[Senate Hearing 117-609]
[From the U.S. Government Publishing Office]
S. Hrg. 117-609
LEGISLATIVE HEARING TO REVIEW S. 4760,
THE DIGITAL COMMODITIES
CONSUMER PROTECTION ACT
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HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
September 15, 2022
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available on http://www.govinfo.gov/
__________
U.S. GOVERNMENT PUBLISHING OFFICE
51-390 PDF WASHINGTON : 2024
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COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
DEBBIE STABENOW, Michigan, Chairwoman
PATRICK J. LEAHY, Vermont JOHN BOOZMAN, Arkansas
SHERROD BROWN, Ohio MITCH McCONNELL, Kentucky
AMY KLOBUCHAR, Minnesota JOHN HOEVEN, North Dakota
MICHAEL F. BENNET, Colorado JONI ERNST, Iowa
KIRSTEN E. GILLIBRAND, New York CINDY HYDE-SMITH, Mississippi
TINA SMITH, Minnesota ROGER MARSHALL, Kansas
RICHARD J. DURBIN, Illinois TOMMY TUBERVILLE, Alabama
CORY BOOKER, New Jersey CHARLES GRASSLEY, Iowa
BEN RAY LUJAN, New Mexico JOHN THUNE, South Dakota
RAPHAEL WARNOCK, Georgia DEB FISCHER, Nebraska
MIKE BRAUN, Indiana
Erica Chabot, Majority Staff Director
Jessica L. Williams, Chief Clerk
Fitzhugh Elder IV, Minority Staff Director
C O N T E N T S
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Thursday, September 15, 2022
Page
Hearing:
Legislative Hearing to Review S. 4760, the Digital Commodities
Consumer Protection Act........................................ 1
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STATEMENTS PRESENTED BY SENATORS
Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan... 1
Boozman, Hon. John, U.S. Senator from the State of Arkansas...... 3
WITNESSES
Panel I
Behnam, Hon. Rostin, Chairman, Commodity Futures Trading
Commission, Washington, D.C.................................... 4
Panel II
Phillips, Todd, Director, Financial Regulation and Corporate
Governance, Center for American Progress, Washington, D.C...... 30
Warren, Sheila, Chief Executive Officer, Crypto Council for
Innovation, San Francisco, CA.................................. 32
Parker, Christine, Vice President and Deputy General Counsel,
Coinbase, San Francisco, CA.................................... 34
Tarbert, Heath, Ph.D., Chief Legal Officer, Citadel Securities,
Chicago, IL.................................................... 35
Dixon, Denelle, Chief Executive Officer, Stellar Development
Foundation, San Francisco, CA.................................. 37
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APPENDIX
Prepared Statements:
Behnam, Hon. Rostin.......................................... 50
Phillips, Todd............................................... 53
Warren, Sheila............................................... 72
Parker, Christine............................................ 93
Tarbert, Heath, Ph.D......................................... 108
Dixon, Denelle............................................... 124
Document(s) Submitted for the Record:
Stabenow, Hon. Debbie:
Arkansas Advocates for Children and Families, letter of
support.................................................... 136
Question and Answer:
Behnam, Hon. Rostin:
Written response to questions from Hon. John Boozman......... 140
Written response to questions from Hon. Raphael Warnock...... 140
Written response to questions from Hon. John Hoeven.......... 141
Written response to questions from Hon. Charles Grassley..... 143
Written response to questions from Hon. John Thune........... 145
Phillips, Todd:
Written response to questions from Hon. Cory Booker.......... 146
Warren, Sheila:
Written response to questions from Hon. Cory Booker.......... 149
Written response to questions from Hon. John Hoeven.......... 152
Parker, Christine:
Written response to questions from Hon. Cory Booker.......... 155
Tarbert, Heath, Ph.D.:
Written response to questions from Hon. John Boozman......... 157
Written response to questions from Hon. John Hoeven.......... 157
Dixon, Denelle:
Written response to questions from Hon. Cory Booker.......... 160
LEGISLATIVE HEARING TO REVIEW S. 4760, THE DIGITAL COMMODITIES CONSUMER
PROTECTION ACT
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THURSDAY, SEPTEMBER 15, 2022
U.S. Senate,
Committee on Agriculture, Nutrition, and Forestry,
Washington, DC.
The Committee met, pursuant to notice, at 10:04 a.m., in
room 215, Dirksen Senate Office Building, Hon. Debbie Stabenow,
Chairwoman of the Committee, presiding.
Present: Senators Stabenow, Brown, Klobuchar, Gillibrand,
Smith, Durbin, Booker, Warnock, Boozman, Hoeven, Ernst,
Marshall, Tuberville, Grassley, Thune, Fischer, and Braun.
STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
OF MICHIGAN, CHAIRWOMAN, U.S. COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
Chairwoman Stabenow. Good morning. I call this hearing to
order of the U.S. Senate Committee on Agriculture, Nutrition,
and Forestry to order. So pleased to see all of our colleagues
here for this really important hearing and discussion.
