The CFTC would be well positioned to oversee spot platforms
    through a similar regulatory framework and achieve similar protections
    if Congress were to direct the CFTC to do so.
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        \22\ E.g., 7 U.S.C.  6d(a)(2).
        \23\ See 17 CFR Part 190.
        \24\ 7 U.S.C.  7(d)(20) and 17 CFR  38.1051.
        \25\ 17 CFR  42.2.
        \26\ Id.

        Question 3. What other protections could Commodity Exchange Act
    ``principles based'' regulation provide?
        Answer. The CFTC is considered a principles-based regulator that
    issues prescriptive rules, when appropriate, in implementing the
    Commodity Exchange Act. For example, the Commission has issued rules
    that elaborate on the core principles applicable to DCMs,\27\ as well
    as rules that mandate disclosures that commodity pool operators and
    commodity trading advisors must make to their retail participants and
    customers, respectively, which include, among other things, information
    about past performance, conflicts of interest, and risk factors.\28\
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        \27\ See 17 CFR  38.150-160.
        \28\ 17 CFR  4.24 and 4.34.
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        Ultimately, the type of regulatory regime provided in the Commodity
    Exchange Act will enable the CFTC to implement effective customer
    protections, while ensuring that the digital asset markets can continue
    to innovate in a responsible manner.

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