[Senate Hearing 117-578]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 117-578


               CRYPTOCURRENCIES: WHAT ARE THEY GOOD FOR?

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                                   ON

       EXAMINING THE PROBLEMS AND POSSIBILITIES OF CRYPTOCURRENCY

                               __________

                             JULY 27, 2021

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs




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                Available at: https: //www.govinfo.gov /






                                 ______
                                 

                 U.S. GOVERNMENT PUBLISHING OFFICE

50-802 PDF                WASHINGTON : 2023










            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
JON TESTER, Montana                  MIKE CRAPO, Idaho
MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia                  JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                     STEVE DAINES, Montana

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                         Tanya Otsuka, Counsel

                Corey Frayer, Professional Staff Member

                 Dan Sullivan, Republican Chief Counsel

                    Landon Zinda, Republican Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                                  (ii)







                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 27, 2021

                                                                   Page

Opening statement of Chairman Brown..............................     1
        Prepared statement.......................................    31

Opening statements, comments, or prepared statements of:
    Senator Toomey...............................................     3
        Prepared statement.......................................    32

                               WITNESSES

Angela Walch, Professor of Law, St. Mary's University School of 
  Law, Research Associate, UCL Centre for Blockchain Technologies     5
    Prepared statement...........................................    33
    Responses to written questions of:
        Senator Cortez Masto.....................................    49
        Senator Sinema...........................................    52
Jerry Brito, Executive Director, Coin Center.....................     6
    Prepared statement...........................................    40
    Responses to written questions of:
        Senator Cortez Masto.....................................    55
        Senator Sinema...........................................    56
Marta Belcher, Chair, Filecoin Foundation........................     8
    Prepared statement...........................................    47
    Responses to written questions of:
        Senator Cortez Masto.....................................    59
        Senator Sinema...........................................    59

              Additional Material Supplied for the Record

Statement of Public Citizen......................................    62

                                 (iii)







 
               CRYPTOCURRENCIES: WHAT ARE THEY GOOD FOR?

                              ----------                              


                         TUESDAY, JULY 27, 2021

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 o'clock a.m., via Webex and in room 
538, Dirksen Senate Office Building, Hon. Sherrod Brown, 
Chairman of the Committee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Senate Committee on Banking, Housing, 
and Urban Affairs will come to order.
    First, I would like to take a moment to acknowledge the 
passing of our friend and former colleague, Senator Mike Enzi. 
Some of us served with him on this Committee, which he joined 
in 1997. We remember his kindness, his personal birthday notes 
that we all looked forward to. He spoke at our Ohio College 
Presidents Conference each year--we always try to bring in 
leaders of both parties--sharing his insights about higher 
education with higher education leaders in my State. He talked 
often of bipartisanship, and he meant it.
    On a personal note, I think of our long discussions about 
Boy Scouts. We were both Eagle Scouts, and we often talked 
about his life's work, really, in many ways, to strengthen the 
scouting movement. Our thoughts are with his wife Diana, his 
children Amy, Emily, and Brad, and with the people of Wyoming. 
A true public servant.
    Since Bitcoin came online in 2009, thousands of these so-
called ``digital assets''--virtual currencies, 
cryptocurrencies, stablecoins, investment tokens--have poured 
into the markets. All of these currencies have one thing in 
common: they are not real dollars. They are not backed by the 
full faith and credit of the United States. And that means they 
all put Americans' hard-earned money at risk. From tech giants 
like Facebook's Libra--or Diem, or however their PR consultants 
attempt to rebrand it next--to fly-by-night operations, we have 
seen far more empty promises than we have seen viable 
cryptocurrencies.
    A cottage industry of decentralized financial schemes has 
also cropped up alongside these alternative financial products, 
in the hopes of creating a parallel financial system with no 
rules, no oversight, and no limits. They claim to enable 
``transparency.'' Their backers talk about the 
``democratization of banking.'' There is nothing ``democratic'' 
or ``transparent'' about a shady, diffuse network of online 
funny money.
    After a decade of experience with these technologies, it 
seems safe to say that the vast majority have not been good for 
anyone but their creators. This technology is almost never used 
to buy goods and services, which is what any currency is 
supposed to be used for, after all. Some cryptocurrency 
supporters see these technologies as a way to take power back 
from the Wall Street bankers, whose too-often complicated and 
opaque financial scheming crashed the economy.
    When the only other option appears to be Wall Street, maybe 
it is hard to blame anyone for putting their faith in 
cryptocurrency. I hear the same message--we all do--over and 
over from people in our States that they do not trust banks, 
and they especially do not trust the biggest banks. They have 
been burned over and over again by fees, by minimum balances, 
by waiting periods, by segregated ``second chance'' accounts. 
And of course, they all remember the crash, the bailouts, the 
lack of accountability. But as these technologies have 
developed, most of them seem to mirror, rather than to 
challenge, the Wall Street model.
    In fact, traditional financial institutions are angling to 
become the biggest players in these markets, and it is a good 
bet they will find even more creative ways to use these new 
technologies to dodge accountability and put our entire economy 
at risk again.
    We should all be concerned. Thankfully, President Biden has 
begun to replace Trump-era financial appointees with real 
financial watchdogs, who take seriously the job of protecting 
people's hard-earned money. But the financial recovery remains 
fragile, as coronavirus variants emerge, and there are still 
regulators to appoint. Yes, some of these underlying 
technologies may have useful applications, beyond evasion of 
banking and securities laws. These are generally applications 
outside of finance. One of those technologies we will hear 
about today, Filecoin, uses economic incentives to provide 
digital storage space.
    But if we want a solution to Americans' legitimate fears 
and concerns and anger about our financial system, shady 
startups are not the answer. We need more community banks that 
are actually in people's neighborhoods and that understand 
their lives. We need No-Fee Accounts, backed by the full faith 
and credit of the United States through the Federal Reserve, 
that allow everyone to open a bank account and make online 
purchases. And we need to show people there will be 
accountability, not just a default to the same Wall Street 
system where bankers get all the profits and working families 
get all the risk.
    We need to make sure the American economy remains the 
safest and most dependable in the world. The last thing we 
should be doing is giving another industry a chance at wrecking 
that reputation, a reputation our entire economy depends on.
    The best thing we can do to protect Americans' money is to 
adopt smart regulations that protect consumers, that protect 
investors, that separate the innovators from the extortionists. 
I look forward to learning more from our witnesses today.
    Ranking Member Toomey.

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Mr. Chairman. One sentiment that 
I certainly share with you were your kind remarks about our 
former colleague, Mike Enzi. I do not know if I have met a more 
good, decent, honorable man than Mike Enzi. We are going to 
miss him, and our hearts go out to his lovely wife, Diana.
    Today's hearing provides us an opportunity to learn about 
the current and potential uses of cryptocurrencies. In short, a 
cryptocurrency connects one person with another through open, 
public networks, separate from Government control or any other 
intermediaries. And cryptocurrencies are a growing part of our 
economy. The first cryptocurrency, Bitcoin, was implemented in 
2009. And while there are varying definitions of what is 
considered a cryptocurrency, there are now thousands of them 
available in many different forms.
    According to a recent University of Chicago survey, 13 
percent of Americans bought or traded cryptocurrency in the 
past 12 months. That is more than half of the total percentage 
of Americans who invested in stocks during that same period of 
time.
    Like other currencies, cryptocurrencies may be useful as a 
store of value or a medium of exchange. However, it is 
important to acknowledge up front that a significant impediment 
to cryptocurrencies, or at least most cryptocurrencies, 
becoming a widely used store of value or medium of exchange is 
their price volatility. That problem could potentially be 
solved by tying a cryptocurrency to other assets, such as a 
fiat currency like the U.S. dollar, for instance. And that is 
what are meant to do.
    On the other hand, some cryptocurrencies may prove to be 
useful as a store of value by serving as alternatives to fiat 
currencies, like the dollar. They may serve as a store of value 
because, unlike fiat currencies, the Government cannot come 
along and print trillions of a cryptocurrency. In this way, 
cryptocurrencies might complement the role that gold has 
historically played as a store of value and hedge against 
inflation. For example, we have seen recently in Venezuela how 
people can use Bitcoin to store value when a Government 
devalues its currency.
    Also, some cryptocurrencies may prove to be useful as a 
medium of exchange for buying goods and services. With 
cryptocurrencies, making payments and conducting transactions 
may become cheaper, easier, and faster for consumers than it is 
using traditional currencies. Cryptocurrencies can be exchanged 
without the need for an intermediary, such as a bank, which 
could virtually reduce transaction costs and fees for consumers 
to zero. In addition, since a person does not need a bank 
account to use cryptocurrencies, they could increase access to 
financial services for many Americans.
    Beyond these often-discussed uses for cryptocurrencies, 
there are other ways that the distributed ledger technology 
that underlies crypto can be used. A distributed ledger is a 
data base that shares information across various sites and 
geographies that is accessible by multiple people. This 
structure ensures that all of these people can access and 
verify the data, and it dramatically reduces the risk of any 
one central actor manipulating the data. In my view, the use of 
distributed ledger technology to have nonintermediated 
transactions verified in a foolproof way is a very powerful 
technological innovation, and this innovation already is having 
an impact on supply chains, financial services, and securing 
digital identities.
    And it has significant potential for verifying the 
ownership of property, whether it might be automobiles, homes, 
or securities. In the United States, we spend a lot of time and 
money to verify property ownership. Distributed ledger 
technology may provide a way to do this faster and at a lower 
cost.
    Over time, it is possible that the application of this 
innovation may become more important than the usefulness of 
crypto as a currency per se, and we are already seeing it have 
a real world impact. As we know, democracy and individual 
freedom in Hong Kong are under assault from the Chinese 
Communist Party. That assault has included the forced closure 
of a prodemocracy newspaper, Apple Daily. But the Chinese 
Government has not been able to erase Apple Daily's important 
work. That is because R-weave, a cryptocurrency network that 
enables permanent data storage, was used to permanently store 
portions of the paper. This technology makes it impossible for 
the Chinese Government to destroy Apple Daily's work, no matter 
how hard it tries. That is just one example.
    Today we will hear from two expert witnesses about other 
current and potential uses of cryptocurrencies. Mr. Jerry Brito 
is Executive Director of Coin Center, a think tank focused on 
cryptocurrencies and related topics. He will discuss an array 
of uses for cryptocurrencies and how these technologies could 
be further developed. Ms. Marta Belcher is Chair of the 
Filecoin Foundation. She helped to develop and launch a 
cryptocurrency, Filecoin, that provides data storage access on 
a decentralized file storage network.
    Now it is important to note that many people have raised 
legitimate issues about cryptocurrencies. These include their 
use in illicit activity and their possible effects on monetary 
policy and on our existing financial infrastructure. I think we 
need to discuss and understand these issues, and address them 
if we need to. But we should not lose sight of the tremendous 
potential benefits that distributed ledger technology offers. 
We should also be mindful that private innovation has enabled 
most of these developments. We should not suppress the concepts 
of individual entrepreneurship and empowerment that have made 
this innovation possible.
    I look forward to hearing from our witnesses today about 
the ways cryptocurrencies are impacting and can potentially 
impact our lives, and I hope we will listen with open minds.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    Our witnesses today are Professor Angela Walch, Professor 
of Law, St. Mary's University School of Law, Research Associate 
at the University College London Centre for Blockchain 
Technologies. Welcome, Professor Walch.
    Mr. Jerry Brito, Executive Director of Coin Center, a 
nonprofit research and advocacy organization focused on policy 
relating to cryptocurrencies and other distributed computing 
technologies. Welcome, Mr. Brito.
    And Ms. Marta Belcher, Chair of the Filecoin Foundation. 
She is also the General Counsel and Head of Policy at Protocol 
Labs, and she is counsel to the Electronic Frontier Foundation. 
Welcome, Ms. Belcher.
    Professor Walch, you are recognized for 5 minutes.
    Thank you for joining us.

    STATEMENT OF ANGELA WALCH, PROFESSOR OF LAW, ST. MARY'S 
 UNIVERSITY SCHOOL OF LAW, RESEARCH ASSOCIATE, UCL CENTRE FOR 
                    BLOCKCHAIN TECHNOLOGIES

    Ms. Walch. Thank you. Chair Brown, Ranking Member Toomey, 
and Members of the Committee, good morning and thank you for 
inviting me to testify here today. My name is Angela Walch. I 
am a professor of law at St. Mary's University School of Law in 
San Antonio, Texas, and a research associate at the Centre for 
Blockchain Technologies at University College London.
    I have been researching cryptocurrencies since 2013, and 
have published numerous papers on the topic. My research is 
focused on the governance of cryptosystems, the problematic use 
of language in the cryptospace, and the ways that 
misunderstandings about these systems can contribute to 
systemic risk.
    I have a few key messages for the Committee today. First, 
over the past several years, we have witnessed the creation of 
an alternative cryptofinancial system, with the growth of this 
financial system dramatically increasing over just the past 
year or two. Cryptocurrencies hit a market cap of over $2 
trillion in April, and there has been rapid integration of 
digital assets into the traditional financial system through 
investments by large, publicly traded companies and venture 
capital firms, the creation of cryptobased financial products, 
and the building of infrastructure to enable both retail and 
institutional investors to participate more seamlessly in the 
cryptoecosystem. Each of these actions creates links between 
the cryptofinancial system and the traditional financial 
system.
    Second, as the cryptofinancial system grows and more links 
are created between it and the traditional financial system, 
there is potential for crises in the cryptofinancial system to 
cross over to the traditional financial system, causing a 
systemic crisis. This could result in widespread harm to the 
public, both in the U.S. and globally, including to people who 
have not chosen to invest or otherwise participate in the 
cryptofinancial system.
    As a single example, imagine a critical software bug in a 
cryptocurrency like Ether, causing the Ethereum network to 
split in two, creating uncertainty and panic amongst Ether 
holders and the entire decentralized financial system that runs 
on the Ethereum network, known as DeFi. With enough links 
between the cryptofinancial system and the traditional 
financial system, such a crisis could ripple through those 
links to the traditional financial system, spreading the 
effects of this single software bug widely.
    Third, many of the decisions that we are making about the 
cryptofinancial system appear to be based on idealized views of 
crypto rather than realistic views. Another way to say this is 
that people and institutions may be investing in crypto's, 
promise and policymakers and regulators may be making decisions 
about how to treat the cryptofinancial system, based on myths 
about crypto.
    Let me give you a few examples. You have probably heard 
that cryptosystems like Bitcoin and Ethereum are 
transformational and positive for freedom because they are 
decentralized and have no intermediaries, and therefore no 
intermediary risk; that they enable people to send value 
directly over the internet, just like you might pay someone in 
cash; that they create immutable records that cannot be 
changed; that certain ones, like Bitcoin, have fixed caps on 
the number of units that can ever be created; that they are 
secure and tamper-proof, open and transparent, so no bad 
behavior can be hidden; that they are protected and regulated 
internally by the incentives built into the systems; that 
concentrations of power that could be exploited do not exist or 
are sufficiently checked by the design of the system.
    If all of this were indisputably true, then yes, this does 
sound amazing and like something everyone should be 
participating in. But every single one of these 
``characteristics'' of cryptocurrencies and digital assets that 
I have recited is only sort of true, as each requires an 
asterisk to indicate the many limitations on its accuracy. If 
you analyze these systems carefully, you realize that what are 
claimed to be characteristics of these systems are largely 
aspirations of these systems. Treating aspirations as reality 
means that every single decision based on the aspirations is 
flawed and embeds risk. If we believe that cryptosystems have 
no intermediaries, for example, and make investment and 
regulatory decisions based on this fact, then the 
intermediaries that do exist can exploit their positions with 
impunity, as we are seeing with miners on the Ethereum network 
today.
    No one thinks the existing financial system is perfect. It 
is riddled with problems, corruption, concentration of power, 
exploitation, excessive risk-taking, and other human problems 
that Congress has long sought to contain and remedy through 
regulation. But crypto, understood through a realistic lens, is 
not a miracle, ``get out of the financial system free'' card. 
It has the same problems. We need to acknowledge the power 
concentrations within it and make thoughtful policy and risk 
decisions about how to address that power.
    Thank you again for inviting me, and I look forward to your 
questions.
    Chairman Brown. Thank you, Professor Walch. Mr. Brito, you 
are recognized for 5 minutes. Thank you for joining us.

   STATEMENT OF JERRY BRITO, EXECUTIVE DIRECTOR, COIN CENTER

    Mr. Brito. Thank you, Chairman Brown, Ranking Member 
Toomey, and Members of the Committee. Thank you for the 
opportunity to testify today.
    The title of this hearing is ``Cryptocurrencies: What Are 
They Good For?'' After a decade since Bitcoin's invention, what 
do we have to show for it? What justifies all the hype and 
investment? Is there today any tangible use case that is 
meaningfully improving people's lives?
    Those questions bring to mind the early days of another 
open, permissionless network, the internet. There was real 
skepticism that despite all the hype over the information 
superhighway we still have very little to show for it, leading 
Paul Krugman to famously predict, in 1998, that, quote, ``The 
growth of the internet will slow drastically because most 
people have nothing to say to each other. By 2005 or so, it 
will become clear that the internet's impact on the economy has 
been no greater than the fax machines,'' end quote.
    The fact that in 1998, there was no Wikipedia or Netflix or 
Zoom could lead one to believe that there never would be and 
that the internet would continue to only be the domain of its 
earliest adopters--computer enthusiasts, spammers, gamblers, 
and pornographers. What skeptics missed is that an open and 
permissionless platform, to which anyone could connect and on 
which anyone could build, would allow an explosion of 
entrepreneurial innovation that would give us applications we 
could not imagine or predict. Cryptocurrency networks like 
Bitcoin are open and permissionless networks just the same. And 
while we may not yet have the Wikipedia or Netflix of 
cryptocurrency, that does not mean that we never will. And 
indeed, there are thousands of entrepreneurs around the world 
developing new applications of cryptocurrency networks, some of 
which I have no doubt will change the world, even if I cannot 
now predict what they are.
    But even if we cannot predict the future, what are some 
concrete applications that we can see today? First, there is 
the base application of Bitcoin, permissionless, person-to-
person payments. In the U.S., we take for granted that we can 
send each other funds effortlessly with our smartphones, but 
this is not the case everywhere in the world, especially where 
authoritarian Governments block payments to and from 
dissidents. Just last year, prodemocracy labor activists in 
Belarus and antipolice violence protesters in Nigeria 
successfully turned to the Bitcoin network to accept donations 
because local banks would not bank them.
    Beyond payments and money, I would point to novel 
applications of cryptocurrency's tamper-resistant ledgers. 
Chinese social media is heavily censored. This has led Chinese 
activists to post messages to the Ethereum blockchain where 
they cannot be taken down. There are many applications of 
cryptocurrency networks being developed for free speech that 
cannot be censored by authoritarian Governments.
    Perhaps more relevant to average Americans are the 
potential applications of cryptocurrency and its tamper-
resistance to enable identity solutions for cybersecurity. The 
root cause of many data breaches, such as those of Experian, 
Equifax, or OPM, is the fact that if an attacker can compromise 
the password of one individual, he may gain access to the 
personal information of millions of others. Microsoft is a 
company that is painfully aware of this vulnerability, as it 
provides the identity infrastructure for over 90 percent of the 
Fortune 500 companies.
    This is why Microsoft spent years helping develop a 
decentralized identity standard built on top of Bitcoin. It is 
called the ION network. It was launched in March. It is live 
and operational, and is now a candidate web standard. By 
replacing usernames and passwords with decentralized 
identifiers, the ION network will allow individuals to control 
their own identities rather than trust data brokers that can be 
compromised at root. This means that an attacker would no 
longer be able to compromise just one credential in order to 
gain access to everyone else's, but would, instead, have to 
hack each individual, a massive improvement to cybersecurity.
    Other benefits of decentralized identifiers include the 
ability to verify credentials, helping, for example, to combat 
disinformation. With ION, it will be trivially easy to verify 
that a photo that you are looking at was signed as authentic by 
his photographer, who, in turn, is credentialed by the 
Associated Press. Additionally, because you own your own 
identity and network of relationships to other identities, we 
will be able to see the emergence of an open, portable social 
graph that will allow for competition with incumbent social 
media networks.
    All of this requires Bitcoin to work. Like the early 
internet, there are real, live use cases of cryptocurrency 
networks today, but we can only see glimpses of the truly 
world-changing applications to come. The Clinton administration 
successfully pursued a deliberate policy of avoiding undue 
restrictions of the internet. To reap the benefits of 
cryptocurrency networks I hope we have the wisdom to do the 
same today. Thank you.
    Chairman Brown. Thank you, Mr. Brito. Ms. Belcher, thank 
you for joining us here. You are recognized for 5 minutes.