We are here today because a rapidly increasing number of
Americans are investing in cryptocurrencies; yet, there is no
Federal oversight over the tokens that make up the majority of
this market.
Just as quickly as these assets have risen in popularity,
we have seen their value drop. As a result, hardworking
Americans have lost billions of dollars, dollars they use to
support their families, keep roofs over their heads, and nestle
away for hard-earned retirement. In the past few months alone,
numerous companies have gone bankrupt, and the value of some
widely traded coins has dwindled to cents on a dollar.
Meanwhile, $1.9 billion worth of cryptocurrency was stolen in
hacks in the first seven months of this year alone, up 60
percent from this time last year.
At the same time, it is important to recognize that
cryptocurrencies and blockchain technology offer an alternative
to using large financial institutions. One-third of Americans
who have bought or traded crypto earn less than $60,000 a year,
some of them--some of whom lack trust in these institutions or
find them too costly. They simply cannot afford, though, to
lose their savings because of a lack of guardrails in these
markets, and that is where we come in our responsibility as
overseeing Federal regulators.
We need to have clear, consistent rules of the road that
allow good actors to innovate and grow while, first and
foremost, keeping customers safe. As the committee with
oversight over one of our Nation's two market regulators, it is
our job to ensure that we bring the necessary protections to
this marketplace.
Together with my partner, Senator Boozman, and with
colleagues, Senators Booker, Thune, Ernst, and Gillibrand, we
have introduced the Digital Commodities Customer Protection
Act. This bill gives the Commodity Futures Trading Commission
(CFTC) oversight over digital assets that act like commodities,
such as Bitcoin and Ether, that currently have no Federal
oversight. This is a glaring hole in our financial system, and
I believe we must close it.
Our bipartisan bill will require that all digital commodity
platforms register with the CFTC. This will set a uniform
national standard and allow the CFTC to catch fraud before it
happens. As its name suggests, our bill is focused on consumer
protection. It will require that platforms segregate and
safeguard customer assets, hold sufficient capital, and abide
by rigorous cybersecurity standards. It will eliminate many of
the conflicts of interest in this market, and it will mandate
that platforms speak truthfully about the risks of trading
digital commodities and do not engage in misleading
advertising.
The CFTC is the right regulator for the job. Congress gave
the Agency oversight over the swaps market in Dodd-Frank, and
it responded by setting the global standard. Our nation's
derivatives markets have been a mainstay for our producers
during recent supply chain disruptions and elevated commodity
prices. We will hear today from Chairman Behnam shortly about
how the CFTC has been a leader in policing the crypto markets
for fraud and abuse.
This week, we received a letter from former Republican CFTC
Chairman, Christopher Giancarlo, expressing his support for the
bipartisan bill, and without objection, I would enter this into
the record. So, ordered.
[The following document can be found on page 136 in the
appendix.]
Chairwoman Stabenow. This bill also gives the Agency
additional resources to get this job done right, which is so
important.
Finally, it recognizes that other financial agencies have
critical roles to play in regulating digital assets, also
important. I am pleased to see Chairman Gensler's recent
comments about how the CFTC and SEC can work together to make
this market work just as we did in putting together Dodd-Frank,
and we have had productive discussions with SEC staff about the
bill, which we appreciate and will continue.
As President Biden has recognized, this is a big
responsibility with a lot at stake, and it is going to take all
of us at the table working together. At our table today will be
some of the brightest leaders in this space, and I look forward
to hearing from each of you on how we can continue to bring
transparency and accountability to this marketplace while still
enabling the innovation that makes this technology so
promising.
I would like to turn now to my colleague and partner,
Senator Boozman, for his opening remarks.
STATEMENT OF HON. JOHN BOOZMAN, U.S. SENATOR FROM THE STATE OF
ARKANSAS, U.S. COMMITTEE ON AGRICULTURE, NUTRITION, AND
FORESTRY
Senator Boozman. Well, thank you so much, Madam Chair, and
it is great to be with you today as we examine S. 4760, the
Digital Commodities Consumer Protection Act (DCCPA). This bill,
which I am proud to co-sponsor with the Chairwoman as well as
Senators Thune and Booker, will bring much-needed regulatory
certainty to the growing digital commodity ecosystem. As this
industry continues to grow, questions remain about the proper
role Federal regulators will play. I believe regulation must
ensure market integrity and consumer protection while also
fostering an environment that encourages innovation. I believe
our bill gives the CFTC the authority to do just those things.
Currently, the digital assets spot or cash markets are
subject to a patchwork of regulations at the State and the
Federal level. This is simply inadequate for market structure
and consumer protection perspectives. It is without question
that digital commodities and related technologies will continue
to play an important role in the global economy for decades to
come. As a result, now is the time to provide regulatory
certainty to the market and create a framework that makes sense
from both a domestic and an international perspective.
