    [Senate Hearing 117-600]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 117-600

                           EXAMINING DIGITAL ASSETS:
                       RISKS, REGULATION, AND INNOVATION

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

                                    HEARING

                                   before the

                           COMMITTEE ON AGRICULTURE,
                            NUTRITION, AND FORESTRY

                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                February 9, 2022

                                   __________

                           Printed for the use of the
               Committee on Agriculture, Nutrition, and Forestry

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                      Available on http://www.govinfo.gov/

                                 _________

                     U.S. GOVERNMENT PUBLISHING OFFICE

    50-068 PDF               WASHINGTON : 2023

               COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

                     DEBBIE STABENOW, Michigan, Chairwoman
    PATRICK J. LEAHY, Vermont            JOHN BOOZMAN, Arkansas
    SHERROD BROWN, Ohio                  MITCH McCONNELL, Kentucky
    AMY KLOBUCHAR, Minnesota             JOHN HOEVEN, North Dakota
    MICHAEL F. BENNET, Colorado          JONI ERNST, Iowa
    KIRSTEN E. GILLIBRAND, New York      CINDY HYDE-SMITH, Mississippi
    TINA SMITH, Minnesota                ROGER MARSHALL, Kansas
    RICHARD J. DURBIN, Illinois          TOMMY TUBERVILLE, Alabama
    CORY BOOKER, New Jersey              CHARLES GRASSLEY, Iowa
    BEN RAY LUJAN, New Mexico            JOHN THUNE, South Dakota
    RAPHAEL WARNOCK, Georgia             DEB FISCHER, Nebraska
                                         MIKE BRAUN, Indiana

                   Joseph A. Shultz, Majority Staff Director
                   Mary Beth Schultz, Majority Chief Counsel
                        Jessica L. Williams, Chief Clerk
                   Fitzhugh Elder IV, Minority Staff Director
                     Fred J. Clark, Minority Chief Counsel

                                C O N T E N T S

                                  ----------

                          Wednesday, February 9, 2022

                                                                       Page

    Hearing:

    Examining Digital Assets: Risks, Regulation, and Innovation......     1

                                  ----------

                        STATEMENTS PRESENTED BY SENATORS

    Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan...     1
    Boozman, Hon. John, U.S. Senator from the State of Arkansas......     2

                                   WITNESSES

    Behnam, Hon. Rostin, Chairman, Commodity Futures Trading
      Commission, Washington, DC.....................................     4
    Ro, Sandra, Chief Executive Officer, Global Blockchain Business
      Council-USA, Pottstown, PA.....................................    22
    Bankman-Fried, Samuel, Founder and Chief Executive Officer, FTX-
      US, Chicago, IL................................................    23
    Boring, Perianne, Founder and Chief Executive Officer, Chamber of
      Digital Commerce, Washington, DC...............................    25
    Werbach, Kevin, Professor, The Wharton School, University of
      Pennsylvania, Philadelphia, PA.................................    26
                                  ----------

                                    APPENDIX

    Prepared Statements:
        Behnam, Hon. Rostin..........................................    44
        Ro, Sandra...................................................    49
        Bankman-Fried, Samuel........................................    58
        Boring, Perianne.............................................    97
        Werbach, Kevin...............................................   115

    Document(s) Submitted for the Record:
    Stabenow, Hon. Debbie:
        U.S. Commodity Futures Trading Commission....................   132
    Werbach, Kevin:
        Joint Economic Committee testimony on November 17, 2021,
          statement for the Record...................................   139

    Question and Answer:
    Behnam, Hon. Rostin:
        Written response to questions from Hon. Debbie Stabenow......   168
        Written response to questions from Hon. John Boozman.........   169
        Written response to questions from Hon. Raphael Warnock......   171
        Written response to questions from Hon. Roger Marshall.......   172
    Ro, Sandra:
        Written response to questions from Hon. Debbie Stabenow......   175
        Written response to questions from Hon. John Boozman.........   177
    Bankman-Fried, Samuel:
        Written response to questions from Hon. Debbie Stabenow......   180
        Written response to questions from Hon. John Boozman.........   181
        Written response to questions from Hon. Roger Marshall.......   184
    Boring, Perianne:
        Written response to questions from Hon. Debbie Stabenow......   185
        Written response to questions from Hon. John Boozman.........   186
    Werbach, Kevin:
        Written response to questions from Hon. John Boozman.........   188

          EXAMINING DIGITAL ASSETS: RISKS, REGULATION, AND INNOVATION

                                  ----------

                          WEDNESDAY, FEBRUARY 9, 2022

                                           U.S. Senate,
             Committee on Agriculture, Nutrition, and Forestry,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 10 a.m., via
    Webex and in room 106, Dirksen Senate Office Building, Hon.
    Debbie Stabenow, Chairwoman of the Committee, presiding.
        Present or submitting a statement: Senators Stabenow,
    Brown, Klobuchar, Bennet, Gillibrand, Smith, Booker, Warnock,
    Boozman, Hoeven, Ernst, Marshall, Tuberville, Grassley, Thune,
    Fischer, and Braun.

    STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
        OF MICHIGAN, CHAIRWOMAN, U.S. COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

        Chairwoman Stabenow. The Committee on Agriculture,
    Nutrition, and Forestry will come to order, and good morning.
    Welcome to today's hearing on digital assets. This is such an
    important hearing today. Thank you to Ranking Member Boozman
    and his staff for working so closely with us on this important
    bipartisan hearing.
        Welcome to Chairman Behnam and our witnesses, and we are
    really looking forward to today's discussion.
        Thirteen years ago, Bitcoin was introduced to the world as
    a new form of digital money that people could exchange online
    without going through a bank. This novel technology aims to
    democratize our financial system and offer new tools for those
    who do not have access to traditional banks and reliable
    currencies.
        Since then, thousands of digital assets, as we know,
    sometimes called cryptocurrencies, have sprung up. Unlike
    traditional fiat currencies, however, cryptocurrencies are not
    backed by the full faith and credit of a central bank, and wild
    swings in value can make digital assets a risky form of payment
    and unreliable store of value.
        Given its instability, you cannot reliably use Bitcoin or
    other digital assets to pay your mortgage or other everyday
    purchases.
        This is not to say that digital assets are without promise.
    Every American, whether or not they have a bank account, should
    be able to send money to their loved ones quickly and easily,
    and our financial markets should be accessible to the average
    investor, not just the wealthy. It is worth pursuing technology
    that will make the financial system work for everyone, but to
    truly work for everyone we need to ensure appropriate
    protections.
        Americans are buying and selling digital assets using
    online exchanges, many of which are unregulated or not held to
    the same standards as traditional financial institutions. This
    poses unacceptable risks to consumers and could lead to
    instability in our financial markets. Fraudsters have already
    stolen billions of dollars in assets, leaving customers with no
    recourse, and some platforms fail to prohibit abusive
    activities like insider trading.
        Last month, we saw the value of digital assets plummet,
    wiping out more than $1 trillion in wealth, and one-third of
    Americans who have traded digital assets earned less than
    $60,000 a year.
        New technologies are making it easier for Americans to buy
    crypto with the press of a button. However, this ease of access
    can backfire when their assets drop in value overnight.
        Finally, we cannot overlook the outsized climate impacts of
    Bitcoin and other digital assets. Astonishing amounts of energy
    are currently being used to mine certain digital assets. When
    those sources of energy are fossil fuels, digital assets
    threaten our progress in fighting the climate crisis. The
    carbon footprint of this technology must be addressed.
        Digital assets may have been designed to democratize the
    transfer of money, but that does not mean they should operate
    without rules. History has shown us, time and again, that this
    is a mistake.
        The good news: regulation and innovation are not mutually
    exclusive. If they were, our financial markets would not be the
    strongest in the world. We cannot afford to wait until the next
    crisis. Congress must work with regulators and the Biden
    administration to design a framework that protects consumers
    and our environment and keeps our markets fair, transparent,
    and competitive.
        The Commodity Futures Trading Commision (CFTC) will play a
    key role in that effort. It currently regulates digital asset
    derivatives and polices fraud in the spot market. I look
    forward to hearing from Chairman Behnam about the work his
    agency is doing in this area, the challenges it presents, and
    what we can do to make these spot markets safer for everyone.
        Now I would like to turn to my friend and Ranking Member,
    Senator Boozman, for his opening remarks.

     STATEMENT OF HON. SENATOR JOHN BOOZMAN, U.S. SENATOR FROM THE
                           STATE OF ARKANSAS

        Senator Boozman. Well thank you very much, Madam Chair, it
    is great to be here, and we want to thank the panel for
    participating. I want all of you all to be extra special nice
    to Senator Tuberville today. He is kind of grouchy. The coach
    is grouchy. Arkansas got after the No. 1, Auburn, basketball
    team yesterday in Fayetteville. I am happy, he is a little
    grouchy, but he will get over it.
        I am pleased to join Chairwoman Stabenow today as we
    examine the ways in which digital assets and blockchain
    technology are impacting financial markets. As this industry
    continues to grow, questions remain as to the proper role the
    Federal Government and regulators should play in encouraging
    further innovation in this space while ensuring market
    integrity and customer protection.
        Digital assets and blockchain technology have already, and
    will continue to, change the way global markets function.
    Currently, digital asset spot or cash markets are subject to a
    patchwork of regulations at the State and the Federal level. It
    is, therefore, critically important we think carefully about
    how we move forward in this area.
        Last month I was pleased to join Chairwoman Stabenow along
    with both the Chairman and Ranking Member of the House
    Agriculture Committee in sending a letter to Chairman Behnam.
    That letter inquired about the scope and the size of digital
    asset markets and whether the CFTC is currently working with
    other Federal financial regulators to both support and police
    this growing financial ecosystem.
        Yes, it is true--bicameral, bipartisan collaboration can
    still exist, and we are demonstrating that at the Agriculture
    Committees, despite what else may be going on in Washington.
    This must be the way we address issues relating to these
    markets going forward, because they are complicated and they
    touch so many of us, whether we appreciate it or not.
        I hope today's hearing provides an opportunity for both
    Chairman Behnam and our esteemed industry stakeholders, that
    are present with us, to weigh in on the questions we posed in
    our letter. I also believe today's hearing is important because
    it begins addressing the growing calls for Congress and
    regulators to work together to provide market participants
    certainty over which digital assets are securities versus
    commodities.
        Further, we need to assess whether expanding the CFTC's
    regulatory footprint to overseeing digital asset commodity spot
    markets is possible or prudent. I am confident the CFTC can
    rise to the challenge to be the right fit for an expanded role
    in digital asset spot markets. However, it is imperative that
    as Congress weighs legislative options we make certain to
    include exchanges, consumer protection advocates, and other
    market participants in the discussion to ensure that the rules
    and regulations work for all stakeholders.
        The digital asset market has grown to nearly a $2 trillion
    global market. That is a staggering number and one which
    demands our careful consideration. It is unquestionable that
    digital assets will continue to play an important role in the
    global economy for years and decades to come.
        In closing, I believe it is imperative that both Congress
    and regulators alike work with the industry and academics to
    further educate ourselves about these markets. As we develop
    laws and regulations establishing guardrails and rules of the
    road for market participants, we do so in a transparent and
    clear manner so everyone knows what those rules are.
        Thank you, Madam Chair. I look forward to today's
    discussion, and with that I yield back.
        Chairwoman Stabenow. Well thank you very much, and welcome
    back Chairman Behnam, and congratulations on your unanimous
    Senate confirmation. You are no stranger to the Agriculture
    Committee, as we all know. Chairman Behnam has extensive
    experience with financial and agricultural markets. During his
    tenure as a CFTC chair and commissioner he has been in the
    forefront of issues critical to global market stability.
        Chairman Behnam was one of the first financial regulators
    to ring the alarm on the climate crisis. He has created a
    dedicated climate unit at the agency, focused on addressing the
    significant risks climate change poses to the financial system.
        The CFTC also has significant experience regulating digital
    asset derivatives and prosecuting fraud and abuse in digital
    asset markets. Given the increasing size and scope of the
    market for digital assets, many of which are commodities, we
    are looking to the CFTC to advise us on how to best protect
    consumers and markets.
        I look forward to getting your perspective, Mr. Chairman,
    on the benefits and risks prevented by these emerging
    technologies and the role of the Commission in regulating this
    market.
        I will turn it over to you for opening comments and then we
    will look forward to questions. Mr. Chairman.

