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





                                                        S. Hrg. 117-151
 
                  DEMYSTIFYING CRYPTO: DIGITAL ASSETS
                       AND THE ROLE OF GOVERNMENT

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE

                                 of the

                     CONGRESS OF THE UNITED STATES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 17, 2021

                               __________

          Printed for the use of the Joint Economic Committee
          
          
          
          
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]           
          
          


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

             U.S. GOVERNMENT PUBLISHING OFFICE 
 46-819                 WASHINGTON : 2022        
 
 
 
        
                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES             SENATE
Donald S. Beyer Jr., Virginia,       Martin Heinrich, New Mexico, Vice 
    Chairman                             Chairman
David Trone, Maryland                Amy Klobuchar, Minnesota
Joyce Beatty, Ohio                   Margaret Wood Hassan, New 
Mark Pocan, Wisconsin                    Hampshire
Scott Peters, California             Mark Kelly, Arizona
Sharice L. Davids, Kansas            Raphael G. Warnock, Georgia
David Schweikert, Arizona            Mike Lee, Utah, Ranking Member
Jaime Herrera Beutler, Washington    Tom Cotton, Arkansas
Jodey C. Arrington, Texas            Rob Portman, Ohio
Ron Estes, Kansas                    Bill Cassidy, M.D., Louisiana
                                     Ted Cruz, Texas

                  Tamara L. Fucile, Executive Director
            Vanessa Brown Calder, Republican Staff Director
                  Colleen J. Healy, Financial Director
                  
                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

                                                                   Page
Hon. Donald Beyer Jr., Chairman, a U.S. Representative from the 
  Commonwealth of Virginia.......................................     1
Hon. Mike Lee, Ranking Member, a U.S. Senator from Utah..........     3

                               Witnesses

Ms. Alexis Goldstein, Director of Financial Policy, Open Markets 
  Institute, Washington, DC......................................     5
Mr. Timothy Massad, Research Fellow, Harvard Kennedy School, 
  Adjunct Professor of Law, Georgetown Law Center, Washington, DC     7
Mr. Kevin Werbach, Professor of Legal Studies and Business 
  Ethics, Director of the Blockchain and Digital Asset Project, 
  The Wharton School, University of Pennsylvania, Philadelphia, 
  PA.............................................................     9
Mr. Peter Van Valkenburgh, Director of Research, Coin Center, 
  Washington, DC.................................................    10

                       Submissions for the Record

Prepared statement of Hon. Donald Beyer Jr., Chairman, a U.S. 
  Representative from the Commonwealth of Virginia...............    36
Prepared statement of Hon. Mike Lee, Ranking Member, a U.S. 
  Senator from Utah..............................................    37
Prepared statement of Ms. Alexis Goldstein, Director of Financial 
  Policy, Open Markets Institute, Washington, DC.................    38
Prepared statement of Mr. Timothy Massad, Research Fellow, 
  Harvard Kennedy School, Adjunct Professor of Law, Georgetown 
  Law Center, Washington, DC.....................................    59
Prepared statement of Mr. Kevin Werbach, Professor of Legal 
  Studies and Business Ethics, Director of the Blockchain and 
  Digital Asset Project, The Wharton School, University of 
  Pennsylvania, Philadelphia, PA.................................    72
Prepared statement of Mr. Peter Van Valkenburgh, Director of 
  Research, Coin Center, Washington, DC..........................   100
Response from Ms. Alexis Goldstein to Questions for the Record 
  submitted by Chairman Beyer....................................   110
Response from Ms. Alexis Goldstein to Question for the Record 
  submitted by Senator Cassidy...................................   111
Response from Ms. Alexis Goldstein to Questions for the Record 
  submitted by Senator Klobuchar.................................   111
Response from Mr. Timothy Massad to Questions for the Record 
  submitted by Chairman Beyer....................................   112
Response from Mr. Timothy Massad to Question for the Record 
  submitted by Senator Cassidy...................................   114
Response from Mr. Timothy Massad to Question for the Record 
  submitted by Senator Klobuchar.................................   114
Response from Mr. Kevin Werbach to Questions for the Record 
  submitted by Chairman Beyer....................................   116
Response from Mr. Kevin Werbach to Question for the Record 
  submitted by Senator Cassidy...................................   118
Response from Mr. Peter Van Valkenburgh to Questions for the 
  Record submitted by Chairman Beyer.............................   119
Response from Mr. Peter Van Valkenburgh to Question for the 
  Record submitted by Senator Cassidy............................   120


                  DEMYSTIFYING CRYPTO: DIGITAL ASSETS

                       AND THE ROLE OF GOVERNMENT

                              ----------                              


                      WEDNESDAY, NOVEMBER 17, 2021

                    United States Congress,
                          Joint Economic Committee,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 2:30 p.m., 
in Room 210, Cannon House Office Building, Hon. Donald S. Beyer 
Jr., Chairman, presiding.
    Representatives present: Beyer, Schweikert, Peters, Estes, 
Beatty, Arrington, and Pocan.
    Senators present: Cruz, Hassan, and Kelly, and Lee.
    Staff: Vanessa Brown Calder, Ismael Cid-Martinez, Hugo 
Dante, Sebi Devlin-Foltz, Carly Eckstrom, Tamara Fucile, Sean 
Gogolin, Devin Gould, Owen Haaga, Erica Handloff, Colleen 
Healy, Jeremy Johnson, Adam Michel, Michael Pearson, Elisabeth 
Raczek, Alexander Schunk, Nita Somasundaram, Sydney Thomas, and 
Emily Volk.

 OPENING STATEMENT OF HON. DONALD BEYER JR., CHAIRMAN, A U.S. 
        REPRESENTATIVE FROM THE COMMONWEALTH OF VIRGINIA

    Chairman Beyer. It is exactly 2:30 and I think it is 1930 
Greenwich Mean Time. So I want to officially call this hearing 
to order.
    Senator, nice to see you.
    I would like to welcome everyone to the Joint Economic 
Committee's hearing entitled, ``Demystifying Crypto: Digital 
Assets and the Role of Government.''
    I want to thank all of our truly distinguished witnesses 
for sharing their expertise today. We will begin with my 
opening statement and then hear from Senator Lee.
    Since the introduction of Bitcoin in 2009, the market for 
cryptocurrencies and other digital assets has expanded from a 
niche product to a globally significant asset worth nearly $3 
trillion last week. While this rapid rise in value has made 
some early adopters quite wealthy, it also poses an array of 
risks, both to everyday investors and the broader financial 
system.
    The purpose of this hearing is to explore emerging trends 
in the digital asset market and discuss prudent steps that 
Congress and the Federal Government can take to update our 
regulatory framework and bring much needed clarity to issuers, 
ensure transparency for investors, and protect the integrity of 
our financial system, while also leveraging exciting 
developments in blockchain technology. Congress can promote 
responsible innovation in this market, while also providing 
basic protections to the investing public.
    Interest and involvement in the digital asset market has 
become increasingly mainstream in recent years. The growth of 
these products has been especially pronounced since the start 
of the coronavirus pandemic, as the reported total market value 
of all digital assets soared from $200 billion, with a ``B,'' 
in January 2020 to nearly $3 trillion, with a ``T,'' just last 
week. To put that in perspective, recent price volatility in 
digital assets has erased $400 billion in value just in the 
last 7 days, an amount roughly equal to the entire size of the 
market just a year ago.
    As the market has grown, we have seen digital asset 
investors broaden from a narrow group of true believers in 
cryptocurrencies to an expanding community that includes 
everyday investors. A Pew survey conducted this fall found that 
16 percent of American adults have personally owned or invested 
in cryptocurrency at some point, up from just 1 percent that 
held any Bitcoin in 2015.
    While many early Bitcoin transactions occurred on little-
known platforms, today investors can buy digital assets through 
Robinhood or Venmo or on large exchanges run by publicly-traded 
companies like Coinbase. But this growth in value and interest 
presents a number of challenges for our economy. The current 
digital asset market structure and accompanying regulatory 
framework are ambiguous and risky for both investors and the 
broader economy. Digital asset holders have been subjected to a 
market that is, as SEC Chairman Gary Gensler has described, 
``rife with fraud, scams, and abuse.''
    The mainstreaming of digital assets is laying the 
foundation for a huge swath of the economy to invest in this 
market. Increased crypto market volatility, or digital bank 
runs, could disrupt more mainstream financial institutions like 
pension funds and mutual funds. And the underlying assets can 
create significant consumer protection issues, given existing 
patterns of financial fraud, hacks, and market manipulation.
    Retail investors may be lured in by the hype around a new 
coin with improbably high rates of return, only to be caught on 
the wrong end of a speculative bubble and lose their entire 
investment. A recent example is Squid, a blatant scam token 
that used the excitement around the popular TV show Squid Game 
to dupe unwitting investors out $3.3 million.
    While all investments involve risk, the lack of disclosure 
and reporting requirements in many parts of the crypto asset 
industry tilt the playing field toward the largest investors 
who can leverage their size to exploit regulatory gaps at the 
expense of retail investors. It is currently difficult for 
regulators to prevent market manipulation by large players who 
can exploit their access to multiple sides of a trade or trade 
on inside information.
    Despite these issues, Congress has not yet weighed in on a 
comprehensive legal framework around these assets. Updating the 
U.S. regulatory framework for digital assets would be in line 
with how officials have responded to past financial 
innovations, although often after the fact, with stronger rules 
to protect consumers and market integrity. For example, Dodd-
Frank created stronger rules on complex swaps and derivatives 
in the wake of, that is, after, the 2008 financial crisis.
    Updated regulation could also reduce the likelihood that 
these emerging developments would destabilize financial markets 
in the broader economy. For example, the largest stablecoin, 
Tether, was recently found not to hold or to not hold 
sufficient reserves of cash and equivalents to fully pay back 
their $70 billion value. Applying regulatory scrutiny to assets 
like Tether and platforms on which they are used could ensure 
that cracks in one asset don't spread to the larger economy.
    Increasing reporting for decentralized finance platforms 
will shine a light on a fast-growing but lightly regulated 
segment of the market. Increased information sharing would also 
improve tax compliance for capital gains from the sale of 
crypto assets.
    The many issues we will discuss today are why I introduced 
the Digital Asset Market Structure and Investor Protection Act 
earlier this year, just a start. This legislation would 
establish much-needed guardrails and provide clarity to 
regulators and investors without stifling innovation. The 
present moment gives us an opportunity to take action before a 
potential crisis hits the broader economy.
    So I really look forward to learning from each one of our 
witnesses today and from my peers' questions.
    So, Senator Lee, the floor is yours.
    [The prepared statement of Chairman Beyer appears in the 
Submissions for the Record on page 36.]

  OPENING STATEMENT OF HON. MIKE LEE, RANKING MEMBER, A U.S. 
                       SENATOR FROM UTAH

    Senator Lee. Thanks so much, Mr. Chairman.
    Throughout the history of our great Nation, entrepreneurs 
and creators have served as the heartbeat of the American 
economy and the engine for America's economic growth. Their 
advances into unknown frontiers of science and technology have 
transformed the quality of life for millions upon millions of 
Americans and also for people around the world.
    Today American innovators are advancing into unknown 
frontiers of cryptocurrencies, using novel technologies to 
securely, create, and trade digitally scarce assets. Like the 
internet of the 1990s, cryptocurrencies are still in their 
infancy. This evolving technology has vast and still very much 
untapped potential to revolutionize established industries and 
to create entirely new ones. Cryptocurrencies are already 
democratizing finance by lowering costs and expanding access to 
an industry that has historically been hard to reach for 
millions of Americans, including hundreds of thousands of 
Utahans.
    Beyond the better known applications to finance, 
blockchain, which is, of course, the technology behind 
cryptocurrencies, has even broader potential. Blockchain can 
securely share health records, efficiently track cross-border 
transactions in global supply chains, and allow online 
consumers to verify the authenticity of pictures or videos.
    I have great optimism that, like the internet before it, 
the technology behind cryptocurrencies, meaning, again, 
blockchain, is something that is going to create a wealth of 
new opportunities, many of which we can't even really imagine 
yet.
    As new markets like this one emerge and grow, there is 
always going to be a temptation here in Washington to expand 
the Federal Government's reach, a temptation to centrally 
control the innovative process and regulate the products of 
those individuals who are at the forefront of American 
advancement. But this is a temptation that must be resisted. 
Rigid one-size-fits-all regulation is something that is kind of 
scary, especially when it is targeted at the cryptocurrency. It 
is certainly unnecessary. And it would all but ensure that this 
next generation of technology companies would end up moving to 
other countries, countries other than the United States. 
Americans would lose access to cryptocurrency markets and miss 
out on the potential economic and social benefits.
    If we want the center of innovation to remain right here in 
the United States for the benefit of American workers and 
American families, Congress should focus on creating clarity 
around how existing rules apply to these new technologies.
    In the case that existing law proves outdated or 
insufficient, then we can assess the need for new rules. 
However, as it stands today, we just need to appropriately 
apply the rules that we already have and are already on the 
books, most of which are applicable here and most of which are 
very much sufficient.
    The proper role of government is to empower innovation 
through clear rules with a light touch. The best approach is 
one in which Congress acts in a manner that is tailored to its 
limited constitutional authority. It is one where the Federal 
Government acts with restraint and, in so doing, protects the 
creation and ingenuity that powers our great country because, 
when we restrain government, we unlock unlimited human 
potential, potential that among the American people is immense.
    In today's hearing, I hope we can focus on policies that 
protect a flexible regulatory framework for Americans who are 
building our future. If we can resist centralizing power in 
Washington, as has long been the impulse of Democrats and 
Republicans alike in this town, and instead preserve the space 
for American innovation to flourish, entrepreneurs across the 
country stand ready to unleash the tremendous opportunity of 
new digital economies.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Lee appears in the 
Submissions for the Record on page 37.]
    Chairman Beyer. Senator Lee, thank you very much.
    Now I would like to introduce our four distinguished 
witnesses.
    Ms. Alexis Goldstein is the Financial Policy Director at 
the Open Markets Institute. She previously worked in financial 
regulatory policy, climate finance, consumer investor 
protection, and higher education for Americans for Financial 
Reform. Prior to working in advocacy, she spent 7 years working 
on Wall Street as a programmer at Morgan Stanley Electronic 
Trading, as a business analyst at Merrill Lynch and Deutsche 
Bank in equity derivatives.
    Mr. Timothy Massad is Senior Fellow at the Kennedy School 
of Government at Harvard University and an adjunct professor of 
law at Georgetown Law School. From 2014 to 2017, he served as 
chairman of the U.S. Commodity Futures Trading Commission. 
Under his leadership, the agency declared virtual currencies to 
be commodities, introduced reforms to address automated 
trading, and strengthened cybersecurity protections. Mr. Massad 
has a BA from Harvard College and a JD from Harvard Law School.
    Mr. Kevin Werbach is a Professor and Department Chairperson 
of Legal Studies and Business Ethics and director of the 
Blockchain and Digital Asset Project at the Wharton School of 
the University of Pennsylvania. His work focuses on 
telecommunications in internet policy, as well as applying 
digital game design techniques to business. Before joining the 
Wharton faculty, he served as Counsel for the New Technology 
Policy at the Federal Communications Commission during the 
Clinton administration. He has published four books including 
``The Blockchain and the New Architecture of Trust.'' Mr. 
Werbach received a BA from the University of California at 
Berkeley and a JD from Harvard Law School.
    Finally, we have Mr. Peter Van Valkenburgh who is the 
Director of Research for Coin Center. Formerly he was the 
Google policy fellow for TechFreedom. He is a graduate of NYU 
School of Law and a self-taught designer and coder.
    So welcome, all of you. We have 5 minutes for each of your 
testimony, and we will begin with Ms. Goldstein and then 
continue in the order of introductions.
    Ms. Goldstein.

