[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





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           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.]

      
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