     STATEMENT OF MARTA BELCHER, CHAIR, FILECOIN FOUNDATION

    Ms. Belcher. Thank you, Chairman Brown, Ranking Member 
Toomey, and Committee Members for inviting to testify today. I 
am Marta Belcher. I serve as the Chair of the Filecoin 
Foundation, one of many companies working on a cryptocurrency 
called Filecoin.
    The question posed by the hearing today is, ``What Are 
Cryptocurrencies Good For?'' Our answer to that question is 
that cryptocurrency can be the foundation for a better 
internet, an alternative to big tech that puts people in 
control of their own data, protects user privacy and security, 
and permanently preserves humanity's most important 
information. Today, I would like to explain how.
    Cryptocurrency makes it possible to send monetary value 
across the globe instantly and securely, just as easily as you 
can send information over the internet by attaching a file to 
an email. That is to say, cryptocurrency does for monetary 
value what the internet did for information.
    For me, the most important thing about cryptocurrency is 
that it creates the ability to program money. In other words, 
you can write computer code that automatically transfers value 
upon a condition being met. For example, you could write a 
computer program that says, for every second of a song that I 
play, automatically transfer the equivalent of a millionth of a 
cent from me to the songwriter. This can happen instantly and 
automatically, with no intermediary between us, even across 
borders. This kind of transaction would be untenable using 
traditional payment systems.
    The cryptocurrency technology I work on, Filecoin, uses 
that same programmable money concept to create a decentralized 
file storage network. If you have extra storage space on your 
computer hardware, you can ``rent it out'' to others who will 
pay you to store their files (or pieces of their files, so that 
only the file owner can put the pieces back together. A 
computer program will regularly check that the files are still 
being stored on your computer and, if so, will automatically 
compensate you with cryptocurrency. It is like Airbnb for file 
storage: storage providers rent out their extra storage space 
to earn Filecoin, and users spend Filecoin to store their files 
on other people's computers.
    That may sound like a niche use case, but we believe this 
could be a foundational technology for the next generation of 
the internet. Today's internet is centralized. The vast 
majority of data making up the many websites Americans use 
every day sits in data warehouses owned by just three 
companies: Amazon Web Services, Microsoft, and Google Cloud. We 
have repeatedly seen these companies suffer blackouts, and vast 
swaths of the Web go down for hours, including websites that 
are massive contributors to the American economy. That is the 
problem with having single points of failure.
    We believe you can create a better version of the Web if 
you combine the storage capacity and computing power on all of 
our individual devices into a supercomputer-like network, and 
store multiple copies of data across those devices. On this 
decentralized version of the internet, websites will stay up 
even if some nodes fail, and the availability of information is 
not dependent on any one server or company. This provides a 
more robust platform for humanity's most important information.
    Filecoin provides the incentive for people to contribute 
storage to that decentralized internet. And these incentives 
work. Since launching last October, nearly 3,000 Filecoin 
storage providers have contributed nearly 8 exabytes of storage 
capacity. To put that in perspective, that could store all of 
the written works of mankind in all languages from the 
beginning of recorded history to today, 10 times over. And that 
storage space is being used to preserve humanity's most 
important information. As just one example, the Starling Lab, a 
project of Stanford and USC, uses the Filecoin network to 
permanently preserve the USC Shoah Foundation's archive of 
55,000 video testimoneys of genocide survivors.
    Filecoin is just one use of cryptocurrency, but it 
demonstrates how being able to program money, to instantly and 
automatically send microtransactions across the world, can 
create economic incentives that enable entirely new 
technologies.
    There are already thousands of projects building other 
cryptocurrency applications, from automatically paying music 
royalties, to compensating people when their data is used, to 
paying journalists for each view of an article, to 
incentivizing consumers to use renewable energy. Some may not 
succeed, but others may move technology forward in ways we 
cannot yet begin to imagine.
    This technology is in its early days, and this stage of 
development for cryptocurrency is often compared to the 
internet of the early 1990s. It would have been a mistake, in 
1995, to believe that we understood then what the internet was 
good for. I would urge the Committee to embrace the possibility 
that cryptocurrency's uses might be just as expansive, and to 
ensure that innovation in this space can continue to thrive.
    I look forward to your questions. Thank you.
    Chairman Brown. Thank you, Ms. Belcher.
    Professor Walch, let us start with a couple of questions. 
Proponents of cryptocurrencies like Bitcoin or Ether use the 
word ``decentralized''--we have all heard that word in the 
testimony--to make it appear that there are not companies with 
outsized power over these financial systems. They claim that 
decentralization puts users on equal footing and reduces 
inequality. We now know that Wall Street, megabanks, and hedge 
funds have a stranglehold, of course, over the financial 
system.
    Are there similar actors who could get outsized power in 
cryptomarkets?
    Ms. Walch. Absolutely, yes. I think the term 
``decentralized'' can really be misleading to us. If we stop at 
the label of ``decentralized,'' because this is just crypto and 
that is the way it is, then we miss looking into these systems 
and seeing the concentrated pockets of power within them. And 
parties who sit in those pockets of power include the core 
software developers that create these systems, maintain them, 
are responsible for continuing to help them operate if a 
critical bug is discovered, making decisions about what 
policies are implemented into the software code that comprises 
the system. We have seen this again and again when there have 
been critical bugs identified in cryptosystems, and the four or 
five software developers have to make a decision about how to 
handle it, for the multibillion-dollar system. We also see 
miners in these systems having concentrations of power.
    Chairman Brown. So explore a little bit more the term 
``decentralized.'' Have there been instances where powerful 
companies or individuals have been able to bend the rules, 
claiming decentralization, but bend the rules to benefit 
themselves?
    Ms. Walch. So we see miners in systems like Ethereum and 
Bitcoin, the ones that use the proof of work consensus 
mechanism, being able to exploit their positions. So there are 
very large mining pools, and what is significant about miners 
is that they have a power that has not been very well 
understood, and that is they get to pick the transactions that 
are in the memory pool and decide whether a transaction goes in 
there, what order it goes in on this powerful ledger, and they 
are able to accept bribes--you can call them bribes, or you can 
just call them payments--to exploit that ordering power, taking 
money for themselves, potentially. It is called miner-
extractable value. And I hope that we will be able to discuss 
it further, because it is seen as a potentially killer for the 
idea of cryptocurrencies.
    Chairman Brown. This sounds to me like something we see in 
this Committee on a number of different issues, sort of phony 
populist marketing brought to us by people that have immense 
power in the marketplace, one way or the other.
    Let me ask you one more question, Professor. As you said in 
your testimony, cryptoeconomic systems are beginning to mirror 
the functions of the traditional financial system. Talk about 
risk to financial stability from having a separate financial 
system operating parallel to the traditional financial system. 
You talked in your testimony about sort of migrating into the 
traditional system. Delineate those risks, if you would.
    Ms. Walch. Sure. So when we have two systems sitting beside 
each other, one cryptofinancial system and one traditional 
financial system, and one, the traditional financial system, 
being regulated while the crypto one is not, we can see, 
through these links that are being built, such as investments 
in cryptocurrencies by large players in the traditional 
financial system, like MicroStrategy, like Tesla, who are 
always in the news these days, with the significant 
institutional investments, with the cryptoinvestment products, 
hedge funds, venture capital funds, et cetera.
    Many, many links are being formed so that things that go 
wrong in the cryptosystem--a catastrophic software bug, any 
sort of failure there--can actually have an impact on every 
single holder of the cryptocurrency that is affected, all the 
holders of financial products that embed that cryptocurrency, 
all the investment funds that touch that cryptocurrency, all 
the potential other cryptocurrencies within the cryptofinancial 
system, because of the fear of contagion, and that can easily 
ripple over to the financial system.
    I am not claiming that that can happen today, but with 
every link that is built, and the larger the cryptofinancial 
system grows, that risk increases.
    Chairman Brown. Thank you. Senator Lummis is recognized for 
5 minutes, from Wyoming.
    Senator Lummis. Thank you, Mr. Chairman and Ranking Member, 
for allowing me to go ahead so I can go to the floor and pay a 
little tribute to my dear friend, Mike Enzi, that you both 
served with, and so many of you served with, who passed away 
today. And I am deeply grateful for this opportunity, so thank 
you.
    Professor Walch, you mentioned, in your written testimony, 
that there are no definitively established definitions in the 
digital asset space, and I think you hit the nail on the head 
there. If we can have a law textbook like this one on virtual 
currency we should be able to agree on common terms.
    So why is it so important that Congress and our regulators 
begin to use the same legal terms to talk about these issues?
    Ms. Walch. Sure. So I have thought a lot about this, and it 
has been an important part of my research. I think that these 
problems with terminology come from the fact that these systems 
are extremely fast moving, that there are products and 
activities created in the cryptofinancial system that kind of 
mirror the financial systems, but we do not know what to call 
them. Do you call them the same thing? How are they different? 
So there is a ton of confusion.
    And we have seen this already reflected in laws that have 
been passed in a bunch of State legislatures, about 
cryptocurrencies, cryptosystem, where misunderstandings and 
improper terminology is embedded into the definitions in the 
laws that are meant to, you know, support or enable innovation 
with cryptocurrencies.
    And I wish there was an easy solution to this problem. We 
have been talking about it for years, and the language, people 
keep adding new terms, like miner-extractable value and yield 
farming and a whole bunch of things that everyone has to learn 
anew when they come into the system. So it is a persistent 
problem and can have important impacts.
    Senator Lummis. Thank you, Professor, and I do think that 
that is a point where Congress can weigh in. So I am looking 
forward to working on that through our Financial Innovation 
Caucus, and perhaps bringing something forward, definition-
wise, for us all to consider.
    Mr.--is it Britto or Brito?
    Mr. Brito. Brito.
    Senator Lummis. Well, it is lovely to have you here. Thank 
you so much. Can you give me some specific use cases on how 
virtual currency and the distributed ledger technology that 
underpins these assets has the potential to reduce the cost of 
financial transactions for everyone, and to create a more 
efficient financial system?
    Mr. Brito. Sure. Thank you for the question. There are any 
number of use cases where some function that today is happening 
in the financial system that depends on a centralized 
intermediary, could be done potentially more efficiently if the 
two parties who rely on that intermediary can connect, you 
know, one on one.
    One example that simply comes to mind would be settlement 
and finality. So today when you want to trade securities or 
other assets you ultimately rely on a series of intermediaries 
that ultimately have one settlement intermediary, where there 
is a book that is, you know, sort of updated by that one party. 
You can imagine a system that depends on one global ledger, 
that anybody has access to, and can swap.
    You know, Senator Toomey mentioned property registries. 
There is a potential there. So today in the United States we 
have title insurance. Why do we have title insurance? Well, we 
have title insurance because the chain of title to a piece of 
property might have been corrupted somewhere along the way. 
With cryptographic distributed ledgers the potential for that 
is greatly, greatly reduced. And so, for example, you might be 
able to eliminate the need for that kind of insurance.
    Senator Lummis. Well, that is helpful and informative, 
because I would note that the St. Louis Fed has noted that the 
U.S. financial sector cost 8.2 percent of GDP in 2021, and that 
payments cost around 1 percent of GDP. Additionally, billions 
of dollars in capital is trapped every day because of 
antiquated means of payment that take days, or even weeks to 
settle. For a Fortune 500 company that regularly sends 
international wire transfers, this is costly, and it is a very 
big deal, and it is something that we also might be able to 
take advantage of by some of these new distributed ledger 
technologies.
    Mr. Brito, we hear a lot, both true and false, about how 
our existing financial system benefits some groups more than 
others. Isn't the transparency and openness of open source 
finance a huge benefit that can ensure a level play field, 
promote financial inclusion, and create trust in our financial 
system?
    Mr. Brito. So I fear overpromising when it comes to saying 
that something like the coin or cryptocurrencies like it will 
guarantee financial inclusion for everybody. I think there is a 
lot of work that needs to be done there. But what I can say is 
that because these systems are broadly transparent you can see 
where the power centers may be, and you can go and address 
them, and you can see what the transactions are, and that is a 
great improvement. And to the extent that you can have parties 
interacting with each other and doing so transparently, that 
would reduce the need for trust, as you say.
    Senator Lummis. Well, one of the points you raised also 
sort of segues into my next question, and that is about virtual 
currencies and money-laundering. There is a myth that virtual 
currency is anonymous, but are not most virtual currency 
transactions recorded on a publicly available ledger that 
cannot be easily altered? It seems to me any criminal would 
avoid creating evidence like that.
    Mr. Brito. Yes. The vast majority of transactions using 
cryptocurrency are recorded transparently on open ledger, and 
these are available to law enforcement. And indeed, talking to 
law enforcement, they tell us how useful that evidence is. So 
why do criminals continue to use these networks? Well, because 
Bitcoin and things like it are good for payments, are good for 
censorship-resistant payments, and so they abuse these 
networks.
    But you are right. They create a trail that, with the help 
of on-ramps and off-ramps that are regulated and compliant, it 
can help law enforcement find and prosecute these criminals.
    Senator Lummis. I thank the witnesses today for their very 
helpful testimony, and, Mr. Chairman, I yield back with my 
thanks.
    Chairman Brown. Thank you, Senator Lummis. Senator Reed of 
Rhode Island is recognized.
    Senator Reed. Well, thank you very much, Mr. Chairman. Let 
me begin by recognizing the passing of Mike Enzi. Mike and I 
came to the Senate in 1997, and to this Committee in 1997, and 
he was a paragon of integrity and decency that we all looked up 
to, and his passing is deeply grieved by all of us.
    With that, let me direct a question to Ms. Walch. Chairman 
Brown talked about the intermediaries as not simply a neutral 
sort of technical aspect, but they have a position which they 
could exploit in this system. And at this point we have no way 
to confirm who these people are. Is that correct?
    Ms. Walch. So I am interpreting your question to be asking 
about who the intermediaries are within the systems, right, who 
the middlemen are between one person sending a cryptotoken to 
another person, and that is the miners. The transaction does 
not end up on the blockchain unless a miner puts it on there.
    So they have not yet been recognized as intermediaries. 
People still call these systems disintermediated. And the power 
that they exercise is in choosing the transactions, ordering 
them, and they can delay people's transactions, they can take 
money to do what are called things like sandwich attacks and 
front-running and back-running, and all kinds of games.
    And there has not been very good research into the mining 
or validating community. They are coming out of the shadows 
much more. Many of them have migrated just recently from China, 
where they were highly concentrated, and China recently made it 
illegal for Bitcoin miners to operate there, so many are coming 
to the U.S., many to my home State of Texas.
    And I think these players need more scrutiny. They are 
intermediaries in important multimillion-dollar, multibillion-
dollar financial systems. They need more scrutiny.
    Senator Reed. And your question raises another question I 
have. China is taking a very close look at this whole 
operation, as indicated by their dispersion of the miners in 
China. What is their goal? Do they want to set up an alternate 
system? Do they want to be able to influence this system so 
that, at a critical moment, they can cause disruption?
    Ms. Walch. So I wish I could tell you what China's goal is.
    Senator Reed. I wish I could tell you also.
    Ms. Walch. But I think that there is speculation that China 
and other Nations feel threatened by cryptocurrencies, because 
they are alternative, nonsovereign monetary systems and 
financial systems, and are not easily controllable by 
Governments, or regulated by Governments. I mean, over the past 
10 years that has been the case.
    I think that China also is looking into, very strongly, 
issuing a central bank digital currency right now, and may feel 
that the threat from cryptocurrencies is more than they want to 
deal with, and certainly not that they want to support as much 
as they were within their own borders.
    Senator Reed. One of the other aspects, of course, and I 
think everyone has alluded to it, is one of the mainstays of 
our economic policy is macroeconomic policy, the Federal 
Reserve's control in the United States and the European Union 
system of the value of currency. And that could be compromised, 
either intentionally or unintentionally, by cryptocurrencies. 
Is that accurate?
    Ms. Walch. So, I mean, one of the original motivations of 
cryptocurrencies was creating an alternate financial system, an 
alternate monetary system, and that was due to a lack of faith, 
really, in existing monetary systems and a feeling that 
Governments were not very responsible stewards of the money 
that they issued.
    I think there is a fundamental tension between the 
existence of cryptocurrencies and sovereign currencies. We are 
seeing that play out in very strange ways right now. I think we 
are in the midst of kind of a revolution and significant change 
on what money is and who gets to make it. We are seeing that 
with events like El Salvador adopting Bitcoin as legal tender. 
We are seeing this with the race of countries to consider 
whether they should issue central bank digital currencies, I 
think in part to compete with cryptocurrencies. And I think 
that given what we have seen over the past few years, with the 
loss of faith in institutions, which is like literally across 
the board, that cryptocurrencies are seen as kind of like a 
safety valve for collapse of important systems. So there is a 
lot going on here.
    Senator Reed. Just a comment. You know, the most incisive 
comment I ever heard about new, disruptive technologies is it 
makes good things better and bad things worse, and I think that 
is where we are. And that is the role of Government, to make 
sure the good things are preserved and the bad things are 
avoided. And I think the comparison is interesting, because 
from my perspective they have displaced newspapers, responsible 
reporting on TV, et cetera. We are into a world of 
disinformation, which is complicating our lives. Just look at 
the vaccination issues. And disinformation seems to be the coin 
of the realm now, not facts.
    So I think we have to be very, very careful going forward 
and learn from our internet experience and think carefully 
about judicious ways we can provide control. Thank you.
    Chairman Brown. Thank you, Senator Reed. Senator Toomey is 
recognized for 5 minutes.
    Senator Toomey. Thank you, Mr. Chairman.
    Mr. Brito, Ms. Walch, in her testimony, suggests, I think 
it is fair to say, that it is problematic to think of some of 
the attributes that we often association with cryptocurrencies 
in absolute terms, and that they are rather relevant trends. 
She has got a list, you know, the idea that it is immutable, 
decentralized, trustless, secure, tamper-proof, 
disintermediated, and several others.
    How do you think about this question of whether these 
concepts are absolute or relative, and how much does that 
matter?
    Mr. Brito. Sure. Thank you for the question. So I think, in 
any complicated system, you really cannot think in terms of 
absolute. When you are having conversations, perhaps even on 
Twitter, where a lot of these conversations happen, I think 
there is a shorthand to talk, you know, in a shorthand sort of 
way, and talk in absolutes. But I think anybody serious 
discussing this is not talking in terms of absolutes.
    And indeed, you know--so that is certainly the case. I 
think it goes a little bit far to say, then, that this is 
confusing policymakers and regulators and people who need to 
pay attention to that. So if you listen to Chairman Brown's 
statement, clearly people are paying attention to the wiggle 
room here, and are addressing it.
    Senator Toomey. Just to follow up on this, Ms. Walch also 
expressed the concern about problems that could emerge, bugs 
that could be discovered. In fact, there have been bugs 
discovered in cryptocurrencies. And she posited a hypothetical 
about, you know, a problem being discovered, say, in Ethereum, 
that caused a loss of confidence that cascaded into the 
financial system.
    How concerned should we be about a problem developing in a 
cryptocurrency cascading into the conventional financial 
system?
    Mr. Brito. So I do not think it is an impossibility. It is 
possible. I will say two things about it. First is what is the 
systemic risk that exists with crypto today? And I am not an 
expert on systemic risk so I look to the experts. Recently, the 
Atlanta Fed President, Raphael Bostic, said that there is a lot 
of volatility but right now it is not at a scale and it does 
not reach into the economy in a way that has systematic 
implications for us. That has been echoed by St. Louis Fed 
President James Bullard, by the European Central Bank, et 
cetera, et cetera.
    So we are not there. Something to keep an eye on, 
absolutely, and to make sure that these links that Professor 
Walch refers to are supervised and regulated, et cetera.
    The other thing I would say briefly is a lot of what 
Professor Walch just said in her testimony just now is that you 
can have a lot of hedge funds and other investment vehicles 
invest in cryptocurrencies, and then later, if there is a bug, 
you know, could decrease in value and have systemic risk. That 
thing could be said for any commodity, right? Cryptocurrencies 
ultimately are commodities. You can imagine an investment in 
orange juice, and you can imagine a literal bug that wipes out 
the orange crop could have systematic effect.
    So it is certainly a possibility but I would not say that 
it is something that should lead us to shy away from 
cryptocurrencies, just to make sure that we have the right 
guard rails in place for hedge funds and other investment 
vehicles.
    Senator Toomey. We have had a little discussion about 
miners, and miners play an essential role in validating 
transactions and maintaining the infrastructure. Should they be 
thought of as intermediaries or as people taking a bribe in 
return for doing the validation?
    Mr. Brito. Yeah, so I do not think it is controversial to 
say that miners are technically, in some broad sense, 
intermediaries, but I do not think they are intermediaries in 
the way that this Committee thinks about it. They are not 
financial intermediaries for financial regulation.
    So for example, when I send you money using PayPal online, 
PayPal is clearly an intermediary, right. They are a financial 
intermediary that can block my transaction, not allow me to 
make a payment at all, can lose my money, they are a custodian, 
et cetera. So they are a financial intermediary, which is what 
we care about.
    But there is another intermediary in this transaction that 
I am making with you, and that is my ISP, my internet service 
provider, right. I need my ISP as an intermediary to be able to 
use PayPal to pay you. But we do not think of ISPs as 
intermediaries, and indeed, in money transmission laws in the 
various States, that basically regulate the facilitation of the 
transmission of money, explicitly exclude ISPs and other 
service providers from regulation. And indeed, the New York 
Department of Financial Services, in their BitLicense, excludes 
miners, because they do not think about them as these kinds of 
intermediaries.
    Senator Toomey. That is very helpful. One last question, 
and this is for Ms. Belcher. You discussed a fascinating, 
actual, real-world use case that is not about speculating on 
the value of the currency but rather accessing a decentralized 
storage.
    So my question for you is, can you explain why 
cryptocurrency is necessary in order to deliver that service?
    Ms. Belcher. Thank you for that question, Senator. Yes. So 
cryptocurrency creates the incentive for people to contribute 
their resources, to maintain the network, and in this case to 
contribute file storage. And that same code that enables you to 
transfer money, to transfer value instantly across the internet 
without an intermediary, also does the process of verifying 
that you are, in fact, storing files.
    Senator Toomey. Thank you. Thank you, Mr. Chairman.
    Chairman Brown. Thanks, Senator Toomey. Senator Menendez of 
New Jersey is recognized.
    Senator Menendez. Thank you, Mr. Chairman. As 
cryptocurrencies become more commonplace we can all agree that 
we will begin to see more widespread adoption of crypto as a 
form of payment in physical retail outlets. So I would like to 
ask each of you one basic question. Do you believe that a 
brick-and-mortar retail business, like a grocery store or a 
pharmacy, should be allowed to accept only cryptocurrency and 
deny customers the opportunity to pay with cash?
    Ms. Belcher. Thank you for the question, Senator. Speaking 
for Filecoin, Filecoin is not intended to be a competitor to 
the U.S. dollar, but rather to be used for a specific purpose 
of file storage.
    As I discussed in my testimony, cryptocurrencies have many 
uses beyond merely facilitating financial transactions, and I 
think that there are many cryptocurrencies that you can think 
of more like other commodities, like gold, that serve the same 
function without necessarily being a competitor to the U.S. 
dollar.
    Senator Menendez. Yeah. My question is rather simple. A yes 
or no would suffice. But I will yours as saying no. Is that----
    Ms. Belcher. Correct. The answer is no.
    Mr. Brito. Today I could open up a store and accept only 
euros, if I had that quirk, and I think the same should be for 
cryptocurrency. It is my store and it is a basic freedom.
    Senator Menendez. Mm-hmm. Professor.
    Ms. Walch. I have a hard time--I am a strong defender of 
cash, for many reasons, so it troubles me, given that not 
everybody has access to digital financial services that they 
would not be able to use cash in basic retail stores.
    Senator Menendez. Well, I agree with those of you who do 
not think it should be limited. You know, according to a May 
2020 report by the Federal Reserve, over 1 in 5 Americans are 
unbanked or underbanked. And despite the potential, I do not 
think it is reasonable to expect that this segment of the 
population is going to suddenly jump into using cryptocurrency 
when they do not even have an opportunity to participate in the 
formal banking system.
    So we need to preserve the option of choice in how you pay 
for retail transactions. That is why I am introducing the 
Payment Choice Act with Senator Cramer and others, to make sure 
that Americans continue to have the option of paying cash for 
everyday purchases, and so millions of unbanked American 
households are not shut out of the economy.
    Let me turn to another issue, which I follow very much as 
the Chairman of the Foreign Relations Committee, and that is 
sanction evasion. I have been actively following Venezuela, 
Russia, and other countries' interests in developing virtual 
currencies for the explicit purpose of evading U.S. sanctions 
as well as the broader pattern of cyber criminals demanding 
payments in cryptocurrency from their victims. And we are 
increasingly seeing a confluence between these two trends.
    The data firm, Chainalysis, estimates that out of all the 
ransomware payments made in 2020, 15 percent of them carried a 
risk of sanctions violations. So essentially victims of 
ransomware attacks are increasingly finding themselves targeted 
by sanctioned entities, and therefore, victims that make ransom 
payments in cryptocurrency may be committing sanctions 
violations.
    So how should we, in Congress, think about addressing this 
problem without undermining the efficacy of our sanctions 
tools?
    Mr. Brito. So I will take that question, Senator. For years 
the FBI has been advising the victims of ransomware not pay 
ransom demands, and this applies to any ransom demand. And a 
demand that is coming from a sanctioned party, then it is not 
just advice. You cannot pay the ransom.
    And on the same advisory page, on their website, the FBI 
highlights that the way to deal with ransomware is to (a) have 
a good cybersecurity system to try to prevent the attack, and 
(b) regularly back up data and secure those backups so you can 
confidently refuse to pay a ransom, if it comes to that.
    Ms. Walch. I would just add one point. I think part of our 
vulnerabilities to ransomware that we are seeing have developed 
over the years with lax cybersecurity practices, and this may 
be tied, in part, to the liability framework that we have had 
around software development, which is that pretty much there is 
no liability even if your software is terrible and has lots of 
bugs, and any obligation to make good software is fully 
disclaimed in the software license.
    So I am not saying that anyone can make perfect software, 
but the accountability paradigm may need to be rethought.
    Senator Menendez. Well, I am all for preventing the 
possibility of a ransomware attack, but I am not for 
sacrificing our sanctions ability for the essence of protecting 
ransomware victims.
    One final question. According to the Cambridge Bitcoin 
Electricity Consumption Index, 4.6 percent of all Bitcoin 
mining occurs in Iran, making it the fifth-largest miner in the 
world. Because the main costs associated with mining 
cryptocurrency is energy, Iran is effectively able to convert 
its oil and natural gas reserves into cash via cryptocurrency 
mining.
    Are there tools that would allow financial institutions and 
regulators to prevent the use of mining to avoid sanctions?
    Mr. Brito. Senator, while there is nothing that can prevent 
anyone with the right equipment and internet connection from 
mining, what is interesting to me about this is that Iran is 
turning one commodity, oil, into another commodity, and to 
cash, really, but into another commodity, Bitcoin, let's say. 
And so it still has to find a way to trade it for hard 
currency, which is ultimately what it wants.
    And so, again, that is why it is so important that we have 
on-ramps and off-ramps that are regulated and compliant. And I 
can say that in the U.S., you know, we have great anti-money 
laundering regulation that requires cryptocurrency exchanges to 
know their customers, to track all transactions, to collaborate 
with law enforcement, and they do. But overseas there are 
exchanges that do not comply with the Fed's regulation. And I 
think if you ask law enforcement they will tell you that is the 
biggest challenge for them, vis-a-vis sanctions violators and 
other criminals.
    Senator Menendez. They do not have to convert it into cash. 
They can use it for payment of necessary goods, and that is 
equally of value to them.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Menendez. Senator Warner 
is recognized for 5 minutes.
    Senator Warner. Thank you, Mr. Chairman. I appreciate the 
fact that you and the Ranking Member are holding this hearing. 
Senator Menendez has talked about how a lot of these issues 
bleed into the Foreign Relations Committee. I can tell you from 
the intel standpoint we have had a number of hearings and 
discussions on this subject. I think it is how we approach this 
on a macrobasis, I am not 100 percent sure.
    And I can assure you on the ransomware piece there is an 
awful lot of this being paid out and crypto being used as the 
payment methodology of choice. And I think if Americans knew 
how much was paid out on a daily, weekly basis, particularly in 
Bitcoin, people would be astonished.
    I want to take my direction of questions a little bit 
differently, because crypto writ large comes out of the whole 
fintech world. We know the fintech world has been basically 
unregulated. But Mr. Chairman, I am seeing, particularly 
China--China, Singapore, and indeed Bermuda is ahead of us in 
terms of using blockchain to create a central bank digital 
currency. My fear is that in many ways China, which is much 
further ahead of us on mobile payment systems, on AliPay, and 
WeChat pay, that these mobile payment systems, which are 
becoming prevalent, especially in Europe, that they then use as 
the default, if you have got a mobile payment, the digital 