It is imperative that both Congress and regulators work
with industry and consumer advocates to ensure the laws and
regulations for market participants are created through a
transparent process that results in a clearly understood set of
rules. Anything less hurts everyone. Regulation by enforcement
without any meaningful engagement with market participants is
no way to police the industry. It is unfair to stakeholders who
operate in good faith but are then punished because they have
not been given clear rules of the road.
Ultimately, this Committee's goal is to establish a
framework that allows industry to innovate and grow while
providing the CFTC the resources necessary to write and enforce
rules that protect consumers and provide retail participants
the ability to fully understand the functions of the
commodities they are buying and selling.
I hope today's hearing provides an opportunity for both
Chairman Behnam and our esteemed panel of stakeholders to weigh
in on the most important features of our bill, including
constructive recommendations to improve the bill, as we look
forward to a committee markup in the near future.
In closing, I am confident the CFTC can rise to the
challenge to be the right fit for an expanded regulatory role
in the digital commodities spot market, and I am confident that
we can work together to protect consumers and allow this ever
growing technology to flourish.
I want to thank Chairwoman Stabenow for her leadership and
look forward to today's discussion and hearing from our
witnesses.
Before I conclude, I would like to welcome one staffer to
the Committee and then thank another staffer who will be
leaving shortly. First, I would like to welcome Erica Chabot.
Erica is the new Majority Staff Director for Chairwoman
Stabenow but is certainly no stranger to the Senate. For the
last 20 years, she has served Senator Leahy, a member and
former Chairman of this Committee, who we all know and are
going to miss as he retires. We really look forward to Erica
and look forward to her service to the Committee.
Second, I would like to thank Darin Guries of my staff for
his exceptional service to the Senate and Committee. Darin is a
native Kansan and has spent the last 15 years working for the
Senate. For the last seven, he has worked for the Agriculture
Committee, first for Senator Roberts and now for me.
The legislation that we are discussing today is largely the
product of bipartisan negotiations led by Darin and Lucy,
working hand in hand to, I think, produce a very, very good
product.
The Committee and the Senate have greatly benefited from
Darin's expertise, judgment, and charm. We will miss Darin as
he leaves the Senate. I wish him great success and many thanks
for his service. We are trying not to be bitter over the people
that have hired him, but it is okay.
Thank you, Madam Chair.
Chairwoman Stabenow. Well, thank you, Senator Boozman, and
thank you so much for recognizing Erica. We are so pleased to
have her here. Welcome, welcome.
Darin, he may think he is leaving, but actually I think we
are not going to let him. Right in the middle of all this?
Really. Oh, my goodness.
I do so appreciate our wonderful staffs. We have been so
fortunate on the Committee, past, present, with some of the
smartest, hardworking people that there are. We very much work
in partnership and certainly on this bill. That has been hand-
in-glove, and we really appreciate all of that.
Well, let me turn now to our first witness. Rostin Behnam
is Chairman of the Commodity Future Trading Commission and
certainly no stranger to this Committee either. Prior to his
time leading the Commission, Chairman Behnam has served as a
commissioner. He has served since 2017 on the Commission and
prior to that was a valuable member of our staff on the
Agriculture Committee.
Welcome, Chairman Behnam, and we recognize you for five
minutes of testimony.
STATEMENT OF THE HONORABLE ROSTIN BEHNAM, CHAIRMAN, COMMODITY
FUTURES TRADING COMMISSION, WASHINGTON, D.C.
Mr. Behnam. Thank you. Chairwoman Stabenow, Ranking Member
Boozman, and members of the Committee, appreciate the
opportunity to be here before you today to discuss the Digital
Commodities Consumer Protection Act.
Last February, when I testified before this Committee, I
noted that the unique characteristics of the growing digital
asset industry necessitated a comprehensive Federal regulatory
regime. I believe that to be more true today and thank the
Committee for taking steps to address these needs through the
DCCPA. I have directed staff at the CFTC to analyze what
additional needs we would have to support its implementation.
Digital asset commodity cash markets have significant
speculative retail participation, often use high levels of
leverage, and largely rely on platform-based custody
arrangements outside of the traditional regulated banking
sector. Market participants may perceive themselves to be
interacting with exchanges and intermediaries regulated like
those in other traditional financial markets, but the reality
is quite different. Since I last testified, over $1 trillion in
market value has been lost in conjunction with the failure of
several large, high profile firms operating in the shadows. One
lesson is that leverage, interconnected markets, and contagion
can wreak the same havoc in the digital asset ecosystem that
they do in our traditional financial markets.
As I have publically stated several times, including to
this Committee, many digital assets constitute commodities. As
recognized by the DCCPA, the CFTC's expertise and experience
make it the right regulator for the digital asset commodity
market. The CFTC facilitates customer protections through its
principles-based market oversight and disclosure regime aimed
at ensuring transparency, integrity, and security of
transactions. These structures inform customers about who they
are dealing with and provide clarity on the risks of
participating in our markets.