       STATEMENT OF THE HON. ROSTIN BEHNAM, CHAIRMAN, COMMODITY
               FUTURES TRADING COMMISSION, WASHINGTON, DC

        Mr. Behnam. Thank you, Chairwoman Stabenow. Good morning to
    both you, Chairwoman Stabenow, Ranking Member Boozman, and
    members of the Committee. I am honored to appear before you
    today for the first time as Chairman of the Commodity Futures
    Trading Commission. I appreciate the opportunity to share my
    views on digital assets and look forward to working with this
    Committee as we collectively address the many issues related to
    this emerging technology.
        For over a century, the derivatives markets have played an
    integral role in the U.S. economy, facilitating risk management
    and price discovery and contributing to financial stability and
    predictability of prices that impact the daily lives of all
    Americans.
        As part of the CFTC's role in ensuring the integrity of
    derivatives markets, the agency understands a great deal about
    underlying reference cash markets, where producers, including
    farmers and ranchers, manufacturers, institutional investors
    directly exchange agricultural commodities, energy products,
    previous metals, and even digital assets.
        While the CFTC does not have direct statutory authority to
    regulate cash markets, it does have fraud and manipulation
    authority. Accordingly, when the CFTC becomes aware of
    potential fraud or manipulation in an underlying market, either
    through regular oversight or surveillance programs, or through
    other means such as a whistleblower tip or referral, we address
    the misconduct through our enforcement authority.
        This is not to diminish the fact that many cash commodity
    markets benefit from Federal oversight. However, the digital
    asset market, which at present is most directly supervised
    through State money transmitter licenses, is unique and
    presents many novel issues for the CFTC, given our limited
    authority to police these volatile markets.
        In fact, there is no one regulator, either State or
    Federal, with sufficient visibility into digital asset
    commodity trading activity to fully police conflicts of
    interest and deceptive trading practices that impact retail
    investors.
        Although the CFTC's core responsibility is regulating the
    commodity derivatives market, there are several unique elements
    of the digital asset commodity cash market that distinguish it
    from other cash commodity markets, suggesting it would benefit
    greatly from more CFTC oversight.
        A few examples. Unlike most cash commodity markets, the
    cash market for digital assets is currently characterized by a
    high number of retail investors, mostly engaged in price
    speculation. Many investors regularly take on high levels of
    leverage when trading, leading to heightened price volatility,
    often exacerbated by cascading liquidations during price
    downturns.
        Most investors in the cash market entrust their digital
    assets to the platforms upon which they trade, failing to
    differentiate this type of custody agreement from that offered
    by traditional regulated banking industry participants.
        I believe these unique characteristics, combined with the
    growing size and customer, operational, and potential future
    financial stability risks associated with the cash market
    necessitate a proactive Federal regulatory approach to ensure
    that the standards that American investors have come to expect
    from our financial markets are equally present in digital
    markets.
        If, in fact, the future of global economy holds a place for
    digital assets, tokenization, blockchain technology,
    decentralized finance, and other elements of the fintech
    ecosystem, then the need to uphold American leadership and
    stewardship of this technology is clear.
        The digital asset industry in the U.S. does not fall under
    a single, comprehensive regulatory regime. Instead, the CFTC
    and other Federal agencies and State regulators have all been
    responsible for collectively establishing the existing and very
    incomplete regulatory environment.
        Since 2014, the CFTC has been aggressive in using its
    limited fraud and manipulation authority in the digital asset
    space. The CFTC has brought nearly 50 enforcement actions,
    overseen an increasing number of registrants offering digital
    asset-based derivatives products, and established dedicated
    internal functions to stay abreast of the technical innovations
    fueling this market.
        However, many challenges remain, and the digital sector now
    demands more and more of the CFTC's attention and time, which I
    believe necessitates additional resources to adequately address
    these issues and risks. The CFTC is well suited to play an
    increasingly central role in overseeing the cash digital asset
    commodity market. Fundamentally, the CFTC is a market regulator
    that ensures market integrity and vibrancy aimed at supporting
    financial stability while ensuring individual customer
    protections through principles-based oversight of exchanges,
    clearinghouses, data repositories, and market participants. We
    now stand ready to do the same within the digital asset
    commodity market.
        As Chairman, I will ensure that the CFTC continues to use
    our enforcement authority to its fullest extent in the digital
    asset commodity space to protect customers from fraud and
    manipulation. The nature of this innovation results in impacts
    to more than just financial markets. We are seeing several
    government agencies consider how this technology impacts
    Federal policy related to payments, custody, illicit activity,
    national security, and a host of other issues.
        Additionally, reports regarding energy usage resulting from
    mining are staggering, oftentimes being compared to that of
    entire countries. On this note, I believe any regulatory
    response to digital assets must include measures to bring
    additional transparency to the conduct that makes this
    innovation possible. Internally, I have directed the CFTC's
    Climate Risk Unit and LabCFTC to examine the climate
    implications of digital assets.
        Since its inception, the CFTC and its markets have been at
    the forefront of innovation and technological development. We
    have also been a forceful and disciplined cop on the beat. The
    continued emergence of digital asset technology presents risks
    and opportunities, and the CFTC stands ready to leverage its
    expertise and experience to confront both.
        Thank you for your time, and I look forward to answering
    your questions.

        [The prepared statement of Mr. Behnam can be found on page
    44 in the appendix.]

        Chairwoman Stabenow. Well thank you very much, Mr.
    Chairman. We will begin five-minute rounds of questioning from
    the Committee. I do believe we have folks that joining us,
    members joining us virtually as well, and so we look forward to
    everyone's questions.
        Let me first thank you for your response to the letter that
    we sent as Chairs and Ranking Members of the House and Senate
    Agriculture Committees. I think it was important, as Senator
    Boozman, indicated, this was a significant sign that we had all
    four corners signing a letter to you and expressing interest in
    having more discussion with you on what the role is for the
    CFTC.
        I would ask unanimous consent to enter your letter into the
    record. So ordered, without objection.

        [The letter can be found on page 132 in the appendix.]