yuan.
    And we could wake up not dissimilar to where we woke up in 
5G, where suddenly when we get alerted to this problem there is 
already kind of a global answer in place, and we have been a 
little bit asleep at the switch. Our central bank has been 
moving slower on this, but this is a very, very aggressive area 
that China is moving on, and again, using the mobile payment 
systems as the kind of camel's nose under the tent.
    So I would like to hear from the whole panel, starting 
maybe with you, Professor Walch. How do we think about, and is 
there an appropriate form to set some international standards, 
not only on digital currencies but just across this whole 
field, because my fear is, as your colleague pointed out, we 
have got fairly decent anti-money laundering laws because, 
again, of the work of this Committee last year. A lot of the 
foreign entities do not. But let's stick with, you know, 
cryptocurrencies writ large and digital currencies backed by 
central banks as a start-off point. I would love to have the 
whole panel respond.
    Ms. Walch. Great. So I agree with you that as these 
cryptosystems are inherently global and international that if 
there is sort of some regulation surrounding them it will be 
difficult if it is just one country taking the lead on that, if 
it is just the U.S. then you risk everyone leaving the U.S. and 
doing things in other countries that do not have such strict 
regulatory systems.
    I think with a framework of something like FATF, that sets 
standards for anti-money laundering, that it expects countries 
to adopt, you could imagine some sort of similar global 
organization that deals with cryptocurrencies, and come to a 
consensus about at least what are some of the core things----
    Senator Warner. But as you said, you could imagine. It is 
not like there is anything out there real time.
    Ms. Walch. Not that I am aware of that is ongoing. I mean, 
certainly global bodies like the G20 are always discussing 
this. The Bank for International Settlements facilities 
discussion of this. But I think it would be helpful if there 
were, you know, more formal agreements about it.
    Senator Warner. Do your colleagues have any comments, other 
members of the panel?
    Mr. Brito. Sure. So I will just say two things. You know, 
we are focused cryptocurrency so we only tangentially look at 
central bank digital currency. But what I will say is two 
things. One, I would recommend that you look at an article by 
Henry Paulson in Foreign Affairs, I think it was earlier this 
year or maybe last year, where he addressed the question of a 
Chinese central bank digital currency. And his point, which I 
took to be persuasive, is that ultimately while they maybe 
digitizing the yuan, the currency is ultimately the yuan. And 
this not an attractive currency that people want to hold. And 
so maybe, you know, it is not really something that threatens 
the supremacy of the dollar.
    The second thing I would say is, so then why is China doing 
this? I think the main reason that they are doing this is that 
they do not want to lose control over their own monetary 
sovereignty. I think their concern is that they are going to 
get dollarized, not that they are trying to yuan-ize us. They 
have strict capital controls, as you know, and I think they 
also want to have strict surveillance of what their population 
is doing.
    In western China, for example, if you stop purchasing 
alcohol and tobacco, the police will come and check up on you. 
And they do this because they are looking at your transactions.
    Senator Warner. Final point.
    Ms. Belcher. I would echo that I think it is important that 
a digital dollar implements measures to protect privacy. I am 
looking at China and the concerns that have been raised around 
CBDCs and surveillance.
    Senator Warner. I will just tell you, Mr. Chairman, I think 
CBDCs, it is coming. If China ends up with the default mobile 
payment system being kind of the underlying payments for most 
mobile payments, and it is already happening in Europe and it 
is increasingly happening in Africa, and then the default 
currency becomes the digital yuan, I think the panel is 
dramatically underestimating the potential threat that poses in 
terms of China's overall plan of technology dominance and the 
potential. And I, frankly, disagree with former Secretary 
Paulson on the intent that China brings to this. And I hope, 
again, that we can spend more time on it, and I appreciate both 
you and the Ranking Member having this hearing.
    Chairman Brown. Thank you, Senator Warner. Senator Daines 
from Montana is recognized for 5 minutes.
    Senator Daines. Thank you, Mr. Chairman, and thanks again 
to all the witnesses for being here today. I truly believe we--
we, being the United States--should look to support innovation 
and be very careful that we do not ever regulate it out of 
existence. A light touch, I think, is what is called in this 
situation.
    RightNow Technologies, a company that I worked for after I 
left Procter & Gamble--I was there for 12 years, so we were a 
pioneer in cloud computing. In fact, when I joined the company 
we used to call it ``hosted companies'' and ``non-hosted 
companies'' or on-premise. We were an open-source, Linux, 
Apache, MySQL, PHP, kind of run-and-gun startup, and we got a 
lot of traction and became the cloud. We were selling a CRM 
solution. Eventually it was acquired by Oracle.
    But I have seen what it is to be on the leading edge of 
something and then turn to something very exciting. People 
thought we were crazy back then, and now, of course, the cloud 
is a massive industry.
    Filecoin, which is represented here by Ms. Belcher, 
provides data storage and access on a decentralized file 
network and seeks to compete with AWS. This is just one of the 
many promising uses for cryptocurrencies, and the last thing we 
should do is regulate these innovators into oblivion.
    The innovations occurring in this space are creating high-
paying jobs in many places, including my home State of Montana, 
because we found that some of the brightest people want to live 
in the best places, and they like the ability to ski, backpack, 
fish, enjoy our national parks, and they are literally right 
out their back doors, and yet they are involved in some of the 
leading edge innovation type tech companies in the world. I 
think that is generally a very positive thing.
    Ms. Belcher, in your testimony you describe Filecoin as 
``Airbnb for file storage.'' What type of growth are you 
expecting for Filecoin in the next 5 years?
    Mr. Brito. Well, it has truly been a massive amount of 
growth just from October, when we launched, to present. I 
mentioned that the amount of storage we have right now is truly 
incredible, and we really hope to see that storage continue to 
grow as we have seen it growing. And we hope to continue to see 
it storing humanity's most important information and storing 
extremely important datasets that need to be preserved for 
posterity.
    Senator Daines. Thank you, Ms. Belcher.
    Mr. Brito, do you see any cryptocurrencies as potentially 
disrupting the SWIFT global payments network, and could they 
coexist?
    Mr. Brito. So, no, I do not think there is going to be a 
disruption of any kind imminently, right. So SWIFT is what 
allows for transfer of dollars, and dollars make up--I mean, an 
overwhelming amount of the finance in the world. I do think 
that they can coexist. You can have both, and, quite frankly, 
cryptocurrencies is not just about moving money. Cryptocurrency 
has the word ``currency'' in it because that is what early 
pioneers of the technology was the word that they used. But 
really, these are open networks for verifying distributed 
ledgers.
    And what this means is that you are going to have 
cryptocurrency networks like Filecoin that store files. That 
has nothing to do with SWIFT. So they can definitely coexist.
    Senator Daines. Thank you. Ms. Belcher, unlike the private 
sector, Congress is not fast and not real good at innovating. I 
think our Founding Fathers, by design, ensured that this city 
could not move real fast and wanted to keep it limited, to 
ensure that the private sector innovation and freedom would 
result in really the greatest of this country, which I believe 
it has.
    How could knee-jerk or overregulation hurt innovation in 
the jobs you are creating?
    Mr. Brito. Well, I think that it is a myth to say that the 
cryptocurrency space is not regulated, and I think that as it 
exists today there are many ways of effectively sensibly 
applying existing regulations in the cryptocurrency space 
without needing to add any additional laws that potentially 
apply specifically to cryptocurrency and might regulate them in 
a different way.
    So just as one example, you know, some people raise issues 
around cryptocurrency, you know, potential fraud in this space, 
but there are all sorts of different ways that you can have the 
CFPB or the FTC go after that kind of fraud. And it does not 
matter whether you are committing that fraud with 
cryptocurrency or pen and paper or the phone. And that is just 
to say that I think that existing regulations do a great job of 
ensuring the space is regulated without overregulating 
cryptocurrency specifically.
    Senator Daines. One last quick question for Mr. Brito, and 
I will need a quick answer. I am in the extra inning here. You 
previously Stated that you do not believe China's development 
of a digital yuan is a threat to the dollar. Could you briefly 
explain why you feel that way?
    Mr. Brito. Sure, because ultimately digital yuan is just 
digitization of the yuan, and the yuan has all the problems 
that economists can point out. I mean, most recently, when the 
COVID pandemic hit, we saw a flight to safety. Did money move 
to the yuan or did it move massively to the dollar? It came to 
the dollar.
    Senator Daines. Thank you, Mr. Brito. Thanks for the short 
answer too. I appreciate it.
    Chairman Brown. Thank you, Senator Daines. Senator Tester 
from Montana is recognized for 5 minutes.
    Senator Tester. Thank you, Mr. Chairman, and I want to echo 
the comments of previous folks that asked questions. I 
appreciate you and the Ranking Member having this hearing.
    Before I start my questions I just want to say that the 
words ``decency'' and ``Mike Enzi'' go hand in hand. Mike was a 
fine man who treated everybody with respect, and somebody that 
obviously is already missed around here but somebody who will 
be missed by not only us but by the State of Wyoming. Quality 
people are not easily replaced, and our thoughts are with Diana 
and the rest of the Enzi people and the people of Wyoming.
    I want to start by taking about--some people here have 
talked about this being a regulated market, or there is 
regulation within the market. I do not see a lot of regulation 
in this market, and my question for all three of you--and as 
briefly as you can because we can burn 4 minutes on this really 
quickly--as briefly as you can, do you think this should be a 
regulated market in a way that is similar to our conventional 
monetary system? Ms. Walch.
    Ms. Walch. So I have gone back and forth on this for many 
years, and what has finally crystallized for me is that I think 
that the cryptofinancial system is different enough from the 
existing financial system that we need to think carefully about 
tailoring actual rules that might apply for it.
    I think that during the last 10 years there has been a lot 
of time spent debating about how crypto fits into our very 
complex, existing financial regulatory scheme.
    Senator Tester. OK. Go ahead, Mr. Brito.
    Mr. Brito. So in the United States we do not regulate 
technologies. We regulate activities.
    Senator Tester. OK.
    Mr. Brito. So to the extent that there are activities that 
pose a risk, the same way that they do in traditional financial 
markets, absolutely it should be regulated.
    Senator Tester. OK. Ms. Belcher.
    Ms. Belcher. I think regulations already are being applied 
in this space. Just as one example, cryptocurrency on-ramps and 
off-ramps are heavily regulated. They do KYC. They register 
with FinCEN. They cooperate with law enforcement. There are 
reports of suspicious activities. So I do think that there are 
regulations that are being applied to this space, even though 
they are not cryptospecific.
    Senator Tester. So I will stay with you, Ms. Belcher. So 
when we have a situation where we have cybercriminals that ask 
for money on an essential piece of property, like the Colonial 
Pipeline, that is critical infrastructure for this country, and 
one of my constituents turns on the TV and sees that the 
payment was made in cryptocurrency, what should that person be 
thinking?
    Ms. Belcher. Well, I think that ransomware is not a 
cryptocurrency problem. I think it is a cybersecurity problem. 
And I think where we saw it in the Colonial Pipeline----
    Senator Tester. Time out here for a second. OK. So if you 
have got a ransom that is being required and it is paid for in 
cryptocurrency, and albeit some of that cryptocurrency, or 
maybe all of it, was gotten back--I am not sure I have heard 
the entire story--cryptocurrency cannot wash their hands and 
say, ``Well, this is not really my problem. It is somebody 
else's problem.'' No, like it or not, it is a problem, and 
cryptocurrency is a part of that problem.
    Ms. Belcher. I think many crimes have also been committed 
with cash, and I think that in terms of crimes committed with 
cryptocurrency, we were actually able to get the Colonial 
Pipeline ransom back, because cryptocurrency is actually a 
public----
    Senator Tester. Do you think that is going to be the way it 
is in all cases, because this is going to continue. And by the 
way, on China's standpoint, I will just tell you this. I think 
that if we think they are getting rid of the miners because 
they do not like them, if they did not like them they would 
treat them like they treat the Uyghurs. They are shipping them 
around the world because they know these guys can raise hell 
with our financial system. That is my opinion, and they want to 
be able to be the big player in the financial industry.
    But the real question here is that if, in fact, we have got 
bad actors out there that are utilizing this technology that 
nobody ever thought--you know, somebody pointed out, I think it 
was Senator Reed, that we want to make the good better and get 
rid of the bad. Well, this is bad stuff that is going on.
    Ms. Belcher. The crime is certainly bad, but I would note 
that, first of all, I would not blame the technology, and I 
think it is actually a terrible technology to commit crimes 
because it creates a public ledger, a public record of each 
transaction. And so law enforcement are able to analyze the 
public chain, and that is why they were able to get back the 
Colonial Pipeline ransomware.
    Senator Tester. OK. First of all, I did not thank you guys 
for your testimony. I appreciate it very, very much. I spent 
much more time with you, Ms. Belcher, than I was going to with 
Brito and Walch, but hopefully you will be able to come back 
again. This is an issue we need more information on so that we 
can make good decisions. Thank you.
    Chairman Brown. Thank you, Senator Tester. Senator Warren 
from Massachusetts is recognized.
    Senator Warren. Thank you, Mr. Chairman, and thank you and 
the Ranking Member for holding this hearing.
    So the cryptocurrency boosters argue that crypto is the 
Yellow Brick Road to a faster, cheaper, and safer financial 
system that works for everyone, not just for the biggest banks. 
There is no question that our financial system needs change--
big, structural change--and we should be willing to consider 
how these new technologies can help consumers and our economy.
    But as the cryptocurrency market grows, it is also our 
responsibility to carefully examine these claims and promises 
about crypto's potential. Now one of the advantages 
cryptoadvocates claim about Bitcoin and other cryptocurrencies 
is that they are, quote, ``decentralized.'' Our current system 
is dominated by a handful of big banks that are mostly free to 
jack up costs for consumers, to restrict access to financial 
products, and gobble up smaller competitors, until the big guys 
become too big to fail.
    By contrast, advocates claim that cryptocurrencies and 
blockchain technology that underlies them decentralize power 
and control, creating the possibility of a more democratic 
financial system.
    So Professor Walch, that sounds pretty good to me. Has your 
research shown that crypto is decentralized in this way?
    Ms. Walch. So it is true that in cryptocurrencies you do 
not have one single central party. So I guess technically you 
could say yes, it is decentralized. It is more than one. But we 
have to remember that there are absolutely pockets of power 
within these systems, particularly the core software developers 
and the large miners, who can absolutely exploit their position 
of power to affect users of the systems.
    Senator Warren. So they have the capacity here to 
manipulate the system. You know, that sounds to me like a lousy 
tradeoff. Instead of leaving our financial system at the whims 
of giant banks, crypto puts the system at the whims of some 
shadowy, faceless group of super-coders and miners, which does 
not sound better to me.
    So let me ask about another claimed benefit of crypto, 
which is that it is safer and more secure than traditional 
Government-issued money in the bank. Because the blockchain 
system is supposed to be difficult to hack, impossible to 
manipulate, and less prone to network failure, we might not 
need to worry about things like data breaches or a cyberattack 
that takes down the network.
    Professor Walch, are cryptocurrencies as safe and secure as 
the proponents claim?
    Ms. Walch. So they certainly have characteristics that 
enable them to be, you know, resistant to hacking, but it is a 
misnomer to say that anything is absolutely secure. Again, the 
parties within the system, such as miners, can exploit their 
positions to reorganize the blockchain, in some circumstances. 
That has become a big issue and topic of discussion within 
Ethereum. This leaves out even the fact that there have been 
countless hacks of exchanges and stuff that are outside the 
cryptosystems.
    Senator Warren. OK. Thank you. But even if crypto is not an 
improvement over our current system when it comes to being more 
democratic or less hackable, there is one other possible 
benefit, and it is a big one. Cryptoproponents claim that 
crypto is safe from the kind of financial crisis that blew up 
the economy back in 2008. After all, the story goes the 
motivation behind Bitcoin's creation was to avoid exposure to 
bank collapses and financial contagion in the traditional 
financial system.
    Professor Walch, for that to be true, crypto would have to 
be insulated from the risks that make our financial system 
vulnerable to a crisis, and vice versa. Is that the case?
    Ms. Walch. No. I do not believe that is true. Risks in the 
cryptosector--software bugs, attacks, anything that could go 
wrong there--can affect the entire cryptosector but can also, 
through all these links that have been built between the 
cryptofinancial system and the traditional financial system, 
those risks can come across those bridges, those links, to 
affect people in the traditional financial system, who may 
never have actually touched crypto in their lives.
    Senator Warren. All right. So look. There is no doubt that 
we need a stronger, safer, and more inclusive financial system. 
The biggest banks have too much power, present too many risks 
to financial stability, and have failed to serve Americans' 
needs.
    The giant banks have created huge problems, but I am not 
convinced that crypto is the solution. In fact, crypto could be 
even more dangerous for consumers, more dangerous for the 
environment, and more dangerous for the stability of our 
financial system. That is why yesterday I sent a letter to 
Secretary Yellen in her capacity as head of the Financial 
Stability Oversight Council, to urge her to lead our regulators 
in developing a comprehensive and coordinated approach to 
regulating cryptocurrencies.
    Look, all the warning signs are flashing--the hype, the 
volatility, the wild claims that turn out to be false. As the 
cryptomarket grows, so do the risks to our financial stability 
and our economy. Regulators need to do their jobs and step in 
before it is too late.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Warren. Senator Van 
Hollen from Maryland is recognized.
    Senator Van Hollen. Thank you, Mr. Chairman and Ranking 
Member Toomey, and thank all of you for your testimony today.
    I have been a long proponent of getting the Federal Reserve 
to move quickly to implement the FedNow system, which is a 
real-time payment system that will eventually help millions of 
consumers avoid many costly overdraft and other fees that have 
cost them billions and billions of dollars. At the same time, 
we have heard that faster instant payments are often argued as 
one of the benefits of blockchain technology.
    And so my question, starting with Professor Walch is, how 
do you evaluate these relative benefits and risks, and what are 
the pros and cons of seeing blockchain and crypto as means to 
provide faster payments, compared to other possibilities?
    Ms. Walch. So I think one thing to keep in mind is that 
there have been policy decisions made about the speed at which 
transactions should be settled on our large global settlement 
systems, and to my understanding it not technology issues that 
are controlling the speed. It is policy decisions about what is 
appropriate and what best manages the risks involved.
    As far as settlement issues on cryptocurrencies, they can 
be fast, but typically because they are probabilistically 
settled, meaning you do not know for sure that the transaction 
is final because someone could theoretically come and 
reorganize the blockchain, they are very different. There is no 
moment of legal finality on a blockchain. It is you are 
probably never going to get your transaction changed.
    Senator Van Hollen. Mr. Brito, could you just comment on 
that?
    Mr. Brito. Sure. So I do not think that cryptocurrencies 
are necessarily competing with what FedNow is trying to do. 
They are sort of different things. I would say, to what 
Professor Walch just said, that they are fast, it is 
probabilistic, but we are building second-layer networks on top 
of networks like Bitcoin that provide faster and more easily 
settled transactions, something like the Lightning Network.
    And one of the things that these networks allow you to do, 
that FedNow, I do not think, can allow you to do, is to engage 
in microtransactions. So imagine being able to make payments 
that are pennies, or sub-penny amounts. That is something that 
is not really economical using our existing financial 
infrastructure. And so once you can do that, that opens up a 
whole range of possibilities, of innovations, that can take 
advantage of that, that we cannot even imagine.
    One thing that comes to mind is today the business model of 
the Web is either advertising--which means tracking--or it is 
payment, but you cannot just pay for the one article or the one 
song that you are listening to. You have to pay for a 
subscription. And so maybe you do not want that.
    Imagine a third option that can compete with the ad 
networks and the big, gated content providers, that allows 
people to pay per article, per second of streaming video. That 
is completely new. Imagine going to an airport and instead of 
paying $20 for a day pass to WiFi you can just pay for the 5 
minutes that you need, or the few kilobytes that you need. And 
at the same time, maybe you share the WiFi in your home and you 
receive payments from people walking by the street, and you can 
then use that crypto at the airport.
    Senator Van Hollen. Got it. I appreciate that. I do want to 
follow up, in my remaining time, with some of the issues 
Senator Warren raised, because Professor Walch, you have 
written about how software developers and cryptocurrency miners 
should be seen as fiduciaries. And you talked this morning 
about how those were--they are not centralized but they are key 
choke points in the system and can be manipulated to harm 
consumers.
    Could you talk about a specific example of how a 
cryptocurrency miner might be able to take advantage of 
cryptocurrency platform?
    Ms. Walch. Sure. So in many of these proof-of-work systems, 
like Bitcoin and Ethereum, there are large mining pools, and 
that means that the other computers who are involved in 
contributing their power to verify the transactions on the 
network, you know, entrust that mining pool operator with the 
power to pick the transactions that are going to go on the 
ledger and the order in which they will appear. The role and 
ability to choose the transactions and add a new series of them 
to the list, to the ledger, rotates around the different 
miners.
    So people say it is disintermediated, but during the moment 
when the miner is choosing the transactions for a particular 
block, technologists characterize this as being in ``God 
mode.'' Right? So those miners can sell, you know, price out 
how valuable it is to people to front-run transactions, to 
choose to put one transaction before or behind another. They 
can do that for their own benefit. And there are huge amounts--
we need to get the research before Congress--there are huge 
amounts of value that miners are exploiting in this way right 
now, and it is seen as a critical, critical issue to the 
success of cryptocurrencies and any claims that it has to be 
immutable, secure, or to lack intermediaries.
    Senator Van Hollen. Thank you. And if the other witnesses 
want to provide, for the record, their opinion on this issue, I 
do think it is an important consumer protection question.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Van Hollen. Senator 
Smith of Minnesota is recognized.
    Senator Smith. Thank you, Mr. Chair and Ranking Member 
Toomey. I appreciate this hearing.
    Professor Walch, in your prepared testimony you briefly 
described decentralized finance, or DeFi, and you said that 
DeFi is a set of financial products mirroring those in the 
traditional finance system that are rapidly being created.
    So over the last 100 years, Congress has enacted this 
regulatory framework for banking, securities, derivatives, and 
other key parts of our financial system, and those laws exist 
for a good reason, right? They are there to protect consumers 
and the integrity of our financial systems. And we wrote these 
laws--Congress wrote these laws--based on lessons learned, from 
stock offerings rife with insider trading and fraud in the 
1930s, the boiler room schemes of the 1980s, the risky swaps 
and derivatives that blew up our economy in 2008.
    So it concerns me when I hear about a seemingly unregulated 
DeFi derivatives market springing up to operate side-by-side 
with this regulated derivatives market. Last month, CFTC 
Commissioner Dan Berkovitz said in a speech, and I am quoting 
here, ``Not only do I think that unlicensed DeFi market for 
derivative instruments are a bad idea, I also don't see how 
they are legal under the Commodities Exchange Act.''
    So Professor Walch, do you agree that many of these DeFi 
instruments are probably operating in violation of the 
Commodities Exchange Act, or how do you see this?
    Ms. Walch. So I have not analyzed that question 
particularly, but I see this as we need to look carefully 
within these systems and see where the same activities are 
happening and whether there are the same risks. And one of the 
claims that is made within, you know, cryptosystems is that a 
lot of these practices are fully automated by software, so, 
therefore, there is not any particular person to be 
accountable.
    I think we need to press harder on those claims, because 
there are people who are, you know, running the software who 
have the keys to make changes to the software. There have been 
many bugs in these systems that have required the parties who 
released the software to run these financial transactions, 
there have been bugs discovered and they had to use their keys 
that they had failed to disclose that they had, to fix the 
problem.
    So we need to look for where power exists, decide how that 
power compares to power in our existing financial system, and 
think about ways to address it.
    Senator Smith. Thank you for that. It seems to me that that 
could be an argument for going down a path where there is 
virtually no accountability, if you argue that, you know, there 
is not a person here. It is just this nameless, you know, 
technology. Yet you still have what I am so concerned about, 
which is this unregulated derivatives market operating side-by-
side with a regulated derivatives market, and how that could 
reward rule-breakers and then undermine the system of exchanges 
and dealers and clearinghouses that Congress has established 
through a century of experience. Right?
    Ms. Walch. Yeah. I think you need to look for the humans in 
the system, find them, and ask what they are doing, and 
whether, you know, you think it poses a risk to other people.
    Senator Smith. Thank you.
    I want to touch on a different topic, just in the few 
minutes that I have left. According to a recent estimate, 
Bitcoin mining produces about 37 megatons of carbon dioxide 
each year. So that the same amount of emissions as the entire 
country of New Zealand. So if you take that on a per-
transaction basis, it is estimated that Bitcoin takes 500,000 
times more energy to verify a payment compared with a Visa 
transaction. So that is a lot of energy, especially at a moment 
where we are, I think, a crucial moment for addressing the need 
to take action on climate.
    If Bitcoin were just this little fad then maybe we could 
ignore this energy inefficiency. But now Bitcoin is estimated 
to consume 0.5 percent of all global electricity. 
Cryptocurrency is increasingly a real concern also as a driver 
of global emissions, and this clearly is not sustainable.
    So I just have a couple of minutes. Would any members of 
our panel like to comment on this, and what needs to happen to 
keep cryptocurrencies from becoming such a significant 
contribute to climate change?
    Ms. Belcher. Thank you for that question, Senator. I would 
note that different cryptocurrencies have different proof 
systems that use different amounts of energy. And when we built 
the first computer, it was the size of an entire room, but over 
time technology gets more scalable and sustainable.
    And we have also seen major cryptocurrencies switch over to 
less energy-intensive proof systems, such as Ethereum's recent 
move to proof-of-stake. And the energy here is being used to 
achieve particular societal benefits. So for Filecoin, those 
benefits are creating a decentralized storage network. That is 
one example.
    Senator Smith. Thank you. I am out of time, but this 
strikes me as a significant issue. I will follow up, Mr. Brito, 
since I am out of time. But I think this is a really important 
issue that we cannot just say we will ride that cost curve 
down, when we do not have time to do that. Thank you.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Smith. Senator Toomey 
has one more comment or question.
    Senator Toomey. Thanks very much, Mr. Chairman, and I will 
ask one question of Mr. Brito. I think Ms. Walch has at least 
once, maybe a couple of times, alluded to the power of miners, 
and specifically the power of miners to decide which 
transactions get put into the block and when. And I think it is 
fair to say that the insinuation is that they may have motives 
and self-interest that might cause them to make decisions that 
would not necessarily be expected by the users, that they are--
``nefarious'' maybe too strong a word, but that there is a 
self-interest that might cause them to engage in some kind of 
distortion.
    So how should we think about the miners and their power to 
decide which transactions get put into the block, and their 
whole role in the validation process?
    Mr. Brito. Sure. What we have to understand is that miners 
cannot redirect, steal, or initiate a user's payments. They 
can, however, affect the order that payments are confirmed on 
the blockchain during the periodic moments when they 
successfully mine the next block. So they cannot block you from 
making a transaction that you want to make. They can just say 
in what order in the block are you located.
    Now this is not a problem in the general case of a person 
sending money to another person on the Bitcoin blockchain, for 
example. It has no effect whatsoever. It can be a problem in 
decentralized exchange transactions, on something like 
Ethereum, when miners use their ability to order transactions 
to their advantage.
    The same problem exists in traditional financial markets. 
That is why high-speed traders build proprietary infrastructure 
to get their trades in as soon as possible. It is why this 
Committee rightly discusses payment for order flow.
    So the problem is very similar. One advantage of 
decentralized finance is that the blockchain reveals these 
strategies publicly, rather than happening secretly, thanks to 
murky internal policies at a large financial institution. 
Speaking generally, to the extent that we believe that there is 
a lack of fairness in these trading systems, one of the best 
solutions is to implement alternative market mechanisms that 
reduce the advantages of transaction ordering. You can change 
the design of the exchange. And since the exchange designers do 
not want this to happen, do not want the miners to be doing 
this, the participants certainly do not want this. There is 
every incentive to change that exchange mechanism, right? Many 
economists now favor using frequent batch auctions rather than 
continuous order books for transactions, in order to prevent 
these problems.
    And what is interesting is that if we were going to change 
from the continuous order book to frequent batch auctions at 
CME or the New York Stock Exchange, that would require one 
massive institutional change. With crypto, it is trivially easy 
for anybody to build a competing exchange that users will go 
to, and indeed we have seen this, and we are beginning to see 
this. And also, the developers of the Ethereum network itself 
do not want to see this, and they are going to be addressing 
the problem as well.
    Senator Toomey. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Brown. Thank you, Senator Toomey. Thank you all. 
As Senator Toomey and I were talking, this is one of the most 
illuminating hearings we have had, and I appreciate you all 
were persuasive, each in your own way, and thank you for that.
    For Senators who wish to submit questions for the record, 
those questions are due 1 week from today, Tuesday, August 3. 
To the witnesses, each of you have 45 days to respond to any 
questions.
    Thank you again. The hearing is adjourned.
    [Whereupon, at 11:37 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN

    First, I'd like to take a moment to acknowledge the passing of our 
friend and former colleague, Senator Mike Enzi.
    Some of us served with him on this Committee, which he joined in 
1997. We remember his kindness, his personal birthday notes that we all 
looked forward to. He spoke at the Ohio College Presidents Conference 
we host each year--we always try to bring in leaders of both parties--
sharing his insights with Ohio's higher education leaders.
    He talked often of bipartisanship--and he meant it.
    On a personal note, I think of our long discussions about Boy 
Scouts. We were both Eagle Scouts, and we often talked about his work 
to strengthen the Scouting movement.
    Our thoughts are with his wife Diana, his children Amy, Emily, and 
Brad, and with the people of Wyoming.
    Since Bitcoin came online in 2009, thousands of these so-called 
``digital assets''--virtual currencies, cryptocurrencies, stablecoins, 
investment tokens--have poured into the markets.
    All of these currencies have one thing in common--they're not real 
dollars, they're not backed by the full faith and credit of the United 
States.
    And that means they all put Americans' hard-earned money at risk.
    From tech giants like Facebook's Libra--or Diem, or however their 
PR consultants attempt to rebrand it next--to fly-by-night operations, 
we've seen far more empty promises than we've seen viable 
cryptocurrencies.
    A cottage industry of decentralized financial schemes has also 
cropped up alongside these alternative financial products, in the hopes 
of creating a parallel financial system with no rules, no oversight, 
and no limits.
    They claim to enable ``transparency.'' Their backers talk about the 
``democratization of banking.''
    There's nothing ``democratic'' or ``transparent'' about a shady, 
diffuse network of online funny money.
    After a decade of experience with these technologies, it seems safe 
to say that the vast majority haven't been good for anyone but their 
creators.
    This technology is almost never used to buy real goods and 
services. Which is what any currency is supposed to be used for, after 
all.
    Some cryptocurrency supporters see these technologies as a way to 
take power back from the Wall Street bankers, whose complicated and 
opaque financial scheming crashed the economy.
    When the only other option appears to be Wall Street, maybe it's 
hard to blame anyone for putting their faith in cryptocurrency.
    I hear the same message over and over from Ohioans: people don't 
trust banks, and they especially don't trust the biggest banks.
    They have been burned over and over again by fees, by minimum 
balances, by waiting periods, by segregated ``second chance'' accounts.
    And of course, they all remember the crash, the bailouts, the lack 
of accountability.
    But as these technologies have developed, most of them seem to 
mirror--rather than to challenge--the Wall Street model.
    In fact, traditional financial institutions are angling to become 
the biggest players in these markets, and it's a good bet they'll find 
even more creative ways to use these new technologies to dodge 
accountability and put our entire economy at risk again.
    We should all be concerned.
    Thankfully, President Biden has begun to replace Trump-era 
financial appointees with real financial watchdogs, who take seriously 
the job of protecting people's hard-earned money. But the financial 
recovery remains fragile, as coronavirus variants emerge, and there are 
still regulators to appoint.
    Yes, some of these underlying technologies may have useful 
applications, beyond evasion of banking and securities laws--those are 
generally applications outside of finance.
    One of those technologies we'll hear about today--Filecoin--uses 
economic incentives to provide digital storage space.
    But if we want a solution to Americans' legitimate fears about our 
banking system, shady start-ups are not the answer.
    We need more community banks that are actually in people's 
neighborhoods and that understand their lives.
    We need No-Fee Accounts, backed by the full faith and credit of the 
United States through the Federal Reserve, that allow everyone to open 
a bank account and make online purchases.
    And we need to show people there will be real accountability--not 
just a default to the same Wall Street system where bankers get all the 
profits and working families end up with all the risk.
    We need to make sure the American economy remains the safest and 
most dependable in the world.
    The last thing we should be doing is giving another industry a 
chance at wrecking that reputation--a reputation our entire economy 
depends on.
    The best thing we can do to protect Americans' money is to adopt 
smart regulations that protect investors and consumers, and separate 
the innovators from the extortionists.
    I look forward to learning more from our witnesses today.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY

    Mr. Chairman, thank you.
    Today's hearing provides us an opportunity to learn about the 
current and potential uses of cryptocurrencies. In short, a 
cryptocurrency connects one person with another through open, public 
networks--separate from Government control or other intermediaries.
    Cryptocurrencies are a growing part of our lives and economy. The 
first cryptocurrency--Bitcoin--was implemented in 2009. While there are 
varying definitions of what is considered a cryptocurrency, there are 
now thousands of them available in many different forms.
    According to a recent University of Chicago survey, 13 percent of 
Americans bought or traded cryptocurrency in the past 12 months. That's 
more than half of the total percentage of Americans who invested in 
stocks during the same period.
    Like other currencies, cryptocurrencies may be useful as a store of 
value or a medium of exchange. However, it's important to acknowledge 
upfront that a significant impediment to cryptocurrencies becoming a 
widely used store of value or medium of exchange is their price 
volatility. That problem could potentially be solved by tying a 
cryptocurrency to other assets, such as a fiat currency like the U.S. 
dollar. That's what stablecoins are meant to do.
    On the other hand, some cryptocurrencies may prove to be useful as 
a store of value by serving as alternatives to fiat currencies, like 
the dollar. They may serve as a store of value because, unlike fiat 
currencies, the Government can't come along and print trillions of a 
cryptocurrency.
    In this way, cryptocurrencies might complement the role that gold 
has historically played as a store of value and hedge against 
inflation. For example, we've seen recently in Venezuela how people can 
use Bitcoin to store value when a Government devalues its currency.
    Also, some cryptocurrencies may prove to be useful as a medium of 
exchange for buying goods and services. With cryptocurrencies, making 
payments and conducting transactions may become cheaper, easier, and 
faster for consumers than it is using traditional currencies.
    Cryptocurrencies can be exchanged without the need for an 
intermediary, such as a bank, which could virtually reduce transaction 
costs and fees for consumers to zero. In addition, since a person does 
not need a bank account to use cryptocurrencies, they could increase 
access to financial services for all Americans.
    Beyond these often-discussed uses for cryptocurrencies, there are 
other ways that the distributed ledger technology underlying crypto can 
be used. A distributed ledger is a database that shares information 
across various sites and geographies that is accessible by multiple 
people. This structure ensures that all of these people can access and 
verify the data, and reduces the risk of any one central actor 
manipulating the data.
    In my view, the use of distributed ledger technology to have 
nonintermediated transactions verified in a fool proof way is a 
powerful technological innovation. This innovation already is having an 
impact on supply chains, financial services, and securing digital 
identities. And it has significant potential for verifying the 
ownership of property, like automobiles, homes, or securities.
    In the United States, we spend a lot of time and money to verify 
property ownership. Distributed ledger technology may provide a way to 
do this faster and at a lower cost. Over time, it's possible that the 
application of this innovation may become more important than the 
usefulness of crypto as a currency.
    We're already seeing it have a real world impact. As we know, 
democracy and individual freedom in Hong Kong are under assault from 
the Chinese Communist Party. That assault has included the forced 
closure of a prodemocracy newspaper--Apple Daily. But the Chinese 
Government has not been able to erase Apple Daily's important work.
    That's because R-weave, a cryptocurrency network that enables 
permanent data storage, was used to permanently store portions of the 
paper. This technology makes it impossible for the Chinese Government 
to destroy Apple Daily's work no matter what it tries to do. That's 
just one example.
    Today we will hear from two expert witnesses about other current 
and potential uses of cryptocurrencies. Mr. Jerry Brito is Executive 
Director of Coin Center, a think tank focused on cryptocurrencies and 
related topics. He will discuss an array of uses for cryptocurrencies 
and how these technologies could be further developed. Ms. Marta 
Belcher is Chair of the Filecoin Foundation. She helped to develop and 
launch a cryptocurrency--Filecoin--that provides data storage access on 
a decentralized file storage network.
    It's important to note that people have raised legitimate issues 
about cryptocurrencies. These include their use in illicit activity and 
their possible effects on monetary policy and on our existing financial 
infrastructure. We need to discuss and understand these issues, and 
address them if needed. But we shouldn't lose sight of the tremendous 
potential benefits that distributed ledger technology offers.
    We should also be mindful that private innovation has enabled most 
of these developments. We should not suppress the concepts of 
individual entrepreneurship and empowerment that have made this 
innovation possible.
    I look forward to hearing from our witnesses today about the ways 
cryptocurrencies are impacting and can potentially impact our lives. I 
hope we will listen to them with open minds.
                                 ______
                                 
                   PREPARED STATEMENT OF ANGELA WALCH

    Professor of Law, St. Mary's University School of Law, Research 
           Associate, UCL Centre for Blockchain Technologies
                             July 27, 2021

    Thank you Chairman Brown, Ranking Member Toomey, and Members of the 
Committee, for the opportunity to testify today.
    My name is Angela Walch. I am a Professor of Law at St. Mary's 
University School of Law in San Antonio, Texas, and a Research 
Associate at the Centre for Blockchain Technologies at University 
College London. At St. Mary's, I teach courses in Contracts and 
Philosophy of Law, along with a course on blockchain technologies and 
the law and a seminar on the Law of Money.
    I have been studying cryptocurrencies since 2013, when I first 
taught about Bitcoin in my Law of Money course. My research has focused 
on the governance of cryptosystems, the problematic use of language in 
the cryptospace, and the ways misunderstandings about these systems can 
contribute to systemic risk. \1\ Because my research deals with 
foundational questions at the heart of this new field, it intersects 
with many of the fields that come together in cryptosystems, including 
law, economics, computer science, archival studies, philosophy, and 
others. I would describe my research as ``Crypto Realism'' as it takes 
a critical approach to these systems, their uses, and their impacts on 
society. I believe it is essential to take a critical, realistic 
approach to these systems due to their potential to impact large 
numbers of people in important ways.
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     \1\ My research is available on the Social Science Research 
Network (SSRN) or at www.angelawalch.com. Representative works include 
Angela Walch, ``The Bitcoin Blockchain as Financial Market 
Infrastructure: A Consideration of Operational Risk'', 18 NYU Journal 
of Legislation & Public Policy 837 (2015); Angela Walch, ``Open Source 
Operational Risk: Should Public Blockchains Serve as Financial Market 
Infrastructures?'' in Handbook of Blockchain, Digital Finance, and 
Inclusion, Vol. 2 (Elsevier, David, Lee Kuo Chuen, and Robert Deng, 
eds., 2017); Angela Walch, ``The Path of the Blockchain Lexicon (and 
the Law)'', 36 Review of Banking & Financial Law 713 (2017); Angela 
Walch, ``In Code(rs) We Trust: Software Developers as Fiduciaries in 
Public Blockchains'' in Regulating Blockchain. Techno-Social and Legal 
Challenges, (eds., Philipp Hacker, Ioannis Lianos, Georgios 
Dimitropoulos, Stefan Eich), Oxford University Press, 2019; Angela 
Walch, ``Deconstructing `Decentralization': Exploring the Core Claim of 
Crypto Systems'', in Cryptoassets: Legal, Regulatory, and Monetary 
Perspectives (Oxford Univ. Press, ed. Chris Brummer, 2019); Angela 
Walch, ``Crypto Miners as Intermediaries'' (in progress).
---------------------------------------------------------------------------
    Given the explosive growth of a separate cryptofinancial system 
over the last decade, and the immaturity of academic and public 
understanding in this area, I am in the process of developing a 
multidisciplinary Center on Digital Assets and Society at St. Mary's, 
with the goal of facilitating urgently needed multidisciplinary 
research in this field, providing a convening site for discussion and 
learning, and contributing to a grounded, realistic understanding of 
how these systems operate and impact society.
    I am happy to be able to discuss these important issues with the 
Committee today, as I consider it vital that policy makers have a 
realistic (rather than idealistic) understanding of the cryptofinancial 
system. Please note that given the constraints of the hearing, the 
discussion of the topics I cover in my testimony is necessarily high-
level and incomplete, but I have tried to provide a useful starting 
point for discussion.
    In my written testimony, I address five areas, as requested by the 
Committee:

  1.  In Part 1, I provide definitions and explanations of key terms 
        and concepts around cryptocurrencies, including a high-level 
        view of their governance structures and use of cryptoeconomics 
        (predictions of how humans respond to incentives) to 
        incentivize parties to maintain and protect the systems;

  2.  In Part 2, I describe the functions and uses of cryptocurrencies;

  3.  In Part 3, I discuss the extent to which cryptocurrencies are 
        integrated within or linked to the traditional financial 
        system;

  4.  In Part 4, I discuss the social and financial costs and benefits 
        of cryptocurrency, as well as risks that cryptocurrencies pose 
        to the U.S. financial system, investors, consumers, and other 
        participants in the economy; and

  5.  In Part 5, I close by discussing how flaws in academic, industry, 
        and public understanding of cryptocurrencies (i.e., idealistic 
        rather than realistic understanding) can taint policy and risk 
        decisions, embedding risk to be revealed when reality bites.

    Please note that the views I express in my written and oral 
testimony are my own, and not those of any organizations with which I 
am affiliated. I do not own any cryptocurrencies, and I have no 
financial interests in the cryptofinancial system. I have previously 
received summer research funding from St. Mary's University School of 
Law, where I teach.
Key Terms and Concepts
    The terminology used in the cryptospace has been challenging since 
Bitcoin's inception. \2\ Vocabulary fluctuates quickly, and terms are 
contested virtually all the time, as the field itself is fast-moving 
and conceptual boundaries are porous. As I will discuss further below, 
this unsettled language contributes to confusion and misunderstandings 
about the cryptofinancial system, which makes policymakers' jobs more 
difficult and embeds risk.
---------------------------------------------------------------------------
     \2\ See, e.g., Angela Walch, ``The Path of the Blockchain Lexicon 
(and the Law)'', 36 Review of Banking & Financial Law 713 (2017); 
Angela Walch, ``Blockchain's Treacherous Vocabulary: One More Challenge 
for Regulators'', 21 No. 2 Journal of Internet Law 1 (2017).
---------------------------------------------------------------------------
    Nevertheless, I will attempt to define a few key terms and concepts 
to assist our conversation. For purposes of this hearing, the 
conceptual division of cryptocurrencies, cryptotokens, and digital 
assets into different buckets (laid out by Goldman Sachs in a recent 
newsletter) \3\ is consistent with how I use these terms and how I see 
others using them in the cryptospace. Note that while I agree with 
Goldman Sachs' conceptual division, I do not fully agree with the 
precise definitions it provides, so will provide my own where 
indicated. Please note that there is no definitively established 
definition of any of these terms.
---------------------------------------------------------------------------
     \3\ Goldman Sach's recent research newsletter ``Crypto: A New 
Asset Class?'', May 21, 2021 (https://www.goldmansachs.com/insights/
pages/crypto-a-new-asset-class-f/report.pdf).
---------------------------------------------------------------------------
    Cryptocurrency: A native, manmade representation of value whose 
movements are tracked on a blockchain record within a cryptoeconomic 
system. Examples of cryptocurrencies include bitcoin and ether.
    Cryptoeconomic System: A sociotechnical system comprised of 
different groups of people that is designed to use peer-to-peer 
computer networks, cryptography, and predictions about how humans 
respond to incentives to create a record of the movements of its native 
cryptocurrency. \4\ [Note that I will use the term ``cryptosystems'' as 
shorthand for ``cryptoeconomic systems'' in this testimony.]
---------------------------------------------------------------------------
     \4\ See Shermin Voshmgir and Michael Zargham, ``Foundations of 
Cryptoeconomic Systems'', available at https://assets.pubpub.org/
sy02t720/31581340240758.pdf, for an in-depth discussion of this 
concept. The study of cryptoeconomic systems is considered a new 
multidisciplinary field of research.
---------------------------------------------------------------------------
    Crypto Tokens: A digital asset ``created by platforms that build on 
top of other blockchains. For example, the tokens of Uniswap and Aave--
UNI and AAVE--are built on the Ethereum network.'' They are 
distinguished from cryptocurrencies which are native to a 
cryptoeconomic system. ``Tokens can be used not only as mediums of 
exchange or stores of value, but also for governance decisions (e.g., 
voting on changes or upgrades to the protocol) or to access platform 
services.'' \5\
---------------------------------------------------------------------------
     \5\ This definition is slightly revised from Goldman Sachs' 
definition of ``cryptotokens.''
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    Digital Assets: ``An intangible asset created, traded, and stored 
digitally. Digital assets in the cryptoecosystem include 
cryptocurrencies and cryptotokens.'' \6\
---------------------------------------------------------------------------
     \6\ This is Goldman Sachs' definition of ``digital assets.''
---------------------------------------------------------------------------
    These definitions do not attempt to cover all characteristics of 
cryptocurrencies, cryptoeconomic systems, cryptotokens, or digital 
assets, as the characteristics themselves remain poorly understood and 
disputed. They are intended, however, to provide grounding for our 
conversation.
    Governance: The Committee also requested testimony on the 
governance structures of cryptocurrencies. I will provide some high 
level commentary on the topic, but note that this is an entire field of 
study on its own that is in its infancy. At a very high level, 
governance of cryptocurrencies deals with questions like what goes into 
the software that the network of computers runs, what transactions end 
up on the blockchain record and the order they appear, how changes are 
made to the software run by the network, and how changes are made to 
the underlying protocol (the ruleset of the network). Parties that are 
involved in the governance of cryptosystems include software 
developers, miners (sometimes called validators or record keepers), and 
other stakeholders like users, token holders, or big players in the 
ecosystem like cryptoexchanges.
    In my view, the governance of cryptosystems is critical to 
understand--who has power, how may it be exercised, and what are the 
limits of power? Since cryptosystems emerged with Bitcoin, a dominant 
thread of the conversation about them has been that they are 
``decentralized,'' and therefore lack sites of meaningful power. You 
may have heard that in cryptosystems, you don't have to trust humans 
and their fallible, corrupt natures--you just have to trust math. If I 
have one message for the Committee today, it is that this statement is 
just inaccurate. Cryptoeconomic systems remain subject to human flaws 
and corruption, whether in how the software is coded, whether the game 
theory designed to operate the system is robust, or whether miners 
collude to exploit their power to order transactions in the blockchain 
record to their benefit. Since Bitcoin's 2009 launch, events across the 
cryptoecosystem have demonstrated time and again that parties within 
cryptosystems (not just those intermediaries outside the systems like 
exchanges or wallet providers) exercise meaningful power. You may find 
many examples of these exercises of power in my research. \7\
---------------------------------------------------------------------------
     \7\ Angela Walch, ``In Code(rs) We Trust: Software Developers as 
Fiduciaries in Public Blockchains'' in Regulating Blockchain. Techno-
Social and Legal Challenges, (eds., Philipp Hacker, Ioannis Lianos, 
Georgios Dimitropoulos, and Stefan Eich), Oxford University Press, 
2019; Angela Walch, ``Deconstructing `Decentralization': Exploring the 
Core Claim of Crypto Systems'', in Cryptoassets: Legal, Regulatory, and 
Monetary Perspectives (Oxford Univ. Press, ed., Chris Brummer, 2019); 
Angela Walch, ``Crypto Miners as Intermediaries'' (in progress).
---------------------------------------------------------------------------
    It is also important to note that the cryptofinancial system is 
characterized by experimental governance. New governance techniques, 
voting mechanics, and forums are being iterated on in all parts of the 
cryptoecosystem. I do not critique the innovation efforts here, but it 
is important to consider the consequences of real-time experimentation 
on the governance of multibillion-dollar systems with increasing 
linkages to the traditional financial system.
Functions and Practical Uses of Digital Assets
    Digital assets (including cryptotokens and cryptocurrencies) are 
used for a variety of purposes, which I believe my fellow witnesses, as 
representatives of the cryptoindustry, will be able to provide 
information on.
    At a high level, digital assets and the cryptofinancial system 
serve many of the same purposes as the traditional financial system--it 
is just different people performing the tasks in sometimes different 
(and sometimes the same) ways.
    Some examples of how people are using digital assets include:

    as a way of increasing or preserving wealth (the ``store of 
        value'' use case);

    to make payments (e.g., remittances);

    as a hedge against a loss in value of other assets, such as 
        U.S. dollars or other assets in one's wealth portfolio;

    as a way of escaping financial surveillance;

    to enable protest against authoritarian Governments;

    to participate in economic activities in the 
        cryptoecosystem, such as the purchase of NFTs (nonfungible 
        tokens that are being used for digital works of art, for 
        example) or digital file storage space;

    as collateral for obtaining loans.