In requiring digital commodity brokers, dealers, and
custodians to join a registered futures association, the DCCPA
acknowledges the key role that self-regulatory organizations,
like the National Futures Association, play in safeguarding the
integrity of markets.
The CFTC has often adapted its oversight capabilities to
meet the demands of evolving markets. Most notably, in the wake
of the 2008 financial crisis, Congress provided the CFTC
authority over approximately 95 percent of the swaps market,
serving as the cornerstone of a robust regulatory regime for
the $350 trillion swaps market.
Returning to the digital asset market, since 2014, the CFTC
has brought almost 60 enforcement cases, including a recent
matter involving a $1.7 billion fraudulent Bitcoin scheme. With
a lack of full visibility into the digital commodity asset
market, the Agency's enforcement program has had to lean
primarily on tips and complaints from the public to identify
fraud and manipulation. The Agency has developed a deep
understanding of this novel market and the underlying
innovations that fuel it, hiring specialists, forming internal
task forces and work groups, leveraging public-private
partnerships, and most recently, restructuring the CFTC's
Financial Technology Hub into the Office of Technology
Innovation.
The DCCPA leverages the historical strength of the CFTC as
a market regulator by requiring registration and supervision of
digital commodity platforms and digital commodity
intermediaries as is required in CFTC-regulated derivatives
markets. Digital commodity facilities will be subject to
compliance with core principles prescribing, among other
things, that the platforms establish and enforce rules
minimizing conflicts of interest, prohibiting abusive trade
practices, establishing system safeguards to minimize
cybersecurity and other operational risks, ensuring the
financial integrity of transactions and intermediaries, and
protecting customer funds.
Critically, all digital commodity platforms must maintain
adequate financial, operational, and managerial resources,
segregate customer funds, and comply with Commission
requirements for the treatment of customer assets. These tools
have proven effective in preserving customer funds and market
operations in times of instability, uncertainty, or market
misconduct.
The DCCPA directly addresses the increased role of retail
participants in the digital commodity asset markets by
directing the Commission to adopt customer protection rules,
requiring digital commodity platforms to disclose to customers
material conflicts of interest and material risks of trading
digital commodities, establishing duties to communicate in a
fair and balanced manner, and establishing standards for the
platforms' marketing and advertising. With the additional
resources contemplated by the funding mechanism in the bill,
and a clear mandate for customer education and outreach to
ensure that our efforts reach all demographics, the CFTC can
swiftly effectuate this new regime.
On September 21st, 1922, nearly 100 years ago to the day,
the Grain Futures Act of 1922 was signed into law, which led to
the near immediate establishment of the then CFTC. With that
legislative accomplishment, this Committee and the Congress
swiftly responded to a policy need that arose on the heels of
emerging risks to American consumers because of then new
financial markets and products, technological innovation, and
the promise of economic development.
With the CFTC's rich history overseeing commodity markets,
coupled with its expertise and track record, which rests on a
firm foundation as a forceful and disciplined cop on the beat,
the Agency stands ready to tackle these new risks and
opportunities one century later.
Thank you, and I look forward to answering your questions.
[The prepared statement of Mr. Behnam can be found on page
50 in the appendix.]
Chairwoman Stabenow. Thank you very much, Mr. Chairman. As
you have indicated and I have spoken about as well,
cryptocurrencies are traded largely by everyday Americans right
now. Some people have voiced concern that the CFTC does not
have a customer protection mandate and, therefore, may not have
the tools that you need to protect these retail customers.
Could you respond to that?
Mr. Behnam. Thank you, Senator. Before I get into any
details, I would say, unequivocally, the Commodity Exchange Act
and the rules that the Commission promulgates from the law
directly support customer protections, full stop and without
question.
In thinking about the layers, because I think there are
several layers to the customer protection regime at the CFTC, I
think it is important to identify each. At the sort of
foundational level is the law itself and the rules that we
implement, which are more prescriptive and more specific
requirements for the registered entities, which you do in your
bill. The core principles can be anything from system
safeguards which directly address cybersecurity and operational
risks, and this is directly about protecting customer funds and
customer assets.
Conflicts of interest, something you noted, which is a big
concern in this issue area, a core principle, we would have to
ensure registered entities which your bill contemplates,
whether it is the trading platforms, the brokers, the dealers,
the custodians, are serving the best interest of the client or
the customer only and no one else.
We have core principles about reporting and recordkeeping.
This is information flow that comes to the Agency so that we
can monitor, for example, disruptive trading practices and
making sure that the market is free from fraud and
manipulation, also prohibiting contracts being listed on
trading platforms that are readily susceptible to manipulation.
These are just a few of the nearly two dozen core
principles which make up the regime and ultimately are
manifested through the rules we prescribe.