        Chairwoman Stabenow. In the letter I was struck by your
    statement that it is hard to estimate how many U.S. and retail
    participants are trading digital assets because the agency has
    limited visibility into this market. I wonder if you could talk
    more and describe the CFTC's ability to surveil the digital
    asset spot market for fraud and manipulation, and what
    implications this has right now for the agency.
        Mr. Behnam. Thank you, Senator. You are absolutely right.
    The authority is limited. It is limited to fraud and
    manipulation. As I pointed out in my statement, this is a
    product of the relationship between derivatives markets and
    cash markets.
        We have a number of exchange-traded derivatives on crypto
    assets, on several registered CFTC exchanges, but the
    visibility into the underlying market is limited, at most, and
    we use our existing surveillance tools to work through some of
    the futures products and see if we can see participants,
    volumes, volatility.
        In essence, this is an unregulated market. As I mentioned,
    we rely on State money transmitter licenses. There is so much
    that we are not able to see because of this limited authority.
    I would point out the fact that the enforcement actions we
    brought since going back to 2015, have largely relied on tips
    and whistleblowers. In essence, we are relying on retail
    customers who are defrauded through Ponzi schemes or pump-and-
    dump schemes to bring information to us.
        We do not have the regular tools that we, as a market
    regulator, have in terms of pre-trade transparency, post-trade
    transparency, a concentrated order book, surveillance tools,
    market intelligence. We do not have any of these very advanced
    tools to monitor markets, so it is giving us a very, very
    narrow lens into what is actually happening in the market. This
    is why I think, you know, as you contemplate more regulatory
    authority for the CFTC, bringing this market into the light, so
    to speak, and more transparency will only allow us to see what
    is going on underneath the hood.
        Chairwoman Stabenow. I could not agree more. This is very
    concerning to me, at the moment, the lack of transparency and
    ability to see what is happening.
        We are seeing an explosion, also, of advertisements
    marketing crypto assets to retail investors, and it is getting
    easier to buy and sell digital assets through apps on our
    phones. I am concerned we are not doing enough to educate
    people about the risks of trading crypto assets, particularly
    under the scenario that you are describing, in terms of limited
    oversight.
        What should Congress consider in terms of customer
    protections as these technologies reach more people?
        Mr. Behnam. Thank you, Senator. I would say, you know, at
    the onset, we are doing what we can with what we have, and in
    terms of customer protections we are using our Office of
    Customer Education to put out brochures and pamphlets and
    mailings and alerts about some of the fraud and manipulation
    that is occurring but also some of the risks that are involved
    with digital assets.
        More importantly, and to more directly answer your
    question, the single best action that Congress can take to
    address customer protections is bringing a regulatory structure
    to this market. Not unlike any other market, whether it is
    securities or derivatives, market structure tends to be pretty
    singular in scope in the sense that, as I mentioned earlier in
    your previous question, if we can embed pre-trade transparency,
    post-trade transparency, which is reporting, having this
    concentrated order book where we can see bids and offers, and
    then having rules of the road for execution, for custody, for
    clearing, and for settlement, these are the main foundations
    and pillars of a well-functioning, transparent market.
        In essence, the repercussions and the consequences of this
    are customer protections, is visibility, is information flow,
    so investors know how they are allocating their capital, and
    they can feel confident that as a regulator we have enforcement
    authority and the rule of law to back us up if there is
    continued fraud or manipulation or anti-competitive behavior.
        Chairwoman Stabenow. Thank you. Listening to, and from a
    consumer standpoint, as well as everyone involved in the market
    but from a consumer standpoint, looking at what needs to be
    done to create the protections and so on, does the CFTC have
    the resources necessary to take on an additional responsibility
    with respect to the digital asset market?
        Mr. Behnam. Senator, the short answer is no. I cannot
    precisely put a number on it, but I have thought about this
    quite a bit in the past few months. I think the best sort of
    benchmark to think about is what the CFTC went through in the
    past 10 years, after the financial crisis. As you know well,
    this Committee gave authority to the CFTC to regulate the then
    over-the-counter derivatives markets. We now have broad swaps
    onto exchanges with a series of regulatory changes that have
    brought, again pre-trade transparency and post-trade
    transparency to the swaps market. Just looking at numbers, in
    2011, our budget appropriation was about $200 million, and now
    we are just slightly over $300 million. Depending on the size
    of the registrant pool that we may get if you were to authorize
    regulation of digital asset commodities, I would think, at a
    minimum, that $100 million mark is probably a starting point to
    look at, as a reference.
        Chairwoman Stabenow. Thank you very much. Senator Boozman.
        Senator Boozman. Thank you, Madam Chair. Chairman Behnam,
    as you testified both today and during your confirmation
    hearing, you indicated that if Congress so decided, the CFTC
    would welcome expanded authority over digital asset spot
    markets. Why are current State-based regulations inadequate,
    and why do you believe the CFTC is uniquely positioned to
    regulate the markets? Why you?
        Mr. Behnam. Thanks, Senator Boozman. I will tell you, as a
    former investigator at the Bureau of Securities in the New
    Jersey Attorney General's Office I will be the biggest advocate
    of State regulators within financial markets. They serve an
    invaluable tool for customers at the State level, whether it is
    customer protections, customer education, and certainly
    enforcement.
        From a market regulatory standpoint, from a market
    oversight standpoint, I think it is very important that we have
    as few regulators as possible, we have as little fragmentation
    as possible, and single points of entry into the market.
    Fragmentation will likely create price dislocations, will have
    different sets of rule books, which could, in the end, create
    risk for investors.
        As we think about the role and the coordination between
    State and Federal, I think there is a strong place for that. As
    I said, States play a key role in financial market stability
    and protecting customers. However, from a market standpoint, I
    think it is important, given if, at a minimum, the national
    scope of these markets but the international scope that we
    have, single regulators at the Federal level, to be that single
    point of entry for market oversight, for surveillance, and for
    a level playing field so that everyone is playing from the same
    rules.
        Senator Boozman. Should the CFTC be given an expanded role
    in regulating digital asset spot markets? How would you respond
    to any concern that this might open the door to future mission
    creep by the CFTC into traditional commodity spot markets,
    which I do not think would be appropriate or welcomed by myself
    or important ag stakeholders.
        Mr. Behnam. Thank you, Senator. I unequivocally agree with
    you. I do not mean to suggest at all that this should be the
    start of the CFTC's role in a larger pool of cash commodity
    markets. As I said in my statement, many cash commodities,
    including in the agricultural space and the energy space, have
    existing Federal regulatory oversight, to some extent. This
    particular market is so unique because of the retail-facing
    element of it and the fact that there is no oversight
    currently.
        I think from a congressional standpoint, as we think about
    this going forward, there is a way to legislatively limit the
    expansive or expansion of authority for the CFTC and make very
    clear that the direction you are giving us is very limited,
    surgically limited to just digital commodity assets and no
    other commodities.
        Senator Boozman. Very good. Cybersecurity, particularly the
    safety of customer assets, continues to play a large role in
    conversations focusing on the digital asset markets. If the
    CFTC is given more regulatory authority over spot markets, what
    cybersecurity and customer protection measures could help
    combat vulnerabilities we have observed in this space?
        Mr. Behnam. Thank you, Senator. One of the things that I
    have been most impressed about, as both commissioner and
    chairman, is the role that we play collectively within the
    whole government in terms of cyber risks. We certainly take
    cues from agencies across the Federal Government, most notably
    DHS. We work together. We have a lot of partnerships to make
    sure that we are using the same tools and resources to the
    extent that we can root out cyberthreats. I do not think this
    would be generally different if you were to give us more
    authority over the digital asset space in terms of our
    coordinating effort.
        One of the things that does concern me in terms of our
    current authority, as you pointed out there just seems to be
    frequent thefts, cyberattacks that are causing coins moving
    around in significant numbers. We would have to think about the
    relationship of the CFTC to third parties and the relationship
    between the registrant and whoever it relates to or enters into
    a contract with. This is synonymous to a third-party vendor.
        I think as we think about potential legislation, ensuring
    that we have the right amount of authority to look through just
    the direct registrant and not necessarily only skim what cyber
    protections or what principles that registrant might be using.
    Those are risks that I think we would have to be very cognizant
    of addressing, given the nature of the technology and its
    international nature as well.
        Senator Boozman. Thank you. Thank you, Madam Chair.
        Chairwoman Stabenow. Thank you very much. We will now turn
    to Senator Tuberville.
        Senator Tuberville. Thank you very much. Chairman, good to
    see you back. Congratulations on your confirmation.
        I appreciate your reply to my letter on the need to include
    State securities regulators in the digital asset working group.
    Thank you very much for that. I also appreciate you taking time
    to meet with the leadership of the Alabama Securities
    Commission, which I understand you will be doing later this
    month. As you know, State regulators have valuable insights to
    offer.
        A question. We have got to make sure the dollar remains the
    world's reserve currency. Do we need to develop a digital
    dollar to do that?
        Mr. Behnam. Senator, I would not want to jump to
    conclusions about whether or not that is the solution to
    maintaining the dollar as the reserve currency, but I do think
    what I am hearing from my colleagues across the government,
    most notably the Fed, the Federal Reserve, is that we are in a
    process of thinking about how we would implement this.
        This is, as you would imagine, no simple task, but as with
    all of this technology we will need to be very deliberate and
    cautious as we integrate this technology into the traditional
    financial system.
        I certainly support the efforts that are being made. I
    think the approach and strategy is correct, but I do not think
    we should rush to anything at this time. Depending on where
    this technology takes us--and I said this in my comment--we
    have to be prepared for it being a part of our larger macro and
    micro economy, and if it is, in fact, going to be that way, in
    five years, 10 years, or longer, we need to prepare now.
        I think the steps that my colleagues are taking over at the
    Federal Reserve and other agencies are appropriate, but I would
    just be mindful of the speed with which we do it and not
    getting into a race where we feel we have to catch up with
    other countries. As we have done in the past, we have been
    deliberate, and I think that has proven to be a successful
    strategy for the United States.
        Senator Tuberville. Thank you. You know, I am a believer
    that every lawful business ought to have access to banking
    services, and I think you are too, regardless of the type of
    business they are in. For example, no oil or gas company or
    firearms manufacturer should be discriminated against when they
    are trying to open a bank account or get a loan. I have heard
    reports of regulators pressuring banks to cutoff financial
    services to legitimate crypto businesses. Are you aware of
    this, and would you agree that it is wrong if it is happening?
        Mr. Behnam. Senator, the short answer is I am not aware of
    this. However, I agree with you that we should not be cutting
    off certain services from the traditional banking system.
    However, I firmly believe this. I think the record is pretty
    clear that I think we need to address the climate crisis as
    soon as possible, and that is a collective action problem.
        As much as we should not cutoff companies or institutions
    or individuals from traditional banking services, I think we
    need to make individuals aware of what is coming and what we
    need to do to manage the transition risk of moving away from
    carbon-intensive energy sources.
        Senator Tuberville. How could foreign adversaries like
    China, Iran, and Russia use crypto-related cybercrimes to harm
    our citizens and our national interest, and what is your agency
    doing to address these threats?
        Mr. Behnam. Senator, this is a problem. I mean, this is the
    limited scope of visibility we have into the market. I would
    just point to, you may be aware but the Justice Department just
    seized $3.5 billion of Bitcoin yesterday from a hack that
    occurred in 2016. I think the lessons from that announcement
    from the Justice Department are that this technology is
    traceable, that we can work through the web of sources and the
    movement of these funds, but it takes time, and that the
    technology is going to be incrementally improving over the next
    few years.
        That said, as we face adversaries across the globe who will
    use this technology to move money around and to take action
    that will negatively affect the United States, I firmly believe
    that bringing transparency through a regulatory structure to
    financial markets will only be a positive step in shedding more
    light and giving our prosecutors, whether it is at Justice
    Department or at the State level, more access to information of
    individuals, institutions, and the flow of this digital
    commodity so that we can root out fraud and bad actors and find
    these individuals who are trying to do harm to the United
    States.
        Senator Tuberville. Yes. I understand the White House is
    working on a digital asset Executive Order. Have you or your
    staff been part of these discussions?
        Mr. Behnam. They have been a part of the discussions and
    they have been working with the White House quite frequently
    over the past several months. I am not aware of the exact
    timing of the issuance of a potential Executive order, but to
    answer your question, we have been participating and working
    with the White House.
        Senator Tuberville. Thank you. Thank you, Madam Chair.
        Chairwoman Stabenow. Thank you very much. I believe we have
    Senator Smith with us virtually.
        Senator Smith.
        [Pause.]
        Chairwoman Stabenow. We shall see. Senator Smith, are you
    with us? Speaking of technology, digital technology.
        [Pause.]
        Chairwoman Stabenow. We will come back to her, and at this
    point we will go to Senator Marshall.
        Senator Marshall. Well thank you, Madam Chair. This morning
    I am sitting here between an Auburn Tiger and an Arkansas
    Razorback and I just wanted to congratulate both those teams
    and remember why we celebrate the thrill of victory and the
    agony of defeat, and what a great blessing it is to have
    college sports. Congratulations to both of those teams. A great
    game last night.
        Madam Chair, if I could I just wanted to publicly request
    that we get Secretary Vilsack in front of us sometime. I am
    certainly concerned. I think we have some questions that
    Americans want to ask him about. Back home, the price of
    fertilizer is certainly an issue, and we would like to ask
    Secretary Vilsack's opinion on that and how is that going to
    impact the SNAP budget. The 30x30 program back home certainly
    has farmers alarmed, so we would love to have him in front of
    us sometime.
        Chairwoman Stabenow. Happy to offer an invitation. Senator
    Boozman and I will work on that.
        Senator Marshall. Thank you so much. Chairman, welcome back
    to the Committee as well.
        As I have been allowed to travel and meet some folks in
    foreign countries and leadership and visit our embassies every
    one of those visits, at some point in time, talks about their
    concerns about cryptocurrencies, specifically how it is being
    used in human trafficking and drug running as well. That is the
    bad news.
        The good news is we have been meeting with companies like
    Coinbase, who were purchasing CFTC-regulated exchanges to
    voluntarily be regulated. A little bit of background on the
    banking industry. I always wonder, well who is our customer?
    Specifically, what would the CFTC's role be in helping regulate
    a company like Coinbase, or, you know, how do we ensure that we
    know who our customers are right now and what does that look
    like going forward to you?
        Mr. Behnam. Thank you, Senator Marshall. You know, with
    respect to that particular acquisition--and that has not been
    the only one in the past few years--my understanding is that
    they will use that entity that has a CFTC license to trade
    derivatives. I do not know if that will evolve or change, but
    we do have a number of onboarding processes and requirements in
    our law and rules that we implemented off of the law to ensure
    that there are appropriate anti-money laundering, know-your-
    customer requirements, proper capital requirements, and that as
    a general matter--and these have developed over decades, as you
    can imagine--that know your customer both from an individual
    retailer, institutional investor standpoint, to a broker or an
    FCM, to the exchanges, the clearinghouses, and the data
    repositories.
        I am confident we have a very robust system in place. We
    work closely with the exchanges and our SROs, most notably the
    National Futures Association, to ensure that we are doing our
    best to identify individuals who may be bad actors or
    participating in illicit activity.
        Senator Marshall. Would you agree with me, though, if they
    are not in an exchange of some sort with monitoring that they
    do not know who their customer is right now?
        Mr. Behnam. Absolutely.
        Senator Marshall. Do you agree with the folks who are
    telling me that there is a significant concern that this is
    being used for human trafficking and drug smuggling?
        Mr. Behnam. I do agree.
        Senator Marshall. What would the CFTC's role--what would
    you do to put meat on the bones to make sure that we are able
    to control that? What could you do if you were given more
    authority?
        Mr. Behnam. Senator, I think it is literally bringing this
    market into the regulatory fold, and it is not unlike what I
    was saying earlier to Senator Tuberville about the Justice
    Department case yesterday. If this ecosystem exists out of the
    regulatory fold, all of these steps, all of these processes
    that we have built over decades to protect investors, protect
    individuals from illicit activity are unregulated.
        Now to some extent these institutions do these things, but
    it is not enough. I think we need the full power of the Federal
    Government, the rule of law and our enforcement authority to
    send a message to both deter this activity but root it out if
    it occurs.
        I do not think it would require anything new or different
    than what we do with respect to our regulated entities. We just
    need to bring it into the regulatory fold.
        Senator Marshall. Certainly my farmers and ranchers back
    home are not my grandparents' farm. They use CFTC markets to
    hedge bets, as a risk management tool. That is the best way to
    describe it, a risk management tool. Do you see an opportunity
    for these cryptocurrencies to offer them another risk
    management tool?
        Mr. Behnam. You know, some of the coins are stores of
    value. You know, Bitcoin has been most notably compared to gold
    or as a store of value. We have seen a direct correlation
    between the price movements of Bitcoin and traditional assets
    as opposed to a safe haven asset.
        I do not want to get into too many details there, but I
    could see, in the future, depending on the development of the
    coins, that some of these tools could be used as a risk
    management tool against certain movements in currency or other
    commodities. We would need a lot more time to see sort of the
    movement of the coins relative to other commodities or
    currencies to see how it might be a risk management tool.
        Senator Marshall. Last question. Bitcoin smells like a
    commodity, it looks like a commodity, it tastes like a
    commodity. Is Bitcoin a commodity?
        Mr. Behnam. Per an Eastern District of New York Federal
    District Court ruling in 2018, it is a commodity.
        Senator Marshall. Thank you. I yield back.
        Chairwoman Stabenow. Thank you very much. I will now turn
    to Senator Gillibrand, who I believe is with us virtually, and
    then we have Senator Hoeven who is with us virtually, and then
    Senator Klobuchar is here.
        Senator Gillibrand.
        Senator Gillibrand. Hi, Madam Chairwoman. Mr. Behnam, I
    understand that cryptocurrency exchange markets differ from
    many commodity markets that the CFTC oversees, in that unlike
    commodity markets for grain and oil, for example,
    cryptocurrency exchange markets often welcome individual retail
    investors.
        I am glad to see that these new opportunities will be open
    to everybody and not just institutional investors. Given this
    fact that many everyday Americans will become involved in this
    emerging financial market, I want cybersecurity to remain a
    priority as we promulgate regulations. Cyberattacks have become
    a major threat throughout the world and could result in a
    massive swing in valuation, lost intellectual property, or
    significant market disruptions through hacks or other targeted
    cyberattacks.
        How do you view the Commission's current ability to
    effectively oversee the marketplace and prevent cyberattacks?
        Mr. Behnam. Thank you, Senator. We simply do not have
    enough authority to oversee the cash commodity digital asset
    marketplace. I think both regulators and customers would
    benefit from a traditional market structure, one that we have
    implemented on the derivatives markets, and that is not
    dissimilar to what we see on the securities side. More
    importantly, the marketplace, the institutions, the
    technologists would benefit from it too.
        I do think customers would benefit greatly, as I have said
    before, transparency would be brought into the marketplace, and
    individuals who wanted to allocate capital toward digital
    assets would benefit from the security, the safety, and the
    comfort of knowing that these are regulated markets, with the
    rule of law and enforcement authority behind it so that if
    there are bad actors, which there always are, those individuals
    or institutions will be held accountable for their actions.
        In terms of----
        Senator Gillibrand. I hear you saying--excuse me--I hear
    you saying that you do not have the authority to do this. If
    you did have the authority can you elaborate on whether CFTC
    has the ability to manage and guard proprietary information,
    and what steps, if any, can we in government take to prevent
    cyberattacks in this sector of the economy if you did have the
    authority?
        Mr. Behnam. Senator, it is no different than what we do
    right now with respect to derivatives markets. We take private
    information and confidential information very carefully. We
    handle it very carefully. It is a critical element of our
    surveillance tools as we overlook a very broad market. We
    interact with market participants and registrants regularly to
    ensure that the steps that we are taking to protect
    information, whether it is PII or data or market information,
    is held confidential and is held in a safe place.
        I do think that this technology poses new challenges and
    new risks, given the nature of it vis-a-vis traditional
    markets, but these would be questions that I would certainly
