[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.
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    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\
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    \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\
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    \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.
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    \2\ https://go.chainalysis.com/2022-Crypto-Crime-Report.html.
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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


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    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
        
        
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    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
        
        
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    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


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    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


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    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


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    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.


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    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/.
    
    
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    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/.


	[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    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⦥=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


	
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    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/.
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Destination of stolen funds, 2015-2021


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          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.
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Weekly total cryptocurrency value and average value per transaction 
        sent to NFT platforms, 2021-2022 YTD
        
        
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    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


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    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.
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    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.
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    \1\ https://atalaprism.io/.
    \2\ https://www.lace.io/.
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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.
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    \3\ https://www.ledgerinsights.com/proof-of-steak-blockchain-food-
beef-traceability/.
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    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/.
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    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/.
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    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.
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    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\
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    \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.
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    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.
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    \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.
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    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\
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    \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.
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    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\
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    \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.
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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.\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).
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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.\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\
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    \11\ E.g., 17 CFR  4.24 and 4.34.
    \12\ 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.
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.
---------------------------------------------------------------------------
    \19\ 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.\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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.

                                  [all]