I would say the second layer is how do we make sure that
our regulated entities are complying with these rules and
regulations. We do this through a series of inspections,
examinations, and investigations. We work in tandem with our
partner, the National Futures Association, which again is
another provision you include in the Act, to create a self
regulatory regime to ensure that the individuals and
institutions that are regulated by our market are complying
with the law, and we make sure that they have the adequate
proficiency and information they need to comply with the law.
The third thing I will mention is enforcement. We have to
ensure that individuals are held accountable for breaking the
law. This is, obviously, one of the key components of our
requirements as a civil litigator.
Within our Agency--and, Chairwoman, you know this--we have
struggled with funding over the past decade or so, and I have
looked at some data points. In the past 10 fiscal years, our
average budget has just been over $240 million per year. In
that same period, this 10-year period, the Division of
Enforcement has assessed penalties, on average, of over $1.5
billion per, so a six times-plus return on investment for the
American taxpayer in enforcement penalties.
A few months ago, I had the privilege of standing next to
the Attorney General as he announced settlement with one of the
largest commodity trading advisors that had manipulated oil
markets. This was a civil and criminal case brought by Justice
and the CFTC, over $1 billion. In this time, we need to ensure
our energy markets are free of fraud and manipulation. That
case was brought by the CFTC.
LIBOR, a benchmark, a financial benchmark which underpins
trillions of dollars of financial contracts, student loans,
mortgages, over 10 years ago was found to be fraudulent. The
setting standard for setting the benchmark itself, which is in
these trillions of dollars of financial contracts, was
manipulated. Billions of dollars of fines assessed against
financial institutions across the globe. That case was
uncovered just downtown at the CFTC.
These are some examples of the work we do, from the rules
set and the implementation, the law, how we enforce it, and the
accountability. I think layered on top of that, which are all
things you include in the bill, which is extremely important,
is the bankruptcy protection which is another amendment to your
bill to the bankruptcy code and is extremely important. We
prioritize customer funds and customer assets above all else,
above creditors and above security holders.
This in total, I think, as a very robust, very
comprehensive customer protection regime, has worked in our
derivatives market very well for decades and, I think, as you
contemplate in your bill, will work as well in the digital
commodity market.
Chairwoman Stabenow. Let me just ask one other question.
Thank you so much. The President has talked about a whole of
government response to the regulation of digital assets and
this new innovation. Take just a moment about how you would
move forward in working. Obviously, two very important
agencies, CFTC, SEC. Again, we did it in Dodd-Frank. We have
got two great regulators. Just speak about, as you move forward
in this space, how you will craft your regulations and how you
see working together.
Mr. Behnam. Chairwoman, you know, it is not going to be any
different than what we have done before, and you alluded to it,
whether it was 2010 with Dodd-Frank or even going back 40 years
with security futures and commodity futures. We are constantly
talking at the highest level, the Chair, Enforcement, the
different divisions. We naturally have intersections between
our markets. We have dually registered entities, whether it is
the intermediaries, the broker-dealers, and the FCMs or the
investment managers. We have to work together to make this work
because, otherwise, the markets would not work like they should
and like they are intended. We have a long history of this.
I do not think we need to try to fix something that is
working right now, and I think it is all about communication,
transparency, and understanding at a high level what the goal
is. Right? This is not about us at the CFTC. It is not about
the SEC. It is about the regulatory framework. It is about
financial markets. It is about protecting customers. If we keep
that goal in mind, I think we will be able to accomplish what
we are tasked with.
Chairwoman Stabenow. Thank you very much.
Senator Boozman.
Senator Boozman. Thank you, Madam Chair, and I appreciate
your questioning concerning enforcement. That is one of the
things that, you know, comes up in regard to the bill. Does the
CFTC have the ability? Are they a strong enough enforcer?
I think you answered that question very, very well,
explaining your role and the great job that you are doing with
the resources that you have and punching so far above your
weight and, yet, while still enabling protecting the customer
while still enabling innovation. Again, thank you for, again, a
great response in that regard.
Another thing that comes up is user fees on derivatives
market activities, and I had the opportunity of being on the
Subcommittee on Appropriations that has to do with that and
really champion efforts to make clear that the CFTC does not
have the authority to impose user fees on derivatives market
activities. That said, our current bill authorizes the CFTC to
impose a user fee only on digital commodity platforms. Do you
agree that our bill, as written, prevents any application of a
user fee onto derivatives market activity?
Mr. Behnam. Senator, in short, the answer is yes, that the
law--that the bill is drafted prescriptively to ensure that the
fee would only be assessed on the digital commodity platforms
and not on traditional derivatives market entities.
Senator Boozman. Right. It would take congressional
authorization to do that.
Mr. Behnam. Correct.
Senator Boozman. In fact, further, do you believe that it
is clear that the only user fee precedent, you know, as a
result of this bill is to say that it would take additional
legislation to authorize a user fee in the traditional
derivatives market the CFTC oversees?
Mr. Behnam. Yes.
Senator Boozman. Very good. I also want to thank you and
your staff. They have done a very, very good job in providing
technical assistance not only with this bill but, again, you
know, just through the many years that we have worked with
them.