    welcome the opportunity to talk to you about so that we could
    see a reduction, hopefully, in these cyberattacks and thefts
    which, unfortunately, happen all too often.
        We need to bring this technology and this market into a
    regulatory fold, at a minimum to start reducing some of these
    risks that exist and then take progressive steps forward to
    ensure that we are if not ahead of the game, at least moving
    with the marketplace, which, as you know, moves very quickly.
        Senator Gillibrand. Yes, and I appreciate your answers, but
    you are not answering the fundamental question of whether you
    have the ability to guard proprietary information and deal with
    cyberattacks in this sector, given the differences between your
    current regulatory framework. It is a very specific question.
    Do you have the ability and the competency to manage the market
    for proprietary information but also prevent cyberattacks in
    the sector? If you answer is you do not know, that is fine. I
    just want to know, do you have the technical expertise and
    ability to guard cyber markets?
        I sit on the Intelligence Committee and the Armed Services
    Committee. Being able to subvert and prevent cyberattacks is
    difficult for every industry. As you are a critical
    infrastructure I am really pushing down on do you have the
    technical capability to do this if we give you the authority?
        Mr. Behnam. The answer is no, we do not have it, because
    this is----
        Senator Gillibrand. That is what I wanted to know. Thank
    you.
        Okay. Given how resource intensive the cryptocurrency
    mining process is, I am particularly interested in promulgating
    regulations that are consistent with our goals to stem climate
    change. There is a company in my home State that recently
    reopened a power plant. That plant used to meet demand surges
    but this company has connected it to a natural gas pipeline and
    is planning to greatly expand its historical operating
    capacity, using it to generate electricity for their
    cryptocurrency mining operation.
        How can we make sure that the correct incentives or
    regulations are in place so we can simultaneously support the
    growth of this new technology without sacrificing the important
    work we are doing to stem climate change?
        Mr. Behnam. As I mentioned in my statement, I have asked
    the Climate Risk Unit, which is a group of staff that I formed
    last year, to look into this issue and see if we can come up
    with policy directives or ideas for you to consider as well as
    the agency. I have also asked staff within LabCFTC, which has
    been our sort of innovative hub for the past few years, to
    think about this issue. We have been engaging with stakeholders
    and asking them to bring us ideas.
        My gut reaction, without having a conclusive set of ideas
    for you, but I look forward to bringing those to you, is that
    something that has served markets well are disclosures,
    disclosures in both the derivatives markets and securities
    markets and all other financial markets. If we can continue to
    raise awareness about this very staggering issue and let end
    users and consumers know what is happening in the
    disproportionate demand and need for energy as it relates to
    mining Bitcoin or other coins, those bits of information, that
    type of information, that disclosure will hopefully create
    incentives to move market participants and stakeholders away
    from that method of mining and toward either renewable energy
    sources, and most importantly, away from carbon-intensive
    energy sources.
        Senator Gillibrand. Thank you so much. Thank you, Madam
    Chairwoman.
        Chairwoman Stabenow. Thank you very much. Senator Hoeven I
    believe is with us digitally.
        Senator Hoeven. Thank you, Madam Chair, and Chairman
    Behnam, would you characterize cryptocurrency as a commodity, a
    currency, or a security, and why?
        Mr. Behnam. Senator, there are thousands, if not hundreds
    of thousands of digital assets and cryptocurrencies so I would
    not want to identify them collectively. There are certainly a
    large number of coins that are commodities, including two of
    the biggest which are Bitcoin and Ether, but given the vast
    number there is no doubt in my mind they are also security
    coins. This is a big, big issue and one that I think we
    collectively should work on as we think about the regulatory
    environment, if at all, is to draw very clear, distinct rules
    of the road of what might constitute a commodity versus what
    might constitute a security.
        Senator Hoeven. Should there be a lead agency for
    regulating cryptocurrency?
        Mr. Behnam. From a markets perspective I do not think this
    issue that we are facing is much different than what the CFTC
    and most notably the SEC have faced for the past 40 to 50
    years. There are futures that are regulated by the SEC, a bulk
    obviously being regulated by the CFTC, the swaps market, which
    this Committee knows well, when Dodd-Frank was passed we had to
    create a line between traditional swaps and security-based
    swaps.
        We have a great relationship. I do not think this is any
    different, it would require a lot of hard thinking, novel
    questions, legal implications. I certainly think we could end
    up in a place where both regulators, both agencies have
    jurisdiction over cash markets, us, the CFTC, having it over
    commodities, the SEC having jurisdiction over securities.
        Senator Hoeven. CFTC, SEC, Treasury should all be
    regulating cryptocurrency in different ways, as they do in
    other financial markets.
        Mr. Behnam. Well, so from a markets perspective the only
    market regulators we have within the Federal Government are the
    Commodity Futures Trading Commission and the Securities and
    Exchange Commission. I would very clearly say those would be
    the only two market regulators over digital asset markets.
    Naturally, given the vast number of issues, whether it is
    illicit activity, national security issues, trade, and any
    number of issues that will emerge if this technology continues
    to take root will require an all-hands-on-deck effort by the
    government, because it implicates expertise from different
    agencies.
        Senator Hoeven. What should Congress be doing right now in
    terms of legislation to help make sure that the right
    regulatory oversight structure is in place as this industry
    develops?
        Mr. Behnam. Senator, given our limited authority, which I
    have mentioned before is very narrow to fraud and manipulation
    in cash markets, my recommendation to you and your colleagues
    is that we need authorization and a regulatory structure over
    cash digital assets. That will not be structurally much
    different than the current markets that we oversee.
        There will obviously, like I said earlier, be novel issues
    and questions we have to ask around custody and settlement,
    given the digital nature of these assets. In terms of general
    market structure we need to embed core principles like pre-
    trade transparency, centralized and concentrated order books,
    post-trade transparency, and clear, consistent rules around
    custody, settlement, clearing, and other elements of the
    trading process.
        Senator Hoeven. Given the newness and the complexity of
    cryptocurrency, is there an understanding in terms of how that
    should be done and what it should entail?
        Mr. Behnam. I think there is a general understanding, and
    this goes to my previous answer, and I say this with a bit of
    caution, but markets are markets, and what we have observed, to
    the extent that we can, is that these assets, regardless of the
    fact that they are so unique from traditional derivatives or
    securities, they function and trade just like any other asset
    would on a marketplace.
        I do think the decades of experience we have within the
    United States going back well over 100 years will inform us
    nicely in terms of what market structure we need to start with,
    in terms of what the framework would look like. However, time
    will pressure us to force all of us, collectively, to ask very
    difficult questions and novel questions about the technology,
    about the traceability, about the sourcing that will go most
    notably to custody issues but also what exactly are we
    identifying as a reportable transaction, what information do we
    need, and ensuring that it is similar and consistent globally,
    above all else. These are questions that I am welcome to ask
    and discuss with you.
        Senator Hoeven. I note my time here. You think that this is
    going to continue to grow and be a very pervasive source of
    executing financial transactions?
        Mr. Behnam. Senator, I would be hard pressed to say no to
    that question. I am very cautious in what I say about what the
    future may hold. As the Chairman of the CFTC I do think my
    responsibility is to assume that it will continue to take root
    and that this technology will continue to emerge and wind
    itself into traditional finance. If we do not approach the
    technology that way we run the risk of stability and safety and
    soundness issues, even in a few years, let alone 10 or 20 or 30
    years.
        I think we have to work under the assumption that it could
    and it will, and whether or not it does, whether it is parts or
    the whole sort of concept of digital assets, is irrelevant. I
    think the important thing is to focus on the assumption that it
    does and start to build the building blocks of a regulatory
    structure now so that we do not run into continued problems and
    risks, whether it is cyber, theft, illicit activity, or
    financial stability risks in the future.
        Chairwoman Stabenow. Thank you very much. Thank you,
    Senator Hoeven.
        Senator Hoeven. Thank you, Madam Chairwoman.
        Chairwoman Stabenow. Senator Klobuchar.
        Senator Klobuchar. Well thank you very much, Chairman
    Stabenow. Thank you, Senator Boozman, for having this important
    hearing. Thank you, Mr. Chairman. You know what they say in the
    Senate--everyone has said it but I have not. I am going to ask
    you a few followup questions that I heard my colleagues, and I
    appreciate your answers.
        As you noted, there is no one regulator at either the State
    or the Federal level with sufficient visibility and authority
    into digital asset trading to fully go after some of the
    conflicts or deceptive trade practices impacting retail
    customers. Can you speak to the existing gaps between the CFTC
    and the SEC in the regulation, and do you have recommendations
    how to bridge that? I know you just gave some recs to Senator
    Hoeven, but that particular issue. The final thing is, gaps,
    recs, and do you think the CFTC is well suited to assume a
    larger role over spot markets for digital assets, and what
    authorities do you need to do it?
        Mr. Behnam. Thanks, Senator Klobuchar. In terms of gaps,
    the most noticeable gap is clarity around what constitutes a
    security and what constitutes a commodity. I think the
    Securities and Exchange Commission has more authority than we
    do certainly in terms of cash market regulation, but the
    question in terms of defining what and which of these digital
    assets are securities becomes the hardest question for both the
    agency and also market participants.
        For us, the bigger challenge, obviously, in addition to
    find out what and which coins constitute commodities is this
    cash market regulation, which segues nicely into your second
    question. We are a derivatives market regulator. We do not
    regulate cash markets. We would need more congressional
    authority to regulate cash markets. I firmly believe we are
    well suited to do this. We have a long history of looking into,
    examining, and working with the digital asset marketplace. At
    its core, we are a market regulator.
        As I have said several times this morning, the core
    principles of a market are similar across all assets, and we
    are well suited. We have great expertise. We would certainly
    buildup expertise to the extent we need it in certain places,
    referencing Senator Gillibrand's question, but I do think we
    are well suited to do it, and we are prepared as well.
        Senator Klobuchar. Are there parallels between how Dodd-
    Frank established a split regime for swap instruments and the
    need for regulation of digital assets today?
        Mr. Behnam. Absolutely, and it is a perfect example and a
    perfect analogy, because this was, you know, a point of
    friction 12, 15 years ago, but we figured it out. Congress
    helped us figure it out. You gave us clear directives, and the
    two agencies did that over a number of years. I could say
    pretty confidently that the market is well functioning and each
    of the agencies have relative jurisdiction over different types
    of swaps, and we can do the same thing here.
        Senator Klobuchar. We know, and I know there have been
    discussions about this, we have seen exponential growth arising
    from a market capitalization in cryptocurrency from $1.6
    billion in 2013 to nearly $2 trillion today. The popularity of
    these assets has been attributed to their ability to diversify
    investment portfolios. We know about hedge against risk.
        With the growing popularity, as I mentioned, of spot market
    trading, how does the CFTC go about disseminating information
    to the general public about scams and things, and getting it
    out there, because this is a brand-new frontier for many
    people, and my past experience as a prosecutor I know when
    there are brand-new frontiers the scammers are there.
        Mr. Behnam. They are, and we are seeing the traditional
    methods used, whether it Ponzi schemes, pump-and-dumps. I will
    note that we even put out a notice earlier this week or late
    last week about dating apps and scams happening through dating
    apps. It is no different than what we have seen. They are just
    using this new asset class as a tool to prey on vulnerable
    individuals. We are using our Office of Customer Education and
    Outreach to do as much as we can with what we have to let the
    public know about the risks associated both with the assets but
    also with the scams that are happening.
        You know, as you would know as well as anyone, we have to
    rely on tips and whistleblowers to bring some of these fraud
    and manipulation cases, which is extremely helpful but it is so
    limited. I fear that there is a well of fraud and manipulation
    happening and individuals losing money that we are just not
    aware of because this market is very opaque.
        Senator Klobuchar. Thank you.
        Chairwoman Stabenow. Thank you so much. I believe we have
    Senator Booker with us virtually.
        Senator Booker.
        Senator Booker. Yes, you have me. Thank you very much. This
    is a really exciting hearing. I want to thank our Chairwoman
    for hosting it.
        I actually believe there is some urgency that we act in
    this space. I think that we can create a more sensible
    regulatory framework. I have always been concerned about the
    technology moving. The lack of government's ability to move at
    the speed of technology undermines the ability for Americans to
    apply this technology.
        I came into the Senate on the Commerce Committee, and I
    remember the FAA was regulating drones in such a horrible way
    that other countries like France were using drones for
    dangerous missions, from fixing poles and wires to doing mining
    work, where we in the United States were still seeing death
    rates that could have been avoided with technology but the FAA
    was so overregulating this new technology. I said to the then
    chairperson of the FAA that if you were around during the time
    of Orville and Wilbur Wright we would have never gotten off the
    ground.
        This is one of those cases where we are already seeing some
    of the hopeful, optimistic possibilities in cryptocurrency. It
    has a democratizing of force. Minorities are overrepresented in
    using that, and obviously it represents, with traditional
    banking or underbanked traditional.
        For me these intermediation possibilities, the
    democratizing possibilities offer a lot of hope, but I do think
    this Committee has a bit of some urgency to act in this space
    and create some frameworks and guardrails to protect against
    the things some of my colleagues have already brought up like
    fraud.
        I would like to ask the chairman right away, what makes you
    hopeful and optimistic in this space, one, and then two, can
    you State quite clear--because I believe you are, this agency
    is--why is this the best agency to provide that needed
    framework and the right regulation to allow this space to
    potentially thrive and achieve that vision that you might have
    about the possibilities of this area?
        Mr. Behnam. Thank you, Senator Booker. Answering your first
    question about my optimism or what the technology holds, I do
    not view this any differently than the series of milestones we
    have seen over the past 100 years in terms of technological
    development, and this is creating a potential avenue for
    quicker, better, more efficient access to capital and the
    transfer of value between individuals at a peer-to-peer level.
        We have to be very careful and cautious and deliberative as
    we approach this technology, as you pointed out, both from a
    regulatory standpoint but I think from a market standpoint.
    There are shifts in terms of market structure and how folks
    access capital and how they transfer capital that
    disintermediate the guardrails that have been built up over
    decades to protect customers, whether it is AML, money
    laundering, or know-your-customer, and other very, very
    beneficial attributes of our financial system and the
    guardrails that have been built up over time.
        I think this is naturally just the next steps. It provides
    a lot of opportunity for our country to take a leading role,
    but we have to be deliberate and cautious as we approach it,
    and be patient so that we do it right and that we do not have
    any unintended consequences.
        Regarding your second question, you know, I will just lean
    on the fact twofold is one, we are a market regulator. We have
    been doing this for many, many years, and regardless of the
    fact that we oversee derivatives assets we know market
    structure. We know surveillance. We know enforcement. We know
    the core components and foundations and pillars of what makes
    markets work, what makes markets transparent, and most
    importantly, what protects customer money. We will continue to
    use that as the foundation to push forward on a potential
    marketplace, a regulated marketplace, for this technology.
        The second element of that question, or response to your
    question, is we have been uniquely exposed to digital assets
    for over five or six years, which does not seem like a lot of
    time but relative to other agencies is actually quite long. It
    is because of our role as a commodity regulator, because of the
    emergence of regulated futures products that reference digital
    assets, it is the creation of our LabCFTC many years, and then
    as Senator Marshall mentioned earlier, it is what we are seeing
    in the marketplace in incumbent digital asset companies
    starting to purchase traditional CFTC entities or license
    entities.
        I think we are well positioned. We have a lot of
    experience. We have great enforcement lawyers and surveillance
    attorneys, market intelligence experts, and I think we are a
    few steps ahead and ready to run with this if that is what this
    Committee and Congress desires.
        Senator Booker. Well, I appreciate those sage and wise
    words from another bald New Jerseyan.
        I do just want to say thank you again to the Chairwoman. I
    do believe we really need to move quickly to control for some
    of the worries that we have, but also to seize upon a
    regulatory framework that will help this. As I said earlier, if
    you just look at the demographics it is already having a bit of
    a leveling field. This is an area where 16 percent of all
    Americans are involved in crypto, and that is growing. Already
    you see 18 percent of African Americans, 20 percent of Latinos,
    you see the majority of crypto owners do not have college
    degrees and they are engaging in this space.
        I just think this is a time for us to act, act quickly, and
    I am excited to do that in a bipartisan way, through this
    Committee that I believe has real jurisdiction in this space.
        Thank you, Chairwoman.
        Chairwoman Stabenow. Well thank you, Senator Booker. We do
    have a real bipartisan opportunity to do something I think is
    important and urgent at this time. Thanks very much.
        I am going to say thank you, Chairman Behnam, and I know we
    have other members that will be submitting questions to you in
    writing. As usual, there are multiple hearings going on today
    at the same time, but much interest in working with you and
    getting your thoughts on an area that needs a lot of
    thoughtfulness and careful discussion about how to move
    forward.
        Thank you very much. I look forward to working with you.
        I am going to call forward our next panel. We have four
    witnesses who we are anxious to hear from. I am going to also
    just indicate that, as usual, we are going to be running up
    against some votes that are scheduled to start at 11:30, two
    votes. We will just be flexible here on how we move forward.
        As you come to sit down I am going to begin introductions,
    in the interest of time.
        I want to welcome the four members of our second panel. All
    four of you are leaders and educators in the digital asset
    marketplace, and we look forward to hearing from you about this
    market, including the current regulatory landscape as we
    consider what the future might look like, should look like.
        First of all, Ms. Sandra Ro, CEO of the Global Blockchain
    Business Council. With her experience in investment banking,
    currency markets, and digital assets, Ms. Ro is a frequent
    university guest lecturer and educates lawmakers, businesses,
    and the media on blockchain technology. Ms. Ro is an appointee
    to the New York State Digital Currency Task Force and serves on
    various international advisory councils, including the World
    Economic Forum's Digital Currencies Governance Consortium.
    While at the CME Group she led the exchange's work on
    developing a Bitcoin futures contract and filed CME's first
    crypto derivatives patents.
        Second, Mr. Sam Bankman-Fried is the Co-Founder and CEO of
    FTX, one of the world's largest digital asset trading
    platforms. He co-founded the company in 2019, and formed FTX.US
    in 2020, to service U.S. customers. Its affiliate, FTX.US
    Derivatives, is one of the first crypto-based exchanges to be
    registered with the CFTC to offer digital asset derivatives.
        Prior to his involvement in the digital asset space, Mr.
    Bankman-Fried was a quantitative trader at Jane Street Capital.
        Mr. Kevin Werbach is a professor at The Wharton School and
    the Director of the Wharton Blockchain and Digital Asset
    Project. He is the author of a book titled ``Blockchain and the
    New Architecture of Trust.'' As an educator, he focuses on the
    business, legal, and public policy implications in emerging
    technologies, including digital assets.
        Mr. Werbach participated in the development of technology
    policy initiatives as part of the Obama Administration's
    Presidential transition team, and he served as counsel for new
    technology policy at the Federal Communications Commission.
        Now I am going to turn to Ranking Member Boozman for our
    fourth witness introduction.
        Senator Boozman. Thank you, Madam Chair. It is a pleasure
    to introduce Ms. Perianne Boring. Ms. Boring is the Founder and
    Chief Executive Officer of the Chamber of Digital Commerce, the
    world's largest trade association representing the blockchain
    industry. The chamber's mission is to promote the acceptance
    and use of digital assets and blockchain-based technologies.
    Working with policymakers, regulatory agencies, and the
    industry, the chamber advocates for a pro-growth environment
    that fosters job creation, innovation, and investment.
        Perianne was named one of America's Top 50 Women in Tech by
    Forbes and one of the 10 Most Influential People in Blockchain
    by CoinDesk. She appears regularly in the financial media to
    share insights on digital asset and blockchain innovations and
    is an active participant in public policy discussions.
        Prior to forming the chamber, Perianne served as a
    television anchor for an international finance program that ran
    in more than 100 countries and reached over 650 million
    viewers. She began her career as a legislative analyst in the
    U.S. House of Representatives, advising on finance, economics,
    tax, and health care policy.
        Thank you again for joining us today.
        Chairwoman Stabenow. Well thank you again to each of you.
    You clearly have a tremendous amount of experience and
    knowledge in this space. We will ask each of you to give five
    minutes of opening testimony and then we will go to questions,
    and we will start with Ms. Ro.

