[Senate Hearing 117-600]
[From the U.S. Government Publishing Office]
S. Hrg. 117-600
EXAMINING DIGITAL ASSETS:
RISKS, REGULATION, AND INNOVATION
=======================================================================
HEARING
before the
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
February 9, 2022
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available on http://www.govinfo.gov/
_________
U.S. GOVERNMENT PUBLISHING OFFICE
50-068 PDF WASHINGTON : 2023
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
DEBBIE STABENOW, Michigan, Chairwoman
PATRICK J. LEAHY, Vermont JOHN BOOZMAN, Arkansas
SHERROD BROWN, Ohio MITCH McCONNELL, Kentucky
AMY KLOBUCHAR, Minnesota JOHN HOEVEN, North Dakota
MICHAEL F. BENNET, Colorado JONI ERNST, Iowa
KIRSTEN E. GILLIBRAND, New York CINDY HYDE-SMITH, Mississippi
TINA SMITH, Minnesota ROGER MARSHALL, Kansas
RICHARD J. DURBIN, Illinois TOMMY TUBERVILLE, Alabama
CORY BOOKER, New Jersey CHARLES GRASSLEY, Iowa
BEN RAY LUJAN, New Mexico JOHN THUNE, South Dakota
RAPHAEL WARNOCK, Georgia DEB FISCHER, Nebraska
MIKE BRAUN, Indiana
Joseph A. Shultz, Majority Staff Director
Mary Beth Schultz, Majority Chief Counsel
Jessica L. Williams, Chief Clerk
Fitzhugh Elder IV, Minority Staff Director
Fred J. Clark, Minority Chief Counsel
C O N T E N T S
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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
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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
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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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A P P E N D I X
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QUESTIONS AND ANSWERS
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