    Though cryptocurrencies are not widely accepted as a form of 
payment, many believe this use will increase, with some speculating 
that Amazon may soon accept bitcoin as a payment method. \8\ Further, 
El Salvador has now adopted legislation making bitcoin a legal tender 
there, and there is speculation that other countries may soon follow. 
And in DeFi (short for ``decentralized finance''), the financial system 
being built on top of the Ethereum network, financial products 
mirroring those in the traditional financial system are rapidly being 
created, as well as new ones.
---------------------------------------------------------------------------
     \8\ Matt Novak, ``Amazon Rumored To Accept Bitcoin by End of 2021 
and Develop Own Currency by 2022'': Report, Gizmodo, July 26, 2021 
(https://gizmodo.com/amazon-to-accept-bitcoin-by-end-of-2021-and-
develop-own-1847360405).
---------------------------------------------------------------------------
    At this point, I think the cryptospace has developed and continues 
to develop in a way that it will soon be fair to describe it as an 
alternative full-fledged financial system, if it is not already.
Integration With Traditional Financial System
    Cryptocurrencies began as niche communities after Bitcoin's launch 
in 2009. The early users of Bitcoin, for example, were largely people 
who were interested in the system as an innovative new technology, or 
who were drawn to it ideologically due to its separation from the 
traditional financial system (no banks) or the monetary policy it 
embedded (i.e., its ``cap'' of 21 million bitcoins). \9\
---------------------------------------------------------------------------
     \9\ I put ``cap'' in quotation marks to indicate that there is no 
fixed technical barrier that limits bitcoin to 21 million coins. The 21 
million limit is currently supported by the Bitcoin community, but the 
community has the choice to alter the limit in the future. There have 
been proposals by prominent Bitcoin community members to consider 
changing the 21 million cap, as it is uncertain how the system will 
function once new bitcoins are no longer awarded to miners, and the 
miners must rely solely on transaction fees to maintain the blockchain. 
However, there is definitely a strong norm within the Bitcoin community 
to keep the 21 million limit.
---------------------------------------------------------------------------
    Around 2015-2016, institutions in the traditional financial system 
became enamored of the ``blockchain technology'' that Bitcoin and other 
cryptocurrencies operate on. There was an explosion of interest in 
permissioned blockchains or ``DLT'' (distributed ledger technology), 
with participation in the group record-keeping process governed by 
explicit contractual obligations rather than by game theory. These 
permissioned systems had the goal of harnessing the technological 
innovation of cryptosystems, while jettisoning their permissionless 
wildness. Proponents of permissionless systems argued that the 
permissioned blockchains were basically joint venture databases, 
missing out on the true innovation of permissionless blockchains.
    Since 2017, however, there has been increasing interest and 
investment from the traditional financial system in permissionless 
cryptosystems like Bitcoin, Ethereum, and others. The ``snowball 
effect'' is a good way to think about the integration of digital assets 
into the traditional financial system, starting out very small, and 
then building on earlier integrations to grow ever more rapidly. 
Government responses to the COVID pandemic (e.g., large relief 
packages) appear to have accelerated the trend. \10\ Here are just a 
few examples of the ways that digital assets are being integrated into 
or linked to the traditional financial system:
---------------------------------------------------------------------------
     \10\ For an overview of institutional involvement in digital 
assets, see Goldman Sach's recent research newsletter ``Crypto: A New 
Asset Class?'', May 21, 2021 (https://www.goldmansachs.com/insights/
pages/crypto-a-new-asset-class-f/report.pdf).

    Widespread investment by institutional investors in digital 
        assets. \11\
---------------------------------------------------------------------------
     \11\ Anna Irrera, ``Most Institutional Investors Expect To Buy 
Digital Assets, Study Finds'', Reuters, July 19, 2021 (reporting on 
Fidelity Digital Assets' 2021 survey of institutional investors that 
finds 7 in 10 institutional investors expect to buy or invest in 
digital assets in the future, and that more than half of institutional 
investors in Asia, Europe, and the U.S. currently invest in digital 
assets).

    Traditional financial institutions offer cryptocustody 
        services. \12\
---------------------------------------------------------------------------
     \12\ E.g., Fidelity, Gemini, Coinbase, and others offer this 
service.

    Growing use of stablecoins like Tether and USDC from 
---------------------------------------------------------------------------
        Circle.

    Major investments by venture capital firms into crypto and 
        the cryptoecosystem. \13\
---------------------------------------------------------------------------
     \13\ Brandon Kochkodin, ``Venture Capital Makes a Record $17 
Billion Bet on Crypto World'', Bloomberg, June 18, 2021; Kate Rooney, 
``Andreessen Horowitz Launches $2.2 Billion Cryptofund and Is 
`Radically Optimistic' Despite Price Fluctuations'', CNBC, June 24, 
2021.

    Direct ownership of cryptocurrencies such as Bitcoin by 
        companies like Square, Microstrategy, and Tesla. \14\
---------------------------------------------------------------------------
     \14\ Stephen Graves and Daniel Phelps, ``The Ten Public Companies 
With the Biggest Bitcoin Portfolios'', Decrypt, July 16, 2021 (https://
decrypt.co/47061/public-companies-biggest-bitcoin-portfolios).

    Companies providing cryptoservices (e.g., exchanges, 
        Bitcoin mining) are now publicly traded. \15\
---------------------------------------------------------------------------
     \15\ For example, Coinbase, a U.S.-based cryptoexchange went 
public in April 2021, and several Bitcoin mining companies are publicly 
traded (e.g., Marathon Digital and Riot Blockchain).

    Bitcoin and Ethereum futures have been trading for several 
---------------------------------------------------------------------------
        years now.

    Major institutions are offering access to cryptofunds to 
        their clients. \16\
---------------------------------------------------------------------------
     \16\ Emily Mason, ``About-Face: JPMorgan Opens Crypto Trading to 
All Clients'', Forbes, July 22, 2021.

    With financial media like Bloomberg and CNBC talking about crypto 
virtually around the clock, and topics like ``Bitcoin'' or ``crypto'' 
regularly trending on Twitter, the trajectory is definitely towards 
ever-increasing integration of crypto into the traditional financial 
system.
    Aside from direct institutional investment, other recent 
cryptoevents increase its potential to impact the traditional financial 
system and the broader economy. Examples include the June announcement 
that El Salvador is making bitcoin a legal tender \17\ and the rapid 
influx of bitcoin miners to places like Texas following China's 
crackdown on bitcoin mining earlier this year. \18\
---------------------------------------------------------------------------
     \17\ Nelson Renteria, Tom Wilson, and Karin Strohecker, ``In a 
World First, El Salvador Makes Bitcoin Legal Tender'', Reuters, June 9, 
2021.
     \18\ David Pan, ``Why China's Ban on Crypto Mining Is More Serious 
Than Before'', CoinDesk, July 9, 2021; Dalvin Brown, ``Bitcoin Miners 
Break New Ground in Texas, a State Hailed as the New Cryptocurrency 
Capital'', Washington Post, July 8, 2021.
---------------------------------------------------------------------------
Social Impact and Risks
    The story of crypto is complex, offering both benefits and risks to 
society and the economy.
Benefits
    Proponents argue that cryptosystems provide an alternative means of 
governance and economic freedom outside of existing institutions. This 
means more than just having an alternative to big banks within the 
traditional financial system. Using crypto (particularly a 
cryptocurrency that enables one to transact anonymously (such as Zcash 
or Monero)) is also a way of hedging against a surveillance State or 
even a collapsing State. There is something to the argument that 
financial privacy is important, and that important freedoms are lost if 
every single expenditure of value may be viewed (and perhaps censored) 
by the State or another powerful intermediary. \19\ We see this same 
argument playing out as central banks evaluate the level of privacy 
that central bank digital currencies should have and whether cash 
should be eliminated.
---------------------------------------------------------------------------
     \19\ See Jerry Brito, ``The Cash for Electronic Cash'', Coin 
Center Report, Feb. 2019 (https://www.coincenter.org/the-case-for-
electronic-cash/).
---------------------------------------------------------------------------
    In authoritarian regimes around the world, we have seen Governments 
use control over the payment system to crack down on dissent, so this 
concern is not invalid. \20\
---------------------------------------------------------------------------
     \20\ See Alex Gladstein, ``Bitcoin Is Protecting Human Rights 
Around the World'', Reason, Feb. 5, 2021 (https://reason.com/video/
2021/02/05/bitcoin-is-protecting-human-rights-around-the-world/).
---------------------------------------------------------------------------
    Cryptoproponents use terms like ``censorship resistant'' and 
``permissionless'' to describe the benefits of cryptosystems, stating 
that any two parties in the world are able to send and receive value 
directly--without going through or having to seek permission from an 
intermediary. If I were a dissident in an authoritarian country, I 
could see how this would be a lifeline. However, I believe that 
cryptoproponents are overstating (perhaps innocently) the censorship-
resistance of existing systems, and that they may not provide as much 
freedom as some hope, given the power of miners in the system to 
manipulate the ordering of transactions or delay them. In Section V 
below, I talk about how mainstream understanding about fundamental 
characteristics of cryptosystems is inaccurate, and how those 
inaccuracies serve as sites of hidden risk.
    Cryptoproponents also claim that the costs of engaging in financial 
transactions are lower than in the traditional financial system, and 
that more people are able to participate in finance and better 
themselves because they do not have to pass through gates like 
accredited investor evaluations. This may be true, but my sense is that 
costs are lower largely because cryptosystems are generally unregulated 
at the moment. Traditional financial institutions could lower their 
costs to consumers if they had fewer regulatory costs, and I'm sure 
they would be happy to have additional customers for their financial 
products. Regulatory avoidance appears to be source of lower costs and 
broader participation--Congress may wish to reevaluate existing 
regulations, but the policy drivers of protecting consumers in 
financial transactions remain, whether in the cryptofinancial system or 
the traditional financial system.
Costs and Risks
    Cryptocurrencies and other digital assets do pose significant risks 
currently, and the risks they pose increase as they permeate the 
traditional financial system and more and more people invest. The 
financialization we have seen of cryptocurrencies and cryptotokens 
means that a problem in a single cryptocurrency (such as, for example, 
a software bug that causes the Ethereum network to fork (or split)) 
could ripple through all the financial products tied to that 
cryptocurrency, as well as all investors in the cryptocurrency, and 
companies that provide other services and products related to the 
cryptocurrency. Further, since many investors appear to view digital 
assets as an asset class, a flaw in a flagship cryptocurrency like 
bitcoin or ether could drag the rest of the digital asset markets down 
as well. Although we have not yet seen ripple effects from the extreme 
price movements that seem endemic to digital assets, we cannot rule out 
such effects in the future, particularly as they become more widely 
used and more integrated into the traditional financial system.
    With the currently unregulated nature of cryptocurrencies, their 
experimental governance systems, which lack the formalized 
accountability structures of the traditional financial system, can be 
sites of risk. It is critical to recognize cryptosystems like Bitcoin 
and Ethereum as infrastructure, as they support the cryptocurrencies 
themselves, as well as any products or activities built on top of the 
systems. This means that the governance of the infrastructure is 
incredibly consequential, as we have learned in my home State of Texas 
with the failures of our electrical grid infrastructure during the 
February 2021 winter storm. In short, governance of infrastructure 
matters to those who rely on it, even if they don't realize it.
    As mentioned earlier, the governance of cryptosystems includes the 
software developers within them, as well as the validators/miners of 
transactions, along with users. It is still a matter of heated debate 
as to how much power any of these groups has.
    Drilling down a bit, the software developers of systems like 
Bitcoin and Ethereum generally use the governance methods of grassroots 
open source software to write and propose changes to the code. \21\ 
This means that they have no obligation to take care of the code for 
the benefit of those who rely on it, and they have no duty not to 
exploit their privileged positions for their own benefit. With large 
companies like Square now funding several Bitcoin developers, it will 
be important to acknowledge the conflicts of interest inherent in the 
relationship, and to ensure that the small group of software developers 
who run these financial infrastructures know where their duties run. 
For this reason, I have analogized the key software developers of 
systems like Bitcoin and Ethereum to fiduciaries, as large numbers of 
people depend on them to be both competent and to act in the best 
interest of the system. \22\ I note that this theory has been subject 
to much debate. \23\
---------------------------------------------------------------------------
     \21\ Angela Walch, ``Open Source Operational Risk: Should Public 
Blockchains Serve as Financial Market Infrastructures?'' in Handbook of 
Blockchain, Digital Finance, and Inclusion, Vol. 2 (Elsevier, David, 
Lee Kuo Chuen, and Robert Deng, eds., 2017).
     \22\ Angela Walch, ``In Code(rs) We Trust: Software Developers as 
Fiduciaries in Public Blockchains'' in Regulating Blockchain. Techno-
Social and Legal Challenges, (eds., Philipp Hacker, Ioannis Lianos, 
Georgios Dimitropoulos, and Stefan Eich), Oxford University Press, 
2019.
     \23\ See, e.g., Raina Haque, et al., ``Blockchain Development and 
Fiduciary Duty'', Stanford Journal of Blockchain Law and Policy (2019).
---------------------------------------------------------------------------
    Miners or validators are also part of the governance of 
cryptosystems, and are similarly infrastructure providers to all who 
rely on the operation of that system. Miners select, order, and propose 
transactions to be added to the blockchain record. While many 
characterized cryptosystems as lacking intermediaries and enabling the 
direct transfer of value between transacting parties, that is 
technically untrue. \24\ Transactions do not appear on the blockchain 
record unless a miner chooses to put them on. While the transaction 
selection and ordering power was generally overlooked as a meaningful 
power for many years, in the past several years, the exploitation of 
the transaction ordering power has become a major issue. Termed ``MEV'' 
or ``Miner Extractable Value'', the amounts that miners are able to 
``extract'' from users wanting to use the blockchain demonstrates the 
importance of this power and the falsity of the ``disintermediation'' 
narrative. \24\ A full discussion of MEV and the powers of miners is 
beyond the scope of this testimony, but it is a site of active 
discussion and research in the cryptospace.
---------------------------------------------------------------------------
     \24\ See Angela Walch, ``Crypto Miners as Intermediaries'' (in 
progress); Antony Lewis, ``Bitcoin's Payments Are Not Peer to Peer!'', 
Bits on Blocks (Dec. 3, 2018), https://bitsonblocks.net/2018/12/03/
bitcoins-payments-not-peer-to-peer/; Primavera De Filippi and Aaron 
Wright, ``Blockchain & The Law'' (2018), 180 (describing miners or 
other transaction processors as intermediaries supporting blockchain-
based networks).
     \25\ See Philip Daian, et al., ``Flash Boys 2.0: Frontrunning, 
Transaction Reordering, and Consensus Instability in Decentralized 
Exchanges'', arXiv:1904.05234v1 (April 10, 2019), available at https://
arxiv.org/pdf/1904.05234.pdf
---------------------------------------------------------------------------
    I highlight these parties (developers and miners) because they have 
largely been left out of the policy and risk discussion, due to 
mainstream views of cryptocurrencies and cryptotokens as ``things'' 
like commodities. From my perspective digital assets are highly 
malleable, subject to the actions of parties like developers, miners, 
and other participants in the applicable cryptosystem, and failing to 
take their malleable nature into account is a source of risk.
    Finally, there is also more research needed on the environmental 
costs of the proof of work mechanisms used in mining Bitcoin and 
Ethereum, as there is debate on this matter.
    I also note that there are many more ways digital assets and 
cryptosystems pose risks to society, but my discussion is limited to 
those I have focused on in my own research.
Realism vs. Idealism
    I will close by emphasizing that cryptosystems are very new, 
experimental, and poorly understood. The knowledge infrastructure 
around these systems is shaky and has lots of errors built into it. 
Many of the ``facts'' that we ``know'' about cryptosystems are simply 
wrong, and making decisions based on idealized versions of 
cryptosystems instead of the realities embeds risk in every decision 
that is made. Based on my work in the field since 2013, using any of 
the following words in an absolute sense to describe a cryptosystem is 
problematic, yet highly consequential decisions are being based on 
these beliefs every day:

    Immutable

    Decentralized

    Trustless

    Enables direct transfers of value

    Secure

    Tamper-proof

    Disintermediated

    Open/Transparent

    Neutral

    Embody philosophies that can't be changed

    I recommend that if you see these words used in a policy paper or 
academic piece in an ``absolute'' versus a ``relative'' way, that you 
take the analysis you are provided with a grain of salt, or come talk 
to me about it.
    More research into these systems is desperately needed, and it is 
unfortunate that we seem to have again put the cart before the horse by 
building massive systems atop poorly understood infrastructures. I urge 
Congress to fund research in this area, to ensure diversity of 
perspectives on any task forces that it creates to examine these issues 
(including academics who are not part of industry), and to recognize 
how consequential these systems are for our world today--for better or 
for worse.
    Thank you again for the opportunity to testify, and I look forward 
to your questions.
                                 ______
                                 
                   PREPARED STATEMENT OF JERRY BRITO
                   Executive Director, Coin Center\1\
                             July 27, 2021