One of the suggestions we have heard from numerous industry
stakeholders is about the definition of dealer. Because our
bill is intended to protect retail consumers, it is not our
intent to cover proprietary trading firms who invest only for
their own accounts to be covered under the definition of
dealer. As currently written, do you believe our legislation
covers this kind of nonretail consumer facing market activity?
Mr. Behnam. Senator, good question, and I think I agree
with you in principle that we are trying to focus on retail
customers. In this case, yes, the principal trading firms, or
the ``prop traders'' as they are more commonly known, would be
exempt from the dealer definition, and that is consistent with
what the Act and this Committee and the Commission have done
with respect to traditional swap dealers. That is my
interpretation, and I think it is drafted appropriately to
create that carve-out for proprietary traders.
Senator Boozman. Very good. Well, I think I am going to
yield back my time in the interest of getting all of the
questions. We appreciate your answers. As an old staffer, you
understand the importance of actually answering questions.
Again, thank you very much.
Mr. Behnam. Thank you, Senator.
Chairwoman Stabenow. Well, thank you very much, Senator
Boozman. Since I went over a few moments, I think we are now
back to even. Thank you very much for that.
I will now turn to Senator Klobuchar, and then I believe
Senator Ernst will be here shortly, and she would be next.
Senator Klobuchar.
Senator Klobuchar. Thank you very much, Chairwoman, and
thank you as well, Senator Boozman.
Chairman, I think we have talked about this before. I
appreciated you visiting my office as well. As you mentioned in
your testimony, these are volatile markets. I think we all saw
that big time when we saw that when digital currencies were
approaching their highest values and the companies were
spending all the millions, maybe even more, on the celebrity
endorsements. I think we all saw the Super Bowl ads. Many
first-time buyers were convinced to invest just in time for the
market to crash, and there are people who are trading on these
unregulated platforms that they may not even realize it. Many
of the investors have not even traded on platforms like this
before.
Could you talk a little bit more about how these underlying
markets work and why you think the CFTC is in a position to
oversee such a volatile market? I know you have done such
things before. Without regulation, what recourse do consumers
have who have been scammed or defrauded by crypto brokers? Kind
of two different questions.
Mr. Behnam. Thanks, Senator. I think in response to your
first question, in many respects, you know, the markets and the
way that the unregulated digital asset platforms are set up and
operate are very similar to the way our traditional markets
operate, but, as you point out, they are unregulated. The
regulation is limited to FinCEN at Treasury and some State
money transmitter licenses, but we do not have that market
regulatory structure which provides that transparency and that
lens into how the markets are operating.
Notwithstanding some obvious custody issues because this
technology is so unique in how you custody the actual
underlying token, the market structure is largely the same. I
think as we contemplate this bill it is about bringing and
shedding light on this marketplace that is otherwise in the
dark, and we would apply the same principles that we have for
decades that have worked quite well.
You talk about volatility, and I think that is in part---
you know, we are seeing correlations between the digital asset
market and traditional equities markets and bond markets, but I
also think that with regulation we will probably see reduced
volatility because you will have more participants and sort of
tighter spreads between individuals willing to buy and sell
these digital assets.
I think it is implementing our core principles,
implementing the rules that we found to be very successful and
effective, focusing on customer protections, focusing on
protecting customer money, but implementing these core
principles that are around trading practices, disruptive
trading practices----
Senator Klobuchar. Okay.
Mr. Behnam [continuing]. ensuring financial resources so
that the platform can do what they are intended to do.
Senator Klobuchar. All right. A June FTC report indicated
that, since 2021, $575 million of the crypto fraud losses
reported to the FTC were about bogus investment opportunities.
I referred to some of this in my last questions. Many of these
originated on social media platforms like Instagram and
Facebook. Could you talk about the interaction with the
platforms, what their role is, and what more could be done on
that front?
I really do not know what your answer is going to be on
this. I just noticed these numbers in my briefings.
Mr. Behnam. Yes, Senator, it is a very difficult area
because we do not have a lens into the trading platforms so we
are relying on customers. As I stated in my statement, every
case that we brought, 60 enforcement cases, has been brought to
us through complaints. We do not have that vision and that lens
into the trading platforms.
Senator Klobuchar. You are saying the bill would help to
give you the transparency into it.
Mr. Behnam. It would provide the authority to the CFTC to
regulate markets, and this volatility, the fraud, the
manipulation, much of it would probably go away because we now
have a regulator, a cop on the beat, and this would deter
activity by bad actors.
Senator Klobuchar. Okay. There is a lot of bad actor
activity going on, on social media platforms, as you know. This
is not the only thing. A cop on the beat would be unique
compared to a lot of the things going on.
When considering the environmental impacts of the
significant energy that is required to mine cryptocurrencies,
like Bitcoin, there is a lot of questions regarding the
sustainability of cryptocurrencies. Can you speak to the way
that this bill approaches the environmental impacts of
cryptocurrencies?