 STATEMENT OF ALEXIS GOLDSTEIN, DIRECTOR OF FINANCIAL POLICY, 
             OPEN MARKETS INSTITUTE, WASHINGTON, DC

    Ms. Goldstein. Thank you so much.
    Chair Beyer, Ranking Member Lee, and distinguished members 
of the committee, thank you for inviting me to testify today. 
My name is Alexis Goldstein, and I am the Director of Financial 
Policy at the Open Markets Institute where my work focuses on 
financial regulation and consumer protection.
    As the chair mentioned, I previously worked on Wall Street 
as a programmer at Morgan Stanley and then as a business 
analyst at Merrill Lynch and Deutsche Bank prior and during the 
2008 financial crisis.
    I am not only a researcher of digit asset markets, I am 
also a user of them. I have used large exchanges. I have used 
so-called decentralized finance platforms, or DeFi. I have 
tried out layer-2 solutions. And I have bridged from one 
blockchain to another. And my impression as a user and a 
student of these systems is that, while many claim that this is 
the future of finance, it looks a lot like the history of 
finance to me.
    The space is full of intermediaries and rent-seeking. For 
example, if you wanted to swap one crypto asset for another on 
Ethereum today, you would have to pay over $100 to a miner to 
execute your transaction on the Ethereum blockchain. If you 
wanted to do it last week, it might have cost you hundreds of 
dollars to do so. If you are a large entity, you can also 
front-run transactions by effectively bribing the miners. You 
can essentially up the transaction fee that you want to pay to 
the miner, and they will execute your transaction before 
others.
    Many of these ostensibly decentralized finance platforms 
also make use of the very same forced arbitration clauses and 
class action bans that the biggest banks in the United States 
do in order to deny their customers the right to sue over 
disputes in a court of law.
    We have also seen the CEO of a major crypto lending and 
borrowing platform called Compound unilaterally threaten to 
report their users to the IRS if they had benefited from a 
software bug that Compound itself created, raising more 
questions about whether this particular platform is truly 
decentralized.
    One of the problems that we see in the existing financial 
systems is that users with the least amount of money often pay 
disproportionately high fees. And, unfortunately, I have found 
this problem is largely replicated in digital asset markets. 
Coinbase, for example, has two cryptocurrency exchange 
platforms, Coinbase and Coinbase Pro. Coinbase is aimed at 
newer users but charges astronomically higher fees than its 
Coinbase Pro offering.
    There are also large concentration concerns in the digital 
asset space. Facebook is one example who is moving ahead on its 
digit asset pilot, despite ongoing questions and concerns from 
lawmakers, concerns that their plans may be incompatible with 
financial regulatory--the current financial regulatory 
landscape.
    Venture capitalists also play a significant presence in the 
cryptocurrency markets and appear to hold considerable market 
power and power over the governance of many of these platforms, 
and their investment is growing fast. VC firms invested $17 
billion in digital asset firms in the first 6 months of 2021, 
which is more than three times what they invested in all of 
2020.
    Hedge funds, family offices, and large too-big-to-fail 
banks are also a growing presence in the crypto markets. There 
are also questions about conflicts of interest among major 
market players. To take a single example, the CEO of the 
exchange FTX, Sam Bankman-Fried, reportedly also owns 90 
percent of a proprietary crypto trading firm, Alameda Research.
    In traditional financial markets, barring a serious 
liquidity crisis, you will be able to sell back the product 
that you purchase. But on DeFi, it is very easy for malicious 
actors to design tokens that can be bought but never sold. Some 
crypto investors solve for this by reading the code of new 
coins to look for pitfalls and ensure they don't fall prey to 
these kinds of scams, but this is a fairly high bar for non-
programmers.
    I worked on Wall Street before enduring the 2008 financial 
crisis before Dodd-Frank, and much what I saw working with the 
then unregulated over-the-counter derivatives market reminds me 
of some of the things I see in today's digital asset 
marketplace.
    Systemic risk tends to arise when the scope, size, scale, 
or interconnectedness of certain activities metastasize and 
spread contagion to the broader financial system. There are 
several concerning items including leverage, opacity in market 
data, and poorly understood interlinkages between market 
participants that are currently present in digital asset 
markets and may indicate potential systemic risk.
    Congress should continue to examine if there are regulatory 
gaps that require new legislation in order to ensure consumer 
and investor protections and ensure that regulators have the 
market data they need to evaluate for systemic risks. For their 
part, regulators should continue to monitor the space and 
ensure compliance with existing laws and regulations.
    Thank you, and I look forward to your questions.
    [The prepared statement of Ms. Goldstein appears in the 
Submissions for the Record on page 38.]
    Chairman Beyer. Thank you, Ms. Goldstein, very much.
    Next hear from Mr. Massad.

 STATEMENT OF TIMOTHY MASSAD, RESEARCH FELLOW, HARVARD KENNEDY 
   SCHOOL, ADJUNCT PROFESSOR OF LAW, GEORGETOWN LAW CENTER, 
                         WASHINGTON, DC

    Mr. Massad. Chair Beyer, Ranking Member Lee, and members of 
the committee, thank you for inviting me to testify today. I 
first testified about crypto in 2014, and it is an honor to be 
here.
    I would like to make eight points. First, there is no 
question that digital asset innovation is incredibly important 
and beneficial overall. But there should also be no question 
that the time to strengthen and clarify regulation of digital 
asset markets is long overdue. If done responsibly, it will 
support, not suppress innovation.
    Second, stablecoins are one of the most urgent challenges. 
If properly regulated, they might help modernize our payment 
system. But today they pose significant risks. The recent 
report of the President's Working Group on Financial Markets 
describes this very well. It calls on Congress to adopt 
legislation that limits stablecoin issuers to ensure depositary 
institutions.
    I prefer a slightly different formulation where we have 
some bank-like specific regulations of the risks but we limit 
the issuer's activities so they aren't making loans and they 
aren't doing all the things that traditional banks do. And in 
that model deposit insurance may not be necessary. This is a 
better way, I believe, to foster competition and innovation and 
address the risks.
    Third, I agree with the PWG report on the need to regulate 
stablecoin arrangements generally, not just the stablecoin 
issuer. Once issued, stablecoins trade on decentralized 
blockchains pursuant to smart contracts, as well as on 
centralized exchanges. This means that no single authority is 
responsible for the overall operation of the stablecoin. And 
with regard to decentralization, or what is called DeFi, 
generally, it can be a good thing. But calling something DeFi 
should not make it a regulatory free zone, and we should keep 
in mind that that label can mean lots of different things. We 
need to apply standards, appropriate standards, to financial 
market activities, not the technology itself, that occur on 
such platforms.
    Fourth, Bitcoin is neither a widely accepted means of 
payment or a stable store of value today. It is a highly 
volatile, speculative investment. It might be tempting to just 
say let the buyer beware. But the continued growth of a largely 
unregulated crypto market poses risks to society including 
risks of illicit activity, tax evasion, ransomware, investor 
fraud, and potential harm to broader financial markets.
    We do not have sufficient information about this market. 
Neither the SEC nor the CFTC has authority today to regulate 
the cash or spot market, if you will, for digital assets, that 
are not considered securities. That is a point that is actually 
not understood by many people, and that is where most trading 
activity occurs today. So we should expand that authority. At 
the same time we should make sure our regulatory policies are 
adequately informed by technological expertise. This is very, 
very important.
    Fifth, in regulating crypto generally, we must balance 
reasonable expectations of privacy and financial transactions 
with the government's legitimate interests such as preventing 
illicit activity and tax evasion.
    Sixth, the evolution of the digital assets has made it 
clear that we need to modernize our payment system. It is 
relatively slow and expensive. A central bank digital currency 
is one way of doing so. There may be other ways as well. My 
concern is we are not moving fast enough to either develop a 
prototype CBDC or to determine what the best strategy is.
    Seventh, CBDC, stablecoins, and digital assets generally 
are often cited as a means to achieve greater financial 
inclusion, and we should consider their potential for doing so. 
But we should act now to prevent--to improve access to 
financial services through other means as well. The need is too 
great, and this should not be deferred.
    Finally, the challenge we face is not unusual, because the 
financial sector constantly innovates and our regulatory system 
has to catch up. I helped draft the original agreements for 
swaps 30 years ago, and swaps created a lot of beneficial 
hedging. But the industry resisted regulation and eventually 
generated excessive risks that almost brought down our 
financial system. It was only then that we created a regulatory 
framework under which the industry is thriving today.
    To conclude, we should take some actions now to strengthen 
the regulatory framework. And some key things that Congress 
should do are, first, require that stablecoin issuers and 
related arrangements be supervised by the Fed or the OCC along 
the lines I have suggested.
    Two, give the SEC or the CFTC clear authority to regulate 
the cash market for cryptocurrencies.
    Three, make sure FinCEN has the tools and resources it 
needs to implement KYC, AML, and CFT standards thoroughly.
    And, four, urge the Fed and the Biden administration to 
accelerate work on modernizing our payment system, including by 
developing a hypothetical CBDC.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Massad appears in the 
Submissions for the Record on page 59.]
    Chairman Beyer. Thank you very much, Mr. Massad.
    We will next hear from Professor Werbach.

  STATEMENT OF KEVIN WERBACH, PROFESSOR OF LEGAL STUDIES AND 
 BUSINESS ETHICS, DIRECTOR OF THE BLOCKCHAIN AND DIGITAL ASSET 
 PROJECT, THE WHARTON SCHOOL, THE UNIVERSITY OF PENNSYLVANIA, 
                        PHILADELPHIA, PA

    Mr. Werbach. Chairman Beyer, Ranking Member Lee, members of 
the committee, thank you for the opportunity to speak before 
you today.
    Blockchain technology and the digital asset ecosystems it 
enables could well represent the most important developments in 
information technology since the internet. The potential exists 
to not only improve the efficiency of many kinds of 
transactions but to make markets more fair, inclusive, open, 
dynamic, and transparent. At the same time, there is no 
question these same technologies can be and are used by 
criminals, fraudsters, and other bad actors. There are major 
risks involved in digital asset-based markets, and it is 
important to distinguish potential from reality.
    These are still in many ways immature technologies. There 
are important questions about energy usage of proof of work 
networks. Holdings of most digital assets are highly 
concentrated, and there are serious concerns about market 
manipulation. It is essential for both market participants and 
policymakers to set a course to accentuate the benefits, while 
limiting the harms.
    Regulation and innovation are not necessarily in conflict. 
In many cases regulatory action to address abuses and provide 
clarity is an important or even necessary condition for long-
lasting and transformative innovation.
    A quarter century ago I served on the White House working 
group that drafted the Framework for Global Electronic 
Commerce, the U.S. Government's approach to the internet. The 
policy adopted then was not that the internet should be a 
totally unregulated space or that the harms it brought should 
be ignored in light of its benefits. While the framework 
opposed, quote, ``undue restrictions,'' it also identified the 
need for a predictable, minimalist, consistent, and simple 
legal environment. That is what we should be seeking today for 
cryptocurrencies and digital assets.
    Take, for example, decentralized finance, or DeFi. DeFi 
could create a more open, inclusive financial services 
environment by removing intermediaries and improving access to 
capital. Increasing the velocity of assets, facilitating 
service composability, unlocking yield opportunities, all have 
the potential to increase risk-adjusted returns available to 
market participants.
    However, DeFi also poses significant dangers which were 
detailed in the DeFi policymaker toolkit, a collaboration of 
the Wharton Blockchain and Digital Asset Project and the World 
Economic Forum.
    The challenge DeFi poses is how to address these challenges 
and risks through regulation. A centralized cryptocurrency 
exchange has a corporate parent, offices, management team, 
custodial assets, and typically licenses or registrations. An 
automated market maker, AMM, or other OnChain DeFi protocol, 
though, need only be software code running on a decentralized 
global blockchain network.
    While this may sound like an insoluble problem, it is 
likely to be manageable in practice. First, DeFi services are 
heavily dependent on stablecoins as on-ramps and off-ramps. 
Clarifying the regulatory context around stablecoins and 
ensuring they are subject to appropriate obligations could help 
address the DeFi regulatory conundrum.
    Second, users often access DeFi functionality through 
websites and services maintained by protocol developers. Some 
developers have already taken steps such as blacklisting tokens 
whose trading would clearly violate securities laws.
    Finally, DeFi protocol and governance tokens do not appear 
from nowhere. The moment of token issuance is an important 
regulatory opportunity. This is, for example, an area of focus 
of MiCA, the European regime under development now for non-
securities digital assets.
    The history of peer-to-peer, or P2P, file sharing 
applications such as Napster 20 years ago also provides a 
helpful roadmap for how seemingly unregulable services can be 
addressed. These applications were held liable for copyright 
infringement when they maintained essential components of 
central control or when they knowingly induced illegal 
activity.
    Going forward, Congress should take a three-pronged 
approach to the regulatory questions that cryptocurrencies 
raise.
    First, where possible, provide breathing space and help 
policymakers gain greater understanding of market dynamics.
    Second, quickly address the low-hanging fruit. There are 
laws and regulations with language that inadvertently fails to 
accommodate digital assets, and fixes are relatively 
uncontroversial. There are also too many obvious bad actors who 
have not faced legal consequences and large players in the 
blockchain ecosystem credibly accused of systemic market 
manipulation.
    Third, at some point outdated legal frameworks are no 
longer technology neutral or effective. Over time, we will need 
to reconsider the basic foundations of financial regulation put 
into place nearly 90 years ago after the Great Depression. Such 
an effort will position the U.S. to maintain its leadership in 
the global financial system as it moves into its next 
technological transition and leadership in the emergent sphere 
of blockchain based activity.
    I look forward to your questions.
    [The prepared statement of Mr. Werbach appears in the 
Submissions for the Record on page 72.]
    Chairman Beyer. Thank you, Professor, very much.
    And, last, we will hear from Mr. Van Valkenburgh.