    Cryptocurrencies receive much attention these days, but even so, 
the real use cases of these new technologies are often glossed over. 
Much cryptocurrency discussion unfortunately leaves the reader with too 
much breathless hype or knee-jerk condemnation and not enough measured 
analysis. It is not surprising, then, that some people may walk away 
with the impression that cryptocurrency is little more than a new 
iteration of the dot com bubble, without any real value add. Some will 
say, ``There is nothing that can be done with cryptocurrency that 
cannot be done with sovereign currency that is meritorious and helpful 
to society.'' \2\
---------------------------------------------------------------------------
     \1\ Coin Center is an independent nonprofit research and advocacy 
center focused on the public policy issues facing cryptocurrency 
technologies such as Bitcoin. Our mission is to build a better 
understanding of these technologies and to promote a regulatory climate 
that preserves the freedom to innovate using open blockchain 
technologies. We do this by producing and publishing policy research 
from respected academics and experts, educating policymakers and the 
media about blockchain technology, and by engaging in advocacy for 
sound public policy. This testimony is based on: Andrea O'Sullivan, 
``Cryptocurrency: What Is It Good For? (A Lot, Actually)'', Coin 
Center, July 30, 2018, https://www.coincenter.org/cryptocurrency-what-
is-it-good-for-a-lot-actually/; and Jerry Brito and Peter Van 
Valkenburgh, ``The Ideal Regulatory Environment for Bitcoin'', Coin 
Center, August 25, 2020, https://www.coincenter.org/the-ideal-
regulatory-environment-for-bitcoin/.
     \2\ Quotation from Rep. Brad Sherman, U.S. House Financial 
Services Committee, Subcommittee on Capital Markets, Securities, and 
Investment, ``Cryptocurrency Markets'', Hearing, March 14, 2018, clip 
available at: https://twitter.com/coincenter/status/976182050616152064.
---------------------------------------------------------------------------
    This is unfortunate, because cryptocurrency technologies have a 
wide range of use cases that extend far beyond the cloistered circles 
of Silicon Valley and Wall Street. What's more, cryptocurrencies' 
technological innovations allow a much broader range of unique 
applications that traditional sovereign currencies could never provide.
    At its core, a cryptocurrency allows any individual to transfer 
value directly to a recipient anywhere in the world, without needing to 
rely on a trusted third party in the middle to facilitate the exchange. 
\3\ This seemingly simple function introduces possibilities for a great 
variety of solutions and improvements in areas of payments, law, 
security, business processes, and much more.
---------------------------------------------------------------------------
     \3\ Satoshi Nakamoto, ``Bitcoin: A Peer-to-Peer Electronic Cash 
System'', White Paper, October 31, 2008, https://bitcoin.org/
bitcoin.pdf.
---------------------------------------------------------------------------
    Here are just a few of the meritorious cryptocurrency applications 
that will be quite helpful to society--that is, if we allow them to 
grow.
Direct Digital Payment
    Let's start with the simplest use case. We may take it for granted 
that we can make payments online, but this state of affairs is neither 
evenly distributed nor always guaranteed. For one, not everyone in the 
world has access to a bank account or credit card with which they can 
engage in online commerce. Furthermore, the current system, which 
relies on third parties to facilitate exchange, is only as good as the 
trust that we can place in them. Such providers could conceivably go 
offline due to technical or cybersecurity difficulties, \4\ or 
Governments could push them to prevent certain transactions, \5\ or 
they could mismanage \6\ or improperly direct user funds. \7\ Whatever 
the hypothetical, the point is that customers must place considerable 
trust in the third party to be a responsible and faithful steward of 
those funds, assuming that individuals have access to those services in 
the first place.
---------------------------------------------------------------------------
     \4\ Nicole Perlroth, ``Attacks on 6 Banks Frustrate Customers'', 
New York Times, September 30, 2012, https://www.nytimes.com/2012/10/01/
business/cyberattacks-on-6-american-banks-frustrate-customers.html.
     \5\ Victoria Guida, ``Justice Department To End Obama-Era 
`Operation Choke Point' '', Politico, August 17, 2017, https://
www.politico.com/story/2017/08/17/trump-reverses-obama-operation-
chokepoint-241767.
     \6\ Kurtis Ming, ``Safe Boxes May Not Be Safe After All'', CBS 
Sacramento, July 26, 2018, https://sacramento.cbslocal.com/2018/07/26/
safe-boxes-stolen-drilled/.
     \7\ Anna Tims, ``Redundancy Payout Nightmare After Bank Transfer 
Error Sends Stranger Money'', The Guardian, September 25, 2017, https:/
/www.theguardian.com/money/2017/sep/25/worker-loses-home-car-bank-
money-transfer-error.
---------------------------------------------------------------------------
    Cryptocurrencies remove the need to rely on any single trusted 
third party to make a transaction. In effect, a cryptocurrency replaces 
a third party like Bank of America or PayPal with the network itself, 
which is managed by a distributed web of computers all across the 
world. This means that Alice can make a payment online directly to Bob 
whenever and wherever she wants, without needing to introduce another 
party that may be cumbersome or costly. This also means that people 
without access to banking services globally can now take part in 
digital commerce.
    In the U.S. we take it for granted that we can send each other 
funds effortlessly with our smartphones, but this is not the case 
everywhere in the world--especially where authoritarian Governments 
block payments to and from reformers. Just last year, prodemocracy 
activists in Belarus and anti- police-violence protesters in Nigeria 
successfully turned to the Bitcoin network to accept donations because 
local banks would not bank them. \8\
---------------------------------------------------------------------------
     \8\ Anna Baydakova, ``Belarus Nonprofit Helps Protestors With 
Bitcoin Grants'', CoinDesk, September 9, 2020, https://
www.coindesk.com/belarus-dissidents-bitcoin; Yomi Kazeem, ``How Bitcoin 
Powered the Largest Nigerian Protests in a Generation'', Quartz Africa, 
October 26, 2020, https://qz.com/africa/1922466/how-bitcoin-powered-
nigerias-endsars-protests/.
---------------------------------------------------------------------------
    This kind of direct digital exchange is not possible with 
traditional sovereign currencies. To make a direct exchange with 
sovereign currencies, individuals will need to meet in person to 
transact, which can be inconvenient or dangerous. To make a digital 
payment, they will need to rely on a trusted third party, which can be 
expensive or unavailable. There is no way to combine direct exchange 
and digital exchange using a traditional sovereign currency, which is 
why cryptocurrencies are so unique and value-generating.
Secure Store of Value
    Cryptocurrencies are useful beyond their application as a medium of 
exchange. By eliminating the need to rely on a third party for the 
issuance and transfer of value, cryptocurrencies empower users to take 
control of their finances. Transfers can only be made when a user 
cryptographically approves a specific transaction--an action known as 
``signing with a private key.'' This means that the user who holds the 
private key, and only that user, can control where and when their money 
is spent.
    This use case is crucial in environments where citizens cannot 
trust that institutions will be responsible stewards of their hard-
earned money. Consider the tragic case of a country like Venezuela, 
where individuals' property and savings can be confiscated by 
authorities through law or inflation. \9\ Many Venezuelans are 
unfortunately unable to access traditional forms of exit such as 
emigration or stealthily accruing more stable sovereign currencies. 
With cryptocurrency, more Venezuelans have an alternative: They can opt 
to purchase or mine a secure store of value that cannot be confiscated 
or inflated away by their Government because they alone control their 
private keys. \10\ Indeed, cryptocurrencies are especially popular in 
Venezuela for precisely this reason. \11\
---------------------------------------------------------------------------
     \9\ Nick Miroff, ``How To Fight Hyperinflation in Venezuela? By 
Seizing Massive Amounts of Cash'', Washington Post, December 13, 2016, 
https://www.washingtonpost.com/news/worldviews/wp/2016/12/13/how-to-
fight-hyperinflation-in-venezuela-by-seizing-massive-amounts-of-cash/; 
Matt O'Brien, ``Venezuela Could Have One Million Percent Inflation. How 
Is That Even Possible?'' Washington Post, July 26, 2018, https://
www.washingtonpost.com/business/2018/07/26/good-news-is-venezuela-wont-
have-million-percent-inflation-soon-bad-news-is-it-might-later/.
     \10\ Rene Chun, ``Big in Venezuela: Bitcoin Mining'', The 
Atlantic, September 2017, https://www.theatlantic.com/magazine/archive/
2017/09/big-in-venezuela/534177/.
     \11\ John Detrixhe, ``Bitcoin Trading in Venezuela Is Skyrocketing 
Amid 14,000% Inflation'', Quartz, June 8, 2018, https://qz.com/1300832/
bitcoin-trading-in-venezuela-is-skyrocketing-amid-14000-inflation/.
---------------------------------------------------------------------------
    There is a use for this property for people living in more 
responsibly managed monetary systems as well. As cybersecurity 
incidents continue to affect more and greater financial institutions, 
more people will find their personal information vulnerable to hostile 
actors. \12\ After all, in order to engage with the traditional system 
of personal finance, we must give over considerable information to 
banks which are then tied to our credit and debit card numbers. 
Cryptocurrencies require no such personal information in order to 
engage in online commerce, and users do not need to trust that 
financial institutions and their vendors will be able to thwart all of 
the many daily attacks on their systems.
---------------------------------------------------------------------------
     \12\ Major hacks on entities such as Equifax, Anthem, Marriott, 
and the Office of Personnel Management are only a few of the high-
profile data breaches that have exposed millions of Americans to 
outside parties. Hacked datasets can be combined to provide an even 
fuller picture of individual information. See: Garrett M. Graff, 
``China's Hacking Spree Will Have a Decades-Long Fallout'', WIRED, 
February 11, 2020, https://www.wired.com/story/china-equifax-anthem-
marriott-opm-hacks-data/.
---------------------------------------------------------------------------
Microtransactions and Metering
    Removing the middleman can also do more than just remove a threat 
point; it can also reduce the cost to send a transaction. By allowing 
people to send value directly to another person, cryptocurrencies may 
prove to be an affordable alternative to other forms of transfer. This 
means that transactions that may have not made economic sense due to 
the fees imposed by third parties in the past may now be feasible, 
which unlocks a range of possibilities.
    One of these is microtransactions, which is just what it sounds 
like: the ability to make tiny transfers of only a few cents (and 
perhaps fractions of a cent) at a time. \13\ When you walk by a gumball 
machine and decide you want a little treat, it takes very little effort 
to just whip out a quarter and receive your desired confection. But 
when you want to purchase the digital equivalent of a gumball online-
say, a single music video, or WiFi coverage to check an email for a few 
minutes, or an in-game upgrade-things quickly become not worth the 
hassle. You would likely have to create an account with the service in 
question and would need to have access to some kind of credit card and 
link it to the service. And because the fees to actually undertake a 25 
cent transaction will be greater than the transaction itself, you won't 
have the option to buy just one item, say, but instead have to pony up 
for a month's worth of access. This kind of arrangement is obviously 
just not worth it, so there are a lot of transactions that aren't 
happening because the existing payments system can't facilitate them. 
\14\
---------------------------------------------------------------------------
     \13\ Steve Glassman, et al., ``The Millicent Protocol for 
Inexpensive Electronic Commerce'', Proceedings of the 4th International 
World Wide Web Conference, December 1995, https://www.w3.org/
Conferences/WWW4/Papers/246/.
     \14\ ``Electronic Commerce With Microtransactions'', Computer 
Weekly, July 22, 1999, https://www.computerweekly.com/feature/
Electronic-commerce-with-microtransactions.
---------------------------------------------------------------------------
    Cryptocurrencies can, for the first time, make microtransactions 
for many services economically feasible. \15\ Let's say that someone 
wants to view a paywalled article online, but does not want to purchase 
a full subscription to that outlet. That person could send a 
microtransaction to the newspaper's cryptocurrency wallet, which would 
automatically unlock the article to the payer. The reader benefits by 
only paying for the content they want, and the newspaper benefits 
because expanded price discrimination can lead to greater overall 
engagement. Additionally, microtransactions present an alternative to 
the advertising model of monetizing content on the web and all the 
attendant privacy-encroaching tracking it brings with it. \16\
---------------------------------------------------------------------------
     \15\ Coin Center demonstrated this capability for Congress using 
the bitcoin lightning network and a lightning-enabled candy dispenser 
that was built by a Swiss developer, David Knezic, out of off the shelf 
hardware and open source software. Transactions could be made for fees 
less than 1/250th of a penny. https://www.coincenter.org/we-
demonstrated-the-bitcoin-lightning-network-in-congress/
     \16\ Brave Software, ``Basic Attention Token (BAT): Blockchain 
Based Digital Advertising'', White Paper, February 10, 2021, https://
basicattentiontoken.org/static-assets/documents/
BasicAttentionTokenWhitePaper-4.pdf.
---------------------------------------------------------------------------
    Metering is a special kind of microtransaction. Rather than a per 
unit price, metered microtransactions allow users to purchase access to 
a service for an unspecified amount of time. WiFi access provides a 
good example. Right now, if people want to purchase public WiFi access, 
they have to purchase a set unit of time for a set price, regardless of 
whether they only need to send a quick email or check on some data for 
work. This can be costly and obnoxious to the user, but there is no 
easy way to meter microtransactions using traditional credit and debit 
cards for the reasons mentioned above. Cryptocurrency provides a 
solution for low-to-no fee metering to access these kinds of club 
goods.
Smart Contracts
    People who say that cryptocurrency can't do anything that 
``sovereign currency'' can't also do probably don't understand that 
cryptocurrencies aren't just a kind of money; they are a kind of 
programmable money. While our examples so far have focused on simple 
currency storage and transfers between parties, cryptocurrencies also 
include scripting capabilities that allow for more complex transactions 
to occur. These kinds of transactions are known as ``smart contracts,'' 
and they work because all of the elements of the exchange to take place 
are entirely digitized. \17\
---------------------------------------------------------------------------
     \17\ Nick Szabo, ``The Idea of Smart Contracts'', 1997, https://
nakamotoinstitute.org/the-idea-of-smart-contracts/.
---------------------------------------------------------------------------
    For example, let's say that Alice would like to gift her 
granddaughter, Erin, with a sum of money upon her 18th birthday. Today, 
Alice's option is basically to hire a lawyer to create a trust that 
will hold the funds and disburse them on the appointed date. Being a 
technologically savvy grandmother, however, Alice knows that she can 
simply program a smart contract to do the same thing without having to 
employ an intermediary. Alice creates a cryptocurrency wallet for 
herself and another for her granddaughter Erin. Alice sends the 
equivalent of $10,000 to her wallet and programs a smart contract. The 
contract is set up so that on the day of Erin's birthday--let's say 
January 3, 2027--the contract will automatically move the funds from 
Alice's wallet directly to Erin's, where she will have complete control 
of those funds. Once Alice sets the transaction in motion, she no 
longer has access to the funds, just as if she had created a trust.
    And that is just the simplest example. Smart contracts can be 
deployed any time that a set of digital promises can be enforced by a 
protocol through which the parties to the promises operate. There are a 
wide range of hypothetical and currently used applications in the 
fields of finance, \18\ law, \19\ and identity. \20\
---------------------------------------------------------------------------
     \18\ Thaddeus Dryja, ``Discreet Log Contracts'', MIT Digital 
Currency Initiative, https://adiabat.github.io/dlc.pdf.
     \19\ Max Raskin, ``The Law and Legality of Smart Contracts'', 1 
Geo. L. Tech. Rev. 304 (2017): pp. 305-341, https://dx.doi.org/10.2139/
ssrn.2842258.
     \20\ Affan Yasin and Lin Liu, ``An Online Identity and Smart 
Contract Management System'', 2016 IEEE 40th Annual International 
Computer Software and Applications Conference (COMPSAC), June 2016, 
https://ieeexplore.ieee.org/document/7552202.
---------------------------------------------------------------------------
    However, smart contracts are not a kind of magic wand. It is 
crucial that the parties to a smart contract are absolutely certain 
that their code will function the way that they intend, and will not be 
susceptible to attack. There have been high-profile smart contract 
failures, resulting in millions of dollars in losses. \21\ With that 
caveat in mind, it is likely that routine and simple smart contracts-
like the illustration with Alice and Erin above-will be ironed out 
relatively quickly, and more experience will improve the quality and 
range of smart contracts available.
---------------------------------------------------------------------------
     \21\ Andrea O'Sullivan, ``Bot-Run Company of the Future Gets 
Hacked'', Reason, August 16, 2016, https://reason.com/2016/08/16/dao-
gets-hacked/.
---------------------------------------------------------------------------
Extra-Monetary Applications
    The examples above show just a few of the ways that cryptocurrency 
offers a great expanse of currency-based applications that traditional 
sovereign currencies simply cannot. But one of the really neat things 
about cryptocurrencies is that they and the open blockchain networks 
that underpin them have uses that primarily have little to do with 
``money'' at all.
    Our previous examples illustrated how blockchain tokens can be 
directly transferred in different kinds of ways. But those tokens don't 
necessarily need to only represent a currency. After all, at the end of 
the day, it's all just zeros and ones on a computer. So a blockchain 
token can hypothetically represent anything that can be digitized. And 
because blockchains are censorship resistant, any entry added to a 
blockchain can be thought of as a persistent, public, and verifiable 
record online. This tamper-resistant recordkeeping, however, is only 
present in open networks with a cryptocurrency or scarce token 
component.
    Consider this story from China: In 2018, a pseudonymous blogger 
reported that a major pharmaceutical company had been manufacturing and 
selling unsafe vaccines. \22\ Although the story went viral on social 
media, Government censors went about removing any posts about it 
online. How could the blogger make sure that his posts would not be 
blotted out? He put it on an open blockchain network; in this case 
Ethereum. By sending a small transaction worth a few pennies of ether 
to their wallet, the blogger was able to attach his expose to the 
metadata of the transaction, thus immortalizing the report's existence 
on the internet.
---------------------------------------------------------------------------
     \22\ Kristin Houser, ``Chinese Citizens Are Using Blockchain To 
Warn Each Other of Unsafe Vaccines'', The Byte, July 25, 2018, https://
futurism.com/the-byte/unsafe-vaccines-china-blockchain.
---------------------------------------------------------------------------
    This kind of application is especially crucial in situations where 
the public must know of some kind of high-level corruption. But there 
are a number of blockchain efforts to record data for commercial and 
legal applications as well. Some people envision a title registration 
service that is entirely or mostly-blockchain-based, which would cut 
down on the need for costly administration and title insurance. \23\ 
Others are working on projects to offer Dropbox-like services, where a 
blockchain would facilitate storing users' files in a decentralized 
manner. \24\
---------------------------------------------------------------------------
     \23\ Avi Spielman, ``Blockchain: Digitally Rebuilding the Real 
Estate Industry'', MIT Center for Real Estate, 2016, https://
dspace.mit.edu/handle/1721.1/106753.
     \24\ For examples, see: https://www.storj.io/, https://ipfs.io/, 
and https://sia.tech/.
---------------------------------------------------------------------------
    Perhaps more relevant to average Americans are the potential 
applications of cryptocurrency tamper-resistance to enable identity 
solutions for cybersecurity. The root cause of many data breaches--such 
as those at Experian, \25\ Equifax, \26\ OPM \27\--is the fact that if 
an attacker can compromise the password of one individual he may gain 
access to the personal information of millions of others.
---------------------------------------------------------------------------
     \25\ Brain Krebs, ``Experian API Exposed Credit Scores of Most 
Americans'', Krebs on Security, April 28, 2021, https://
krebsonsecurity.com/2021/04/experian-api-exposed-credit-scores-of-most-
americans/.
     \26\ Alfred Ng, ``How the Equifax Hack Happened, and What Still 
Needs To Be Done'', CNet, September 7, 2018, https://www.cnet.com/tech/
services-and-software/equifaxs-hack-one-year-later-a-look-back-at-how-
it-happened-and-whats-changed/.
     \27\ Brendan I. Koerner, ``Inside the Cyberattack That Shocked the 
U.S. Government'', WIRED, October 23, 2016, https://www.wired.com/2016/
10/inside-cyberattack-shocked-us-government/.
---------------------------------------------------------------------------
    Microsoft is a company that is painfully aware of this 
vulnerability as it provides the identity infrastructure for over 90 
percent of Fortune 500 companies. \28\ This is why Microsoft spent 
years helping develop a decentralized identity standard built on top of 
Bitcoin. It is called the ION network, it was launched in March, is 
live and operational, and is now a candidate W3C standard. \29\
---------------------------------------------------------------------------
     \28\ Apron Shah, ``Microsoft Azure: The Only Consistent, 
Comprehensive Hybrid Cloud'', Microsoft Azure blog, September 25, 2018, 
https://azure.microsoft.com/en-us/blog/microsoft-azure-the-only-
consistent-comprehensive-hybrid-cloud/.
     \29\ ``Decentralized Identifiers (DIDs) v1.0'', W3C Candidate 
Recommendation Draft, July 20, 2020, https://www.w3.org/TR/did-core/.
---------------------------------------------------------------------------
    By replacing usernames and passwords with decentralized 
identifiers, \30\ the ION network will allow individuals to control 
their own identities rather than trust data brokers that can be 
compromised at root. This means that an attacker would no longer be 
able to compromise just one credential in order to gain access to 
everyone else's, but would instead have to hack each individually--a 
massive improvement to cybersecurity.
---------------------------------------------------------------------------
     \30\ Ibid.
---------------------------------------------------------------------------
    Other benefits of decentralized identifiers include the ability to 
verify credentials--helping, for example, to combat disinformation. For 
example, with ION it will be trivially easy to verify that a photo 
you're looking at was signed as authentic by a photographer 
credentialed by the Associated Press. \31\ Additionally, because you 
own your own identity and network of relationships to other identities, 
we will be able to see the emergence of an open, portable social graph 
that will allow for competition with incumbent social networks.
---------------------------------------------------------------------------
     \31\ ``Tangents From Coin Center: Daniel Buchner'', Podcast, 
October 21, 2020, https://www.youtube.com/watch?v=VMzJ3AdhDtI.
---------------------------------------------------------------------------
What About Regulation?
    A cursory review of just a handful of the most high-profile 
applications of cryptocurrency technologies reveals that these 
innovations can yield benefits that traditional sovereign currencies 
never could. It is never a bad thing to wait to get involved with a new 
technology until you feel that you really understand it--especially 
when that technology can also be a kind of financial investment. The 
great thing about cryptocurrencies is that they are entirely voluntary: 
If a person feels uncomfortable using them, they are in no way 
obligated to get involved.
    There are a lot of very good reasons that cryptocurrency 
enthusiasts spend so much time improving and building out new 
infrastructure to bring these innovations to more and more people. And 
while there are certainly illicit uses of cryptocurrency, that is par 
for the course for new technologies: from automobiles to the internet. 
The solution to that is not to throw out the baby with the bath water. 
A policy environment that preserves for tinkerers and innovators the 
greatest possible space to develop new and better applications of 
cryptocurrency technologies will ensure that society gets the most 
value possible.
What Would Such an Environment Look Like?
    As it turns out, with the notable exception of tax policy, the 
prescription for an enlightened policy environment that balances the 
risks and benefits of cryptocurrency is essentially the regulatory 
regime at which the United States has arrived after years of policy 
evolution. The U.S. regime is not perfect, it can improve, but it gives 
regulators and law enforcement the tools they need to sensibly address 
risks and criminal behavior. We divide the policy areas into four 
general categories of regulation: consumer protection, investor 
protection, financial surveillance, and tax. We'll go through them one 
at a time.
Consumer Protection
    The purpose of consumer protection regulation is to ensure that 
businesses who take custody of consumer cryptocurrency for any 
purpose--whether it is for safekeeping, to provide payments or exchange 
services, or anything else--are sound and law-abiding. This is 
typically done through licensing. That is, a business cannot legally 
offer a service to the public that involves taking custody of consumer 
funds without first acquiring permission (a license) from the State. 
The State gives a license to any business that meets certain criteria, 
including passing a background check, posting a bond, satisfying 
minimum capitalization requirements, and offering specific disclosures 
to customers. \32\
---------------------------------------------------------------------------
     \32\ See, generally: Marco Santorini, ``What Is Money Transmission 
and Why Does It Matter?'' Coin Center, April 7, 2015, https://
www.coincenter.org/education/policy-and-regulation/money-transmission/; 
See also, e.g., Coinbase license list, accessed June 28, 2021, https://
www.coinbase.com/legal/licenses.
---------------------------------------------------------------------------
    The key to a sensible consumer protection licensing regime is 
twofold. First, and most important, it should be clear that the 
licensing requirement is triggered by custody and nothing else. Second, 
licensing requirements should be reasonable and nonduplicative.
    Taking custody of consumer funds is the activity that creates a 
risk to consumers (for obvious reasons), and it is that risk that 
licensing aims to ameliorate. Therefore, if a business provides 
cryptocurrency services to consumers (possibly including payments or 
exchange services) but does not take custody of consumer funds, it 
should be excluded from any licensing requirement. Only if a firm has 
the ability to lose or steal or otherwise risk consumer funds should it 
be required to be licensed.
    In contrast to this, some foreign Governments have made the mistake 
of requiring a license from any business that engages in cryptocurrency 
services, even if no risk to consumer funds can be identified. This is 
pernicious because it places a burden on firms that have innovated in 
such a way to provide services to consumers without creating the kind 
of risk that licensing is meant to address in the first place. The way 
to avoid that is to have any licensing law turn exclusively on whether 
the business has ``control'' of consumer cryptocurrency, and the best 
statutory definition of ``control'' available is found in the Uniform 
Law Commission's Regulation of Virtual-Currency Businesses Act (RVCBA):

        ``Control'' means . . . [the] power to execute unilaterally or 
        prevent indefinitely a virtual-currency transaction \33\
---------------------------------------------------------------------------
     \33\ ``Uniform Regulation of Virtual-Currency Businesses Act'', 
National Conference of Commissioners on Uniform State Laws, drafted at 
the ULC Annual Conference, San Diego, CA, July 14-20, 2017, https://
www.uniformlaws.org/HigherLogic/System/
DownloadDocumentFile.ashx?DocumentFileKey=bd2ebf37-48a6-1d1e-8644-
a9869bb-4f0e7&forceDialog=0.