Mr. Behnam. Thank you, Senator. The bill provides and
requires the CFTC to draft a report within 6 months and report
back to this Committee and the House Ag Committee in
consultation with other U.S. regulators, most notably, those
that have expertise in the energy space, and I think this is
the appropriate approach to this issue.
We have heard the statistics about the amazing amount of
energy used to mine coins. I would say that an event occurred
last night with Ethereum, which is going to reduce energy
consumption, a step in the right direction but certainly not
resolving the problem.
I think at its core the report will stand as a basic
starting point so that we can examine what the issues are,
where the energy usage is occurring, and what is the
correlation between the energy usage and the outcome, the
mining of the tokens. From there, I think that would lead to
future policy discussions, potentially disclosures, and
hopefully, incentives to move away from carbon-intensive energy
sources.
Senator Klobuchar. Well, thank you very much. I have a lot
of faith in you, Mr. Chairman, and look forward to working with
Senators Stabenow and Boozman and others on this.
I did want to point out before we turn it back that we have
with us the winning pitcher of the congressional softball game,
Senator Gillibrand, who got four strikeouts--Joni knows. She
used to play on this team--and, against all odds, beat the
press that we will just say was significantly younger as we had
two grandmothers on our team. The congressional team beat the
press, and we should be very pleased with Senator Gillibrand's
performance as a pitcher. She was incredible.
Chairwoman Stabenow. All right. Way to go. That is
terrific. Thank you.
All right, Senator Ernst.
Senator Ernst. Oh, wonderful. Thank you very much,
Chairwoman Stabenow and Ranking Member Boozman. Today's
hearing, it is extremely interesting. I think we have probably
got a lot of viewers out there that are interested as well.
Chairman, thank you for being here. We have heard all of
these concerns. The cryptocurrency companies are being pushed
out of the U.S. to other jurisdictions due to the lack of
regulatory clarity. I would like you to walk through a little
bit more how the bill would address those concerns and
encourage American competitiveness but then why also should we
want to promote the U.S. as a leader and an attractive
jurisdiction for cryptocurrency companies. What benefit does
this bring to every American, even those that are not engaged
in cryptocurrency?
Mr. Behnam. Thanks, Senator. Yes, for sure, I have heard
probably many of the anecdotes you have heard about companies
needing to move overseas because of the regulatory uncertainty.
I think this bill in many respects is one element of the larger
digital asset-crypto ecosystem, but it is certainly a huge step
forward given the size of the market that you contemplate
regulating.
I think with that regulatory certainty the innovators, the
entrepreneurs are going to have more incentives to consider
staying within the U.S., raising capital here, and starting
their businesses here. It is the regulatory certainty. It is
the understanding that the law will be clear and they know how
it will impact and intersect with their business and not fear
something unknown in the future.
To your second point, you know, I view this in many
respects like any technological disruption or innovation that
has occurred for decades. I mentioned the Grain Futures Act
from 100 years ago in my opening statement. It was a different
time when our farmers and ranchers were creating futures
markets, and that was technological innovation at the time.
Here we are 100 years later with a very different
technological innovation, but I think it is important, at a
minimum, despite where the technology may go. I cannot predict
the success or failure of it, but there certainly is demand.
There is certainly optimism. I think there is a vision for it
to be implemented into our economy. When you have those core
fundamentals being discussed and being outlined, then I think
it is important, collectively, as elected officials and as
regulators, we do what we can to balance customer protections
against innovation and supporting the technology.
Senator Ernst. If you could describe for us, what would
happen if we do not move on this in the next six months, if we
do not move in the next year? What is the potential there?
Mr. Behnam. It is always difficult to give an exact
timeline to when things may shift within the marketplace. I
think, quite frankly, the U.S. does a very good job--and I will
speak only from a financial regulatory position--of balancing
the need to move cautiously to ensure that we are embedding the
principles that have worked well for our capital markets and
our derivatives markets for over a hundred years, and that
means moving slowly, thoughtfully, but moving and making sure
we are advancing the conversation and giving entrepreneurs and
innovators a sense of what the direction the country is going
to take from a policy perspective.
We have to balance the ``Oh, if you do not do something
now, we are going to move overseas.'' You know? I take that
with a grain of salt.
We have to have the conversation. We have to engage. We
have to come up with a framework and set a timeline and a
pathway so that these innovators, these entrepreneurs can do
what they do best, and I think we are on that path. This is
certainly a step in the right direction. It is a very positive
step, and I think if we continue to do that we will be able to
preserve these entities, these companies, these entrepreneurs
within the U.S.
Senator Ernst. Fantastic. I really appreciate it.
I want to echo what Senator Klobuchar said. Thank you,
Senator Gillibrand, for leading such a great team and a great
victory. I have played women's softball, congressional softball
for many years. I was not able to make the game last night. We
lost all the years that I played, and they won last night. What
is the common denominator there? Anyway, thank you, Kirsten.