STATEMENT OF PETER VAN VALKENBURGH, DIRECTOR OF RESEARCH, COIN 
                     CENTER, WASHINGTON, DC

    Mr. Van Valkenburgh. Chair Beyer, Ranking Member Lee, 
members of the committee, thank you for this opportunity to 
speak with you today.
    On Halloween 13 years ago, an email to a public mailing 
list shared a link to a PDF. It was the Bitcoin white paper, 
3,192 words, a handful of simple illustrations, and some C++ 
computer code. The following January, a 2-megabyte computer 
program was made freely available for download to the same 
public mailing list. Less than 5 years later, the person or 
persons sending these emails under the pseudonym Satoshi 
Nakamoto sent their last message and has not been heard from 
since.
    Today, a few thousands words, a computer file smaller than 
a cat video, and a missing author have brought about an 
economic revolution, over $3 trillion worth of economic 
activity recorded and secured on blockchains, shared ledgers 
that no single person, corporation, or government permissions 
or controls.
    Who can we thank for that remarkable, utterly unpredictable 
outcome? Not just the person or persons who went by Satoshi. 
They stood on the shoulders of brilliant cryptographers and 
computer scientists. Perhaps above all, they were inspired by 
another shared and open computer network that no single person 
controls, the internet, a place where a good idea shared 
anonymously and publicly can stand on its merits, spread to a 
community of like-minded innovators, and flourish.
    America grew rich because of that openness, The ingenuity 
of immigrants, entrepreneurs, explorers, and technological 
pioneers. We don't like permissioned systems in this country 
because we know that you can't prejudge genius. We want open 
systems that afford dignity and access even to people we don't 
yet know or understand. As Steve Jobs would have put it, the 
crazy ones, the misfits, the rebels.
    So I am not going to tell you who is going to show up on 
the bitcoin blockchain or the coming decentralized web or what 
exactly they are going to build. I couldn't tell you that today 
anymore than I could have told you in 1990 that Satoshi would 
show up on the internet alongside Sergey and Larry with Google 
and Jimmy Wales with Wikipedia.
    All I am going to tell you is that we finally built a tool 
that can make money work without banks, make organizations work 
without corporations and courts, make sharing and transacting 
online work without big tech, and that, because of all that, 
there is a better chance that tomorrow's misfits will be able 
to speak, share, and innovate.
    This uniquely American ideal, however, isn't about anarchy. 
It is about opportunity under the law. Bitcoin and follow-on 
cryptocurrencies are not unregulated. Sensible, technology-
neutral regulations have protected consumers and investors and 
prevented money laundering and illicit finance. The American 
approach is to flexibly regulate activities, not to ban or 
blacklist the publishing of new ideas and tools.
    Anyone can freely write and share the open source software 
that makes these technologies works. Any prior restraint on 
sharing that expressive content violates our First Amendment 
rights. But if you promise an investor you will invent and 
build them a new future cryptocurrency, we expect you to 
register as the issuer of the security.
    No one is made to open their homes and private bitcoin 
wallets to a search by the police without a warrant. But if you 
provide a service to help people buy and sell bitcoin as a 
third party, you are expected to know your customers and apply 
anti-money laundering controls.
    There are some gaps in America's crypto public policy. The 
gaps are not, contrary to popular belief, a central bank 
digital currency gap with China. The CCP is more interested in 
banning permissionless tools like bitcoin and substituting a 
surveillance tool that will give them even more control over 
the misfits within their borders. We should not emulate that 
policy.
    The gaps are much more mundane. On the margin, securities 
and commodities futures laws can be improved. And there are 
well-drafted bills in the House that address those issues. 
Other gaps concern taxes. The recently passed infrastructure 
bill included rushed language that could unintentionally stifle 
innovation and invade personal privacy. There was a bipartisan 
solution with widespread support, but procedurally it was 
impossible to implement before the bill's passage.
    Existing IRS policy leaves taxpayers uncertain of their 
obligations with regard to cryptocurrency transactions. Tax 
issues are complex. So I have left specifics to my written 
testimony.
    Suffice it to say, there is no reason why America can't 
continue to be a home for permissionless innovation, while also 
enriching its treasury. We did it with the early internet, and 
we will do it again with cryptocurrency networks.
    Thank you.
    [The prepared statement of Mr. Van Valkenburgh appears in 
the Submissions for the Record on page 100.]
    Chairman Beyer. Thank you, Mr. Van Valkenburgh.
    Thank you all very much. Fascinating testimonies. I 
encourage all of us to read the larger versions, too, because 
there is so much more content in them.
    Let me begin my five minutes of questions.
    Mr. Massad, you talk some about stablecoins. And we just 
heard Mr. Van Valkenburgh say that, you know, already we are 
sufficiently protected against too much illicit use of 
stablecoins or cryptocurrencies, tax evasion, terrorism. And we 
have read a number of times in the last week about Tether 
having the $64 billion, $70 billion but not enough actual 
assets if converted.
    How do we protect investors from a run on a stablecoin like 
Tether?
    Mr. Massad. Sure. Thank you, Mr. Chairman, for the 
question.
    We have to have policies that require that the reserves 
that they receive, in other words, the money they receive for 
the tokens, are invested in highly safe liquid assets, ideally 
just cash so that it is always there.
    What we have today is a situation where there are no 
requirements, and a firm like Tether has investments in 
commercial paper. We don't even know what kind of commercial 
paper. There is a lot of speculation that it is commercial 
paper in China. They have loans. They were found to have loans 
to affiliates. They may even have investments in 
cryptocurrencies.
    So that risk is that if there is a sudden spike in demand 
for redemptions, they will not be able to meet it. Or if they 
have to liquidate assets, that could cause downward pressure on 
assets prices. If they, in fact, have $30 billion of commercial 
paper, that is a huge amount that would affect the market. So 
that is the main thing.
    And then we also have to address the ancillary 
arrangements, the fact that these things are traded on 
decentralized blockchains.
    Chairman Beyer. We often wonder how many of these investors 
realize that these are not insured deposits, you know, with the 
FDIC.
    Mr. Massad. Well, that is a good question. There is a lot 
of stickiness, though, to people's use of Tether because Tether 
plays a very important role. It allows people to move value 
around between exchanges and between cryptocurrencies. And, 
frankly, Tether illustrates that our payment system needs to be 
modernized, needs to be improved. That is why it has grown so 
much. It has also probably grown because it is a vehicle for 
tax evasion and potentially for illicit activity.
    Chairman Beyer. Thank you.
    Ms. Goldstein, in your written testimony you highlighted 
the Squid incident where developers pulled all the liquidity 
out of the coin. Can you explain how a rug pull works and what 
we can do to prevent rug pulls?
    Ms. Goldstein. So a rug pull typically happens when a 
developer creates a token, puts it on a blockchain, whether it 
be the Ethereum blockchain or another blockchain. There is lots 
to choose from: Avalanche, Harmony ONE--take your pick--Binance 
Smart Chain. And you create what is called a liquidity pull for 
it.
    And what that involves is going to a decentralized exchange 
like Uniswap or one of their competitors and basically putting 
two tokens together, your new token, your Squid Game token, and 
usually a stablecoin. And you put enough volume of those two 
tokens on there so that people who want to buy your Squid token 
can go in, use the stablecoin that they have put into the 
liquidity pull, and buy their Squid Game token.
    But because they are the ones who have sort of initially 
provided the liquidity for that pull, once people come in and 
they buy the Squid Game token, they can also pull that 
liquidity out at any time and essentially cause the price of 
the token to crash.
    So they basically tend to wait until enough people buy it 
up that the price begins to run up. And it runs up sufficiently 
enough that this new token that they have minted out of thin 
air, right, they have created it out of nothing, is worth 
something. And they pull all the liquidity out and run off with 
the money and that is what happened with the Squid Game token.
    Chairman Beyer. Thank you very much, I think.
    Professor Werbach, Senator Lee talked about a light touch 
and not centralizing everything in Washington, DC, you know, 
with the fear that too much regulation stifles innovation. How 
do you see that tradeoff or even that that supported network 
between regulation on the one hand and innovation on the other?
    Mr. Werbach. Innovation is not just one thing. There are 
many different kinds of regulation, and I think the concern is 
a valid one. There are ill-fitting regulations. There are 
situations where regulation is not necessary. But it is not 
inherently the case that having a regulated market is 
inconsistent with having innovated market. If that were the 
case, then the U.S. would be the least regulated financial 
market in the world instead of one of the most regulated.
    Regulation can promote trust. There is a reason why our 
capital markets are so successful. People come here because 
they trust that it is a fair and open market and one that will 
allow their sophisticated activities in an appropriate way.
    So the question is really what kinds of regulations we 
have, and I agree with Mr. Van Valkenburgh. It is not that 
there is no regulation in this digital asset space. We have 
existing rules which in some cases are not being enforced. In 
some cases there are questions about how they can be enforced 
for new kinds of assets. In some cases there are gaps.
    So what we need to do is something like what we did 25 
years ago with the internet. Do an inventory. Identify what the 
issues are. Identify what the existing regulatory structures 
are and identify where there are gaps, where there are 
problems, where the danger is that either the absence of 
regulation or the lack of clarity about regulation that exists 
will lead to these kinds of abuses and will lead to a situation 
where the market potentially collapses.
    Chairman Beyer. Thank you very much.
    Let me now yield to Senator Lee from Utah for five minutes.
    Senator Lee. Thanks so much, Mr. Chairman.
    Mr. Van Valkenburgh, I would like to start with you, if 
that is all right.
    Sometimes when Congress discusses cryptocurrency, you see 
concerned faces. You see sometimes people reflecting a certain 
degree of fear or anxiety. But the conversation is almost 
always alarmist in nature when it comes up in these hallways 
and those on the other side of the Capitol. We hear claims to 
the effect that this is a space that is sort of analogous to 
the Wild Wild West and could likely lead to chaos, pandemonium, 
more criminal activity and financial ruin on a widespread basis 
including victimization by those who are least able to absorb 
risk.
    But as you have pointed out, the industry is, in fact, 
already regulated. I mean, crypto markets do, in fact, face 
consumer protections when enforced by a whole host of alphabet 
soup Federal regulatory agencies--CFPB, FTC, FT--CFTC, SEC, and 
FinCEN, just to name a few. State attorneys general also have 
authority. Is that accurate?
    Mr. Van Valkenburgh. It is quite accurate, Senator.
    Senator Lee. And cryptocurrency and the blockchain 
technology that it is built on itself contains its own sort of 
mechanism for self-regulation and protections against fraud and 
abuse, does it not?
    Mr. Van Valkenburgh. That is the foundational principle 
behind bitcoin is the double spending which is the most obvious 
type of fraud. Counterfeiting of digital money is policed for 
by a public transparent ledger that anyone can audit and check 
themselves.
    Senator Lee. In fact, for these very reasons aren't there 
ways in which crypto markets are always improving consumer 
safety and reducing financial risk?
    Mr. Van Valkenburgh. Always improving is a strong 
statement. I think, by virtue of these networks being 
inherently public, we have great advantages. However, by these 
technologies being very new, there is a steep learning curve. I 
am very optimistic for the long-term future of the technology, 
however.
    Senator Lee. Because they are based on a new technology, 
they could offer some real advantages, it seems to me, to 
lower-income customers who are looking either at them from the 
standpoint of something to invest in or something to use as a 
means of transferring money from one place to another. In some 
ways there could be economic benefits to poor and middle-class 
consumers everywhere from them, wouldn't there?
    Mr. Van Valkenburgh. I think its greatest benefits, quite 
frankly, are not even here in the U.S. They are in countries 
that have literally no access to financial services because 
they don't have the rule of law, and the technology even in its 
current state can easily fill a gap in those places that have 
been left behind.
    Senator Lee. Like the underbanked, the underbanked could 
benefit significantly from it.
    So if we ban some of these privacy features in 
cryptocurrencies or if we regulate them to death, how might we 
be precluding or missing out on some of the beneficial 
innovations that require privacy protections?
    Mr. Van Valkenburgh. I think innovation and creativity 
require some sphere of privacy so that you are not immediately 
judged for the things that you are going do that are 
nontraditional, and that was the big story of the internet was 
a bunch of misfits who felt like they could come up with a new 
idea for a social network or something like that and be able to 
experiment freely. I think the same will be true of open block 
networks which also afford people that free and open platform 
for experimentation.
    Senator Lee. Are you familiar with the phrase ``born in 
regulatory captivity'' versus ``born in regulatory freedom''?
    Mr. Van Valkenburgh. Yes.
    Senator Lee. It seems like it might be apropos here.
    Now for Americans who own a little Bitcoin and use it to 
buy something or to send some money back home, how could 
Congress help make it easier for them to comply with the 
Byzantine labyrinth of legal implications that could accompany 
that?
    Mr. Van Valkenburgh. I think the thing Congress can do to 
help those folks most would be to regularize and make clear our 
tax policies, especially by providing a de minimis exemption 
from capital gains taxation for small cryptocurrency 
transactions which otherwise trigger a capital gain and a need 
to report and simply make using the technology very difficult. 
We have that kind of exemption for foreign currency 
transactions. It makes sense to have the same for 
cryptocurrency transactions.
    Senator Lee. Where would you be inclined to set the limit, 
if you were king for a day and you had the ability to set the 
de minimis safe harbor? Where would you put it?
    Mr. Van Valkenburgh. Being a humble person, I would set it 
where the foreign currency exemption is. And that is where it 
is set in legislation we have seen in the House from DelBene 
and Mr. Schweikert.
    Senator Lee. You know, as you have noted, a lot of the 
barriers to innovation for cryptocurrencies come from existing 
laws and uncertainty about how those laws might be enforced, 
some variation in whether it is in enforcers or in 
interpretation of existing authorities.
    In many cases that uncertainty and overly broad 
interpretations of these existing financial regulations have 
begun to push some of this technology overseas or at least some 
of the pioneering U.S. technology companies overseas.
    What do you think is the best way to protect consumers and 
to ensure America remains, you know, at the cutting edge of 
this type of innovation?
    Mr. Van Valkenburgh. I would agree with my fellow panelists 
that stablecoins are an interesting area, and the regulatory 
field there is somewhat convoluted. There are certainly 
stablecoin issuers who are violating the law, who have not 
registered as State money transmitters, or who have not 
chartered themselves as State banks or trust charters. There 
are also regulated stablecoin issuer, and there is also the 
possibility of creating more of a Federal home for regulation 
of stablecoins. We don't have a legal gap there, I think. We 
just have an enforcement gap, and that is a real problem.
    Senator Lee. My time has expired. I appreciate year 
testimony. This really could be a boon for America's poor and 
middle class. Let's not get in the way of it.
    Chairman Beyer. Thank you, Senator, very much.
    I now recognize the Senator from New Hampshire, Senator 
Hassan.
    Senator Hassan. Well, thank you very much, Mr. Chair and 
Ranking Member Lee. And thanks to all the witnesses today for 
your work.
    Ms. Goldstein, I want to start with a question to you. I 
recently wrote to several agencies including the Department of 
Justice and the Treasury, highlighting a cyberattack on the 
town of Peterborough, New Hampshire. The perpetrators quickly 
converted most of the $2.3 million, which in a small town in 
New Hampshire I can assure you is a lot of money, in taxpayer 
dollars that they stole. And they converted it into 
cryptocurrency, making it unrecoverable.
    What actions can agencies take to prevent this kind of 
criminal activity such as the rapid conversion of illicit funds 
into cryptocurrency?
    Ms. Goldstein. Senator, thank you for your question.
    There are four suggestions that I have. The first is that a 
large portion of this marketplace likely falls under existing 
securities laws. And applying those rules, including rules that 
apply to broker dealers, I think would help stop illicit 
actors' ability to move money anonymously and help prevent that 
sort of ransomware conversion.
    My second suggestion is that the Treasury Department can 
enforce some guidance that they just put out in October. OFAC 
put out this clarification that if you do digital assets, you 
need to comply with sanctions. You need to check whoever is 
using your platform against the sanctions list. And I think the 
Treasury Department enforcing that guidance would be a good 
step forward.
    The third is anything the agencies can do with your help, 
if needed, to promote more information sharing can always help. 
FinCEN analysts can put out reports as a result of that.
    And the last think I would suggest is that FinCEN has a 
very specific set of financial regulations regarding financial 
crimes specifically. And I know you are already talking to them 
about this, but I think strong enforcement of those would also 
be helpful.
    Senator Hassan. Okay. Thank you so much.
    Mr. Massad, in the letters that I wrote, I emphasized how 
stronger know your customer requirements for cryptocurrency 
exchanges can curtail the criminal use of cryptocurrency. It 
becomes much harder to evade law enforcement when your name is 
attached to the cryptocurrency wallet you are using to commit 
crimes like ransomware attacks, drug trafficking, and money 
laundering.
    How could stronger know your customer requirements for 
cryptocurrency exchanges help authorities prevent and prosecute 
criminal uses of cryptocurrency?
    Mr. Massad. Thank you for the question, Senator.
    It is extremely important, and one big example of this is 
what is happening with ransomware. There was a recent FinCEN 
report just issued a couple of weeks ago that documented how 
ransomware is increasing rapidly. I think the Colonial Pipeline 
incident was a real wake-up call, too, because that is a 
company that didn't have a lot of personal identifying 
information. It was an infrastructure company, and yet it was 
hit. I think we are going to see more of that.
    The FinCEN report talks about how these illicit actors 
often act through the crypto exchanges. They reuse addresses. 
They make multiple transfers of the illicit profits so they 
can't be traced. And, you know, KYC is critical here. And we 
need to bolster, you know, FinCEN in this. But it is more than 
that. We also have to have a structure of regulation around 
these exchanges.
    Coinbase, Kraken, these other exchanges, they are not 
subject to the same standards that we have for securities and 
derivatives exchanges. They are registered as money 
transmitters. That is a pretty light touch of regulation. They 
don't have standards to prevent fraud, to prevent conflicts of 
interest, to prevent things like wash trading. Wash trading is 
where you essentially trade with yourself or with an affiliate. 
That is very, very common.
    And there is a very interesting CFTC action here. The CFTC 
only regulates derivatives contracts. So to say that, you know, 
the SEC or the CFTC has power over these exchanges is wrong 
because the CFTC can't regulate that cash market for Bitcoin 
anymore than it can regulate the sale of cows just because it 
regulates cattle futures.
    And yet it does have very limited power to bring fraud 
actions, but that takes a lot of resources to do. They did 
bring one against Coinbase. But even one of the Republican 
commissioners said, ``you know, this is going to mislead the 
public into thinking that we regulate these exchanges. And we 
don't.'' So that is--it is a broader problem than just KYC 
standards but that is critical.
    Senator Hassan. That is very helpful. Thank you.
    One more question again for you, Ms. Goldstein. I recently 
introduced a bipartisan bill with Senator Ernst that would 
require Treasury to report to Congress on how cryptocurrency is 
used globally and its effects on global supply chains. How has 
cryptocurrency mining affected global supply chains in recent 
years including for critical technologies such as 
semiconductors?
    Ms. Goldstein. Well, Senator, I commend you and your fellow 
senator for the bill and the report that you request.
    Essentially cryptomining has an arms race. Their technology 
needs to improve all the time so they can keep up and make 
money. And that means often they have to replace the equipment 
very fast, and that means more demand for semiconductors. And 
that means less, you know, electronics makers who use 
semiconductors for other things are able to access them.
    So I do think that there a lot of research, in particular, 
showing, for example, graphics card needs secondhand goes in 
conjunction with the price of ether, for example.
    Senator Hassan. Okay. Thank you very much.
    And thank you Mr. Chair.
    Chairman Beyer. Thank you, Senator, very much.
    I now recognize the gentleman from Arizona, Mr. Schweikert.
    Representative Schweikert. Thank you, Mr. Chairman.
    I may take this a slightly different way just because you 
and I have worked on discussions around this for a long time. I 
have a fascination with distributive ledger technologies. I 
think I hold the record of being the first one to actually 
mention bitcoin in a Ron Paul hearing, believe it or not, many 
years ago.
    Could we spend a couple of seconds, because three of you 