    For firms that do take custody (control) of consumer 
cryptocurrency, licensing criteria should be clear and sensible. First, 
in contrast to the United States where a business must acquire dozens 
of licenses in each state in which it does business, an ideal 
regulation would be national or transnational (e.g., the E-Money 
License in the European Union) in scope. \34\ Second, the level of 
regulation imposed by the license should be calibrated to the level of 
custody risk posed to customers by the business. For example, the RVCBA 
includes a provision that allows firms to operate without a license 
(simply by registering) until their business activity exceeds $35,000 
annually. \35\
---------------------------------------------------------------------------
     \34\ Peter Van Valkenburgh, ``The Need for a Federal Alternative 
to State Money Transmission Licensing'', Coin Center, January 2018, 
https://www.coincenter.org/the-need-for-a-federal-alternative-to-state-
money-transmission-licensing/.
     \35\ Supra at 33.
---------------------------------------------------------------------------
Investor Protection
    The purpose of investor protection regulation is to ensure that 
investors do not face information asymmetries that would put them at a 
disadvantage. This means ensuring accurate financial reporting issuers 
of equities, as well as ensuring the fairness of markets. Bitcoin and 
cryptocurrencies like it are not securities, in part because there is 
not a firm or person who runs the Bitcoin network or issues bitcoins. 
It is instead more accurately classified as a commodity. \36\ 
Therefore, regulations that apply to securities and securities markets 
should not apply to Bitcoin and cryptocurrencies like it. In contrast 
to the United States, which employs a court-made test for determining 
whether an asset qualifies as an ``investment contract,'' most other 
countries list in statute what assets are securities. The ideal 
regulatory policy should simply ensure that Bitcoin and 
cryptocurrencies are not treated as securities.
---------------------------------------------------------------------------
     \36\ This has been stated policy at both the SEC and the CFTC. 
See: Neeraj Agrawal, ``SEC Chairman Clayton: Bitcoin Is Not a 
Security'', Coin Center, April 27, 2018, https://www.coincenter.org/
sec-chairman-clayton-bitcoin-is-not-a-security/; William Hinman, 
``Digital Asset Transactions: When Howey Met Gary (Plastic)'', Remarks 
at the Yahoo Finance All Markets Summit: Crypto, San Francisco, CA, 
June 14, 2018, https://www.sec.gov/news/speech/speech-hinman-061418; 
``CFTC Statement on Self-Certification of Bitcoin Products by CME, CFE 
and Cantor Exchange'', Commodity Futures Trading Commission, December 
1, 2017.
---------------------------------------------------------------------------
    As far as market regulation is concerned, an ideal policy would be 
to simply ensure equal treatment between markets in cryptocurrency and 
commodities. Typically, it is not markets for commodities themselves 
that are regulated, but commodity derivatives markets that are subject 
to regulation. Alternatively, foreign exchange market regulation could 
serve as a model for cryptocurrency exchange regulation or new 
authority could be given to a Federal supervisor, such as that proposed 
in the Digital Commodity Exchange Act. \37\
---------------------------------------------------------------------------
     \37\ Rep. Michael K. Conaway, ``Digital Commodity Exchange Act of 
2020'', H.R. 8373, House Agriculture Committee, 116th Congress, 
introduced September 24, 2020, https://www.congress.gov/bill/116th-
congress/house-bill/8373.
---------------------------------------------------------------------------
Financial Surveillance
    The purpose of financial surveillance laws (better known as anti- 
money-laundering regulation) is to deputize private businesses as 
criminal investigators for the State. \38\ Generally these laws apply 
only to a defined class of business referred to as ``financial 
institutions.'' \39\ Regulated financial institutions must collect 
identifying information about their customers, as well as surveil their 
customer's activities and report detailed information about certain 
specified transactions (or potentially all transactions) to the 
financial surveillance regulator, which will in turn share that 
information with law enforcement and national security agencies. \40\ 
Throughout this process customer information is collected and 
transmitted to the Government without a search warrant, and, in some 
cases, without any independent legal process whatsoever. \41\ Persons 
engaged in a variety of cryptocurrency activities may or may not be 
classified as financial institutions and be obligated to surveil their 
customers or transactional counterparts. \42\
---------------------------------------------------------------------------
     \38\ Peter Van Valkenburgh, ``Electronic Cash, Decentralized 
Exchange, and the Constitution'', 0Coin Center, March 2019, https://
www.coincenter.org/electronic-cash-decentralized-exchange-and-the-
constitution/#iii-electronic-cash-decentralized-exchange-and-the-
fourth-amendment (Section III: Electronic Cash, Decentralized Exchange, 
and the Fourth Amendment).
     \39\ 31 U.S.C. 5312.
     \40\ Id.
     \41\ Supra n. 38.
     \42\ ``Application of FinCEN's Regulations to Persons 
Administering, Exchanging, or Using Virtual Currencies'', Financial 
Crimes Enforcement Network, FIN-2013-G001, March 18, 2013, https://
www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf; and 
``Application of FinCEN's Regulations to Certain Business Models 
Involving Convertible Virtual Currencies'', Financial Crimes 
Enforcement Network, FIN-2019-G001, May 9, 2019, https://
www.fincen.gov/sites/default/files/2019-05/
FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
---------------------------------------------------------------------------
    As far as financial surveillance is concerned, an ideal policy 
would be to require a warrant for any State collection of personal 
financial data from a financial institution including businesses 
facilitating cryptocurrency activities. This, however, would be an 
extreme shift in policy; banks have been subject to financial 
surveillance laws in the U.S. since the 1970s, and the Supreme Court 
found long ago that bank customers have no reasonable expectation of 
privacy over records that they willingly hand over to banks while 
transacting. \43\ Similar regimes have proliferated across the world 
thanks to international standards-setting bodies such as the Financial 
Action Task Force. \44\ Short of reviving judicial oversight and a 
warrant requirement for the mass collection of customer financial data 
by law enforcement, a pragmatic policy is to seek equal treatment as 
between cryptocurrency businesses and traditional financial 
institutions. This means that only those businesses that hold and 
control customer cryptocurrency (as in our definition from consumer 
protection above) should be classified as regulated financial 
institutions. Noncontrolling cryptocurrency businesses such as miners, 
node-operators, software developers, or minority key-holders in a 
multi-sig arrangement, should never be classified as financial 
institutions. Individuals transacting on their own behalf (buying and 
selling, donating, or paying for goods and services) should also never 
be classified as financial institutions. Generally speaking, this is 
the current policy of FinCEN. \45\
---------------------------------------------------------------------------
     \43\ Supra n. 38 and California Bankers Assn. v. Shultz, 416 U.S. 
21 (1974).
     \44\ ``About'', Financial Action Task Force, accessed July 24, 
2021, https://www.fatf-gafi.org/about/.
     \45\ ``Application of FinCEN's Regulations to Certain Business 
Models Involving Convertible Virtual Currencies'', Financial Crimes 
Enforcement Network, FIN-2019-G001, May 9, 2019, https://
www.fincen.gov/sites/default/files/2019-05/
FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
---------------------------------------------------------------------------
Taxation
    Ideally, the IRS should state clearly and in detail how 
cryptocurrency transactions will be taxed as this may not be intuitive 
given the novelty of cryptocurrencies as assets including how to 
account for basis in calculating capital gains. \46\ There should also 
be a threshold in the amount gained below which no tax is due. Without 
such a de minimis exemption from capital gains taxation, a 
cryptocurrency user could trigger a taxable event every time she pays 
for a good or service rendering cryptocurrencies too complicated for 
micropayments or other simple payments use. \47\
---------------------------------------------------------------------------
     \46\ James Foust, ``A Duty To Answer: Six Basic Questions and 
Recommendations for the IRS on Crypto Taxes'', Coin Center, April 2019, 
https://www.coincenter.org/a-duty-to-answer-six-basic-questions-and-
recommendations-for-the-irs-on-crypto-taxes/.
     \47\ There is already a de minimis exemption from capital gains 
taxation for foriegn currencies and legislation has been introduced to 
apply a similar sensible standard to cryptocurrencies. See: Mike 
McSweeney, ``New Congressional Bill Seeks De Minimis Tax Exemption for 
Smaller Crypto Transactions'', Office of Congressman David Schweikert, 
January 16, 2020, https://schweikert.house.gov/media-center/in-the-
news/new-congressional-bill-seeks-de-minimis-tax-exemption-smaller-
crypto.
---------------------------------------------------------------------------
    Cryptocurrency block rewards from mining or staking on 
cryptocurrency networks should not be taxed as income when they are 
created. These rewards are best analogized to fruit that has ripened on 
the taxpayer's land, crops grown in her fields, or precious metals 
mined from her soil. Applying a tax liability at the moment the new 
value is created generates extreme accounting difficulties and 
overtaxes the citizen. Instead, should a country wish to collect taxes 
related to mining or staking activities, it should tax them when they 
are sold by the miner or staker. \48\
---------------------------------------------------------------------------
     \48\ Mattia Landoni, ``Dilution and Its Discontents: Quantifying 
the Overtaxation of Block Rewards'', Coin Center, August 2020, https://
www.coincenter.org/dilution-and-its-discontents-quantifying-the-
overtaxation-of-block-rewards/.
---------------------------------------------------------------------------
Conclusion
    As the above lays out, there are many use cases for 
cryptocurrencies that can be beneficial to society. Allowing this 
technology to flourish can also help maintain the position of the 
United States as the home to global innovation. In order for us to 
achieve this promise we must also carefully consider the ideal 
regulatory environment that both fosters innovation and adequately 
protects consumers. As noted at the outset, the regulatory regime in 
the United States goes in the right direction.
    Like the early internet, there are real, live uses of 
cryptocurrency networks today, but we can only see glimpses of the 
truly world-changing applications to come. The Clinton administration 
successfully pursued a deliberate policy of avoiding undue restrictions 
of the internet. \49\ To reap the benefits of cryptocurrency networks 
we should have the wisdom to do the same today.
---------------------------------------------------------------------------
     \49\ Jerry Brito, ``How the SEC and CFTC Can Address 
Cryptocurrency While Preserving U.S. Innovation'', Coin Center, January 
25, 2018, https://www.coincenter.org/how-the-sec-and-cftc-can-address-
cryptocurrency-while-preserving-us-innovation/.
---------------------------------------------------------------------------
                                 ______
                                 
                  PREPARED STATEMENT OF MARTA BELCHER
                       Chair, Filecoin Foundation
                             July 27, 2021

    Thank you, Chairman Brown, Ranking Member Toomey, and Committee 
Members, for inviting me to testify today.
    I'm Marta Belcher. I serve as Chair of the Filecoin Foundation, one 
of many companies working on a cryptocurrency called Filecoin. The 
question posed by this hearing is, ``What Are Cryptocurrencies Good 
For?'' Our answer to that question is that cryptocurrency can be the 
foundation for a better internet--an alternative to big tech that puts 
people in control of their own data, protects user privacy and 
security, and permanently preserves humanity's most important 
information. Today, I would like to explain how.
    Cryptocurrency makes it possible to send monetary value across the 
globe instantly and securely--just as easily as you can send 
information over the internet by attaching a file to an email. That is 
to say, cryptocurrency does for monetary value what the Internet did 
for information.
    For me, the most important thing about cryptocurrency is that it 
creates the ability to program money. In other words, you can write 
computer code that automatically transfers value upon a condition being 
met. For example, you could write a computer program that says, for 
every second of a song that I play, automatically transfer the 
equivalent of a millionth of a cent from me to the songwriter. This can 
happen instantly and automatically, with no intermediary between us, 
even across borders. This kind of transaction would be untenable using 
traditional payment systems.
    The cryptocurrency technology I work on--Filecoin--uses that same 
programmable money concept to create a decentralized file storage 
network. If you have extra storage space on your computer hardware, you 
can ``rent it out'' to others who will pay you to store their files (or 
pieces of their files, so that only the file owner can put the pieces 
back together). A computer program will regularly check that the files 
are still being stored on your computer and, if so, automatically 
compensate you with cryptocurrency. It's like Airbnb for file storage: 
storage providers rent out their extra storage space to earn Filecoin, 
and users spend Filecoin to store their files on other people's 
computers.
    That may sound like a niche use case, but we believe this could be 
a foundational technology for the next generation of the Internet. 
Today's Internet is centralized. The vast majority of data making up 
the many websites Americans use every day sits in data warehouses owned 
by just three companies: Amazon Web Services, Microsoft Azure, and 
Google Cloud. We have repeatedly seen these companies suffer blackouts, 
and vast swaths of the Web go down for hours, including websites that 
are massive contributors to the American economy. That's the problem 
with having single points of failure.
    We believe you can create a better version of the Web if you 
combine the storage capacity and computing power on all of our 
individual devices into a supercomputer-like network, and store 
multiple copies of data across those devices. On this decentralized 
version of the Internet, websites will stay up even if some nodes fail, 
and the availability of information is not dependent on any one server 
or company. This provides a more robust platform for humanity's most 
important information.
    Filecoin provides the incentive for people to contribute storage to 
that decentralized Internet. And these incentives work. Since launching 
last October, nearly 3,000 Filecoin storage providers have contributed 
nearly 8 exabytes of storage capacity. To put that in perspective, that 
could store all of the written works of mankind in all languages from 
the beginning of recorded history to today, 10 times over. And that 
storage space is being used to preserve humanity's most important 
information. As just one example, the Starling Lab--a project of 
Stanford and USC--uses the Filecoin network to permanently preserve the 
USC Shoah Foundation's archive of 55,000 video testimonies of genocide 
survivors.
    Filecoin is just one use of cryptocurrency, but it demonstrates how 
being able to program money--to instantly, automatically send 
microtransactions across the world--can create economic incentives that 
enable entirely new technologies.
    There are already thousands of projects building other 
cryptocurrency applications, from automatically paying music royalties, 
to compensating people when their data is used, to paying journalists 
for each view of an article, to incentivizing consumers to use 
renewable energy. Many of these projects will fail, but some may move 
technology forward in ways we cannot yet begin to imagine.
    This technology is in its early days, and this stage of development 
for cryptocurrency is often compared to the Internet of the early '90s. 
It would have been a mistake, in 1995, to believe that we understood 
then what the Internet was good for. I would urge the Committee to 
embrace the possibility that cryptocurrency's uses might be just as 
expansive, and to ensure that innovation in this space can continue to 
thrive.
    I look forward to your questions. Thank you.

               RESPONSES TO WRITTEN QUESTIONS OF
             SENATOR CORTEZ MASTO FROM ANGELA WALCH

Q.1. If Americans decide to hold digital tokens in significant 
volume, commercial banks will face a compression of margins. 
What mechanisms can you expect commercial banks to implement to 
recoup fees from consumers?

A.1. If Americans hold digital tokens in significant volume and 
conduct many financial activities through them, they may engage 
in fewer financial activities through banks and the traditional 
financial system. This could result in a loss of fees by banks 
as they lose customers to the cryptofinancial system.
    Actors in the traditional financial system, including 
commercial banks, are responding to the growth of the 
cryptofinancial system in a number of ways. First, they are 
seeking to integrate digital assets into the financial products 
they offer consumers, such as futures products and investment 
funds whose returns are based on the performance of digital 
assets. They are also building infrastructure that intersects 
with the cryptofinancial system, such as custody services to 
enable institutions to hold digital assets. I also expect 
commercial banks to offer advisory services to clients on 
investment strategies for digital assets, to provide research 
services and reports on the cryptofinancial system, and to 
invest directly in digital assets on their own behalf. Some may 
push to issue stablecoins, and some are becoming validators/
miners within cryptosystems. There are no longer sharp 
divisions between the traditional financial system and the 
cryptofinancial system.

Q.2. Should we require the Financial Stability Oversight 
Council (FSOC) to become more involved with regulating 
cryptocurrencies? Does FSOC have a role to help us collaborate 
with other Nations to prevent money laundering and crime 
enabled by cryptocurrencies?

A.2. FSOC may have a role to play in regulating 
cryptocurrencies. That is because it seeks to be a body that 
sits astride the fragmented financial regulatory structure we 
have in the U.S., bringing the leaders of the various financial 
regulatory agencies together to monitor and address threats to 
financial stability. The byzantine, fragmented Federal 
financial regulatory structure has arguably hindered the U.S 
response to crypto, contributing to uncertainty about which 
regulatory agency should be addressing which cryptorelated 
issues. This confusion has arguably enabled the systemic risks 
posed by crypto to grow while the agencies try to figure out 
their regulatory boundaries (as has happened in the debate over 
which digital assets are securities and which are commodities).
    Whether it is FSOC or another task force, I believe that a 
unified task force is needed to determine how the U.S. should 
respond to crypto, and that this is a matter of urgency. That 
is because the siloed regulatory agencies are in a sense 
imprisoned by their own regulatory mandates, which makes it 
difficult to think holistically about the cryptoissue. My 
recommendation to the Committee is to create a unified task 
force for crypto with a diverse set of parties (including 
critics, proponents, and technologists) in the discussion to 
ensure that the recommendations of the task force are grounded 
in facts rather than aspirations or myths.

Q.3. What difficulties do securities and banking regulators at 
the State and Federal level face to prosecute fraudulent and 
unregistered offers and sales of digital asset securities?

A.3. There are a number of difficulties that State and Federal 
regulators face in these prosecutions. A nonexhaustive list 
includes those described below.
    1. Each cryptosystem is unique. This means that the digital 
assets running on that system are unique, and that each 
requires individual scrutiny by regulators to evaluate whether 
the token is a security or a commodity, or whether the token 
doesn't really fit neatly in either regulatory category. This 
requires expertise and time from the regulators. When there are 
new cryptosystems launching all the time, it requires a lot of 
manpower and expertise to keep up. This is different from 
companies that regulators are used to that have more 
standardized entity structures (e.g., corporations or LLCs) and 
accounting practices.
    2. Each cryptosystem is fast-moving and evolving. At this 
point, there are no fully ``ossified'' cryptosystems, and 
arguably, none of them will ever be ossified, as they are 
complex mixtures of people (developers, miners/validators, 
users) and technology (cryptography and mechanism design) that 
may change based on the decisions made by people comprising the 
system. This means that regulators cannot make a decision about 
the status of a particular digital asset as a security or 
commodity (as they have done in characterizing bitcoin and 
ether as commodities, for example) and think that the status 
question is forever resolved. If the system changes (perhaps 
becoming more centralized in the composition of its developers 
or validators), it may make sense for a digital asset to be 
treated as a security at some points in its life and as a 
commodity at other points, even vacillating between the two. 
\1\ This is an undesirable situation as it limits 
predictability and legal certainty for people building 
cryptosystems and those using digital assets. It can undermine 
the credibility of the regulatory framework if a particular 
digital asset is found not to be a security, but later events 
mean that the digital asset should be treated as a security, 
and the regulator feels that it has to live with the 
nonsecurity/commodity categorization for stare decisis reasons.
---------------------------------------------------------------------------
     \1\ For a discussion of the problems with using 
``decentralization'' as a standard for evaluating whether a token is a 
security or a commodity, see Angela Walch, ``Deconstructing 
`Decentralization': Exploring the Core Claim of Crypto Systems'', in 
Cryptoassets: Legal, Regulatory, and Monetary Perspectives (Oxford 
Univ. Press, ed. Chris Brummer, 2019). For other explorations of 
decentralization as a legal standard, see Josh Garcia and Jenny Leung, 
``Data Points To Measure Blockchain Network Centralization'', Oct. 
2020, available at https://ketsal.com/blog/quantifying-blockchain-
network-centralization/; Gabriel Shapiro, ``Defining Decentralization 
for Law'', April 2020, available at https://lex-node.medium.com/
defining-decentralization-for-law-58ca54e18b2a.
---------------------------------------------------------------------------
    There remains dispute over which digital assets are 
securities and which are commodities. The SEC has been 
criticized by the cryptoindustry for regulating by enforcement 
rather than through issuing clear guidance, while the SEC has 
stated a number of times that it believes that the rules on 
what digital assets are and are not securities are clear. \2\ 
There also appears to be somewhat of a turf war between the 
CFTC and the SEC over which digital assets fall in which 
agency's regulatory perimeter. \3\ This means that there is a 
risk of some digital assets falling into a regulatory gap, or 
that consumers/investors could be harmed during the period that 
the agencies are figuring out which of them should address a 
particular activity or digital asset.
---------------------------------------------------------------------------
     \2\ See, e.g., Laurie Dunn, ``SEC Rules on Crypto Are Just Not 
Clear'', Bitcoin Insider, Sept. 15, 2021.
     \3\ See Nikhilesh De, ``State of Crypto: SEC vs. CFTC'', CoinDesk 
(Op-Ed) (Aug. 31, 2021).
---------------------------------------------------------------------------
    Limited staff and funding is also a hindrance to 
prosecution, particularly given the exploding scale of the 
cryptofinancial system and its rapid intermingling with the 
traditional financial system. \4\ The SEC has formed a 
Strategic Hub for Innovation and Financial Technology (FinHub) 
and the CFTC a ``Lab CFT'' to focus on financial technology 
innovations, among them digital assets, but it is likely that 
hiring additional staff to address digital assets would enhance 
the agencies' efforts in this area.
---------------------------------------------------------------------------
     \4\ See, e.g., Gary Gensler, Chair of the SEC, Written Testimony 
before the Senate Committee on Banking, Housing, and Urban Affairs, 
Sept. 14, 2021 (``As our capital markets have grown, though, the SEC 
has not grown to meet the needs of the 2020s. At the end of fiscal year 
2016, the SEC had 4,650 people on board. Nearly 5 years later, though, 
that number had decreased by about 4 percent.'').

Q.4. Should every digital payment service cooperate in all law 
enforcement initiatives, including, but not limited to, anti- 
money laundering requirements, ``Know Your Customer'', and 
---------------------------------------------------------------------------
antitrafficking projects?

A.4. This is a difficult question for policy makers to sort 
through. If one is confident that the existing anti- money 
laundering regulatory framework is effective in stopping money 
laundering, the financing of terrorism, and human trafficking, 
and that it provides the right balance of privacy and 
deterrence of crime, without causing other harms such as 
excluding people from financial system, then it makes sense to 
apply the framework to equivalent risks and activities in 
crypto. FATF and FinCEN have been working to extend the 
existing AML/KYC framework, though there is significant debate 
as to which parties in the cryptofinancial system should have 
responsibilities akin to banks to police AML on behalf of the 
Government.
    There are two issues important to think through regarding 
AML and crypto. First, the existing AML framework relies on 
banks to assist law enforcement in policing money laundering, 
in large part due to the intermediary role they play in 
financial transactions. Cryptoproponents argue that applying 
the AML framework from the banking world to them does not make 
sense because cryptotransactions are not intermediated, but 
direct from person to person, meaning that there is no party 
within cryptotransactions for AML rules to target. I believe 
that this is inaccurate, given the middleman role that miners/
validators play in every cryptotransaction. Miners are arguably 
a regulatory intervention point for addressing AML goals, 
though they have been excluded from the AML regulatory 
perimeter by FATF and FinCEN thus far.
    The second issue related to AML and crypto is that 
cryptoproponents, along with others, have raised important 
concerns about the existing AML regulatory framework. These 
include concerns about privacy and whether the Government 
should have visibility into every financial transaction people 
engage in, along with the cost/benefit ratio of the existing 
AML framework (how much money laundering/crime does it stop 
compared to the costs of implementation, limits on financial 
freedom, and excluding people from the financial system). 
Concerns about Government surveillance and financial privacy 
are among the reasons that people are attracted to crypto, and 
flag that it may be time to reevaluate the policy goals of the 
existing AML framework, and whether the way Congress is 
achieving those goals strikes the right balance in terms of 
privacy, crime prevention, regulatory burdens, and financial 
inclusion.

Q.5. Should we be worried that, if widely adopted, 
cryptocurrencies will substantially limit the ability of 
countries to use capital controls in times of financial crisis?

A.5. Without commenting on the merits of capital controls, I 
believe that this is a realistic worry unless gateways to 
obtaining cryptocurrencies (such as exchanges or crypto ATMs) 
were also targeted by the capital controls. \5\ If people hold 
cryptocurrencies for themselves, it is harder for capital 
controls to reach them because they are not participating in 
the traditional banking system. If citizens of a country 
perceive that a financial crisis is brewing and capital 
controls may shortly be imposed, they may choose to purchase 
cryptocurrencies in advance of capital controls to remain in 
control of their value.
---------------------------------------------------------------------------
     \5\ See Maggie R. Hu, Adrian D. Lee, and Talis J. Putnins, 
``Capital Flight: Evidence From the Bitcoin Blockchain'', available at 
https://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2020-
Dublin/papers/EFMA%202020-stage-1301-question-Full%20Paper-id-338.pdf 
(Draft of Jan. 15, 2020) (examining the use of bitcoin to evade Chinese 
capital controls); Yang Yu and Jinyuan Zhang, ``Flight to Bitcoin'', 
available at https://ssrn.com/abstract=3278469) (2020) (examining a 
possible ``flight to bitcoin'' by citizens in countries with heightened 
economic uncertainty); Jill Carlson, ``Cryptocurrency and Capital 
Controls'', available at https://ssrn.com/abstract=3046954 (2016) 
(examining the use of bitcoin by Argentinians to evade capital 
controls).
---------------------------------------------------------------------------
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                       FROM ANGELA WALCH

Q.1. Cybersecurity remains a growing concern in both the public 
and private sectors. Do you believe that the use of 
cryptocurrencies and blockchain technology has the potential to 
mitigate cyberthreats to institutions in both the public and 
private sectors through the use of alternative methods of file 
storage, direct transactions, and other use-cases for 
cryptocurrencies?

A.1. Cryptocurrencies and blockchain technologies are often 
referred to as inherently secure and robust to cybersecurity 
threats. Despite this reputation, there have been many 
successful attacks on various cryptosystems and there are 
various attack vectors that exist. \1\ It is important to 
recognize that parties within cryptosystems, such as the 
miners/validators and software developers, also pose attack 
risks to the system, much as ``insider'' attacks pose 
cybersecurity risks in non-blockchain systems. \2\ Though 
cryptosystems are generally described as fully open and 
transparent, without concentrations of power that could be 
exploited, these are overstatements and can cause us to miss 
opportunities for exploitation by insiders. For example, in 
September 2021, there was a ``supply chain attack'' on the 
software code for an application for SushiSwap, a decentralized 
exchange that operates on Ethereum. \3\ A ``supply chain 
attack'' is one in which a developer intentionally embeds code 
that could be exploited (in this case, to steal funds, though 
the funds ended up being returned). Further there have been 
numerous bugs in the software code of various blockchains and 
blockchain applications that have been exploited, or that were 
fixed on emergency bases through the sometimes nonpublic 
actions of small groups of software developers and miners. \4\
---------------------------------------------------------------------------
     \1\ For an overview of known possible attacks on blockchain 
systems, see Tobias Guggenberger, Vincent Schlatt, Jonathan Schmid, and 
Nils Urbach, ``A Structured Overview of Attacks on Blockchain 
Systems'', Twenty-fifth Pacific Asia Conference on Information Systems, 
Dubai, UAE (2021) (identifying 87 known types of attacks on blockchain 
systems); Muhammad Saad, Jeffrey Spaulding, Laurent Njilla, Charles 
Kamhoua, Sachin Shetty, DaeHun Nyang, and Aziz Mohaisen, ``Exploring 
the Attack Surface of Blockchain: A Systematic Overview'', https://
arxiv.org/pdf/1904.03487.pdf (2019).
     \2\ See Ivan Homoliak, Flavio Toffalini, Juan Guarnizo, Yuval 
Elovici, and Martin Ochoa, ``Insight Into Insiders and IT: A Survey of 
Insider Threat Taxonomies, Analysis, Modeling, and Countermeasures'', 
ACM Computing Surveys, Vol. 52, Issue 2, pp. 1-40 (2019).
     \3\ See Ax Sharma, ``Cryptocurrency Launchpad Hit by $3 Million 
Supply Chain Attack'', ArsTechnica, Sept. 17, 2021.
     \4\ For a discussion of several of these, see Angela Walch, ``In 
Code(rs) We Trust: Software Developers as Fiduciaries in Public 
Blockchains'', in Regulating Blockchain. Techno-Social And Legal 
Challenges, (eds., Philipp Hacker, Ioannis Lianos, Georgios 
Dimitropoulos, and Stefan Eich), Oxford University Press, 2019; Angela 
Walch, ``Deconstructing `Decentralization': Exploring the Core Claim of 
Crypto Systems'', in Cryptoassets: Legal, Regulatory, and Monetary 
Perspectives (Oxford Univ. Press, ed. Chris Brummer, 2019);
---------------------------------------------------------------------------
    Further, viewing cryptocurrency transactions as ``direct'' 
or ``peer to peer'' is problematic as they are intermediated by 
miners and validators within the cryptosystems. Miners and 
validators are able to exploit their powers of selecting and 
ordering transactions to be added to the blockchain, and it is 
an open research question as to whether this issue can be 
resolved.