        STATEMENT OF SANDRA RO, CHIEF EXECUTIVE OFFICER, GLOBAL
             BLOCKCHAIN BUSINESS COUNCIL-USA, POTTSTOWN, PA

        Ms. Ro. Thank you. Thank you, Chair Stabenow, Ranking
    Member Boozman, and members of the Committee. Thank you for
    inviting me to testify.
        My name is Sandra Ro, and I am the CEO of the Global
    Blockchain Business Council, the leading not-for-profit
    industry association for blockchain technology ecosystem,
    representing nearly 400 institutional members.
        I began my career as a financial engineer at Deutsche Bank
    and Morgan Stanley. Subsequently, I led CME Group's
    digitization team where we pioneered some of the earliest
    regulated cryptocurrency products, for example, the CME Bitcoin
    futures today on which U.S. Bitcoin ETFs trade.
        At CME, my team worked together closely with the CFTC, and
    these close relationships were critical to our ability to
    innovate effectively and responsibly.
        Today I will share three blockchain use cases that are
    moving our society in a more secure, transparent, and equitable
    direction. First, as requested by the Committee, I will start
    with some basics.
        The Bitcoin whitepaper, published in 2008, outlined a peer-
    to-peer electronic cash system using a consensus mechanism
    known as Proof of Work. On the Bitcoin ledger, transactions are
    arranged in consecutive blocks. Simply put, Proof of Work
    requires members of a network, known as miners, to solve a
    mathematical puzzle to secure the network. Once a miner solves
    and confirms a transaction, it is assigned to a block. The
    block is time-stamped and added linearly to the blockchain. For
    this work, the miner that first solved the puzzle receives
    compensation in the form of a block reward.
        Since Bitcoin's creation, a variety of other consensus
    mechanisms have been created, most popular among them something
    called Proof of Stake. Proof of Stake is a consensus mechanism
    where users offer their digital assets as collateral for a
    chance to validate a transaction. It is estimated that the
    energy required to participate in a Proof of Stake network is
    roughly equivalent to the energy required to operate a home
    computer.
        Each consensus mechanism has benefits and drawbacks.
    Regardless of the consensus mechanism, most blockchains share
    the following attributes.
        Blockchains help us move ``data as value'' in a secure,
    lower-cost, peer-to-peer model. Blockchains necessitate to
    collaboration. Blockchains facilitate a permanence of records,
    which makes cooking the books or tapering with records
    extremely difficult. Finally, blockchain transactions are
    traceable. Most ledgers are pseudonymous, making it possible to
    track the flow of funds.
        What does this look like in practice? The First National
    Bank of Omaha is working with a consortium of partners to
    create Cattle ID, a system that uses blockchain to create
    unique digital identifiers for cattle, and enables cattle
    ranchers to add health and treatment records to each animal.
        Another company, Circular, is tokenizing critical mineral
    and metals to track their journey from mine to factory to
    recycling. These materials are essential to the technology and
    automotive industries. Enhanced tracking and tracing of these
    materials could increase accountability and reduce the
    exploitation of people and planet.
        Finally, the InterWork Alliance, Microsoft, and others, are
    working to create transparent and functional voluntary carbon
    credit markets by creating common standards that are helping
    markets reduce fraud, improve discovery, and create more
    accurate calculations of carbon offsets and credits.
        Harnessing this technology to solve real-world problems and
    expand economic opportunities will be a generational effort. It
    is not too late for the U.S. to lead.
        I look forward to answering your questions today.

        [The prepared statement of Ms. Ro can be found on page 49
    in the appendix.]

        Chairwoman Stabenow. Thank you very much. Next, Sam
    Bankman-Fried. Welcome.

    STATEMENT OF SAMUEL BANKMAN-FRIED, FOUNDER AND CHIEF EXECUTIVE
                      OFFICER, FTX-US, CHICAGO, IL

        Mr. Bankman-Fried. Thank you, Chair Stabenow, Ranking
    Member Boozman, and members of the Committee. Thanks so much
    for having me here today.
        I am Sam Bankman-Fried, the CEO and Co-Founder of FTX. We
    are a global digital asset exchange. We were founded in 2019,
    and today we have roughly $15 billion of volume that trade
    daily on the platform.
        One of the big things that I want to point to in the
    digital asset industry is the equitable access that it provides
    to users, which is somewhat unique to this industry.
    Traditionally, in order to get access to market data, you need
    to pay millions or tens of millions of dollars per year, often
    separately to each venue, such that only the largest and most
    sophisticated trading firms are even allowed to see the order
    book that they are sending their orders to. Intermediaries
    obscure the data, obscure the transparency.
        In the cryptocurrency industry and on FTX in particular,
    all of our market data is 100 percent free for everyone. It is
    available on our website for users, for regulators, for press,
    and any other interested parties. We do not charge licensing
    fees. We do not charge registration fees. We do not charge data
    fees. It is all available for free.
        In addition to that, in traditional market structures most
    consumers do not have the same access to liquidity that the
    most sophisticated investors do. While the largest trading
    firms can go straight to an exchange, sending orders directly
    into the best price matching engine, most consumers are forced
    to go through many different intermediaries, each of which add
    latency, increase fees, reduce transparency, reduce the
    flexibility of the orders that they can send, and result in a
    very different market structure and a less-favorable market
    structure that the less sophisticated members are allowed to
    access.
        On FTX, and in general in the digital asset ecosystem,
    everyone who is registered is allowed to send orders directly
    to our exchange in the same way. Whether you are doing it
    through our mobile app or website or our API, they all have the
    same access directly to our matching engine, and every user,
    from the consumer to the sophisticated trading firm, gets
    equitable access to our liquidity.
        Talking a little bit about what our U.S. business looks
    like today, we have a spot or cash market that offers digital
    asset commodity transactions, for instance, a Bitcoin versus
    U.S. dollar spot marketplace. We also have a CFTC license
    digital asset derivatives exchange, formerly LedgerX, now FTX
    US Derivatives, which has numerous licenses from the CFTC to
    offer futures and options on digital assets and follows the
    same general model as the rest of our systems do, with
    equitable access and free market data.
        The spot business, as has been mentioned here earlier
    today, is not chiefly overseen by a Federal markets regulator,
    although the CFTC does have some amount of anti-fraud
    investigative authority. It is instead overseen by a patchwork
    of State money transmitter and money service business
    organizations.
        Looking at the regulatory landscape today for digital
    assets, there are some holes, and one that I want to point to
    in particular, which has been brought up earlier today, is
    around spot commodity transactions. With commodity futures, the
    CFTC unambiguously have regulatory oversight and authority.
    With securities markets, the SEC clearly has authority.
        With cash commodity markets, it is substantially less
    clear, and those are the markets that spot Bitcoins trade on
    today in the United States, without a clear Federal regulator.
    This leads to all the standard risks with having not enough
    Federal oversight, risks to consumers, potential systemic
    risks, and a lack of clarity for the industry.
        This has led to the State we are in today, where despite
    the majority of the intellectual property for the digital asset
    industry originating from the United States, 95 percent of
    volume occurs offshore. The majority of assets are not
    accessible at all from the United States. It would be great to
    be able to move that liquidity, that business, back onshore,
    and providing Federal oversight and clarity would be great for
    that.
        I think that the CFTC is in a very strong position to do
    this. The CFTC has extensive experience regulating digital
    asset markets through their cryptocurrency futures markets that
    they list. They have extensive markets regulatory activity,
    they understand the cash markets, and they have extensive
    experience monitoring the cybersecurity of their registrants.
    We, and other registrants, go through very extensive protocols
    by them to ensure the safeguarding of assets. I would love to
    see that jurisdiction expand to be able to provide Federal
    oversight for the cash markets, similar to how they do for
    derivatives markets today, both to provide consumer protection,
    protecting systemic risks, and to provide a clear and
    consistent framework for the industry to be able to bring much
    of this back onshore.
        Thanks, and I am excited to answer any questions that you
    guys have for me today.

        [The prepared statement of Mr. Bankman-Fried can be found
    on page 58 in the appendix.]

        Chairwoman Stabenow. Thank you very much. Ms. Boring,
    welcome.

       STATEMENT OF PERIANNE BORING, FOUNDER AND CHIEF EXECUTIVE
          OFFICER, CHAMBER OF DIGITAL COMMERCE, WASHINGTON, DC

        Ms. Boring. Thank you for inviting me to participate in
    today's hearing.
        I first learned about Bitcoin right here when I was working
    as a congressional staffer in 2011. After seeing the financial
    crisis of 1908 rock my community, I left my home State of
    Florida to work on public policy for a more sound and inclusive
    financial and monetary system. I am convinced that this
    technology is our best hope for achieving that.
        Bitcoin, other digital assets, and blockchain technology
    represent American values like democratization at its core. Its
    distributed nature should be embraced, not feared. These
    technologies will play a key role in the financial services
    industry and will soon be considered critical infrastructure as
    we move toward a digital economy. Many nations around the world
    understand this, and they are competing to be leaders of
    exponential technologies like blockchain. As we look across the
    global stage, we see many nations, most notably the Communist
    Party of China, who have made blockchain technology a top
    national priority.
        We find ourselves in a new space race. It is the cyber
    space race of controlling the systems and the governance that
    will power the digital economy, and I fear that we are so far
    behind that we have not even acknowledged that there is a race
    underway. As the world's largest economy, the stakes cannot be
    higher.
        With that said, our Nation has experienced these challenges
    before, whether it was the space race or internet innovation,
    and our experiences show us that we do best when we recognize
    the private sector is our greatest strength. As the first and
    the largest blockchain policy organization, we have over eight
    years of experience in understanding the nuances and the
    complexities of digital asset policy frameworks. It is from
    this position that I urge the Committee to consider two key
    issues: regulatory clarity and regulatory cohesion.
        Digital asset innovators have been operating in an unclear
    regulatory environment for far too long. In order for American
    businesses to be able to compete on the global stage they need
    to know what the rules of the road are.
        Today our regulatory structure is fragmented. There are
    regulators that police fraud and market integrity such as the
    CFTC and the SEC. There are consumer protection regulators,
    including the CFPB and the FTC. There are prudential and
    monetary bank policy regulators, such as the Fed, the OCC, and
    the FDIC. There is another category of regulators that consist
    of financial policy and anti-crime orgs, including FinCEN and
    the Department of Justice. Then, on top of all of this, there
    are a number of State-level regulators that have a purview over
    digital assets as well.
        This fragmentation has led to a lack of regulatory clarity
    and is hampering innovation and impacting American global
    competitiveness. We have members who have been waiting for
    action by the regulators for over five years, only to take
    their products elsewhere. It is time for the U.S. and for this
    Committee to begin putting in place policies that create
    clarity and spur innovation and blockchain and economic growth
    and opportunity for all.
        We urge this Committee to work with other policymakers to
    first adopt the chamber's 2019 National Action Plan for
    Blockchain, which proposes that U.S. blockchain policy should
    take a holistic government approach, with clearly articulated
    support for the private sector development of innovation
    required to grow emerging industries.
        Second, provide regulatory clarity by identifying a lead
    regulator. We believe the CFTC is well positioned to assume
    that role. The CFTC is a market regulator that has a long
    history of taking on the regulation of new and innovative
    products with a strong track record of enforcing cases of
    fraud, market manipulation, and other illegal activity. The
    CFTC already regulates Bitcoin and Ether, which accounts for
    about 60 percent of the market today. It has spot market anti-
    fraud and manipulation enforcement authority, and it has a
    history of vetting and approving new types of innovative
    products, and most recently digital assets.
        Finally, the CFTC's principles-based regime has a mandate
    to promote responsible innovation. A principles-based model is
    effective in the regulation of new assets classes because it
    allows the regulator to set desired outcomes but gives the
    market the flexibility to innovative on how those outcomes are
    achieved. I am confident a similar policy framework will
    achieve the same results for blockchain and for our country.
        Thank you. I look forward to your questions.