have sort of touched on it, let's do some societal good. 
Transaction costs, using of my credit card, the wire transfer, 
what do we as policymakers need to do to in many ways use the 
technology that should crash the price of someone walking into, 
whether it be Walmart and using a credit card or sending money 
back to the family in Guatemala? This technology should be 
crashing that price.
    First, what do we as regulators need to do on that? And 
then we are going to go down the rabbit hole on a couple of 
other things like identity and other things that could actually 
help. We were trying to do an experiment in Arizona of using a 
blockchain to identify homeless activities and the benefits 
attached to them and have it in a universal spot.
    Mr. Massad. Thank you, Congressman. It is an excellent 
question. Stablecoins are one possible way to do that if they 
are properly regulated. A stablecoin is simply a token.
    Representative Schweikert. Well, I am sorry. I am going to 
geek out with you just----
    Mr. Massad. Yes.
    Representative Schweikert. I am very familiar with the 
underlying mechanism. Matter of fact, years ago I worked on an 
escrowing for a blockchain code----
    Mr. Massad. Uh-huh. Uh-huh.
    Representative Schweikert [continuing]. to show you how far 
down the rabbit hole I went.
    But you think a stablecoin would be your methodology for 
creating a----
    Mr. Massad. A faster----
    Representative Schweikert [continuing]. rail.
    Mr. Massad [continuing]. pace. It certainly could be 
because, again, it is a token that is then backed by the dollar 
and there is a lot of proposals----
    Representative Schweikert. Would you use a stable token?
    Mr. Massad. A stable token?
    Representative Schweikert. Yes, where there is a----
    Mr. Massad. An algorithmic kind of----
    Representative Schweikert. Yes.
    Mr. Massad [continuing]. formula?
    Representative Schweikert. You know, here is my piece of 
plastic. I swipe it over here. We have an agreement that it 
represents this many units.
    Mr. Massad. Well, that is the hardware----
    Representative Schweikert. Yes.
    Mr. Massad [continuing]. the plastic part.
    What I am talking about is, you know, currently, as you 
point out, our system, our payment system is it is essentially 
bank deposit dominated. Credit cards still go through banks.
    Representative Schweikert. Uh-huh.
    Mr. Massad. You know, wire transfers go through banks. And 
banks, frankly, haven't innovated enough. With a stablecoin, if 
properly regulated, you could potentially have new entrants 
into payments that then are creating new payment rails using 
that digital technology.
    Representative Schweikert. Okay. So, instead of you and I 
going over thin line technology because we have white-boarded a 
fixed--a stable token actually----
    Mr. Massad. Uh-huh.
    Representative Schweikert [continuing]. which is pretty 
much the same thing, what do we have to do policywise to make 
that available? Because overnight that would actually change 
costs in our society of using----
    Mr. Massad. Right.
    Representative Schweikert [continuing]. three percent, five 
percent?
    Mr. Massad. Yes, it could. I think we need to create a 
regulatory framework to regulate those issuers so that--and the 
PWG report I think lays out a lot of issues. My only concern 
with it is it recommends that Congress adopt legislation that 
says only insured depository institutions can do this.
    Representative Schweikert. But that would----
    Mr. Massad. And----
    Representative Schweikert [continuing]. screw up the cost 
structure again.
    Mr. Massad. I think that limits competition.
    Representative Schweikert. Okay.
    Mr. Massad. Right.
    Representative Schweikert. Okay. The same sort of question. 
How do I make--how do I use distributive ledger, blockchain 
technology, whatever title you want to give it--I know this is 
more crypto--but also using the knowledge that we are 
developing here to benefit society and those transactions?
    Mr. Van Valkenburgh. So, I think my fellow witness, Mr. 
Werbach, with his insights about the Clinton administration's 
Framework for Global Electronic Commerce is on the money.
    Technologies back then in the 1996 hearings about the 
internet could not have allowed people to share high-speed 
video, could not have allowed people to have Zoom conferences 
instead of hearings, could not have allowed people to do online 
banking. You could send a very small amount of data through the 
internet at that point. I didn't have----
    Representative Schweikert. I was involved in the old Check 
21, to give you an idea how far back.
    Mr. Van Valkenburgh. Yes. And in a very real sense today, 
we still are at that point with respect to cryptocurrencies. As 
my fellow witness said, sometimes the fees are actually quite 
high. And it seems as though there is no hope of moving more 
economic activity, let alone social networking transactions, 
identity transactions onto these networks.
    The layered architecture of these technologies, however, 
means we have lots of avenues to build more scaleable, more 
efficient solutions. And it is a story of free and open 
platforms that allow anyone to build that innovation.
    We gave a briefing in the House, I think in this very 
building, where we used the Lightning Network, an open payment 
network built on top of bitcoin's open protocol, to buy candy 
from a candy machine. A transaction of half a penny got you 
M&Ms from the machine, and the fee for that transaction was 1/
250 of a penny. That was actually a settled transaction that 
ultimately ended up batch settled without just on the 
blockchain by the Lightning Network far better than the 
corresponding banking system that we have today, ACH, credit 
card authorizations.
    Representative Schweikert. I am actually up against the 
time. But that is actually part of the discussion of ID, 
licensing, benefits, my ability to send some resources to 
grandma. I know we--I know the money is in the cryptocurrency. 
That is where the enthusiasm is. But sometimes I think we 
failed to understand. If we do this smartly, the benefits of 
distributive ledger and stable code--and code is ultimately 
insurable, if we can ever get that far--could we actually also 
do some really good thing to society, not only in our country 
but around the world?
    And with that, I yield back.
    Chairman Beyer. Thank you, David, very much.
    Now I recognize the Senator from southern California, Mr. 
Peters.
    Representative Peters. I wish I was a Senator. That would 
be a nice six year term, but I am just a lowly Representative.
    Thank you very much, Mr. Chairman. Thanks for having this 
hearing. This has actually been fascinating and a really good 
presentation.
    It sounds like we are struggling at the beginning of this 
phenomenon with using government to come up with fair rules 
like the markets have that people can trust without getting in 
the way of innovation that can happen. I think that is a pretty 
common story, and we are just at the beginning of it.
    One issue I had for you, though, Ms. Goldstein, is to be 
fair, we want to make sure that there is--this currency is not 
used for tax evasion. And I just want to refer to the 
bipartisan infrastructure framework. There was a provision that 
attempts to prevent tax evasion in the crypto space by 
requiring starting in 2024 brokers to report cryptocurrency 
gains in a 1099-B form.
    I wonder what you thought of that as a measure to curb tax 
evasion. Is that sufficient, or do you think there are other 
particular measures that we should pursue?
    Ms. Goldstein. I am a supporter of that language. I think 
it is important. I think, you know, we talk a lot about 
innovation in this space, but, you know, there are a lot of 
companies we think of as so innovative like Charles Schwab or 
TD Ameritrade and they are supplying those sorts of tax 
reporting every day.
    And I think--I had to do my cryptocurrency taxes last year 
because I did not get a 1099-B form from a lot of the different 
platforms that I used. I had to pay a third-party vendor over 
$100 or $200, I don't exactly remember, in order to generate my 
tax form for me so that I could submit it to the IRS and make 
sure that my crypto taxes were paid appropriately.
    And so, I think not only is there a benefit of sort of 
going after some of the tax evasion that the administration has 
reported is happening, but there also is a benefit to the end 
user. It would make it a little bit easier for them to do their 
own taxes. The burden would no longer be on the own individual 
investors, it would be on the platform.
    Representative Peters. Right. And I assume in this industry 
we won't hear any back talk about how difficult it is to 
calculate this, because appreciables and standard operations it 
seems like.
    I had a question for Mr. Massad. In a recent Brookings 
Report you suggest that the Financial Stability Oversight 
Council should commence a review of stablecoins. Can you tell 
us a little more about what you think in general we are going 
to get out of this, not at the level Mr. Schweikert would 
understand but maybe the public could. Not to ding Mr. 
Schweikert, but it is no surprise that he understands this at 
the same level as the witnesses.
    Mr. Massad. The Financial Stability Oversight Council has 
the power under the Dodd-Frank Act to designate a payment 
activity as systemically important or likely to become 
systemically important. And I think the growth of stablecoins 
from very low numbers to over $130 billion today, plus the 
potential future growth if we did allow them to do broader 
application might very well meet that test.
    If they do that, then the Federal Reserve is charged with 
developing risk management standards. So I think that is a way 
to create a regulatory framework, certainly Congress could pass 
legislation too, but I think the FSOC could take that action 
and that could address a lot of the issues that we have 
mentioned, making sure the reserves are invested in cash, 
making sure there is liquidity, making sure there is 
operational resilience, and making sure things like KYC are 
adequately dealt with.
    Representative Peters. That would certainly be an important 
thing in lieu of there is no deposit guarantee----
    Mr. Massad. Correct.
    Representative Peters [continuing]. There is cash behind 
it.
    Mr. Massad. That is right. And today some of the stablecoin 
issuers are registered as trust companies, but that State 
registration doesn't mandate all the standards that I am 
talking about. It is still a light touch.
    Representative Peters. Mr. Werbach, tell me what the key 
differences are you would identify between decentralized 
finance in traditional banking and whether you think there is a 
potential that affects the integrity of the dollar, this whole 
phenomenon.
    Mr. Werbach. Well, decentralized finance is essentially 
transforming finance and financial services entirely to 
software. So it is about financial services that settle on a 
blockchain, a decentralized ledger that are noncustodial so you 
don't give up control of your assets to the third party and 
that are open, programmable, and composeable.
    So this is basically open so software and these pieces can 
be plugged into each other. It is a much more open and dynamic 
way of doing financial services, and it is one reason that we 
have seen an explosion of activity in DeFi and companies coming 
up with new opportunities, which can be very beneficial.
    The problem is they do it without the kinds of restraints 
that we have in the traditional system. And some of those 
restraints are very important for all the reasons that my 
fellow witnesses and I talked about, whether it is about money 
laundering or about protecting investors. So the answer is not 
to go back to the banking system and to prevent DeFi from 
happening.
    The question is first of all understanding what those risks 
are and also understanding what is happening in the 
marketplace. Because for example, there are DeFi insurance 
platforms are coming into existence that allow you to hedge 
against the risk that there is a hack on a DeFi service. But 
again, all of this is so new that we don't have an 
understanding of what it is.
    Representative Peters. I appreciate it. My time has 
expired, but again thank you for the hearing. Thank you to the 
witnesses.
    Chairman Beyer. Thank you very much, Congressman.
    I next recognize the Congressman from Kansas, Mr. Estes.
    Representative Estes. Thank you, Mr. Chairman. And thank 
you for all the witnesses for being here today. This is a great 
topic for us to be talking about. Obviously, when we look to 
the future there is a lot of technology out there and where we 
can possibly go with the country.
    And I want to go back and we talked a little bit about 
this, but, you know, over the past 30 years we have seen a 
number of innovations tied directly to the internet, and a lot 
of rapid developments, and adaptation. And really it was 
impossible to really know how the internet would function back 
when it was first being formed.
    So today we see that the blockchain technology and the 
capability there that gives Americans ability to reliably 
record information without having an intermediary to act as the 
recorder of that information. I think there is a whole host of 
potential applications from across the economy from land titles 
and ownership records, to contracts, to improving security over 
and above what we frequently have talked about in terms of 
crypto technology as being used as a currency. And I think 
there is a lot of decisions we have to make in both areas.
    Just like when the internet was new, we need to be careful 
about how Congress approaches these new technologies and what 
regulations we put in place. Just like there were many false 
starts with internet there in the dot.com bubble, but today it 
is really a critical tool that we have.
    It is good that the Congress didn't regulate the internet 
out of existence in the 1990s before it was clear what all 
those uses could be. And I hope that, you know, as we work 
through this process we come up with a goal that makes sure 
that we don't impose unnecessary barriers to the innovation. I 
hope that along with looking for protection from bad actors, 
Congress is very deliberative in its process and coming up with 
those legislative decisions that will help this technology grow 
and expand for things we haven't thought of today or discussed 
today.
    I do have a couple questions. Mr. Van Valkenburgh, what do 
you see are some of the exciting technologies that are citing 
applications that we can use with the blockchain technology 
going forward?
    Mr. Van Valkenburgh. Thank you, Congressman. And your 
colleague, Mr. Schweikert was going down this avenue as well. I 
think I would like to talk about identity. So when we think of 
blockchain networks as you said just now, we often think mostly 
about money.
    And cryptocurrencies are the scarce commodity tokens that 
power them are essential to the operation of these systems, 
because they create a fair reward for anyone who donates 
computing power to secure the blockchains and the data on that 
blockchain.
    So you don't need permission who can secure that data, you 
have an open competition of people securing that data and doing 
it transparently and getting a fair reward on the blockchain.
    With that said, one the blockchain is secure, you can put 
information in that blockchain that goes beyond merely a 
transaction where I paid Mr. Schweikert a bitcoin. You can put 
a transaction on that blockchain where I testified in front of 
Congressman Schweikert and I attested to my identity by using a 
unique cryptographic key in my phone when they let me in the 
front door. This kind of identity transaction is another 
intermediated transaction when it takes place on the internet 
today.
    We rely on major corporations to run our social networks, 
to run our credit reporting agencies, to run all the tools and 
systems that identify us that permission our access to 
buildings. The OPM uses major enterprise identity providers in 
order to secure government buildings for personnel.
    All of these ledgers are centralized and siloed and can 
ultimately be improved and decentralized by using open 
blockchain networks to secure identity transactional data, 
rather than trusting one corporation or company to do that. To 
that end, Microsoft has pioneered something called the ION 
network.
    It is not Microsoft's technology, per se. They are 
developing an open standard and contributing along with other 
corporations to a decentralized identity standard that would 
actually anchor identity data into the bitcoin blockchain so it 
is more secure and less vulnerable as a centralized data 
repository would be to hacking, and ransomware, and such.
    Representative Estes. What you have taken was very complex, 
trying to figure out how to deal with cryptocurrency and now 
made it even much more complex in terms of the other 
applications.
    I am about out of time. I don't know if you can say a quick 
comment about cybersecurity and how that might effectively be 
positive through this.
    Mr. Van Valkenburgh. Sure when we think of cryptocurrencies 
and cybersecurity we often jump to ransomware because it is 
used as a payment for ransomware. I think it is important to 
point out that Deputy Treasury Secretary Wally Adeyemo said in 
his speech last week, ``ransomware is not a cryptocurrency 
problem in the same way online fraud schemes are not the fault 
of the internet.''
    In fact I would go further and say that cryptocurrency 
technologies are ultimately the solution to ransomware 
cybersecurity issues because the big tech paradigm of securing 
user data in a centralized database is what creates 
vulnerability to hacking.
    If we decentralized control over that data, decentralized 
the social network, decentralized an identity provider you lose 
that single point of failure and that vulnerability from a 
ransomware and hacking perspective.
    Representative Estes. You certainly give us a lot to think 
about in trying to figure out what we do.
    Mr. Chairman, I yield back.
    Chairman Beyer. Thank you, Mr. Estes, very much.
    I now recognize the distinguished Congresswoman from 
Columbus, Ohio, Ms. Beatty.
    Representative Beatty. Thank you, Mr. Chairman and thank 
you to our witnesses, and my colleagues. This is very 
intriguing. And I want to come back to it, but I want to say 
this before my times runs out. I am really interested in the 
capital gains issue in how that would work as we deal with it 
in crypto versus I know how it works in real money when you 
have capital gains and how you have to apply to it.
    So I don't know if I have enough time. I will ask my 
questions, but I want to come back to that.
    But I will stay with you Mr. Van. I have a large Somali 
immigrant population in my district. As a matter of fact, I 
have the second highest in the country next to Minnesota.
    And I have worked with them, and many business individuals, 
and the Treasury for years to help them solve their remittances 
issue, because Somali does not have an adequate central banking 
system.
    Can you describe how bitcoin and crypto can potentially 
help with remittances or not? Because right now, they are 
traveling to Dubai once a month and sometimes with incredibly 
large, millions of dollars in a briefcase to get it back to 
come to Somali.
    Mr. Van Valkenburgh. So the value of bitcoin and other 
permissionless open blockchain networks for remittances is that 
it makes starting a new remittances business the barriers to 
entry to that field of endeavor much lower. You don't need to 
gain access to an ACH network, you don't need to have a well-
functioning financial system in say the destination nation for 
the payment.
    With that said, I want to be sober about this, you still 
may have last mile concerns. If the person at the other end of 
remittance is happy get a decentralized cryptocurrency then 
they may be able to receive that cryptocurrency using nothing 
more than a phone and an internet connection, which in many 
parts of the world may be something you would be more likely to 
have than access to well functioning financial services.
    However, if you want local currency, you will need to find 
someone willing to exchange the decentralized cryptocurrency 
for the local currency, and that is another point for potential 
failures or a place where regulation may be necessary because 
it is a trusted activity.
    Representative Beatty. Mr. Werbach, I know you have gone 
around the country giving lectures to business folks, attorneys 
and in your book when you talk about this being the new 
architect. Any comments on that?
    Because I think you hit on something. You have to have it 
on both ends and how advanced do we know for this population 
that I just mentioned, do we have any Intel on what is 
happening in Somali with this.
    Mr. Werbach. Well, this is something that is developing in 
the marketplace. Early on when bitcoin came around and 
cryptocurrencies came into existence, people said obviously 
this is going to be the solution for remittances. It is so much 
cheaper and you don't have the intermediation.
    Many companies went into the market thinking they would 
deploy these solutions and in most cases they failed or in most 
cases they were outcompeted by traditional kinds of services in 
part because of these last mile issues.
    And in part because in many ways the transaction in the 
middle of the network is fairly efficient under modern 
financial systems.
    So really what we need to see is how the market is 
developing and whether there are solutions as the technology 
evolves on both ends. And for example, as which have systems 
like the Lighting Network that Mr. Van talked about that may 
lead to more efficiency of these payments. It is certainly 
possible that a cryptocurrency-based remittances system will be 
a better solution but, we shouldn't prejudge.
    We shouldn't be in favor of one technology over the other. 
We should encourage the so-called traditional financial 
technologies to evolve and develop as well and have a 
marketplace that ultimately is best for the people using it.
    Representative Beatty. Thank you. I will try it get one 
more question in.
    Mr. Massad, in your testimony you spent a great deal of 
time addressing the slow and expensive payment system that we 
have in the United States. You even say that cryptocurrency 
namely, Central Bank Digital Currency, is one way to address 
this, but the Federal Reserve has been working on a faster 
payment system for a few years and many other countries--with 
many other countries around the world have a real-time payment 
system without the use of the Central Bank Digital Currency.
    Wouldn't the easiest route to address this outdated payment 
system be just to move into a real-time payment system which 
the Feds is already working on as opposed to creating a whole 
new system with Central Bank Digital Currency?
    Mr. Massad. It is an excellent question, Congresswoman. The 
Fed initiative which is called FedNow will certainly help a 
lot. The question, though, is first is it going to take a 
little while before it even comes online, but more importantly, 
will the benefits of FedNow really be widely decision 
contributed?
    Banks have to decide if they can manage it, if their own 
systems are capable of using it? And will they pass on the 
benefits? My concern is we need more competition to ensure 
innovation. The other thing about FedNow is that technology 
probably doesn't have the throughput that blockchain type 
technologies have.
    So I don't think it would be as good. And it is not clear 
you can develop smart contracts and so forth. So you know, it 