Q.2. There have been multiple instances of cryptocurrencies 
being used for the purposes of money laundering and threat 
financing. How can Congress best mitigate the risk posed by bad 
actors' use of cryptocurrencies while enabling consumers and 
institutions in both the public and private sectors to benefit 
from the use of such new and emerging technologies?

A.2. This is a difficult question for policy makers to sort 
through. If one is confident that the existing anti- money 
laundering regulatory framework is effective in stopping money 
laundering, the financing of terrorism, and human trafficking, 
and that it provides the right balance of privacy and 
deterrence of crime, without causing other harms such as 
excluding people from financial system, then it makes sense to 
apply the framework to equivalent risks and activities in 
crypto. FATF and FinCEN have been working to extend the 
existing AML/KYC framework, though there is significant debate 
as to which parties in the cryptofinancial system should have 
responsibilities akin to banks to police AML on behalf of the 
Government.
    There are two issues important to think through regarding 
AML and crypto. First, the existing AML framework relies on 
banks to assist law enforcement in policing money laundering, 
in large part due to the intermediary role they play in 
financial transactions. Cryptoproponents argue that applying 
the AML framework from the banking world to them does not make 
sense because cryptotransactions are not intermediated, but 
direct from person to person, meaning that there is no party 
within cryptotransactions for AML rules to target. I believe 
that this is inaccurate, given the middleman role that miners/
validators play in every cryptotransaction. Miners are arguably 
a regulatory intervention point for addressing AML goals, 
though they have been excluded from the AML regulatory 
perimeter by FATF and FinCEN thus far.
    The second issue related to AML and crypto is that 
cryptoproponents, along with others, have raised important 
concerns about the existing AML regulatory framework. These 
include concerns about privacy and whether the Government 
should have visibility into every financial transaction people 
engage in, along with the cost/benefit ratio of the existing 
AML framework (how much money laundering/crime does it stop 
compared to the costs of implementation, limits on financial 
freedom, and excluding people from the financial system). 
Concerns about Government surveillance and financial privacy 
are among the reasons that people are attracted to crypto, and 
flag that it may be time to reevaluate the policy goals of the 
existing AML framework, and whether the way Congress is 
achieving those goals strikes the right balance in terms of 
privacy, crime prevention, regulatory burdens, and financial 
inclusion.

Q.3. The conversation around central bank digital currencies 
(CBDCs) has grown in recent years. Chairman Powell has stated 
that the Fed awaits authorization from Congress before moving 
forward with the development and implementation of a U.S. CBDC. 
Would a blockchain-based U.S. CBDC benefit consumers by better 
protecting financial transactions? Are there additional 
benefits or risks associated with the use of blockchain 
technology for the purposes of a U.S. CBDC?

A.3. Global research into CBDCs is looking broadly into many 
possible technology implementations, including blockchain-based 
systems. \5\ Although cryptocurrencies (which are blockchain 
systems) were arguably what stimulated central banks to 
consider CBDCs, it is important to consider whether a 
blockchain technology-based CBDC offers benefits over other 
possible technologies. There are two different types of 
blockchain technologies that could be used: public/
permissionless blockchains or private/permissioned blockchains 
(sometimes referred to as distributed ledger technologies, or 
DLT). Researchers have largely ruled out using public/
permissionless blockchains for CBDCs, but DLT is still part of 
the research discussion.
---------------------------------------------------------------------------
     \5\ See, e.g., Sarah Allen et al., ``Design Choices for Central 
Bank Digital Currency'', Global Economy & Development Working Paper 
140, July 2020, available at https://www.brookings.edu/wp-content/
uploads/2020/07/Design-Choices-for-CBDC-Final-for-web.pdf; David Chaum, 
Christian Grothoff, Thomas Moser, ``How To Issue a Central Bank Digital 
Currency'', SNB Working Papers (March 2021), available at https://
www.snb.ch/n/mmr/reference/working-paper-2021-03/source/working-paper-
2021-03.n.pdf; Raphael Auer and Rainer Bohme, ``The Technology of 
Retail Central Bank Digital Currency'', BIS Quarterly Review, pp. 85-96 
(Mar. 2020).
---------------------------------------------------------------------------
    With reference to public/permissionless blockchains (such 
as Bitcoin, Ethereum, and other cryptoeconomic systems on which 
cryptocurrencies run), a critical difference between a CBDC and 
a cryptocurrency is that a CBDC is offered by a central issuer 
(the central bank) and the success of that CBDC will depend on 
trust in the central bank and the applicable country, along 
with the technology used to build the CBDC. By contrast, with a 
cryptocurrency, there is no single central issuer of the 
applicable token, as many parties within the blockchain system 
work together to issue and maintain the token.
    A public/permissionless system like that used with Bitcoin 
or Ethereum is a poor fit for a CBDC because there is no 
accountability to the public (as would be required for a 
government currency), and because the central bank would not be 
able to control the monetary (or other) policies of the CBDC. 
Thus, adopting a cryptocurrency as legal tender, as El Salvador 
has recently done, poses risks to consumers (e.g., volatility, 
operational risks) that the Government or central bank cannot 
easily mitigate. \6\
---------------------------------------------------------------------------
     \6\ See Tobias Adrian and Rhoda Weeks-Brown, ``Cryptoassets as 
National Currency? A Step too Far'', IMF Blog, July 26, 2021 
(discussing the risks raised by El Salvador's designation of Bitcoin as 
legal tender).
---------------------------------------------------------------------------
    With regard to DLT-based CBDCs, there is debate about 
whether DLT is necessary or worthwhile. Some argue that using 
DLT-based systems introduces unnecessary complexity and reduced 
efficiency (including in transaction processing capacity) to 
the system without corresponding benefits in resilience or 
privacy. \7\ Others, like Sweden, are trialing CBDCs using 
permissioned blockchain systems. \8\ This is a matter of 
ongoing research and debate, however, with complex technical, 
policy, and legal considerations involved, and there are no 
easy or settled answers at this time.
---------------------------------------------------------------------------
     \7\ See, e.g., David Chaum, Christian Grothoff, Thomas Moser, 
``How To Issue a Central Bank Digital Currency'', SNB Working Papers 
(March 2021), available at https://www.snb.ch/n/mmr/reference/working-
paper-2021-03/source/working-paper-2021-03.n.pdf (proposing a CBDC that 
does not use blockchain technology).
     \8\ Sveriges Riksbank, E-krona pilot: Phase 1, April 2021, 
available at https://www.riksbank.se/globalassets/media/rapporter/e-
krona/2021/e-krona-pilot-phase-1.pdf (reporting on the results of the 
trial of e-krona using a blockchain-based system, and on the need for 
further research for this new technology).
---------------------------------------------------------------------------
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
             SENATOR CORTEZ MASTO FROM JERRY BRITO

Q.1. If Americans decide to hold digital tokens in significant 
volume, commercial banks will face a compression of margins. 
What mechanisms can you expect commercial banks to implement to 
recoup fees from consumers?

.A.1. I don't believe it necessarily follows that if Americans 
decide to hold digital tokens in significant amounts that this 
will mean that commercial banks will face a compression of 
margins. It would not be the case any more than the fact that 
Americans holding stocks and bonds affect bank margins. 
Cryptocurrencies are a new commodity asset class similar to 
gold or oil. Americans will hold cryptocurrency tokens as an 
investment or for consumptive use. I do not believe that 
Americans will use cryptocurrencies as a substitute for dollars 
as currency. \1\
---------------------------------------------------------------------------
     \1\ See Andrea O'Sullivan, ``How Do Cryptocurrencies Affect 
Monetary Policy?'' Coin Center, June 20, 2018, https://
www.coincenter.org/education/policy-and-regulation/how-do-
cryptocurrencies-affect-monetarypolicy/.

Q.2. Can you explain more how a person who does not have access 
to a bank account or does not have access to the internet can 
---------------------------------------------------------------------------
obtain cryptotokens and transact in cryptocurrencies?

A.2. Someone without a bank account or internet access can 
obtain cryptocurrency by trading cash for cryptocurrency. This 
can be done at an automated teller machine or via an in-person 
transaction. To possess cryptocurrency one does not need access 
to a computer; one only needs to be able to hold a series of 
letters and numbers (call it a password) that controls a 
certain amount of cryptocurrency units. This can be done on 
paper, \2\ with tamper-proof coins, \3\ or even by memorizing 
the password. \4\ That all said, it is very unlikely that any 
significant number of persons will use these methods. The 
question posed is akin to asking, how can a person who does not 
have access to the internet make use of email or online 
shopping? While one can conceive of ways to do so, such as 
using internet cafes or libraries, it is likely not something 
that persons without internet access will pursue. This would be 
a significant concern if cryptocurrency were to replace the 
dollar, but as I explained above I do not believe that is a 
serious possibility. A more likely concern is that physical 
cash is replaced by a national digital currency, something that 
would indeed affect those persons who do not have bank accounts 
or internet access.
---------------------------------------------------------------------------
     \2\ ``Paper Wallet'', Bitcoin wiki, accessed September 16, 2021, 
https://en.bitcoin.it/wiki/Paper-wallet.
     \3\ ``Casascius Physical Coins'', Bitcoin wiki, accessed September 
16, 2021, https://en.bitcoin.it/wiki/Casascius-physical-bitcoins.
     \4\ ``Brainwallet'', Bitcoin wiki, accessed September 16, 2021, 
https://en.bitcoin.it/wiki/Brainwallet.

Q.3. What opportunities exist for redress in terms of smart 
contracts whereby an issue in the program's code results in an 
---------------------------------------------------------------------------
unintended consequence for both parties involved?

A.3. There are a few ways to address a situation where an 
undetected bug in a smart contract generates an unexpected 
result for the parties involved. First, depending on the 
circumstances, parties may be able to contact and seek redress 
from counterparties. Second, to the extent the smart contract 
was marketed as fit for a particular purpose, there may be 
recourse under common law fraud claims and Unfair and Deceptive 
Acts and Practices laws at the Federal and State levels. \5\
---------------------------------------------------------------------------
     \5\ 15 U.S.C. 45, see also https://www.nclc.org/images/pdf/udap/
report-50-states.pdf.
---------------------------------------------------------------------------
    That all said, smart contracts are typically open source 
code (i.e., legible by anyone and free of copyright 
protections) and, if executed, will operate in a deterministic 
manner, so there is little reason to expect recourse beyond 
contract or UDAP. As an analogy, imagine one comes across the 
plans for a wood folding chair on a woodworker's personal 
website. One downloads the plans and follows them to a tee, yet 
at the end the chair does not fold properly because the 
woodworker who drew up the plans made a mistake. What recourse 
does one have? One doesn't have a contract with the woodworker, 
nor did the woodworker market his plans or make any 
representations about them. It's a case of mutual mistake since 
one didn't spot the error any more than the woodworker did.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                        FROM JERRY BRITO

Q.1. Cybersecurity remains a growing concern in both the public 
and private sectors. Do you believe that the use of 
cryptocurrencies and blockchain technology has the potential to 
mitigate cyberthreats to institutions in both the public and 
private sectors through the use of alternative methods of file 
storage, direct transactions, and other use-cases for 
cryptocurrencies?

A.1. Yes. For example, the root cause of many data breaches--
such as those at Experian, \1\ Equifax, \2\ OPM \3\--is the 
fact that traditional centralized databases are particularly 
vulnerable: if an attacker can compromise the password of one 
individual he may gain access to the personal information of 
millions of others.
---------------------------------------------------------------------------
     \1\ Brain Krebs, ``Experian API Exposed Credit Scores of Most 
Americans'', Krebs on Security, April 28, 2021, https://
krebsonsecurity.com/2021/04/experian-api-exposed-credit-scores-of-most-
americans/.
     \2\ Alfred Ng, ``How the Equifax Hack Happened, and What Still 
Needs To Be Done'', CNet, September 7, 2018, https://www.cnet.com/tech/
services-and-software/equifaxs-hack-one-year-later-a-look-back-at-how-
ithappened-and-whats-changed/.
     \3\ Brendan I. Koerner, ``Inside the Cyberattack That Shocked the 
U.S. Government'', Wired, October 23, 2016, https://www.wired.com/2016/
10/inside-cyberattack-shocked-us-government/.
---------------------------------------------------------------------------
    Microsoft is a company that is painfully aware of this 
vulnerability as it provides the identity infrastructure for 
over 90 percent of Fortune 500 companies. \4\ This is why 
Microsoft spent years helping develop a decentralized identity 
standard built on top of Bitcoin. It is called the ION network, 
it was launched in March, is live and operational, and is now a 
candidate W3C standard. \5\
---------------------------------------------------------------------------
     \4\ Apron Shah, ``Microsoft Azure: The Only Consistent, 
Comprehensive Hybrid Cloud'', Microsoft Azure blog, September 25, 2018, 
https://azure.microsoft.com/en-us/blog/microsoft-azure-the-only-
consistent-comprehensive-hybrid-cloud/.
     \5\ ``Decentralized Identifiers (DIDs) v1.0'', W3C Candidate 
Recommendation Draft, July 20, 2020, https://www.w3.org/TR/did-core/.
---------------------------------------------------------------------------
    By replacing usernames and passwords with decentralized 
identifiers, \6\ the ION network will allow individuals to 
control their own identities rather than trust data brokers 
that can be compromised at root. This means that an attacker 
would no longer be able to compromise just one credential in 
order to gain access to everyone else's, but would instead have 
to hack each user individually--a massive improvement to 
cybersecurity.
---------------------------------------------------------------------------
     \6\ Ibid.
---------------------------------------------------------------------------
    Other benefits of decentralized identifiers include the 
ability to verify credentials--helping, for example, to combat 
disinformation. To explain, with ION it will be trivially easy 
to verify that a photo you're looking at was signed as 
authentic by a photographer credentialed by the Associated 
Press. \7\ Additionally, because a decentralized network allows 
you to own your own identity and control your network of 
relationships to other identities, there can be an open, 
portable social graph capable of competing with incumbent, 
proprietary social networks.
---------------------------------------------------------------------------
     \7\ ``Tangents From Coin Center: Daniel Buchner'', Podcast, 
October 21, 2020, https://www.youtube.com/watch?v=VMzJ3AdhDtI.
---------------------------------------------------------------------------
    Similarly, decentralized file storage networks like 
Filecoin, Sia, and Storj, allow individuals and firms to take 
advantage of cloud data storage without having to trust the 
security of a single service provider like Google or Amazon. 
Instead, user data is chopped into many pieces, those pieces 
are individually encrypted with a key that only the user 
controls, and redundantly stored across nodes of the network. 
This means there is no single point of failure for an attacker 
to exploit--a vast improvement over today's standard model.

Q.2. There have been multiple instances of cryptocurrencies 
being used for the purposes of money laundering and threat 
financing. How can Congress best mitigate the risk posed by bad 
actors' use of cryptocurrencies while enabling consumers and 
institutions in both the public and private sectors to benefit 
from the use of such new and emerging technologies?

A.2. The key to combating illicit use of cryptocurrencies is 
ensuring proper regulation of the on- and off-ramps from the 
traditional financial systems. Illicit actors will always 
ultimately seek to cash out their illicit gains. \8\ Exchanges 
and other off-ramps are the choke points at which they can be 
identified and funds seized. Law enforcement has had great 
success disrupting illicit activity using a combination of 
blockchain analysis and KYC information collected by exchanges. 
The problem is that not all exchanges comply with anti- money 
laundering laws, in particular foreign exchanges based in Asia 
and Eastern Europe. This is the biggest gap in law 
enforcement's ability to target criminal activity, especially 
when the States that have such rogue exchanges within their 
borders do little to assist U.S. investigators. Law enforcement 
needs greater help addressing these rogue exchanges overseas. 
To the best of my knowledge, all U.S.-based exchanges comply 
with BSA requirements and actively cooperate with law 
enforcement. Increasing regulatory burdens on these exchanges, 
or even introducing requirements they cannot possibly comply 
with, will not improve matters and will instead cede further 
ground to those who disregard the law.
---------------------------------------------------------------------------
     \8\ The idea that one would be able to live and operate entirely 
within a cryptocurrency economy is fanciful. See Andrea O'Sullivan, 
``How Do Cryptocurrencies Affect Monetary Policy?'' Coin Center, June 
20, 2018, https://www.coincenter.org/education/policy-and-regulation/
how-do-cryptocurrencies-affect-monetarypolicy/.

Q.3. The conversation around central bank digital currencies 
(CBDCs) has grown in recent years. Chairman Powell has stated 
that the Fed awaits authorization from Congress before moving 
forward with the development and implementation of a U.S. CBDC. 
Would a blockchain-based U.S. CBDC benefit consumers by better 
protecting financial transactions? Are there additional 
benefits or risks associated with the use of blockchain 
---------------------------------------------------------------------------
technology for the purposes of a U.S. CBDC?

A.3. The greatest potential benefits from adopting a CBDC are 
related to the interoperability in payments it could 
facilitate. This depends, of course, on an open and 
permissionless design. \9\ On the other hand, the greatest 
threat of a CBDC is to privacy. One can imagine a CBDC design 
that gives the Government and corporations full visibility into 
all citizens' transactions--indeed this is how China's CBDC 
works. \10\ Add to this the elimination of cash and the result 
is an economy in which all transactions are intermediated and 
thus surveilled. This would be at complete odds with the 
liberal values of an open society. \11\ Luckily, cryptocurrency 
technology shows us that we have the technical capacity to 
design a CBDC in such a way that it is open, permissionless, 
and as private as physical cash. \12\
---------------------------------------------------------------------------
     \9\ Peter Van Valkenburgh, ``Open Matters: Why Permissionless 
Blockchains Are Essential to the Future of the Internet'', Coin Center, 
December 2016 (see subsection IV.A.ii. ``Why Open Is Critical for 
Cash'').
     \10\ Raymond Zhong, ``China's Cryptocurrency Plan Has a Powerful 
Partner: Big Brother'', New York Times, October 18, 2019, https://
www.nytimes.com/2019/10/18/technology/china-cryptocurrency-facebook-
libra.html (``Chinese officials use something of an oxymoron to 
describe what their new currency will offer: `controllable anonymity. . 
. . As long as you aren't committing any crimes and you want to make 
purchases that you don't want others to know about, we still want to 
protect this kind of privacy,' Mr. Mu, the deputy director of the 
central bank's payments department, said in another recent online 
lecture on China's cryptocurrency plans.'').
     \11\ Jerry Brito, ``The Case for Electronic Cash'', Coin Center, 
February 2019, https://www.coincenter.org/the-case-for-electronic-
cash/.
     \12\ Matthew Green and Peter van Valkenburgh, ``Without Privacy, 
Do We Really Want a Digital Dollar?'' Coin Center, April 30, 2020, 
https://www.coincenter.org/without-privacy-do-we-really-want-a-digital-
dollar/.
---------------------------------------------------------------------------
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
            SENATOR CORTEZ MASTO FROM MARTA BELCHER

Q.1. Digital-currency based systems could magnify concerns 
surrounding illicit activity and consumer risk. What 
recommendations do you have pertaining to consumer devices to 
safeguard data and combat fraud and identity theft?

A.1. We can--and already do--sensibly apply existing laws and 
regulations to the cryptocurrency space to address concerns 
regarding illicit activity and consumer risk.
    It is a misconception that cryptocurrencies are 
unregulated. The onramps and offramps where people buy, sell, 
and custody cryptocurrency are heavily regulated. These onramps 
and offramps are chartered banks, trust companies, or State-
licensed money transmitters. As financial institutions under 
the Bank Secrecy Act, they register with the Financial Crimes 
Enforcement Network (FinCEN), verify their customers' 
identities, and share details of suspicious transactions with 
law enforcement.
    In addition, if someone commits fraud, it does not matter 
what technology they use to do so. If someone commits fraud, 
actions can be taken by the Consumer Financial Protection 
Bureau, the Federal Trade Commission, the Commodity Futures 
Trading Commission, the Securities and Exchange Commission, and 
State attorneys general, in addition to private causes of 
action--regardless of whether the fraud is committed using 
cryptocurrency, cash, the phone, email, pen or paper, or any 
other technology.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                       FROM MARTA BELCHER

Q.1. The entertainment industry creates thousands of jobs and 
provides Arizonans with the opportunity to enjoy art, theatre, 
and music. Do you believe that the cryptocurrencies have great 
potential to support artists' income through the use of 
programmed royalty transactions?

A.1. Yes, cryptocurrencies have the potential to--and already 
do--support artists' income through programmed royalty 
transactions.
    Cryptocurrency creates the ability to program money--in 
other words, to write computer code that automatically 
transfers value upon a condition being met. For example, you 
could write a computer program that says, for every second of a 
song that a user plays on a computer, automatically transfer 
the equivalent of a millionth of a cent from the listener to 
the songwriter. This can happen instantly and automatically, 
with no intermediary between the user and the songwriter, even 
across borders.
    There are already many cryptocurrency applications that use 
this technology for paying music royalties. For example, Audius 
is a music streaming platform that uses the Interplanetary File 
System's decentralized technology to directly link artists with 
their listeners, to enable artists to control and monetize 
their own music.

Q.2. Cybersecurity remains a growing concern in both the public 
and private sectors. Do you believe that the use of 
cryptocurrencies and blockchain technology has the potential to 
mitigate cyberthreats to institutions in both the public and 
private sectors through the use of alternative methods of file 
storage, direct transactions, and other use-cases for 
cryptocurrencies?

A.2. At the Filecoin Foundation, we are using cryptocurrency 
technology to build a decentralized version of the Web--an 
alternative to Big Tech that puts people in control of their 
own data, protects user privacy, and enhances cybersecurity.
    Today's Internet is centralized. The vast majority of data 
making up the many websites Americans use every day sits in 
data warehouses owned by just three companies: Amazon Web 
Services, Microsoft Azure, and Google Cloud. We have repeatedly 
seen these companies suffer blackouts, and vast swaths of the 
Web go down for hours, including websites that are massive 
contributors to the American economy. That is the problem with 
having single points of failure.
    The Filecoin Foundation is working to create a better 
version of the Web by combining the storage capacity and 
computing power of many individual devices into a 
supercomputer-like network, and storing multiple copies of data 
across those devices. On this decentralized version of the 
Internet, websites will stay up even if some nodes fail, and 
the availability of information is not dependent on any one 
server or company. This provides a more robust platform for 
humanity's most important information.

Q.3. There have been multiple instances of cryptocurrencies 
being used for the purposes of money laundering and threat 
financing. How can Congress best mitigate the risk posed by bad 
actors' use of cryptocurrencies while enabling consumers and 
institutions in both the public and private sectors to benefit 
from the use of such new and emerging technologies?

A.3. It is a misconception that cryptocurrencies facilitate 
crime. Cryptocurrencies like Bitcoin are not anonymous; they 
are pseudonymous. Bitcoin's ledger publicly and permanently 
records all transactions, including the public key (which is 
similar to a username) of the people making the transactions. 
This public ledger can help law enforcement trace bad actors. 
For example, after the recent Colonial Pipeline ransomware 
attack, law enforcement officials were able to recover the 
Bitcoin that had been paid in ransom within days of the attack.

Q.4. The conversation around central bank digital currencies 
(CBDCs) has grown in recent years. Chairman Powell has stated 
that the Fed awaits authorization from Congress before moving 
forward with the development and implementation of a U.S. CBDC. 
Would a blockchain-based U.S. CBDC benefit consumers by better 
protecting financial transactions? Are there additional 
benefits or risks associated with the use of blockchain 
technology for the purposes of a U.S. CBDC?

A.4. Central Bank Digital Currencies raise important questions 
about privacy and surveillance. In order to protect civil 
liberties, it is critical that CBDCs implement safeguards to 
ensure that individuals can engage in financial transactions 
without all financial records being made available to the 
Government by default.

              Additional Material Supplied for the Record

                      STATEMENT OF PUBLIC CITIZEN

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]