        [The prepared statement of Ms. Boring can be found on page
    97 in the appendix.]

        Chairwoman Stabenow. Thank you very much. Last but
    certainly not least, Mr. Werbach.

      STATEMENT OF KEVIN WERBACH, PROFESSOR, THE WHARTON SCHOOL,
              UNIVERSITY OF PENNSYLVANIA, PHILADELPHIA, PA

        Mr. Werbach. Chair Stabenow, Ranking Member Boozman,
    members of the Committee, thank you for the opportunity to
    testify before you. I will discuss four issues which are
    addressed at greater length in my written statement: first,
    what digital assets; second, how should we think about
    regulating them; third, what are some of the major risks; and
    fourth, what can we learn from the development of internet
    regulation?
        Digital assets have the potential to increase efficiency,
    improve equity, promote privacy and individual freedoms, and
    broadly, create more competitive, fair, and transparent
    markets. I emphasize, though, the word ``potential.'' The
    vision of a decentralized Web3, replacing centralized
    platforms, is a beautiful dream that many are passionately
    working toward, but we must separate dreams from present
    reality.
        While the technical foundations are complex and important,
    the basic concepts here are straightforward. Most people do not
    understand how the internet actually works either. Digital
    assets are simply things of value represented through digital
    tokens used in valid transactions on a blockchain ledger.
    Blockchain diffuses the trust that previously resided in
    central entities.
        However, this does not mean trust goes away. Having
    confidence that a digital representation on a public shared
    ledger is actually worth something, potentially millions of
    dollars in the cases of certain non-fungible token, is
    fundamentally an exercise in trust. Moreover, the absence of
    centralized trust creates burdens as well. If you lose the
    cryptographic keys associated with your digital assets, they
    are effectively gone. Platforms such as Coinbase and FTX
    generally take custody of users' assets, similar to traditional
    exchanges, because they are efficiencies of central
    intermediation. Decentralized finance, or DeFi, which removes
    these custodial relationships, raises its own challenges. We
    must examine carefully where risks and opportunities for abuses
    arise.
        Too much of the conversation around digital assets started
    with a mistaken assumption they are currently unregulated. Just
    because something is a new kind of derivative or security does
    not mean those frameworks no longer apply. Addressing digital
    assets will not be the task for any one regulator any more than
    internet policy is. The CFTC should be given authority where
    the market activity involved is something it is well suited to
    address.
        Even more important, the divide between agencies should not
    be a reason for gaps in the regulatory regime. Someone needs
    clear authority over spot markets and digital assets that are
    not considered securities over exchanges that are now among the
    most valuable and prominent firms and financial services,
    including some that are nominally offshore, and stablecoins
    that claims reserves in the tens of billions. The only way,
    over the long run, to promote trust in legitimate firms is to
    distinguish and take down the bad actors.
        According to Chainalysis, cryptocurrency crime reached an
    all-time high in 2021, with $14 billion sent to known illicit
    addresses. It is worth nothing this represented only 0.15
    percent of transaction volume. However, $14 billion is not a
    small number, and hacks draining tens or hundreds of millions
    of dollars, such as the recent Wormhole attack, are
    distressingly common.
        Moreover, practices that are routinely banned for other
    asset classes, such as wash trading, pump-and-dump schemes,
    fake assets, and hidden conflicts such as exchanges listing
    tokens they previously invested in, are widespread. The
    stablecoin Tether continues to play an outsized role in the
    digital asset world, despite having been found to have lied
    about its backing and engage in other illegitimate practices.
        There is something wrong when sizable attacks and fraud are
    so common. Yet investors and major firms appear to shrug them
    off entirely. Failing to lose trust in untrustworthy platforms
    suggests investors may not rationally be assessing risks. That
    could be a recipe for disaster.
        I helped develop the U.S. approach to internet regulation
    in the 1990's, in the Clinton Administration. The policy then
    was to avoid unnecessary restrictions on innovation while
    critically addressing the policy issues that arose. Most
    internet activity then did not involve regulated activities.
    When it did, such as communication services under the
    jurisdiction of the FCC, regulators took action to avoid
    situations where quirks in technology would undermine
    legitimate public policy goals.
        Many times I have heard that regulatory hurdles and digital
    assets would cause the U.S. to fall behind. Yet here we are,
    2022, the U.S. is home to a large, diverse, and growing
    industry of digital asset and blockchain firms and investors,
    thanks to the dynamism of our economy and also to the trust in
    our markets.
        That said, the sooner the gaps in legal authority or ill-
    fitting rules can be addressed, the better. This is already a
    $2 trillion market. This Committee should ensure the CFTC has
    the legal authority and resources to engage in active fact-
    finding, rulemaking, and enforcement in the digital asset
    space, in concert with other regulators at the Federal and
    State level.
        I look forward to your questions.

        [The prepared statement of Mr. Werbach can be found on page
    115 in the appendix.]