is one option, but I think we need to look at these others.
    And if I may going back to your question on remittances 
also incredibly important it really should be as easy as 
sending an email to send money abroad. And I think again 
digital technologies--digital assets probably regulated could 
do that. I would favor stablecoins or CDBCs over something like 
bitcoin.
    Representative Beatty. My time is up. Thank you, Mr. 
Chairman.
    Chairman Beyer. Thank you, Congresswoman.
    And now the gentleman from Texas, Mr.----
    Representative Arrington. Bringing up the rear over here, 
Mr. Chairman. Thank you all for your insights. It was a great 
discussion so far. And the panel has certainty helped educate 
me on something that I am not so familiar with, so I admit that 
from the outset.
    Mr. Van Valkenburgh, what an eloquent and powerful picture 
of America as the laboratory of innovation as a result of 
freedom, free people, free markets, unleashing creativity, 
ingenuity, and creating value for customers, not just here but 
around the world.
    So thank you for that. I loved listening to the uniquely 
American ideal that I think we all subscribe to, by the way, at 
least that is what I am hearing from the other witnesses.
    And I heard Mr. Werbach talk about a light touch. Maybe you 
said something like minimalistic legal construct. We want to 
all balance innovation and the need for having rules and basic 
safeguards. Because I don't know as much as I need to give any 
informed comments beyond this, I was a former regulator, chief 
of staff at the FDIC for many years. A lot of regulations there 
were derived from the risk to the deposit insurance. Right?
    I mean, with that came a lot of risk management on the 
safety and soundness and then there were a lot of consumer 
protection regulations and rules to follow. Absent systemic 
risk and the deposit insurance for consumers that the taxpayers 
are ultimately accountable for as a backstop, what are the gaps 
here?
    If there was one thing that you could all agree on in terms 
of filling the gaps to make sure we had basic safeguards, but 
we were not in any way I think you said in some ways regulation 
appropriately applied at the right time in the maturation 
process could support this not stifle it. I agree with that.
    So what would you all agree on, one or two things that 
maybe kind of the 80/20 rule, a few things that could close the 
gap, most significantly where there would be common ground 
among my colleagues and I.
    Mr. Van Valkenburgh. Thank you, Congressman. That is an 
excellent question. I think we would all actually agree on 
taxes. I did want to bring up a point earlier about the 
bipartisan infrastructure legislation and the self-reporting--
third-party reporting provisions, sorry, that were in that 
piece of legislation.
    As I said, there is language that it was vague and 
therefore could stifle innovation and harm personal privacy. 
And so, I do think a fix to that language was important and 
there was a bipartisan fix in the Senate, it could just not be 
procedurally implemented. But I am not saying that because I am 
against third-party reporting.
    In fact, folks in the cryptocurrency ecosystem have been 
asking for guidance from IRS, if they are running a company 
that helps someone buy Bitcoin, how can they do specifically 
third-reporting for their customers to make sure their 
customers can easily comply with taxes.
    Because I agree with Ms. Goldstein. When I filed my crypto 
taxes, it is not easy. So clarity there is important. I just 
think we should be careful the way we draft these laws and 
there was some slight issues with the language in the 
infrastructure bill.
    Again I would say de minimis exception from capital gains 
transaction for small transactions is essential to tax policy. 
And we can also have better tax policy with respect to assets 
that people receive because of cryptocurrency forks, which I 
will not dare explain at the moment, but Representative Emmer 
in the House you actually has proposed excellent legislation to 
address that issue.
    Representative Arrington. Thank you.
    Mr. Werbach, would you agree? And what you would add to 
that?
    Mr. Werbach. Thank you, Congressman.
    I would agree with that. I think we all agree that 
stablecoins are an area where there needs to be some 
investigation. We may not all agree on precisely what that 
should entail or whether additional legislation is needed, but 
I think we would agree that there are actors in that 
marketplace who are non-compliant, who purport not to do 
business in the U.S. and yet are listed on virtually every U.S. 
exchange.
    So I think we might agree about something where there is a 
need for action. I think we might agree on this issue that Mr. 
Massad talked about in terms of the gap on spot market exchange 
regulation.
    Again, not necessarily exactly what it looks like, but if 
there is third-party exchange then there needs to be some 
oversight for market integrity just as we have with other kinds 
of exchanges. And the fact that the split between the CFTC and 
the SEC is what it is, if that it just creates an unfortunate 
byproduct in this area.
    Representative Arrington. Thank you.
    Mr. Massad?
    Mr. Massad. Yes.
    Representative Arrington. And Ms. Goldstein in the final 
seconds here.
    Mr. Massad. First I am pleased that Mr. Van Valkenburgh 
agrees on the stock market. And just to clarify, a lot of 
people think while it is either a security or a commodity so 
that means the SEC and the CFTC just have to decide how to 
regulate this, which one is going to do it. That is not the 
case.
    The SEC can only regulate the digital assets that are 
securities. The CFTC regulates futures and swaps that are based 
on those other digital tokens and even sometimes on digital 
tokens that are securities. But again, that means the CFTC can 
regulate bitcoin futures the same way it regulates cattle 
futures.
    But the CFTC doesn't regulate the buying and selling of 
cows, nobody regulates the buying and selling of bitcoin, it 
just--other than the States, but that is a very light touch.
    The other thing I think we might be able to agree on is the 
importance of KYC, know your customer an anti-money laundering. 
The system we have now is essentially trying to check that at 
what we call the on ramps and the off ramps. So as you go into 
the crypto market, or come out of crypto market and exchange 
that for dollars, that is good and I think FinCEN has done a 
pretty good job there.
    But where we might start to differ is as the cryptomarket 
grows and you are able to do more and more things with crypto 
and you don't have to cash out, how do we prevent that illicit 
activity then? That is where it gets tougher, where what do we 
do about what is called unhosted wallets? What do we do about 
DeFi transactions?
    How do we have reasonable KYC that is risk based, that 
doesn't try to, you know, regulate every single transaction, 
that recognizes people are entitled to some privacy and we 
still have to prevent that illicit behavior. That is tricky.
    Representative Arrington. Thank you, Mr. Massad. Mr. 
Chairman.
    Ms. Goldstein. If the chair might allow.
    Representative Arrington. Would you indulge a final comment 
from the witness?
    Chairman Beyer. Absolutely.
    Representative Arrington. He is never this nice to me, by 
the way, when you are not around.
    Ms. Goldstein. I appreciate the flexibility and I 
appreciate all the fellow witnesses' comments. I thank Mr. Van 
Valkenburgh and I certainly agree that crypto tech is very 
difficult. I think we may disagree about the solution. I would 
prefer the base infrastructure above tech.
    I think two things we may all agree on, there are laws that 
apply currently to digital asset marketplaces and those laws 
should be enforced. And the other thing that maybe we could 
agree on is that the market data could be a lot better. Right 
now, we really rely on the exchanges themselves to self report. 
And I think some standardization of that market data is 
something we could potentially all agree on.
    Representative Arrington. Excellent. Thank you.
    Thank you, Mr. Chairman.
    Chairman Beyer. And I want to announce our next hearing, it 
will be on cryptocurrency forks.
    I recognize the penultimate questioner. Apparently Senator 
Cruz is on his way. And a vote has just been called in the 
House so the distinguished gentleman from Madison.
    Representative Pocan. This has been a great education, 
perhaps I will say for someone like myself that isn't super 
well versed in cryptocurrency. I spend much of my time thinking 
about the 40 percent of the people who don't have $400 in the 
bank for emergency expense.
    And so I guess the questions I am going to ask are more 
based on the calls we get into our office. I know that in about 
an 8-month period just recently I think from October 2020 to 
May 2021, 7,000 people reported scams to the tune of about $80 
million in cryptocurrency or crypto scams really. It is not 
necessarily in currency.
    Ms. Goldstein, I am just kind of curious, what are some of 
the inherent risks to digital assets that aren't necessarily in 
traditional investments? And specifically what are some of the 
areas as regulators should be in investigating in this space to 
protect consumers, that average person who calls a 
congressional office, who doesn't follow cryptocurrency 
anywhere near the level of discussion we had today?
    Ms. Goldstein. Well, thank you for the question, 
Congressman, I think there is a lot of different risks in the 
digital asset marketplace that are particularly unique. One is 
that individual users are sort of--they need to manage the 
counterparty risk themselves in a way that you traditionally 
wouldn't in the banking system. Right? You have a bank account 
and FDIC insurance, you are not worrying about who is on the 
other side.
    That is also true if you are trading stocks. Right? You 
might rely on SIPC. And you pretty much can guarantee that if 
you trade a stock at the end of the day you will probably get 
it. Right? And there are protections in place, because we have 
markets and those markets have rules. You don't necessarily 
know that that is true when in gauging in some of the 
cryptocurrency transactions.
    I think some of the other risks are the kind of scams that 
you are getting calls about. Right? We mentioned the Squid 
coin. Right? The ability to create these tokens that you can 
buy and then never sell. And if you are not able to read the 
code to identify that when you are purchasing a token, you may 
fall prey to that scam.
    There is also a potential for market manipulation. There is 
a lot of really big what they call whales, whether those are 
crypto hedge funds or exchanges that have prompt trading arms 
that are owned by CEOs, whatever it may be, there is real 
potential here for market manipulation.
    There is even a whole technical term for it, minor 
extractable value, which is the ability of cryptocurrency 
minors to sort of rearrange transactions in a way that they 
profit from.
    So all of this would benefit obviously from existing laws 
being enforced, but also perhaps to the extent that you and 
Congress see that there are gaps, making sure that the rules 
that we are used to in this sort of traditional markets are 
applied here so that individual investors aren't subject to 
these kinds of market manipulations.
    Representative Pocan. If you crank it up a couple notches, 
so rather than an individual getting scammed, are we at any 
risk of having a broader more systemic risk to our country? And 
what specific kind of regulatory effects do we need to do in 
order to safeguard against that?
    Ms. Goldstein. Well, Congressman, I think it is a great 
question and it is a hard one to answer because the market is 
very opaque right now. And there are a lot of entities that are 
private funds, whether they are family offices, or hedge 
funds--hedge funds do some basic reporting, but they are not 
required to report their cryptocurrency transactions on the 
form 13-F that the SEC make them file every quarter. Family 
offices have no reporting requirements whatsoever.
    So it is a little hard to tell that we have industry data. 
Right? We know that institutional investors are more and more 
interested, private funds in particular in getting in this 
space. And what I think about, what I worry about is contagion.
    So I think about Archegos. Right? That was one family 
office that was--that was able to cost billions of dollars in 
losses to banks who all happen to be on the side of same basket 
of trades. If big--too big to fail banks are also 
counterparties to hedge funds who also have big cryptocurrency 
portfolios and there is volatility in that market that may lead 
them to sell noncrypto assets, and they are all selling 
noncrypto assets at the same time, you could lead to a spiral 
which could perhaps impact the economy.
    So that is the way I am thinking about contagion given the 
limited data that we have to really understand the complete 
picture.
    Representative Pocan. Well, I look forward to however this 
conversation, Mr. Chairman, continues. I know our colleague--
former colleague, Jared Polis, was quite successful in this 
area. But he was quite successful to begin with.
    You know, I think what I am looking for on that average 
call we get into the office, someone who didn't have a lot of 
money to begin with and tried something and got scammed, just 
make sure that we have the right regulatory network to protect 
that person.
    So I yield back. Thank you very much.
    Chairman Beyer. Thank you, Congressman Pocan.
    Now the distinguished Senator from Arizona, Senator Kelly.
    Senator Kelly. Thank you, Mr. Chairman and thank you 
everybody for being here today. I really appreciate it.
    Ms. Goldstein, a question about stablecoins but first of 
all a new technology is something I am always very interested 
in innovation. I think it is one of the things our country does 
so well.
    But and I am concerned about cryptocurrency and 
unstablecoins, and one aspect of stablecoins is that in theory 
provide a bit more stability, linking the coin to a reserve, 
but key issue to address as it relates to stablecoins is 
insuring sufficient transparency to protect the users, the 
folks who buy stablecoins.
    So how do we ensure that there are--is sufficient 
transparency about the reserves utilized in stabilizing the 
coins value?
    So could you talk a little bit about that transparency and 
the requirements for disclosure if there are some.
    Ms. Goldstein. Thank you for the question, Senator. I think 
there are a lot of different ways that we could approach this 
problem and it sort of depends on the State locally. Right? 
Some stablecoins are algorithmic, and they have a basket of 
assets and they move around, some are meant to be pegged to the 
dollar or another Fiat currency.
    And I think there are a lot of different places that 
regulators could approach this problem. Some stablecoins may be 
securities, but should be regulated by the SEC which would 
bring a substantial amount of transparency. The Presidential 
Working Group has considered, you know, that the prudential 
regulators have asked Congress to look into doing some 
legislation around stablecoins.
    There is also a role for FinCEN to play and make sure that 
stablecoin issuers who are doing redemptions and also issuing 
these new stablecoins aren't doing anything that involves any 
sort of financial crimes. There is also I think an important 
piece about stablecoins, which is that DeFi doesn't work 
without stablecoin.
    And that is a new and emerging piece of this marketplace. 
It is operating in some cases without adherence to solve our 
existing laws, like know your customer, anti-money laundering, 
compliance and combating terrorist financing.
    So I think unfortunately there is no easy answer. There is 
perhaps a role for every single regulator and of course the 
role for State Attorneys General. Right? I actually think that 
Tether might be a bit behind that they are supposed to give a 
quarterly disclosure of their reserves and I am not quite sure 
that they have done that on time. So there is also a goal for 
State law enforcement as well.
    Senator Kelly. So in general, do you feel we need more 
transparency and disclosure than we have today with regard to 
stablecoins?
    Ms. Goldstein. I think that that would be helpful, but I 
also think that the regulators have a number of tools to ensure 
that currently. And I would encourage them to use the tools 
they currently have to maybe have that happen.
    Senator Kelly. Thank you, Ms. Goldstein.
    And Mr. Chairman, I yield back the remainder of my time.
    Chairman Beyer. Senator, thank you very much.
    And our ultimate questioner, the distinguished Senator from 
Texas, Senator Cruz.
    Senator Cruz. Thank you, Mr. Chairman. And I appreciate the 
adjective as the ultimate questioner. I will take that with a 
chuckle.
    You know, I have to say, I think cryptocurrency and bitcoin 
mining provide enormous opportunities. They are creating vast 
amounts of wealth, they are creating a hedge for people against 
inflation. Inflation is a growing concern across the country. 
They are creating entrepreneurs in all 50 States.
    I am also particularly proud that my home State of Texas is 
becoming an oasis for the blockchain community, for bitcoin 
miners, for innovators, and entrepreneurs in the crypto world. 
Unfortunately, the one thing that is capable of screwing all of 
this up is the United States Congress. And I have deep concerns 
that Congress is already in the process of doing so.
    As most people watching this hearing know, in the recently 
passed so-called bipartisan infrastructure bill, there are 
provisions targeting and inflicting enormous harms on the 
crypto industry.
    As originally drafted, the infrastructure packaged a 
provision that expands the definition of broker to nearly all 
participants in the cryptocurrency structure, treating them as 
a financial institution, which means they have to report 
consumer information to the IRS, even if those participants 
don't have access to that information.
    Additionally, the infrastructure bill included language 
incorporating digital assets under section 6050I of the 
Internal Revenue Code which states that in a broad range of 
scenarios, any person who receives over $10,000 in digital 
assets must verify the sender's personal information, including 
Social Security number, and sign and submit a report to the 
government within 15 days. And failure to comply results in 
mandatory fines and can be a felony with up to 5 years in 
prison.
    We have seen how crypto poses a threat to totalitarian 
regimes. For that reason, the Chinese communist government 
recently acted to ban bitcoin mining. And the sad reality of 
Congress legislating in this matter, I can speak at least for 
the Senate, I doubt there are five Members of the United States 
Senate that could tell you what the hell a Bitcoin is. And 
legislating is always a messy process, but when it comes to 
legislating in an area where most Members of this body have 
very little familiarity of the details, it is highly perilous.
    So Mr. Van Valkenburgh, your testimony has addressed many 
of these concerns, but can you share what the impact is of the 
provisions in the bill just signed into law? And in particular 
address what I have this week introduced stand alone 
legislation that would repeal these crypto provisions. And 
should Congress legislate in this area? Almost certainly, but 
it should do so after an awful lot of hearings and awful lot of 
learning what is going on. And it should do so with an eye to 
not destroying this industry rather than simply using a machete 
and letting the consequences fall on the American people.
    Mr. Van Valkenburgh. Thank you, Senator. I strongly agree 
the 6050 reporting requirement represents a rather grave threat 
to personal privacy and the fact I believe it is in 
contravention of our Fourth Amendment rights, to not have our 
personal papers searched without a warrant.
    The Fourth Amendment protects our private papers when we 
keep them in our homes and when we have them on our persons. 
The Bank Secrecy Act which is our know your customers rules and 
anti-money laundering rules is constitutional because those 
reports are filed by third parties, by banks where the customer 
voluntarily provides their private information to the third 
party, and the third party holds it for a legitimate business 
purpose.
    The U.S. Supreme Court found that to be constitutional then 
if the governments gets that information without a warrant 
which is the Bank Secrecy Act is constitutional to this day. It 
is also why the government can go to Google and get your gmail 
email history without a warrant. That was a compromise and a 
reading of the over the Fourth Amendment of the Supreme Court 
came up with in 1970 in California Bankers Association v. 
Shultz and Miller.
    Now in the 6050I reporting context, please tell me who the 
third party is to a two-party transaction where someone 
received more than $10,000 worth of bitcoin? There is no third 
party so how can the third party doctrine make a warrant 
unnecessary for the collection of that very intimate 
information, a Social Security number.
    Senator Cruz. And let me ask you if this new legislative 
provision particularly if it is enforced aggressively by the 
Biden Treasury Department and Biden IRS, if it succeeds in 
decimating the bitcoin and crypto industry in driving it 
overseas, is that good or bad for America?
    Mr. Van Valkenburgh. Well, I believe it would be bad. 
However, I am optimistic. The provision doesn't go into effect 
until 2024. There are very reasonable and I think strong 
constitutional arguments to invalidate it before that happens.
    And I also think a lot of folks in Treasury have the right 
idea about this stuff and would actually agree that some level 
of privacy protections are important. So I don't think we are 
on the cusp of apocalypse as of yet.
    Senator Cruz. Well, I hope you are right. And I hope 
Congress also acts to avoid apocalypse without rolling the dice 
and seeing if that prediction is right or wrong.
    Chairman Beyer. Only appropriate that the ultimate 
questioner brings up the apocalypse.
    Thank all of you very much for gathering with us. It has 
been a fascinating conversation. I promise every one of our 
other panelists up here, Democratic and Republican, really 
enjoyed learning a lot more about cryptocurrency. I personally 
would love to learn how to become a backup, a miner, Ms. 
Goldstein. Although, when I was in Glasgow last week, at least 
more than one were talking about the energy impacts of mining, 
and this contribution to climate change.
    So formally let me thank you for this important 
conversation on a very complex topic, digital assets and 
cryptocurrencies have grown to become a globally significant 
financial market. Understanding these new and complicated forms 
of financial assets, activities, and products is necessary for 
Congress to address both the risks and benefits of this growing 
technology and hopefully to do it in a balanced way that 
doesn't stifle innovation, that doesn't chase it overseas, but 
it makes sure that we are doing all the kind of protections 
that we need.
    I thank each of you for your timely contributions. Thank 
you for written remarks that are ten times longer than what you 
offer verbally which are excellent ideas. And thank all my 
colleagues who have all gone to vote for their part in this 
discussion.
    This record will remain open for three days. This hearing 
is now adjourned.
    [Whereupon, at 5:10 p.m., Wednesday, November 17, 2021, the 
hearing was adjourned.]

                       SUBMISSIONS FOR THE RECORD

         Prepared statement of Hon. Donald Beyer Jr., Chairman,
                        Joint Economic Committee
                              recognitions
    This hearing will come to order. I would like to welcome everyone 
to the Joint Economic Committee's hearing titled ``Demystifying Crypto: 
Digital Assets and the Role of Government.''
    I want to thank each of our truly distinguished witnesses for 
sharing their expertise today. Now, I would like to turn to my opening 
statement.
                               statement
    Since the introduction of Bitcoin in 2009, the market for 
cryptocurrencies and other digital assets has expanded from a niche 
product to a globally significant asset worth nearly three trillion 
dollars just last week. While this rapid rise in value has made some 
early adopters quite wealthy, it also poses an array of risks to both 
everyday investors and the broader financial system.
    The purpose of this hearing is to explore emerging trends in the 
digital asset market and discuss prudent steps that Congress and the 
Federal Government can take to update our regulatory framework and 
bring much-needed clarity to issuers, ensure transparency for 
investors, and protect the integrity of our financial system--while 
also leveraging exciting developments in blockchain technology. 
Congress can promote responsible innovation in this market while also 
providing basic protections to the investing public.
    Interest and involvement in the digital asset market has become 
increasingly mainstream in recent years. The growth of these products 
has been especially pronounced since the start of the coronavirus 
pandemic, as the reported total market value of all digital assets 
soared from two hundred billion dollars in January 2020 to nearly three 
trillion dollars today.
    As the market has grown, we have seen digital asset investors 
broaden from a narrow group of true believers in cryptocurrencies to an 
expanding community that includes everyday investors. A Pew survey 
conducted this fall found that sixteen percent of American adults have 
personally owned or invested in a cryptocurrency at some point, up from 
just one percent who reported holding Bitcoin in 2015. While many early 
Bitcoin transactions occurred on little-known online platforms, today, 
investors can buy digital asset through Robinhood or Venmo, or on large 
exchanges run by publicly-traded companies like Coinbase.
    But this growth in value and interest presents a number of 
challenges for our economy. The current digital asset market structure 
and accompanying regulatory framework are ambiguous and risky for both 
investors and the broader economy. Digital asset holders have been 
subjected to a market that is, as SEC Chairman Gary Gensler described 
it ``rife with fraud, scams, and abuse''.
    The mainstreaming of digital assets is laying the foundation for 
huge swaths of the economy to invest in this market. Increased crypto 
market volatility or a digital bank-run could disrupt more mainstream 
financial institutions like pension funds or mutual funds. And the 
underlying assets can create significant consumer protection issues 
given existing patterns of financial fraud, hacks, and market 
manipulation.
    Retail investors may be lured in by the hype around a new coin with 
improbably high rates of return, only to be caught on the wrong end of 
a speculative bubble and lose their entire investment. A recent example 
was ``Squid'', a blatant scam token that used the excitement around the 
popular TV show Squid Game to dupe unwitting investors out of 3.3 
million dollars.
    While all investments involve risk, the lack of disclosure and 
reporting requirements in many parts of the crypto asset industry tilt 
the playing field toward the largest investors who can leverage their 
size to exploit regulatory gaps at the expense of retail investors. It 
is currently difficult for regulators to prevent market manipulation by 
large players who can exploit their access to multiple sides of a 
trade, or trade on inside information.
    Despite these issues, Congress has not yet weighed in on a 
comprehensive legal framework around these assets.
    Updating the U.S. regulatory framework for digital assets would be 
in line with how officials have often responded to past financial 
innovations with stronger rules to protect consumers and market 
integrity. For example, Dodd-Frank created stronger rules on complex 
swaps and derivatives in the wake of the 2008 financial crisis.
    Updated regulation can also reduce the likelihood that these 
emerging developments would destabilize financial markets and the 
broader economy. For example, the largest stablecoin Tether was 
recently found to not hold sufficient reserves of cash and equivalents 
to fully back their seventy billion dollar value. Applying additional 
regulatory scrutiny to assets like Tether, and the platforms where they 
are used, could ensure that cracks in one asset don't spread to the 
broader economy.
    Increasing reporting requirements for decentralized finance 
platforms will shine a light on a fast-growing but lightly regulated 
segment of the market. Increased information sharing would also improve 
tax compliance for capital gains from the sale of crypto assets.
    The many issues we will discuss today are why I introduced the 
Digital Asset Market Structure and Investor Protection Act earlier this 
year. This legislation would establish much-needed guardrails and 
provide clarity to regulators and investors without stifling 
innovation. The present moment gives us an opportunity to take action 
before a potential crisis hits the broader economy.
    I am looking forward to learning from each of our witnesses today.
                               __________
          Prepared statement of Hon. Mike Lee, Ranking Member,
                        Joint Economic Committee
    Throughout the history of this great nation, entrepreneurs and 
creators have served as the heartbeat of the American economy and the 
engine of America's growth. Their advances into unknown frontiers of 
science and technology have transformed the quality of life for 
millions of Americans, and for people around the world.
    Today, American innovators are advancing into the unknown frontiers 
of cryptocurrencies, using novel technologies to securely create and 
trade digitally scarce assets. Like the internet of the 1990s, 
cryptocurrencies are still in their infancy. This evolving technology 
has vast--and still untapped--potential to revolutionize established 
industries and create entirely new ones.
    Cryptocurrencies are already democratizing finance by lowering 
costs and expanding access to an industry that has historically been 
hard to reach for millions of Americans, including hundreds of 
thousands of Utahns.
    Beyond the better-known applications to finance, blockchain--the 
technology behind cryptocurrencies--has even broader potential. 
Blockchain can securely share health records, efficiently track cross-
border transactions in global supply chains, and allow online consumers 
to verify the authenticity of pictures or videos.
    I have great optimism that, like the internet before it, the 
technology behind cryptocurrencies will create a wealth of new 
opportunities, many of which we cannot yet imagine.
    As new markets like this one emerge and grow, there is always a 
temptation in Washington to expand the Federal Government's reach--a 
temptation to centrally control the innovative process and regulate the 
products of those individuals who are at the forefront of American 
advancement.
    This temptation must be resisted.
    Rigid, one-size-fits-all regulation targeted at the cryptocurrency 
economy is unnecessary, and it will all but ensure that this next 
generation of technology companies moves to other countries. Americans 
could lose access to cryptocurrency markets and miss out on the 
potential economic and social benefits.
    If we want the center of innovation to remain here in the United 
States, for the benefit of American workers and American families, 
Congress should focus on creating clarity around how existing rules 
apply to these new technologies. In the case that existing law proves 
outdated, we can assess the need for new rules. However, as it stands 
today, we just need to appropriately apply the rules we already have on 
the books.
    The proper role of government is to empower innovation through 
clear rules with a light touch. The best approach is one where Congress 
acts in a manner that is tailored to its limited constitutional 
authority. It is one where the Federal Government acts with restraint, 
and in so doing, protects the creation and ingenuity that powers our 
great country.
    In today's hearing, I hope that we can focus on policies that 
protect a flexible regulatory framework for the Americans who are 
building our future.
    If we can resist centralizing power in Washington, and preserve the 
space for American innovation to flourish, entrepreneurs across the 
country stand ready to unleash the tremendous opportunity of new 
digital economies.
    Thank you.
    
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]     
    
     
     Response from Ms. Alexis Goldstein to Questions for the Record
                      submitted by Chairman Beyer
    1. Given the increasing number of countries exploring digital 
currencies, including China, do you think that the Federal Reserve 
should be given explicit authority issue a digital dollar? If the Fed 
does not issue a digital dollar, are you concerned about the U.S. 
dollar losing its role as the world's reserve currency?

      To the extent that the Federal Reserve (``Fed'') needs 
additional authorities to issue a digital dollar, Congress should 
contemplate granting it. Some cryptocurrency market actors have implied 
they do intend to challenge the primacy of the U.S. dollar \1\ or that 
so-called stablecoins and so-called decentralized finance enable 
participants to ``get rid of their fiat.'' \2\ The CEO of the 
cryptocurrency exchange Kraken has also made derisive statements about 
Federal Reserve notes,\3\ suggesting that market participants would 
like to overtake U.S. dollars as a mode of exchange, despite Kraken 
applying for a master account with the Fed. \4\ The Fed should monitor 
for any current, potential, and ongoing risks to the dollar, including 
the introduction of private money.
---------------------------------------------------------------------------
    \1\ Investor Presentation, Circle (Jul. 7, 2021), https://
www.sec.gov/Archives/edgar/data/0001824301/000121390021036070/
ea143875ex99093_concordacq.htm at 23. (In the Investor Presentation 
included in Circle's July 2021 8-F SEC filing, Circle states that the 
``opportunity'' and ``long-term addressable market'' for USDC is all 
$130 trillion of the M2 money supply.)
    \2\  Jake Chervinsky, head of policy for the Blockchain Association 
(@jchervinsky), Twitter (Aug. 27, 2021, 3:09 PM), https://twitter.com/
jchervinsky/status/1431333014907277312. (``I mean sure, that's a cute 
retort, but the point of decentralized exchange is to let people get 
rid of their fiat & buy bitcoin without relying on a centralized 
intermediary to execute the trade. You need a decentralized fiat 
instrument to do that.'')
    \3\  Jesse Powell, CEO of Kraken (@jespow), Twitter (Aug. 29, 2021, 
2:48 AM), https://twitter.com/jespow/status/1431871317138018306. 
(``Except #bitcoin is issued by the public, transparently, predictably 
according to math and code that is freely available for all to audit. 
Contrast this with the privately issued, unpredictable, shadowy, 
Federal Reserve Note, operated by the elite, without independent 
audit.'')
    \4\  Robert Stevens, Kraken Will Be First US Crypto Bank. Here's 
Why It Matters, Decrypt (Sep. 16., 2020), https://decrypt.co/42077/
kraken-first-us-crypto-bank-heres-why-matters.

    2. It is my understanding that thousands of transactions a day for 
millions of dollars are not recorded on the blockchain and are instead 
settled ``off-chain''. Are ``off chain'' digital asset transactions a 
problem and should regulators require that these transactions are 
---------------------------------------------------------------------------
reported to a central repository?

      One of the purported benefits of various blockchains and 
distributed ledgers is transparency--including that transactions are 
publicly viewable. Off-chain transactions lack this transparency, and 
leave both the public and regulators reliant on the firms and/or 
entities conducting the off-chain transactions to provide full and fair 
disclosure. One indicator of potential systemic risk is opacity (in 
addition to leverage and interlinkages between market participants), 
and the prominent of off-chain transactions raise this risk. The 
opacity of off-chain transactions does raise risks. Regulators and 
Congress alike should consider ways to bring more transparency, not 
just to off-chain transactions, but to the crypto asset markets 
broadly.

    3. The CFTC just fined Tether--the issuer of USDt--$41 Million for 
making false and misleading statements about its reserve holdings, 
after finding that USDt was only backed one for one with dollars just 
27 percent of the time. Given that USD Tether is the most actively 
traded digital asset in the World, should the CFTC fine have been 
bigger to discourage similar activities by other fiat based stablecoin 
issuers in the future?

      All regulators, including the Commodity Futures Trading 
Commission (CFTC), should ensure that settlement fines are sufficiently 
large to deter future offenses, rather than being seen as merely the 
cost of doing business by the offending firm. I would also note that 
transaction volumes in cryptocurrency markets need to be viewed 
skeptically, as the market lacks regulatory oversight to allow for 
reliable market data reporting.

    4. In 2018 senior SEC officials announced that Bitcoin and 
Ethereum, the two largest digital assets by market capitalization, 
would not be treated as securities. The CFTC has taken the position 
that both Bitcoin and Ethereum are commodities and permitted CFTC 
exchanges to offer futures and swaps contracts on both digital assets. 
However, the regulatory status of many other digital assets remains 
unclear. Should Congress mandate that the SEC and CFTC work together to 
clarify the status of other major digital assets?

      The Commodity Futures Trading Commission (CFTC) and the 
Securities and Exchange Commission (SEC) have multiple avenues for 
ongoing dialog and collaboration, including but not limited to formal 
MOUs and informal modes of engagement. As previously noted by CFTC 
Commissioner Dan Berkovitz, the Commodity Exchange Act ``does not 
contain any exception from registration for digital currencies, 
blockchains, or `smart contracts.' '' \5\ SEC Chair Gensler has stated 
that ``It doesn't matter whether it's a stock token, a stable value 
token backed by securities, or any other virtual product that provides 
synthetic exposure to underlying securities. These products are subject 
to the securities laws and must work within our securities regime.'' 
\6\ The SEC and the CFTC should continue to enforce all existing laws 
and regulations.
---------------------------------------------------------------------------
    \5\ CFTC Commissioner Dan M. Berkovitz, Keynote Address Before FIA 
and SIFMA-AMG, Asset Management Derivatives Forum, Commodity Futures 
Trading Commission (Jun. 8, 2021), https://www.cftc.gov/PressRoom/
SpeechesTestimony/opaberkovitz7.
    \6\ SEC Chair Gary Gensler, Remarks Before the Aspen Security 
Forum, Securities and Exchange Commission (Aug. 3, 2021), https://
www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-
03.
---------------------------------------------------------------------------
                               __________
     Response from Ms. Alexis Goldstein to Question for the Record
                      submitted by Senator Cassidy
    Discussions around cryptocurrency, especially at this hearing, 
focus on what the Federal Government's role in cryptocurrency 
regulation should be. While the Federal Government considers its 
approach, states are starting to take action. Some examples include 
Wyoming setting up regulations allowing for cryptobanks, while New York 
has introduced its BitLicense. From the different approaches taken by 
states toward digital currency, what lessons can the Federal Government 
take away?

      A number of states take different approaches to crypto 
asset oversight. State based regulation is often inadequate to mitigate 
national risks, including systemic risks, and may also lead to market 
fragmentation. The Federal Government should focus its attention on 
oversight, ensuring there is adequate enforcement of existing 
securities and derivatives laws, as well as identifying if there are 
any regulatory gaps that require action to ensure consumer and investor 
protection in the cryptocurrency space--including the ability for 
regulators to monitor for systemic risk.
                               __________
     Response from Ms. Alexis Goldstein to Questions for the Record
                     submitted by Senator Klobuchar
    1. As mentioned in your testimony, late last month, developers of a 
new cryptocurrency sought to take advantage of the popularity of 
Netflix's Korean thriller ``Squid Game'' and introduced a ``Squid'' 
coin. Between October 26 and November 1, the value of a Squid coin rose 
by more than 23 million percent, from a little more than a mere cent to 
$2,861.80.

     Early on the morning of November 1, the value of a Squid coin 
collapsed from a high of just over $2,860 to effectively zero as 
cryptocurrency traders watched the token's unknown creators clean out 
some $3.3 million in funds, according to digital records. The maneuver, 
known as a ``rug pull'' in cryptocurrency circles, occurs when a 
token's creators abandon the project by exchanging many virtual coins 
for real-world cash. They quickly drain liquidity from the product, 
effectively driving 3 the coin's value to zero and leaving other 
investors holding the bag in an apparent scam.

     With the anonymity and complexity of cryptocurrency, what 
protections do American investors, particularly retail investors, have 
from predatory creators of digital currencies?

      Retail investors should receive the same protections when 
they trade crypto assets as they do when they trade equities and/or 
derivatives. Regulators have noted that there are no exceptions from 
existing laws for crypto assets. For example, former CFTC Commissioner 
Dan Berkovitz has noted that the Commodity Exchange Act ``does not 
contain any exception from registration for digital currencies, 
blockchains, or `smart contracts.' '' \7\ Securities and Exchange 
Commission Chair Gensler has also noted in remarks before the SEC's 
Investor Advisory Committee that many crypto asset tokens ``may be 
unregistered securities, without required disclosures'', further 
clarifying that ``to the extent that there are securities on these 
trading platforms, under our laws they have to register with the 
Commission unless they meet an exemption.'' \8\ All investors in crypto 
assets deserve the protections that Americans have come to expect when 
trading in U.S. markets.
---------------------------------------------------------------------------
    \7\ CFTC Commissioner Dan M. Berkovitz, Keynote Address Before FIA 
and SIFMA-AMG, Asset Management Derivatives Forum, Commodity Futures 
Trading Commission (Jun. 8, 2021), https://www.cftc.gov/PressRoom/
SpeechesTestimony/opaberkovitz7.
    \8\ SEC Chair Gary Gensler, Remarks before the Investor Advisory 
Committee, Securities and Exchange Commission (Dec. 2, 2021), https://
www.sec.gov/news/statement/gensler-iac-statement-120221.

    2. There are many national security concerns in this space, from 
ransomware to illicit payments and financial crimes. This October, the 
Treasury's Office of Foreign Assets Control (OFAC), which publishes 
lists of individuals and companies owned or controlled by, or acting 
for or on behalf of, countries subject to U.S. sanctions, released new 
guidance--clarifying that all digital market participants are expected 
---------------------------------------------------------------------------
to monitor their users against the sanctions list.

     What are the challenges for the industry in complying with this 
guidance?