        Chairwoman Stabenow. Thank you very much. We appreciate the
    testimony of all of you. Let me start with questions and ask
    Mr. Bankman-Fried, you have supported increased regulation for
    the spot digital asset market. One of the concerns that I have
    is that without additional resources this will put the CFTC in
    a situation where they are being pulled away from its
    traditional areas of responsibility, regulating the derivatives
    markets including the markets critical for our agricultural
    producers.
        I wonder if you might speak to how Congress should ensure
    that the CFTC has adequate resources to continue to oversee the
    markets at its core of its jurisdictions while expanding their
    responsibilities.
        Mr. Bankman-Fried. Thank you, Chair Stabenow. I completely
    agree. I would love to see the CFTC play a more active role in
    licensing and regulating the digital asset space, and I agree
    that that will likely involve increasing its scope and an
    increased need for resources.
        There are, of course, a lot of ways to address that. You
    can imagine addressing it through appropriations, through other
    means.
        I think one way could be contributions from the digital
    asset industry as well. If that were the preferred approach, I
    know that we would be completely comfortable participating in
    that, so long as it was a reasonable framework. Obviously, we
    do not want it to be a blank check of infinite size. You know,
    assuming that it is a well thought out and reasonable framework
    for supporting the licensing activity of the CFTC in the
    digital asset ecosystem I think that would be healthy, and I
    think we would be happy to play a part, and I suspect that
    other members of the digital asset industry would as well.
        Chairwoman Stabenow. All right. Thank you very much. I
    think this is going to be important, and certainly as in other
    areas and financial entities and so on where there are fees,
    something where folks are contributing. I think that is going
    to be important to be able to give the CFTC the additional
    resources to do what you and others are suggesting. I
    appreciate that.
        Ms. Ro, Bitcoin mining is, as we have talked about,
    extremely energy intensive. The United States is now home to
    one-third of the world's Bitcoin mining, much of which is
    powered by fossil fuels. I am concerned this is going to
    threaten our ability to combat the existential threat of
    climate change and strain our electrical grid.
        Can mining become more sustainable, and if so, what can
    Congress do to encourage this transition?
        Ms. Ro. Absolutely. Thank you very much for that question,
    Chair Stabenow. First, if we go back five, six years, we had a
    different challenge in the crypto mining sector. Most of crypto
    mining occurred in places like China and Russia, where we had
    very little visibility around what was going on in the mining
    sector, and often, also, not good energy sources, or dirty
    energy sources.
        What we have today is actually an opportunity. Most of the
    mining has shifted to the U.S., to Canada, and to the Nordic
    countries. Why? Because people will go where they can find
    energy at the cheapest level possible, and when you think about
    the bans that have occurred in China and in Russia and various
    other places, that is actually a net positive, especially for
    the U.S.
        What we should do is to encourage the crypto mining firms
    to set up, in an observed and obviously having proper oversight
    environment, where we champion the move toward increasing
    renewable usage, but we bring this industry to the U.S., and to
    Canada and to other peers. Why? Because we need that oversight
    and that visibility of what is going on in such an incredibly
    important sector.
        There are a few things going on right now that policy can
    accelerate. Private sector is already looking to adopt more
    renewables. Private sector is also agreeing with States on
    caps. Meaning if there is a peak load occurring in any given
    State that mine shut down. They no longer mine, and they wait
    until the peak load has come down. These are creative and very
    sensible, practical ways of then transitioning to a place where
    we are mostly renewable.
        I really encourage a rethink around how we embrace this
    sector and encourage the positive use of renewable energy.
        Chairwoman Stabenow. Thank you very much. Ms. Boring, what
    is the Chamber's view of this issue?
        Ms. Boring. First and foremost, all industries and all
    technologies use energy. We have very good visibility into the
    energy uses of Bitcoin today. Bitcoin mining consumes about
    0.12 percent of the world's energy production. If this went
    away we would still have very significant conversations and
    issues to work out as it relates to climate change and energy
    usage.
        Two differences between Bitcoin mining and other energy
    producers are, one, we have very strong visibility into the
    energy and the cost and the resources based on the transparency
    of the blockchain. Second, this energy--this sector of Bitcoin
    mining is leading the transition to renewable energy sources.
    Today the industry is powered 59 percent by renewable sources.
    It is one of the most sustainable, if not the most sustainable
    industries in the world today.
        Chairwoman Stabenow. Thank you very much. I see my time is
    up. Senator Boozman has gone to vote as we are taking turns
    back and forth here, so I am going to turn to Senator Sherrod
    Brown, who has multiple hats, including chairing the Banking,
    Housing, and Urban Affairs Committee. Welcome.
        Senator Brown. Thank you, Madam Chair, and I really
    appreciate your question about the environment. Saying that,
    well, we do not do it in China anymore, that is what makes us
    environmentally principled and conscious, does not really take
    us really take us where we need to. Thanks for raising the
    issue, Madam Chair.
        We hear a lot about innovation. I am concerned that digital
    assets create big risks for consumers, and our committee, the
    Banking and Housing Committee, we have been looking at
    cryptocurrency for years. We are going to continue to make sure
    consumers are protected in these markets. Next week, Under
    Secretary of the Treasury Liang will testify about their
    resident President's Working Group report on stablecoin. I look
    forward to coordinating with Chair Stabenow, and Senator Booker
    is very interested in this, and a number of others. Senator
    Smith and Senator Warnock sit on both committees, so we have
    work to do there.
        A question, Mr. Werbach, and then a question, Mr. Bankman-
    Fried. Mr. Werbach, digital assets make it easier to conduct
    transactions outside the regulations that keep criminals and
    terrorist from using our financial system. Yesterday, the
    Justice Department announced an investigation into two
    individuals that allegedly tried to launder more than $3
    billion of stolen Bitcoin.
        Big risk here. How do we approach bringing digital assets
    within a BSA/AML, anti-money laundering framework?
        Mr. Werbach. Thank you, Senator. It is a very important
    question. There are all sorts of illicit activities that happen
    using digital assets, and there is a need to bring this whole
    ecosystem within the frameworks that we have established for
    illicit finance and to figure out new technological means to do
    that. Much of this involves finding mechanisms for entities to
    know their customers and to communicate that information and to
    provide surveillance capabilities for regulators.
        Now the exact way that this happens may be different for
    digital assets, but in recent years there has been movement in
    this direction. The Financial Action Task Force globally has
    adopted something called a Travel Rule for communicating
    information between virtual asset exchanges, and industry has
    started to work on coming up with the technological means to
    implement that in a way that is not inconsistent with
    regulation.
        Ultimately it comes back to the fundamental issue that
    regulators need to have oversight. These need to be exchanges
    and other entities that are subject to market regulators like
    the CFTC and the SEC, that can figure out how to implement
    those kinds of requirements, because there is no question,
    there is far too much financial crime going on. There is
    financial crime outside of crypto, of course, as well, but
    there is far too much going on using these assets.
        Senator Brown. Thank you, Professor.
        Mr. Bankman-Fried, if we turn on the TV these days there
    are ads for crypto everywhere. I understand this Sunday FTX
    will have an ad in the Super Bowl. I heard they are not cheap.
    There is no question that crypto companies want working people
    to put money on the line--that is who you are reaching out to.
    Last week, hackers stole $320 million from a crypto platform,
    Wormhole. In this case, investors got lucky. The trading firm
    behind it came to the rescue. We know we cannot always count on
    those trading firms. There just is not that much money.
        Crypto.com--that is the one we see if you watch college
    football; you see Matt Damon on just about every college
    football broadcast--crypto.com lost $30 million last month.
    Scams and hacks are everywhere in crypto.
        Mr. Bankman-Fried, is it reckless for crypto companies to
    get rich by selling Americans such a dangerous, risky product?
        Mr. Bankman-Fried. Thank you, Senator Brown, for the
    question. I think what this highlights is the need for Federal
    oversight of the cryptocurrency industry, and as you pointed
    out there have been a number of hacks and scams historically.
    Most of this has happened on unregulated venues.
        There are really sophisticated tools that the CFTC and
    other Federal agencies have to help mitigate this risk. The
    CFTC has a really extensive cybersecurity and anti-hacking
    program that all of their registrants go through, and there has
    been a very good track record of those companies. I think that,
    you know, digital assets exchanges being subject to that level
    of oversight would be entirely appropriate and would help to
    mitigate the exactly risks that you are pointing to there.
        I think that when you look at the sort of another instance
    of this that you brought up, which is scams, often on rather
    than the platform side but the asset side, the individual
    assets, that moving toward a world where there is a Federal
    registration regime for digital assets, that involve the same
    level of disclosure and anti-fraud protection that we see for
    securities today, would be entirely appropriate, and would help
    to protect against scams, Ponzi schemes, pump-and-dumps, and
    other similar activity there.
        I think that it will have to be a little bit different than
    any registration forms that currently exist because there are
    some nuanced differences between digital assets and current
    assets, but many of the same anti-fraud principles apply in
    exactly the same way. I think that having a Federal oversight
    through that system could help address that piece of it as
    well.
        Senator Brown. Thank you. Madam Chair, thank you.
        Chairwoman Stabenow. Thank you very much. I look forward to
    working with you on this. Senator Boozman.
        Senator Boozman. Thank you, Madam Chair.
        Ms. Boring, there are over 17,000 digital assets. Can you
    briefly explain what digital assets are generally used for and
    how they are regulated? Further, what is the real-world
    application of digital assets, particularly Bitcoin and Ether,
    which represent about 60 percent of the digital market? We are
    hearing a lot about the potential for fraud, the fraud that is
    going on, and this and that, but tell us, so many people are
    confused as to what this really represents.
        At the hearing today we are digging a little bit deeper,
    but for a lot of our colleagues this is something that, you
    know, they have heard about but they do not really understand.
    What is the real-life purpose of getting these things on the
    market?
        Ms. Boring. Yes, so to really understand the purpose of
    this technology you have to understand the problem that it
    solves in internet architecture. The internet was supposed to
    be a place for peer-to-peer transfers. It works for
    communications. It works for media. It does not work for things
    of value.
        For example, if I take a picture on my cellphone and I go
    to send it to you, peer-to-peer, directly, so we are not using
    an intermediary for me to deliver that to you, like the Postal
    Service. When I send it, there will be a copy of that picture
    on your device and there will still be a copy of that picture
    on my device.
        Okay, great. That works for photos but does not work for
    money. If I am sending you money it is really important that
    when I send it to you it leaves my control and it is only in
    your custody. That is the innovation that Bitcoin solves. That
    problem is called the double-spending problem, and it was not
    until 2009, with the launch of Bitcoin, that we knew how to do
    that.
        Previously, financial services were being retrofitted to
    sit on top of the internet. You can think about this in a way
    of taking a picture of the front page of The Washington Post,
    for example, and just hosting that picture on a website. Is the
    news online? Technically, but are we using that infrastructure
    and that architecture to transform the way that we are sharing
    that information? No. Financial services is just now starting
    to see that technological boom in peer-to-peer direct
    transfers.
        What is this used for today? There are many different
    cryptocurrencies, as you noted. Bitcoin has the largest market
    cap out of all of them, and it is used as a digital store of
    value. The Chairman of the Fed, Jerome Powell, has testified in
    Congress before comparing it to a digital gold. That is its
    main purpose.
        Other cryptocurrencies, like Ether and Proof of State
    networks are smart contracts applications. Those are two very
    different things, a store of value versus smart contracts.
        Senator Boozman. Very good. Thank you. If each one of you
    all would--this is a question for all of you, but you have only
    got about 30 seconds to answer it or the Chairwoman will yell
    at me, which is not a good thing.
        I guess the question, or the heart of the matter is, do you
    believe it is necessary for Congress to provide market
    participants greater certainty when it comes to regulation of
    digital asset, spot markets, and if so, what should be
    considered as that framework is developed?
        We will start with you.
        Ms. Ro. Ranking Member Boozman, thank you very much for
    that question. In terms of what we have talked about today, I
    think the urgent first step is to provide the CFTC with the
    authorization and the resources and funding needed to oversight
    certain parts of the market, and it is pretty clear that
    derivatives and crypto derivatives fall in that that, but then
    the next question is the spot markets, with relation to what is
    identified and defined as commodity within the digital assets.
    I am going to emphasize that again--not all digital assets
    would be commodities. It would be subset. Making very clear
    what that is and that demarcation will be very important to the
    markets.
        Senator Boozman. Okay.
        Ms. Ro. That first step alone will do wonders to really
    help move forward on the clarity point.
        Senator Boozman. Very good.
        Mr. Bankman-Fried. I think that it would be great to have
    congressional action here, and I think providing clarity on the
    regulatory framework would be appropriate and helpful for the
    industry and for oversight.
        I also think that there is some actions that could be taken
    without a new bill passing. I think that when you look at
    retail commodity spot transactions with some amount of
    financing, that is an example of an area where I think the CFTC
    already has some regulatory authority. I think for cash markets
    more generally, it would be great to get congressional action
    and clarity on that point.
        Senator Boozman. Go ahead.
        Ms. Boring. Our ask, in terms of what this Committee can
    do, and the biggest issues impacting our space, as I Stated in
    my oral regulatory clarity and regulatory cohesion. To start, a
    good first start would be to create a joint working group
    between the CFTC, the SEC, and the industry. We are pleased to
    see that there has been bipartisan support for that, and we
    would further encourage that here on the Senate side as well.
        I mentioned the National Action Plan for Blockchain. We
    have eight regulatory principles that we outline in the
    National Action Plan. We would be happy to collaborate with
    that on you further. We also think that the CFTC is well
    positioned to a lead regulator in this space.
        Senator Boozman. Good. Go ahead, sir.
        Mr. Werbach. I would agree, Senator, with what everyone
    else has said, that spot market authority for crypto
    commodities is essential. More broadly, Congress needs to look
    to where there are gaps in the regulatory structure. Not all of
    them are within the purview of this Committee, but stablecoins
    are one that have been identified, central bank digital
    currencies, some of the energy and climate-related issues where
    tax policy or other methods may provide incentives, and more
    broadly tax issues around digital assets or situations where it
    has become clear that the existing legal frameworks need some
    updating.
        Over the long term, this is the future of financial
    services. There certainly is an urgency to make these kinds of
    modifications, but I think Congress needs to start the process
    of thinking about how might we restructure fundamentally our
    financial regulatory system, given the kinds of innovations and
    changes that these technologies herald.
        Senator Boozman. Thank you, Madam Chair. Thank you.
        Chairwoman Stabenow. Thank you very much. Senator Booker.
        Senator Booker. Thank you, Chairwoman. I agree with so much
    of what is being said on both sides of the aisle about the
    concerns and the worries and about the urgent need for a clear
    regulatory framework. I want to try to highlight right now some
    of the things that I think are important to drive home.
        Ms. Boring, Mr. Bankman-Fried, could you both comment on
    why America right now, if we were just unfurling our
    patriotism, is losing out on a lot of opportunity that this
    industry right now is mostly overseas and not here at the
    center of the global markets? What are the opportunities that
    are missing out and the dangers, in fact, of not creating a
    clear regulatory framework that would have these transactions
    and more being done here in America? If the two of you could
    address that.
        Ms. Boring. America, global competitiveness is a huge
    concern of mine. This technology, the digital technology, does
    not see national borders. It is a global technology, by its
    nature. Companies are going to operate in areas where they have
    legal certainty. We have members today, started by Americans,
    U.S. small businesses, they are not comfortable operating here
    because they do not understand the rules of the road, and they
    are going overseas.
        Having legal certainty and regulatory certainty is
    absolutely essential, and this Committee has a key role to play
    in that conversation. Then as I mentioned earlier, you have
    this issue of regulatory fragmentation. The issue is not a lack
    of regulation. It is that you have so many cooks in the
    kitchen, and stakeholders, all pulling to have purviews over
    different areas of this asset class, and it adds a lot of
    bureaucracy and red tape to running a business here,
    particularly a small or medium-sized business, in these digital
    assets in the United States.
        Regulatory clarity and having a cohesive strategy for
    businesses is essential to promoting economic growth here in
    the United States.
        Senator Booker. Thank you.
        Mr. Bankman-Fried. I agree with most of that. Thank you for
    the question, Senator. I think, you know, first, briefly, you
    know, 95 percent of volume is offshore. Most tokens are traded
    exclusively offshore, because of the lack of clarity today.
    That poses a real threat to the States. I would love to see
    that come back onshore.
        You look at the majority of digital asset transactions are
    conducted by U.S. dollar-backed digital assets right now,
    stablecoins. That could change to a different currency if the
    United States does not take a lead on providing a clear pathway
    and oversight for digital asset transactions. You could see the
    center of the digital economy being somewhere other than the
    United States, unlike the center of most other marketplaces and
    economies.
        In terms of what I think the promise is, I think there is a
    ton. You look at the unbanked, the underbanked, it is not
    shocking that minorities disproportionately use digital assets.
    It is not shocking that those who do not have equitable access
    to our current financial infrastructure disproportionately use
    digital assets. It is one of the first times that people have
    direct access to their own finances, that people are not forced
    to wait five days for a transfer to clear, getting overdraft
    charges every day along the way. It is one of the first times
    that people can get clarity on what is going on without having
    to hire lots of accountants to keep track of their own ledger.
        It is also, I think, something that provides a lot of hope
    for other areas of our economy and of our Nation. I think when
    you look at social media, I think one thing that has become
    clear are the dangers of having really any approaches to
    centralized social media control and censorship, and there are
    no right answers sometimes.
        One thing that I would be really excited to see would be
    blockchain technology providing an agnostic messaging protocol,
    which would allow interoperability between different social
    media platforms, break down some of the network effects, break
    down some of the barriers, and allow competition and allow
    different types of moderation to play on the same messaging
    protocol without holding captive the users and the content. I
    think that is another area where we could see real good
    produced by----
        Senator Booker. Mr. Bankman-Fried, I am going to interrupt
    you because I have only got 30 seconds left, and I am offended
    that you have a much more glorious afro than I once had.
        Really quick, I got into politics because, as a city
    councilman in a neighborhood I still live in, low-income Black
    and Brown community, and I was appalled at the banking
    industry. When I was mayor we did a lot to try to
    disintermediate the banks. We brought Kiva into Newark to try
    to get direct loans. They had better repayments to Kiva loans
    than the banks but they did not use their same opportunity. I
    see what overdraft fees have done, and we fought with our local
    banks to get them to eliminate these fees.
        You are right that Black and Brown people right now are
    overrepresented in this space. I have concerns, whenever you
    have large money, large industry getting into something, but
    you could close me out by saying to me that the best view of
    the future, and how this could really empower the communities
    that all of us on this Committee probably are really focused
    on, and that I got in politics to make sure I serve?
        Mr. Bankman-Fried. Absolutely. I completely agree with
    that, Senator. I think that it could help provide direct,