      The October guidance from Treasury's Office of Foreign 
Assets Control noted that Specially Designated Nationals and Blocked 
Persons List (the ``SDN List'') has included virtual currency addresses 
since 2018, and this list is downloadable across a variety of formats. 
The accessibility of this list, and the further clarity provided in the 
October guidance, should make it straightforward for the cryptocurrency 
industry to comply, and ensure their platforms and protocols are not 
interacting with virtual currency addresses on the SDN list. Further, 
as noted in the guidance, the industry should also conduct historical 
lookbacks of past transactional activity ``after OFAC lists a virtual 
currency address on the SDN List to identify connections to the listed 
address.'' \9\
---------------------------------------------------------------------------
    \9\ Sanctions Compliance Guidance for the Virtual Currency Industry 
(Brochure), Office of Foreign Assets Control, (Oct. 2021), https://
home.treasury.gov/system/files/126/
virtual_currency_guidance_brochure.pdf. (See, e.g.: ``OFAC's inclusion 
of virtual currency addresses on the SDN List may assist the industry 
in identifying other virtual currency addresses that may be associated 
with blocked persons or otherwise pose sanctions risk, even if those 
other addresses are not explicitly listed on the SDN List. For example, 
unlisted virtual currency addresses that share a wallet with a listed 
virtual currency address may pose sanctions risk because the sharing of 
a wallet may indicate an association with a blocked person. Similarly, 
virtual currency companies may consider conducting a historic lookback 
of transactional activity after OFAC lists a virtual currency address 
on the SDN List to identify connections to the listed address.'').
---------------------------------------------------------------------------
                               __________
      Response from Mr. Timothy Massad to Questions for the Record
                      submitted by Chairman Beyer
    1. Given the increasing number of countries exploring digital 
currencies, including China, do you think that the Federal Reserve 
should be given explicit authority issue a digital dollar? If the Fed 
does not issue a digital dollar, are you concerned about the U.S. 
dollar losing its role as the world's reserve currency?

    The critical issue is ramping up our research and development to 
determine exactly how we should design a U.S. CBDC and whether its net 
benefits make it worthwhile. The Fed will ultimately want explicit 
authority to issue a digital dollar. But I would be concerned that if 
we focus on that issue now, the process of building the consensus to 
grant that authority may raise all the issues of what would it look 
like, how would it work, is it worth it, would it disintermediate the 
banks, etc. I have no objection to granting the authority now if it can 
be done; I am simply suggesting that it is not the most urgent task, 
because we have not answered these other questions about CBDC design 
and benefits.

    I don't think there is a near term risk of the dollar losing its 
role as the world's reserve currency but we cannot afford to be 
complacent either. The role of the dollar as the world's reserve 
currency is attributable to a number of factors, many of which are not 
directly tied to the technological form of money, such as the size and 
liquidity of the U.S. Treasury market (so that investors can obtain 
``safe'' assets in times of stress), the stability of our government, 
the size and resilience of our economy, the strength of the rule of 
law, etc.

    The dollar's prominence in international payment systems is 
sometimes thought of as part of its role as the world's reserve 
currency, but in many ways, it is distinguishable and more directly 
tied to the speed and efficiency of our payments system. That is why I 
think modernizing our payments system, and making sure it is 
interoperable with other countries' systems, is critical. A CBDC is 
potentially one way to do that; there may be other means as well. That 
is why we need to accelerate our research and design of CBDCs.

    2. It is my understanding that thousands of transactions a day for 
millions of dollars are not recorded on the blockchain and are instead 
settled ``off-chain.'' Are ``off chain'' digital asset transactions a 
problem and should regulators require that these transactions are 
reported to a central repository?

    You are correct that there are a lot of transactions involving 
crypto-assets that are not recorded on any blockchain and are instead 
settled off-chain. The most common form of this is transactions made on 
a centralized exchange, which are recorded in the exchange's ledger. 
The exchange itself has a master account(s) on the blockchain which 
contains all of the particular crypto-asset that its customers own. But 
the absence of a regulatory framework for these exchanges means there 
is no assurance that the amount of say, bitcoin, held by the exchange 
on the blockchain is even equal to all of its customers holdings on the 
ledger. The general absence of transparency is a problem. I would focus 
first on creating an overall framework of regulation, particularly for 
crypto exchanges and other intermediaries, that requires reporting, 
disclosure and transparency similar to what we have in the derivatives 
and securities market. Exchanges should be required not only to keep a 
record of all bids, offers and transactions, but make that record 
available for appropriate regulatory and law enforcement purposes, and 
provide adequate pre and post-trade transparency to investors. I would 
do that first, and then consider whether we need a central repository.

    3. The CFTC just fined Tether--the issuer of USDt--$41 Million for 
making false and misleading statements about its reserve holdings, 
after finding that USDt was only backed one for one with dollars just 
27 percent of the time. Given that USD Tether is the most actively 
traded digital asset in the World, should the CFTC fine have been 
bigger to discourage similar activities by other fiat based stablecoin 
issuers in the future?

    I cannot comment on how the CFTC determined the size of its fine, 
but I would say that I do not think the CFTC has sufficient authority 
to discourage similar activities by other stablecoin issuers. The 
CFTC's action was based on application of its anti-fraud authority 
under Section 6(c) of the Commodity Exchange Act. The CFTC does not 
have general power to regulate stablecoins or to set standards for 
stablecoin issuers. The best way to discourage bad actors is to create 
such a regulatory framework. CFTC Commissioner Dawn Stump expressed 
this very well in her concurring statement. She explained that while 
the action was an appropriate application of the anti-fraud provisions 
of Section 6(c) of the CEA, it was likely to cause confusion about the 
CFTC's role, since the agency does not regulate stablecoins. 
Specifically, she said the CFTC action may give investors a ``false 
sense of comfort that we are overseeing those who issue and sell these 
coins such that they are protected from wrongdoing.'' See https://
www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement101521.

    We need to create a regulatory framework for stablecoin issuers 
that requires them to keep all reserves in cash (or, possibly, other 
highly liquid assets), guarantee redemption at par, and restrict their 
other activities, among other things, as I discussed in my testimony.

    4. In 2018 senior SEC officials announced that Bitcoin and 
Ethereum, the two largest digital assets by market capitalization, 
would not be treated as securities. The CFTC has taken the position 
that both Bitcoin and Ethereum are commodities and permitted CFTC 
exchanges to offer futures and swaps contracts on both digital assets. 
However, the regulatory status of many other digital assets remains 
unclear. Should Congress mandate that the SEC and CFTC work together to 
clarify the status of other major digital assets?

    I believe the key problem is a lack of regulatory authority over 
the cash or spot market, not whether any particular token is a 
commodity or a security. The fact that Bitcoin and Ethereum are 
regarded as commodities gives the CFTC authority over derivatives 
pertaining to Bitcoin and Ethereum; it does not give the agency plenary 
authority to regulate Bitcoin and Ethereum, just as it does not have 
plenary authority to regulate any other commodity. Instead, it 
regulates derivatives based on commodities. Congress has given the CFTC 
limited power to prevent fraud and manipulation in the commodities 
markets themselves because of concern that fraud and manipulation would 
undermine the derivatives market, but that does not constitute general 
power to set standards for the trading of commodities.

    Moreover, the derivatives the CFTC regulates includes derivatives 
on securities. Thus, while it would certainly be helpful for the SEC to 
clarify which crypto-assets it views as securities, there would still 
be a gap in regulation of those that are not securities. Congress 
should provide authority to the SEC or the CFTC to regulate the cash 
market for crypto-assets that are financial instruments. I would be 
happy to provide more information about that.
                               __________
      Response from Mr. Timothy Massad to Question for the Record
                      submitted by Senator Cassidy
    ``Discussions around cryptocurrency, especially at this hearing, 
focus on what the Federal Government's role in cryptocurrency 
regulation should be. While the Federal Government considers its 
approach, states are starting to take action. Some examples include 
Wyoming setting up regulations allowing for cryptobanks, while New York 
has introduced its BitLicense. From the different approaches taken by 
states toward digital currency, what lessons can the Federal Government 
take away?''

    The Federal Government can certainly examine what the states are 
doing and learn from it, and I think there are areas where the states 
should retain their traditional primary jurisdiction, such as in 
uniform commercial code issues and how those might apply to digital 
currency, how State banking laws and regulations apply to digital 
assets, and so forth. But I think we need a Federal framework of 
regulation for digital assets that are financial instruments generally, 
just as we have in securities, derivatives, banking and other core 
financial markets. For example, although some might say that 
stablecoins are adequately regulated by State money transmitter laws or 
the specific digital laws of certain states, I think that we need a 
uniform national approach that protects against run-risk and other 
risks to financial stability, and ensures a basic level of investor 
protection. In addition, market development will be hampered if we have 
variations in approaches on those basic issues.
                               __________
      Response from Mr. Timothy Massad to Question for the Record
                   submitted by Senator Amy Klobuchar
    A report by the President's Working Group on Financial Markets 
(PWG), the Federal Deposit Insurance Corporation, and the Office of the 
Comptroller of the Currency on cryptocurrency stated in part that 
stablecoins, which are cryptocurrencies pegged to a central currency 
like the dollar, have failed to maintain a stable value and could 
expose users to unexpected losses.

     Can you explain why the recommendations made in the report 
are so important, and what if any changes you would make to the 
report's recommendations?

    The recommendations are important because of the risks that 
stablecoins pose today, as well as their potential for broader use. But 
I would make significant changes to those recommendations.

    First, regarding the risks: stablecoins have grown enormously in 
value in a short time (from around $20 billion a year ago to over $130 
billion today in market capitalization) because they facilitate trading 
of other crypto-assets. They have the potential for much broader use, 
as payment mechanisms generally. The risks they pose are described at 
length in the report. A primary one is run risk: similar to a money 
market fund, a stablecoin issuer might not have sufficient liquid 
reserves to redeem tokens particularly if there were a spike in demand 
for redemption. This could trigger a run on that issuer or potentially 
other stablecoin issuers as well (as happened with money market funds 
in September 2008), and that could create stresses in interconnected 
markets or financial products. For example, sales of assets to meet 
redemption demands in a run could create downward pricing pressure on 
those asset markets. Inability to meet redemption demands could cause 
holders to default on obligations, and to the extent those holders have 
leveraged positions, that can increase the stress and damage. There are 
other risks as well related to the fact that stablecoins operate on 
decentralized blockchains that may have varying degrees of security, 
resilience etc.

    But at the same time, stablecoins have the potential to improve the 
speed and efficiency of payments, outside of the crypto sector. They 
are effectively privately issued digital dollars. This could be a great 
benefit to individuals and businesses. Our payments system is based on 
bank deposits, and while it is reliable, safe and relatively efficient, 
it is actually slower and more expensive than the systems in many other 
developed countries, and probably much slower than what a digitized 
system could be.

    That is why we need to create a sound regulatory framework. The 
report calls for legislation that would limit stablecoin issuers to 
insured depository institutions subject to appropriate supervision and 
regulation. It also calls for oversight of custodial wallet providers 
and for appropriate risk-management standards for other entities that 
perform activities critical to the functioning of the stablecoin 
arrangements. Finally, it calls for stablecoin issuers to comply with 
restrictions to limit affiliation with commercial entities and for 
standards to promote interoperability.

    My primary disagreement is with the recommendation that we limit 
stablecoin issuers to IDIs. I believe we should develop a more tailored 
model of regulation for stablecoin issuers, with standards that are 
more specific to the risks posed and which would also facilitate more 
competition and innovation in the payments industry.

    We should require that stablecoins are at all times fully backed by 
cash that is deposited with a bank, or in a master account with the 
Federal Reserve. This will eliminate the risk that exists today where 
stablecoin reserves may be invested in other assets that could lose 
value, or be difficult to liquidate, or whose sudden liquidation might 
drive asset prices down. Such a requirement would effectively prohibit 
maturity transformation by stablecoin issuers--the practice of taking 
demand deposits, which are short-term liabilities, and using them to 
fund longer-term loans or investments. We could also restrict the 
activities of a stablecoin issuer so that it does not engage in many of 
the activities that a traditional IDI might engage in. We should 
require some capital, even if the tokens are fully backed by cash, 
because there can be operational or other losses. This approach could 
be implemented through novel or special purpose charters.

    The PWG report refers to the possibility of ``access to appropriate 
components of the Federal safety net.'' While it is unclear whether or 
on what terms this might include deposit insurance, I am not persuaded 
that is necessary if the tokens are fully reserved with cash, the 
entity's activity is sufficiently isolated and other safeguards are in 
place. I believe it would be better to design a regulatory framework 
that does not include deposit insurance.

    I am concerned that the recommendation to limit stablecoin issuers 
to IDIs under present supervisory standards would not sufficiently 
address the particular risks that stablecoins pose, and could result in 
limiting competition as a practical matter. Let me address the second 
point first.

    Limiting stablecoin issuers to IDIs is likely to favor existing 
banks over new entrants because of the length of time it could take new 
entrants to get a charter and deposit insurance. (None have that 
today.) It could also mean that the largest banks are favored over all 
other banks because of capital advantages as well as technological 
advantages (they may be more able to create the platforms to issue and 
manage stablecoins, which settle instantly, as discussed below). The 
more tailored regulatory approach described above would allow new 
entrants, provided they can meet requirements of the type noted above, 
which would facilitate more competition in payments. (An existing bank 
holding company could still enter the stablecoin business by creating a 
ringfenced subsidiary that meets the requirements.)

    As to the risks, simply saying an issuer should be an IDI does not 
ensure it has the technological platform to manage instantly settled 
stablecoins (most banks do not). Moreover, it means the stablecoin 
activity would be co-mingled with all the other activities that many 
IDIs engage in, such as making loans and other investments. That makes 
it far more difficult to isolate the stablecoin activity.

    Because this is a new activity, it would be much better to isolate 
it, and design regulations specific to the risk.

    Some may object to allowing special purpose payment entities to 
have master accounts at the Federal Reserve, particularly if they are 
not FDIC-insured and do not have the same business models as 
traditional banks. But in fact, the Fed has already granted master 
accounts to uninsured entities whose business models are very different 
from traditional banks. Two derivatives clearinghouses have master 
accounts with over $100 billion on deposit on a combined basis, which 
monies represent customer funds. They are not regulated as banks nor 
insured by the FDIC. They are permitted to have master accounts because 
they were designated by the FSOC as systemically important financial 
market utilities under Article VIII of the Dodd Frank Wall Street 
Reform and Consumer Protection Act. They are subject to Federal Reserve 
oversight as a result of that designation.

    I would be happy to elaborate on any of these issues.
                               __________
      Response from Mr. Kevin Werbach to Questions for the Record
                      submitted by Chairman Beyer
    1. Given the increasing number of countries exploring digital 
currencies, including China, do you think that the Federal Reserve 
should be given explicit authority issue a digital dollar? If the Fed 
does not issue a digital dollar, are you concerned about the U.S. 
dollar losing its role as the world's reserve currency?

    Mr. Chairman, thank you for holding the hearing on Demystifying 
Crypto, and for your ongoing interest in the digital asset market. I am 
pleased to respond to your questions.

    I believe the Federal Reserve should be given authority to issue a 
digital dollar. However, whether the Fed should actually do so, and 
what exactly a ``digital dollar'' would involve, are questions that 
require further study. The Fed should be given encouragement and a 
green light because the development of central bank digital currencies 
forces consideration of essential attributes of the next evolution of 
money and payments. Concerns such as interoperability, privacy, 
scalability, and financial stability, as well the transformative 
potential of programmable money, will not be adequately explored unless 
the Fed engages aggressively.

    I am not worried about the U.S. dollar losing its reserve currency 
status to a CDBC in the near term. Given its tight capital controls and 
limitations on exchange rates, as well as the absence of central bank 
independence, China's effort to internationalize the RMB will run into 
limits regardless of how advanced its eCNY initiative is relative to 
the rest of the world. However, over time, there is no question that 
existing U.S. and global payments systems will need to evolve and be 
further digitized. They are too slow, too inefficient, too inflexible, 
and too reliant on established intermediary firms. If the U.S. fails to 
participate actively in the global effort to rethink money which 
cryptocurrencies and CBDCs have kicked off, in time the primacy of the 
dollar will be in jeopardy.

    2. It is my understanding that thousands of transactions a day for 
millions of dollars are not recorded on the blockchain and are instead 
settled ``off-chain''. Are ``off chain'' digital asset transactions a 
problem and should regulators require that these transactions are 
reported to a central repository?

    It is true that many digital asset transactions are not recorded on 
the blockchain. On-chain transactions can be costly, slow, and lacking 
in finality, especially on the most prominent blockchains such as 
Bitcoin and Ethereum. Custodial cryptocurrency exchanges, for example, 
typically net transactions among their customers in a manner similar to 
conventional stock exchanges. Payment intermediaries may similarly not 
record each transaction on-chain. Also, with layer-2 solutions such as 
the Bitcoin Lightning Network, transactions are conducted on temporary 
off-chain connections, with the net results recorded on the blockchain 
when the channel is closed. On the other hand, the rise of 
decentralized finance (DeFi) a financial services ecosystem operating 
completely in the form of on-chain smart contracts, could point the way 
toward more transactional activity on-chain.

    Put simply, an off-chain transaction is not decentralized in the 
same manner as an on-chain one, and it should not be treated as such. 
Whether off-chain transactions are a problem depends on what concern is 
being raised, and on how the off-chain activity is happening. If, for 
example, an exchange handles transactions through its own records, that 
exchange can and should provide analogous reporting to conventional 
securities exchanges. The issues may be different if the question is 
tax avoidance, AML/CFT compliance, market surveillance for securities 
and commodities regulation, or something else. A universal rule that 
all transactions be reported to a central repository would far exceed 
how conventional financial services are treated, and would likely be 
inconsistent with the Fourth Amendment and American norms of financial 
privacy.

    3. The CFTC just fined Tether--the issuer of USDt--$41 Million for 
making false and misleading statements about its reserve holdings, 
after finding that USDt was only backed one for one with dollars just 
27 percent of the time. Given that USD Tether is the most actively 
traded digital asset in the World, should the CFTC fine have been 
bigger to discourage similar activities by other fiat based stablecoin 
issuers in the future?

    There are grave concerns about Tether's role in the digital asset 
trading ecosystem. The proven accusations in the CFTC action and the 
New York Attorney General case alone would be sufficient to undermine 
trust in any normal financial instrument, and its backers. The opacity 
of Tether's reserves, regulatory status, and practices are deeply 
alarming for a coin whose entire purpose is to be a stable underpinning 
for the market. And there are even more serious allegations than those 
considered by the CFTC, such as evidence presented in peer-reviewed 
academic research suggesting that Tether was deliberately used to 
manipulate the Bitcoin market; questions about the veracity of Tether's 
current reserve disclosures; and purported transactions among Tether, 
related entities, and a small number of influential market actors. 
These allegations have not, to my mind, been convincingly disproven. 
The fact that Tether nominally does not operate in the U.S. seems 
inconsistent with the reality that USDT the dominant trading pair for 
most cryptocurrencies on most U.S.-based exchanges. Tether also 
provides large volumes of USDT for undisclosed collateral directly to 
U.S.-based market-makers and cryptocurrency lenders.

    The CFTC, the Department of Justice, and other U.S. financial 
enforcement agencies should seriously investigate these claims, and the 
relationships among Tether, its related entities, and the large digital 
asset firms it appears to do significant transactions with. While I 
cannot prejudge what the evidence will show in such investigations, if 
even some of the more serious accusations are trust, a fine of any size 
is an insufficient penalty. Moreover, the penalties should not be 
limited to Tether alone if, in fact, its transaction partners knew and 
deliberately capitalized on fraudulent or otherwise illegitimate 
business arrangements. Finally, U.S. regulation of the stablecoin 
market should cover any stablecoin provided, held, or listed as a 
trading pair on U.S. based exchanges and other digital asset platforms, 
regardless of its nominal place of incorporation.

    4. In 2018 senior SEC officials announced that Bitcoin and 
Ethereum, the two largest digital assets by market capitalization, 
would not be treated as securities. The CFTC has taken the position 
that both Bitcoin and Ethereum are commodities and permitted CFTC 
exchanges to offer futures and swaps contracts on both digital assets. 
However, the regulatory status of many other digital assets remains 
unclear. Should Congress mandate that the SEC and CFTC work together to 
clarify the status of other major digital assets?

    Congress should seek to ascertain whether the gaps between the SEC 
and CFTC on cryptocurrency regulation are an artifact of coordination 
failures under the prior Administration; an enduring turf battle; or a 
reflection of flaws in our regulatory structure. For example, the 
limits on the CFTC's authority to regulate spot markets in commodities 
mean that only digital assets classified as securities are subject to 
the full range of market integrity and other oversight. Telling the 
agencies to coordinate will not address this legal gap; only Congress 
can.

    In my estimation, while coordination between the SEC and CFTC would 
be valuable, it is not the central problem today. An asset can be both 
a security (or more precisely, the consideration for an investment 
contract) and a commodity, depending on the circumstances. Both 
agencies could provide significantly greater clarity in how they apply 
the relevant classifications in the digital asset context. It is 
distressing that the definitive SEC statement on Ethereum is a 2018 
speech by a staff member, which did not even explicitly the status of 
the original Ether crowdsale. (In some ways, Ether is the most 
important digital asset because of its foundational role for 
decentralized applications, and because other tokens are generally 
issued in a manner much closer to Ether than bitcoin.) I personal find 
the ``sufficiently decentralized'' concept articulated by Director 
Hinman in that speech quite promising. However, it has not been taken 
up by the Commission in any meaningful way.
                               __________
       Response from Mr. Kevin Werbach to Question for the Record
                      submitted by Senator Cassidy
    ``Discussions around cryptocurrency, especially at this hearing, 
focus on what the Federal Government's role in cryptocurrency 
regulation should be. While the Federal Government considers its 
approach, states are starting to take action. Some examples include 
Wyoming setting up regulations allowing for cryptobanks, while New York 
has introduced its BitLicense. From the different approaches taken by 
states toward digital currency, what lessons can the Federal Government 
take away?''

    Thank you, Senator, for your interest in this topic.

    The financial services sector is an area of shared responsibility 
between states and the Federal Government. Corporate and commercial law 
requirements are determined primarily at the state level, and states 
play a major role in regulation of money transmitters, banks, and trust 
companies. State attorneys general also play an essential part in 
enforcement actions. The challenge is to balance the experimentation 
that multiple state regimes allow with the need for consistency and 
minimum standards for activities that are not just national but, in 
some senses, global in scope.

    New York is to be commended for moving early to develop a 
regulatory regime for digital assets, with the adoption of the 
BitLicense in 2015. Unfortunately, the BitLicense was written and 
interpreted in such a way that, for some time, it was too difficult for 
firms to meet the licensure requirements. Many firms left the State 
because they found the BitLicense too onerous. The New York Department 
of Financial Services has in recent years taken a somewhat more 
flexible approach. The BitLicense also may have been too early. The 
digital asset market at the time had not yet developed the level of 
sophistication and integration with traditional finance that it now 
enjoys. A safe harbor mechanism, a longer compliance window, or a 
carve-out for smaller entities, might have made the BitLicense more 
viable.

    Wyoming and several other states have more recently adopted a 
variety of laws to create a viable environment for digital asset 
activity. The Wyoming Special Purpose Depository Institution framework, 
in particular, offers a pathway forward for the provision of narrow 
banking services to cryptocurrency firms that seeks to address the 
major risk areas regulators and banks have expressed. Without taking a 
position on any of the specific provisions of these state laws, the 
question is whether having varied state regimes for crypto-native banks 
represents the best solution, or is necessary only because Federal 
entities such the FDIC, Fed, and OCC have made it artificially 
difficult for conventional banks to participate in these markets. There 
is also the question of how State rules interact with the Federal 
system, such as whether state-chartered institutions can access Federal 
Reserve master accounts.

    Important lessons from the history state activity in this area 
include the following. First, bespoke regimes may be necessary to 
tailor rules to the distinctive aspects of digital asset markets. 
Second, there are many different issues under the umbrella of 
cryptocurrency regulation, which will not all have the same solutions. 
Third, policymakers should clearly identify the problems they are 
trying to address, and how the specified requirements address them. 
Fourth, as noted earlier, rules should reflect the maturity of the 
industry and the nature of the entities subject to their requirements.
                               __________
Response from Mr. Peter Van Valkenburgh \1\ to Questions for the Record 
                      submitted by Chairman Beyer
---------------------------------------------------------------------------
    \1\ Peter is Director of Research at Coin Center, the leading 
independent non-profit research and advocacy group focused on the 
public policy issues facing cryptocurrency technologies such as 
Bitcoin. http://coincenter.org.
---------------------------------------------------------------------------
    1. Given the increasing number of countries exploring digital 
currencies, including China, do you think that the Federal Reserve 
should be given explicit authority to issue a digital dollar? If the 
Fed does not issue a digital dollar, are you concerned about the U.S. 
dollar losing its role as the world's reserve currency?

    That other countries are exploring central bank digital currencies 
is not a sufficient reason for the Federal Reserve to be given 
authority to issue one. Historically most money has been issued by 
private entities rather than by the Federal Reserve itself, and the 
mere fact that money can be digital is not reason to change this 
policy.\2\ If the Fed does not issue a digital dollar there's no 
greater or lesser chance that the dollar will lose its role as the 
world's reserve currency. Currencies are strong when they are backed by 
nations that have strong rule of law, stable and accountable 
institutions, and transparent monetary policies.\3\ On these margins 
America is well ahead of, for example, China, whose recent announcement 
of a digital yuan has driven headlines. Indeed, China's motivations for 
issuing a digital yuan are likely based on the need to retain power 
over its population through surveillance and central control; \4\ it 
may serve only to weaken protections for human rights and the certainty 
of business relationships in China thereby undermining rather than 
strengthening the yuan.
---------------------------------------------------------------------------
    \2\ Randal K. Quarles, ``Parachute Pants and Central Bank Money,'' 
Speech before the 113th Annual Utah Bankers Association Convention, Sun 
Valley, Idaho, June 28, 2021, https://www.federalreserve.gov/
newsevents/speech/quarles20210628a.htm.
    \3\ Henry M. Paulson Jr., ``The Future of the Dollar,'' Foreign 
Affairs, May 19, 2020, https://www.foreignaffairs.com/articles/2020-05-
19/future-dollar; Jerry Brito, ``China's digital yuan is not a threat 
to the dollar,'' blog, January 13, 2020, https://blog.jerrybrito.com/
2020/01/13/chinas-digital-yuan-is-not-a-threat-to-the-dollar/.
    \4\ Samantha Hoffman et al., ``The flipside of China's central bank 
digital currency,'' Australian Strategic Policy Institute, Policy Brief 
No. 40, 2020, https://s3-ap-southeast-2.amazonaws.com/ad-aspi/2020-10/
Digitalcurrency_1.pdf.

    2. It is my understanding that thousands of transactions a day for 
millions of dollars are not recorded on the blockchain and are instead 
settled ``off-chain''. Are ``off chain'' digital asset transactions a 
problem and should regulators require that these transactions are 
---------------------------------------------------------------------------
reported to a central repository?

    Off-chain transactions are no different from internal transactions 
between customers within a major bank or a payment intermediary such as 
PayPal or Venmo. Neither leave any record outside of the internal 
records of the institution, and both are potentially subject to 
existing recordkeeping and reporting rules here in the U.S. A 
transaction between two users of a money transmitter like PayPal is 
subject to the same state money transmission licensing rules and 
requirements and Federal anti-money laundering reporting requirements 
as transactions between two users of a cryptocurrency exchange.

    3. The CFTC just fined Tether--the issuer of USDt--$41 Million for 
making false and misleading statements about its reserve holdings, 
after finding that USDt was only backed one for one with dollars just 
27 percent of the time. Given that USD Tether is the most actively 
traded digital asset in the World, should the CFTC fine have been 
bigger to discourage similar activities by other fiat based stablecoin 
issuers in the future?

    I do not have an opinion regarding the size of the fine. Any issuer 
or redeemer of a backed stablecoin to American users is engaging in a 
regulated activity. Depending on the specific circumstances, the 
stablecoin may be a security (requiring registration with the SEC),\5\ 
a commodities derivative (subject to CFTC oversight),\6\ or money 
transmission and/or deposit-taking activities triggering state and/or 
federal licensing and/or bank chartering obligations.\7\ There is also 
no reason that the issuer could not be subject to multiple overlapping 
rules from any of these regulatory structures. All in all, the CFTC 
fine is certainly not likely to be the last or largest penalty for non-
compliant issuers, and there will likely be more significant deterrent 
effects from the collection of enforcement actions taken as a whole.
---------------------------------------------------------------------------
    \5\ ``Stablecoin Regulation,'' Coin Center Tangents Podcast, 
October 15, 2021, https://www.youtube.com/watch?v=5wJtM52G9_w.
    \6\ ``CFTC Orders Tether and Bitfinex to Pay Fines Totaling $42.5 
Million,'' Commodity Futures Trading Commission, Press Release Number 
8450-21, October 15, 2021, https://www.cftc.gov/PressRoom/
PressReleases/8450-21.
    \7\ See e.g. ``NYDFS Grants First Charter to a New York Virtual 
Currency Company,'' New York Department of Financial Services, Press 
Release, May 7, 2015, https://www.dfs.ny.gov/reports_and_publications/
press_releases/pr1505071.

    4. In 2018 senior SEC officials announced that Bitcoin and 
Ethereum, the two largest digital assets by market capitalization, 
would not be treated as securities. The CFTC has taken the position 
that both Bitcoin and Ethereum are commodities and permitted CFTC 
exchanges to offer futures and swaps contracts on both digital assets. 
However, the regulatory status of many other digital assets remains 
unclear. Should Congress mandate that the SEC and CFTC work together to 
---------------------------------------------------------------------------
clarify the status of other major digital assets?

    Ultimately the question of whether an asset is a security is one 
for the courts, which almost 70 years ago saw fit to create a flexible 
test for investment contracts.\8\ I believe that judge-made test 
remains a good fit even when these assets are digital.\9\ That said, 
judge-made tests take time to apply to new facts as cases only 
gradually make their way to the courts and eventually into clarifying 
precedent from new judicial holdings building on old.
---------------------------------------------------------------------------
    \8\ SEC c. Howey Co., 328 U.S. 293 (1946), https://
supreme.justia.com/cases/federal/us/328/293/.
    \9\ Peter Van Valkenburgh, ``Framework for Securities Regulation of 
Cryptocurrencies,'' Coin Center, August 2018, https://
www.coincenter.org/framework-for-securities-regulation-of-
cryptocurrencies/.

    The best way to reduce uncertainty in this realm would be either 
(1) to press the SEC to take more cases to court, rather than settling 
them (which does not leave a precedential record in the form of new 
judge-made law), (2) to offer a safe harbor from arbitrary enforcement 
actions for token issuers who register and perform sensible 
disclosures,\10\ or else (3) to overrule the courts and replace the 
flexible definition of securities with something more rigid in 
legislation.\11\ Mandating that the SEC and CFTC work together will not 
inject any certainty into this arena because it would merely empower 
the two agencies to make policy arbitrarily, without guidance from 
congress, without judicial oversight, without binding precedent, and 
with all of the inconsistencies and transience inherent in periodic 
political upheavals within the executive branch.
---------------------------------------------------------------------------
    \10\ See e.g. ``Clarity for Digital Tokens Act of 2021,'' H.R. 
5496, 117th Congress (2021-2022), https://www.congress.gov/bill/117th-
congress/house-bill/5496/text; Hester Peirce, ``Token Safe Harbor 
Proposal 2.0,'' U.S. Securities and Exchange Commission, April 13, 
2021, https://github.com/CommissionerPeirce/SafeHarbor2.0.
    \11\ See e.g. ``Securities Clarity Act,'' H.R. 8378, 116th Congress 
(2019-2020), https://www.congress.gov/bill/116th-congress/house-bill/
8378; ``Securities Clarity Act,'' H.R. 4451, 117th Congress (2020-
2021), https://www.congress.gov/bill/117th-congress/house-bill/4451.
---------------------------------------------------------------------------
                               __________
   Response from Mr. Peter Van Valkenburgh to Question for the Record
                      submitted by Senator Cassidy
    ``Discussions around cryptocurrency, especially at this hearing, 
focus on what the Federal Government's role in cryptocurrency 
regulation should be. While the Federal Government considers its 
approach, states are starting to take action. Some examples include 
Wyoming setting up regulations allowing for cryptobanks, while New York 
has introduced its BitLicense. From the different approaches taken by 
states toward digital currency, what lessons can the Federal Government 
take away?''

    The greatest lesson that the Federal Government can take from the 
states is that we don't need new regulatory systems or even new rules 
to effectively regulate activities performed using these technologies. 
If a company is performing money-transmission-like services using 
bitcoins rather than dollars, there's no reason to regulate that entity 
any differently than a traditional money transmitter. When states have 
attempted to create cryptocurrency-specific regulatory structures the 
result has been both (a) disruptive and (b) ultimately not particularly 
dissimilar from the existing regulatory systems in place for equivalent 
activities performed using non cryptocurrency assets. It ends up being 
much ado about nothing.

    Take, for example, the New York BitLicense. The New York Department 
of Financial Services went through an exhaustive process of creating a 
new license type soliciting multiple rounds of comments and several 
drafts of new regulations.\12\ Ultimately, however, ambiguous terms and 
uncertain language in those rules made New York a less welcoming 
environment for new cryptocurrency businesses.\13\ Meanwhile, the 
nature of the license was, nonetheless, not much different from a 
typical money transmission license as far as protections afforded the 
customers of licensees. More recently, the DFS has been chartering 
trust companies to deal in cryptocurrencies just as they would charter 
any trust company irrespective of the assets in which they deal.\14\ 
This technology-neutral approach has, it seems, borne more fruit from 
an innovation and investor protection standpoint than the de novo 
BitLicense approach.
---------------------------------------------------------------------------
    \12\ ``Regulation and History,'' New York Department of Financial 
Services, accessed December 3, 2021, https://www.dfs.ny.gov/
apps_and_licensing/virtual_currency_businesses/regulation_history; 
Peter Van Valkenburgh and Jerry Brito, ``New York BitLicense Comment,'' 
Coin Center, October 14, 2014, https://www.coincenter.org/new-york-
bitlicense-comment/; Peter Van Valkenburgh and Jerry Brito, ``Comments 
to the New York Department of Financial Services on the Revised Virtual 
Currency Regulatory Framework,'' Coin Center, March 27, 2015, https://
www.coincenter.org/app/uploads/2020/05/Coin-Center-BitLicense-Comment-
March-2015.pdf.
    \13\ Peter Van Valkenburgh, ``Our thoughts on the BitLicense: 
California is Winning,'' Coin Center, June 3, 2015, https://
www.coincenter.org/our-thoughts-on-the-bitlicense-california-is-
winning/.
    \14\ See e.g. ``NYDFS GRANTS FIRST CHARTER TO A NEW YORK VIRTUAL 
CURRENCY COMPANY,'' New York Department of Financial Services, Press 
Release, May 7, 2015, https://www.dfs.ny.gov/reports_and_publications/
press_releases/pr1505071.
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