    clear, equitable access to financial services to minorities, to
    economically disadvantages, to the underbanked. It could help
    get them, for the first time, in an area without discrimination
    from the underlying technology and also where they have just
    clear transparency on what their finances are, on what their
    assets are, where they have control but they are not beholden
    to institutions who are charging them fees while delaying on
    providing services. I think you could do a lot to help serve
    those communities, and I think I am really excited for that
    vision of the future.
        Senator Booker. Mr. Chairman, thank you very much, Sir.
        Senator Boozman.
        [Presiding.] Thank you.
        Senator Booker. I hear rumors that you had a great afro
    back in your day too, sir.
        Senator Boozman. Lots of hair. Senator Thune.
        Senator Thune. Thank you, Mr. Chairman, and I assume that
    all of you are going to be the life of the Super Bowl party,
    because when Matt Damon comes on and says ``Fortune favors the
    brave'' you can start riffing about cryptocurrencies.
        You know it is mainstream when professional athletes, some
    of whom will be participating in this weekend's Super Bowl,
    like Odell Beckham, are getting their compensation, or at least
    part of their compensation in the form of crypto.
        I am interested, obviously, as most of my colleagues are,
    in what is the best approach to make sure that we are not
    stifling innovation but that we are regulating digital asset
    technology in a way that appropriately reflects the risks.
        Mr. Werbach, in your view, what would a risk-based approach
    of digital asset regulation look like?
        Mr. Werbach. Thank you, Senator. That is a very healthy way
    to look at this, because there are a variety of technologies
    here, and any entity involved needs to think about what are the
    different kinds of risks. There were some questions before
    about the banking system and the way that certain banks have
    been unwilling to take on cryptocurrency clients. Fundamentally
    that should be a risk-based process in terms of assessing what
    are the concerns, what are the dangers here, and what are the
    mechanisms for addressing those kinds of concerns.
        It is easier to do all of that within an overarching
    structure where regulators provide some level of general
    guidance, provide some oversight and surveillance of markets,
    but then allow entities to devise the risk-based structures
    that make the most sense for them.
        This is actually a very diverse market with different kinds
    of assets, different kinds of exchanges. It is changing very
    fast. A very specific, prescriptive approach, requiring one set
    of requirements may not work, but there needs to be some
    encouragement and some guidance about what a risk-based
    approach would look like. Again, that is starting to happen,
    bottom up, in certain areas where regulators are pushing, but
    it needs to start with that requirement that will get
    participants in the industry to move forward.
        Senator Thune. Mr. Bankman-Fried and Mr. Ro, you both make
    it sound like the United States is not particularly competitive
    when it comes to attracting the digital asset industry, which
    begs the question about what other countries are doing and how
    the U.S. regulatory framework of digital assets compares with
    that of other countries. Could you talk about why other
    countries are more attractive and why the United States is not
    particularly competitive, and does it have to do with a
    regulatory framework in those countries?
        Mr. Bankman-Fried. Yes. Thank you, Senator, for your
    question. I completely agree.
        Now it is worth noting there are a lot of countries in the
    world. Each has a different approach, and many other countries
    are also not competitive on this, but many of them are. I think
    the big differences that you see, it is not on whether
    regulation is stringent or lax. It is on whether regulation is
    clear or unclear.
        The biggest thing that we see with countries that have done
    a really good job at attracting the digital asset industry is
    having clarity from the regulators about what licenses one
    should be pursuing, about what the oversight is on those, who
    the overseeing body is, about how one registers and things that
    need to be registered.
        Providing a pathway forward with sufficient oversight is
    the hallmark of the countries that have done very well at this,
    and I think the biggest problem in the United States, I think
    ``patchwork'' has been a word that has been used a few time
    here, it is the patchwork of regulation, that there are
    simultaneously too many sort of cooks in the kitchen, and yet
    not enough oversight, because there is a diffusion of
    responsibility. I think having a clear framework with clearly
    communicated--you know, whether they are prescriptive
    guidelines or maybe more appropriately sort of principles-based
    guidelines, but a clear regulator in charge of those or clear
    cooperation between regulators on it, clear licensing and
    registration pathways that are not lax but that are clear I
    think is the single biggest thing that is missing.
        Ms. Ro. If I may add to that--thank you, Senator--there are
    two countries I want to highlight that we may want to borrow
    part of their playbook, maybe not all their playbook.
    Switzerland. FINMA is a regulator that has been very early, to
    be very clear about how things are defined, whether something
    is a utility token or a security token. Whatever token it is,
    whey have made very clear definitions.
        Further, they have come out in front on how they deem
    different classifications of activities and what falls under
    their oversight or not. They were also one of the first to come
    out with a licensing regime for these crypto funds, and this is
    what happens when you do that. There is a little town called
    Zug. Crypto valley. It has that name--no one ever heard of Zug
    eight years ago, but it is now home to hundreds, if not
    thousands, of crypto companies. These people do not all live
    there but they have set up shop there. I think that is
    something we should think about.
        Estonia. I will leave you with Estonia. That was an
    interesting one as well. They have an E-resident program, and
    they have digitized a large chunk of their government services.
    What is interesting, as an entrepreneur, about setting up in
    Estonia, I do not need to go there either. I need to prove my
    identity. I need to obviously have the requisite capital to
    invest. Everything else I can do digitally. I can even have
    encrypted signatures for legal documents.
        It is a very interesting model, and so we should be looking
    at those types of things to encourage business to come here.
    They do not necessarily physically have to come here, but to
    set up shop and to create jobs here.
        Senator Thune. Thank you. Mr. Chairman, if I could just
    have Ms. Boring take this one for the record, because my time
    has expired and I have to run over and vote. You mentioned
    examples of blockchain technology in use today, and in
    particular I appreciate you pointing out applications in
    agriculture.
        You mentioned livestock ownership, recordkeeping use, and I
    would like to have you, if you could for the record, tell us
    more about that use and how it affects American farmers and
    ranchers.
        Ms. Boring. Yes, happy to, and thank you for the question.
    Blockchain technology is providing security and transparency to
    supply chains, and it is ultimately arming our farmers,
    ranchers, as well as consumers with better information and data
    about agriculture products.
        One example of this is a company called BeefChain. They are
    based in Wyoming. They are a small business here in the U.S.,
    and they are a pioneer of this technology. Cattle is tagged
    with an RFID and given a unique digital identifier. That
    cattle's unique ID, as well as other information that is
    collected throughout the supply chain, such as where it was
    born, has it received hormones or not, when it was sold, where
    it was sold, all that information is collected, secured, and
    stored using blockchain technology.
        Blockchain technology is bringing other benefits to supply
    chains, such as making them more efficient. It is helping
    increase trust in different brands, especially small farmers
    and ranchers here throughout the U.S. It is helping with
    sustainability goals, food freshness, food safety. It helps
    prevent fraud as well as food waste.
        Senator Thune. Thank you, and thank you, Mr. Chairman.
    Thank you all for being here. I appreciate your insight.
        Senator Boozman. Senator Braun.
        Senator Braun. Thank you, Mr. Chairman. As an entrepreneur
    and business owner, probably most fresh off the street here in
    the Senate, this is an interesting area to me. I also came from
    the world of economics so long ago.
        We talk about a lot of that stuff, including our budget
    that is now the worst it has ever been in the history of our
    country, $1.5 trillion a year, gives a lot of fuel for non-
    sovereign currencies. Some of the stuff that anybody would be
    worried about, where we have been the reserve currency for so
    long, due to some of the predictability when we used to balance
    our budgets, when we used to not have inflation. I will not get
    into that. It would take up too much time.
        I have got a question about the new technology--I will
    start with Ms. Boring--when it comes to Elon Musk, who loves
    the idea of all of this but quit accepting cryptocurrency due
    to the environmental impact. Is there something down the road
    that would, through economy of scale make the energy use less,
    you know, for all the benefits that it looks like it may give
    us someday, because that is going to be an increasingly
    significant issue. What is your take on that, and do you
    believe Elon Musk had something there, in citing how energy
    intensive and expensive it is to establish blockchain?
        Ms. Boring. Yes, thank you for that question. It has been
    interesting to see Elon Musk's stance of digital assets. While
    they decided to stop accepting certain digital assets, they
    still own it and it is still sits on Tesla's balance sheet.
    Think actions speak as a part of the approach as well.
        Specific to energy concerns, we have seen a number of
    groups and people and Members of Congress express concerns
    about the energy uses of certain digital assets, specifically
    those that use Proof of Work. The point that I made earlier is
    what is important about what we are seeing in the Bitcoin
    mining industry and other Proof of Work blockchains is that
    this industry is leading the transition to renewables.
        We represent companies that are publicly traded and listed
    here in the United States that are partnered with renewable
    plants like solar and wind, throughout the U.S. These
    partnerships between the renewable industry and the Bitcoin
    mining industry is bringing new investments and innovation into
    renewables, and that needs to be an incredibly important part
    of the conversation as we look at policy responses to those
    concerns.
        Senator Braun. I think when you look at what a small
    percentage it is currently of transactions, and with the
    increasing emphasis on maybe the cleanest, least expensive
    fuel, I think down the road, hopefully, both of those converge
    in the right direction. I think there is going to be plenty of
    demand for something in addition to sovereign currencies that
    look a little shaky and risky for, you know, what the
    dependability was there in the past.
        I have got a question for Mr. Werbach. When it comes to
    this emerging technology, kind of analogous to the internet. We
    did not know where that was going to go, and look where it has
    come. Now its biggest susceptibility is from cyber thieves. I
    think many would wonder about using blockchain and
    cryptocurrencies, you know, when it is in that realm of can it
    be hacked. Is it something that can give you peace of mind and
    security for all the reasons I have mentioned already?
        How do you draw a comparison between this and the internet
    in terms of concerns, fledgling industry, and then what about
    its long-term safety and security when it based upon a
    technology that many of us do not know much about?
        Mr. Werbach. Senator, that is a very important question,
    and we forget that back in the 1990's, people said, ``How would
    you buy something on the internet? You mean you are going to
    type in your credit card number to a computer and it is going
    to go off somewhere in the ether, and you are going to believe
    that someone is not going to steal your credit card?''
    Americans were worried about e-commerce for exactly that
    reason, and to some extent for good reason.
        What happened? Part of what happened was technology
    evolved. There were various technical mechanisms to ensure that
    your credit card was protected. Part of it is regulation, that
    there is oversight of the credit card industry, so if, in fact,
    your credit card is stolen, your entire balance is not at risk.
    It is capped by the issuers. Part of it had to do with
    regulation and oversight of these industries as a consumer
    protection matter.
        Ultimately people got confident. I focus on the idea of
    trust. That is the title of my book, and that is the
    similarity. People learned to trust the internet as they had
    good experiences with it, and the same thing is possible here.
        The ironic thing is that the blockchain technology itself
    is incredibly secure. It is cryptographically secure. Bitcoin
    is a trillion dollars at its peak in assets, and no one has
    successfully been able to hack that ledger because it is so
    secure, based on the underlying cryptographic structures.
        The problem, though, is that you are holding keys at the
    edge of the network, you have to secure your own keys. You
    cannot rely on the bank or the intermediary providing all that
    security, and that is what has opened up the opportunity for
    all these hacks.
        Again, we need to move forward with industry working and
    identifying technologies and best practices as well as having
    oversight and regulatory mechanisms to ensure that there are
    basic standards.
        Senator Braun. Thank you. Interesting new horizons, I would
    say.
        Senator Boozman. Senator Tuberville.
        Senator Tuberville. Thank you, Senator Boozman. Thanks for
    being here today. I think you will all agree that it is
    critical for the United States to be the undisputed leader in
    the digital asset game. Up to this point we have led the world
    in financial innovation. Under the previous administration,
    regulators understood the importance of encouraging innovation
    and took a light-touch regulatory approach to the digital
    assets industry.
        We have seen a dramatic shift over the course of the past
    year, and I am concerned about the regulation of enforcement
    mentality that is starting to take hold. If this keeps up,
    innovators are going to leave the U.S. and move overseas to
    places like the UK and Singapore. We cannot let that happen,
    and we certainly cannot allow China to get ahead of us in the
    financial innovation.
        Sam, you built a great company and had tremendous success.
    I am a free market guy who happens to think that is a good
    thing. What do regulators and those of us serving in Congress
    need to do to keep companies like yours operating in the United
    States, and how can we encourage more innovation here?
        Mr. Bankman-Fried. Thank you, Senator, for the question and
    for the kind words. I completely agree that it is imperative
    that we allow the current industry to stay here, and hopefully
    much of the current offshore industry to move back into the
    United States as well. Again, we are in a situation where 95
    percent of volume is offshore today, and it would be great to
    see a lot of that move back into the United States.
        The biggest things that we need are regulatory clarity, and
    again, it not so much a matter of are regulations stringent or
    lax. It is much more a question of are they clear, and is there
    a regulatory pathway forward for registration and licensing?
        To maybe name a few specific areas there, getting clarity
    on the cash cryptocurrency markets, the spot markets, would be
    really great for the industry. Much of the institutional
    capital is sitting on the sidelines waiting for that. I think
    the CFTC would be an appropriate regulator for spot digital
    commodity transactions.
        I think a second thing, and this is one of the bigger
    things, is on the token registration. A lot of activities
    taking place outside of the United States right now is because
    there is not a clear registration process for tokens in the
    United States. I think it is appropriate to have a registration
    process, to have anti-fraud controls and other similar things
    that we see in other marketplaces. You know, you cannot just
    exactly copy-paste the registration process for a security or
    something like that to a digital asset because there are some
    differences, even if many of the same principles do still
    apply.
        I think a similar principles-based system but one which
    acknowledges the unique aspects of digital assets and can
    provide that same clarity but allow them to actually register
    in the United States and be offered on U.S. platforms would be
    really important for bringing a lot of the industry back
    onshore, because again, most tokens are not accessible at all
    in the United States because there is no clear registration
    pathway today.
        I think that those are two of the biggest things to
    address, and I think addressing those two, plus a regulatory
    framework for stablecoins, which I think is going to be coming
    to a head soon, and I think having some sort of auditing
    framework for it as well would do an enormous amount to provide
    clarity, so that people could get licensed in the United
    States, could get registered here, and could conduct their
    business activity here rather than going to jurisdictions
    outside of here who had developed frameworks for it.
        Senator Tuberville. Thank you. Of the thousands of digital
    assets out there, what percentage would each of you say are
    commodities versus securities, and I would like for everybody
    to just give an estimate. Ms. Ro?
        Ms. Ro. There are so many that are out there, I think the
    digital asset definition basically means any asset that is
    digitized. If we take a subset of the different
    classifications, you have to put aside all of the CBDCs,
    central bank digital currencies--that is another category--you
    have got your tokenized physical things, as I like to call
    them. When you tokenize or digitize real eState or gold or
    actual physical things, that is its own subcategory, and they
    have their own kind of demarcations, depending on what physical
    thing they are.
        Some of the rest could actually probably fall under the
    commodities bucket, and that is where it gets complicated.
        I cannot give you an exact percentage, but I would start
    classifying things into sub-buckets, and then we will be able
    to parse out how much of that is actually commodities.
        Senator Tuberville. Sam?
        Mr. Bankman-Fried. If you weight by volume or market cap I
    think the vast majority of activity is in commodities. If you
    instead weight by number of tokens, I think that some of them
    are clearly commodities. I think some of them are unclear and
    have some properties of a number of different asset classes and
    do not fit into any bucket. I think it is sort of a split by
    those, if you look at number of tokens rather than market cap
    or volume.
        Senator Tuberville. Ms. Boring?
        Ms. Boring. I agree with Mr. Bankman-Fried. If you go by
    market cap, the vast majority are commodities. Bitcoin and
    Ether today compose over 60 percent of the market
    capitalization of the entire digital asset ecosystem, and they
    have been defined as a commodity by the CFTC today.
        There are other categories. We kind of talked about
    categories of digital assets. Another one is intentional
    digital asset securities. That is another area that is a
    nascent and emerging piece of the ecosystem but has yet to
    really fully be realized because of the lack of regulatory
    clarity by the policymakers.
        Mr. Werbach. Digital assets do not have a fundamental
    attribute. The question is how they are used. It is true--the
    vast majority of digital assets are used in investment schemes,
    are used as a form of fundraising, which is the attributes
    under the Howey Test of a security. There are situations that
    are in the middle. Ether, the SEC has suggested is a commodity
    today but may well have been a security when it was originally
    issued back in 2014-2015. Bitcoin, because there is no entity
    that is issuing Bitcoin that is raising money, it makes sense
    to think about it as a commodity. You are not contributing to
    some investment scheme through the efforts of others. It is a
    decentralized network.
        I would agree with what the other speakers have said about
    if you just look at the market today, but the important
    question is really what is going on. What is the nature of the
    activity that is involved? That is going to change and develop.
    The same asset may, in different circumstances, be in more than
    one category.
        Senator Tuberville. Thank you. Thank you for such a complex
    issue that we are all heading toward, and your expertise, and
    thanks for coming here today. Senator Boozman.
        Senator Boozman. Thank you very much, and again, a special
    thanks to all of our witnesses and our Committee members and
    staff for really a very informative hearing that I think has
    helped us as we go forward.
        On behalf of Senator Stabenow and myself, as you can see
    there is no shortage of questions on this issue. We appreciate
    your testimony, which will help us get a better grasp on the
    potential and the risk of digital assets. As of now, there is a
    gap in the oversight of digital assets. This poses a danger to
    the American consumers and could threaten the resiliency of our
    financial markets if left unchecked.
        I want to reiterate that regulation and innovation are not
    mutually exclusive, and that is what we are all working to
    achieve. We have an opportunity here to broaden participation
    in our financial markets, but this must be paired with
    consistent rules of the road that protect investors and their
    markets.
        You have given us a lot to consider, and we look forward to
    further discussions in this Committee, and with that, that
    concludes our hearing today. The record will remain open until
    tomorrow at 5 p.m. for members to submit additional questions
    or statements.
        With that the hearing is adjourned.

        [Whereupon, at 12:26 p.m., the Committee was adjourned.]

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

                                A P P E N D I X

                                February 9, 2022

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

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

                       DOCUMENTS SUBMITTED FOR THE RECORD

                                February 9, 2022

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

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

                             QUESTIONS AND ANSWERS

                                February 9, 2022

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

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                     [all]