Great victory.
Thank you, Chairman.
Mr. Behnam. Thank you.
Chairwoman Stabenow. Well, thank you so much.
I do--I am going to turn to the winning pitcher of last
night's game and a leader of it, Senator Gillibrand.
Senator Gillibrand. Thank you, Madam Chairwoman.
Thank you to Amy and thank you to Joni. Amy is our
commentator, so she keeps the crowd very lively, which is very
important. Joni has the best arm of the whole team. You better
come back next year so we can keep our winning.
Chairman Behnam, thank you so much for your leadership on
this issue. Thank you for being willing to work with this
Committee, for you being willing to work with me on my
legislation as well. This bill that we are looking at, I think,
can be transformational. I think it is timely. I think it is
urgent. I think it is necessary to create stability in a market
that is growing.
I talk to a lot of colleagues about cryptocurrency,
blockchain, Web3, and they say, well, is this going to go away?
It is here for good. It is part of the world economic
community.
The question that we have as a Committee right now is: Are
we going to be part of the solution, or are we not?
What is needed so much right now are rules of the road. We
just need rules of the road so market participants, so
innovators, so businesses can have basic clarity on how to
create their businesses, what level of oversight and
accountability will be effective, how to create basic safety
and soundness, how to create consumer protection. You being
part of this process has been absolutely essential to getting
this bill written and to getting where it is today for the
Committee. I am very, very optimistic.
I would like you to continue along with the line that
Senator Ernst started about why is this relevant now. This bill
takes jurisdiction over the commodities part of
cryptocurrencies. Some cryptocurrencies are securities. Digital
assets can take many forms. SEC has a regulatory
responsibility. CFTC will have a regulatory responsibility. IRS
will have a regulatory responsibility and so will thoughts and
ideas on cybersecurity, which I will address after this
question.
What I would like you to talk about is: How does this bill
fit into the broader framework? Why is getting this bill done
now so essential? Why and how does getting this bill done now
allow us to build on it to do the rest of the regulatory
frameworks, to then go and look at the Banking Committee and
try to do stablecoins, go and look at the Banking Committee to
try to get SEC regulation for those digital assets that are
securities? Talk about why this piece matters now.
Mr. Behnam. Senator, thanks for the question. You know, you
rightfully point out that this is one piece of the puzzle. We
all have a role to play. We all have our pieces to contribute
to the larger puzzle. I have been lucky to participate in the
Principles Working Group, the Financial Stability Oversight
Council, other international fora, and this is a big issue.
You mentioned stablecoins. This is a predominantly,
prudentially, banking-regulated issue. The security tokens.
There are thousands of security tokens that innovators are
creating and that we need to address. There are issues around
payments, custody, settlement, so many different elements of
this larger digital asset ecosystem that in many respects is
interconnected. As much as their own little silo, they are all
interconnected.
I think this is an important bill because, you know, you
expressly outlined Bitcoin and Ether and commodity tokens. That
will be a significant majority of the digital asset
marketplace, and I think it will push the conversation forward
so that we can continue to have policy around the different
areas of the digital asset space clarified and complete because
as much as this will bring clarity, transparency, and most
importantly, as you point out, customer protections to this
particular market, which is significant, the other elements
need to be completed, too.
We need to complete the larger puzzle because if we are
going to see advancements in the technology and the innovation
coupled with the customer protections, the market resilience,
and ultimately, financial stability depending on the size of
the market, we need to have this patchwork all plugged together
so that we have the full lens into that space from a regulatory
perspective and from a prudential perspective.
Senator Gillibrand. Thank you, Mr. Chairman. Along the
lines that I mentioned on cyber, when I first became involved
in this issue, it was through my role on the Intelligence
Committee, and so obviously, addressing things like cyber
threats, fraud, theft, privacy breaches, and other technology-
based crimes facilitated through Web3 applications by foreign
adversaries is top of mind for me.
Can you talk a little bit about the work that you and your
Agency are undertaking to be ready to address these types of
threats and what needs to be done in the future to ensure
security of the commodities market?
Mr. Behnam. Thanks, Senator. You know, cybersecurity is top
of mind at the Agency right now. We are a financial market
regulator that has systemically important registrants. As I
mentioned in my earlier responses and in my statement, we have
core principles which drive our rules and regulation. The core
principle around system safeguards directly relates to
cybersecurity. We have to build operational resilience within
the institutions, the regulated institutions. Thankfully, the
DCCPA addresses this specifically, prescriptively mentions
cybersecurity.
We are leveraging the tools, the expertise we have. We
understand that we are going to have to up our game because
from a markets perspective the cyber resilience and cyber
issues are largely the same but this technology, specifically
the custody element, how do we hold these tokens, and the
unique nature of the technology is going to require some deep
thinking. It is going to require new hires and new expertise in
the space. Those are the areas that I am concentrated on.
Using the resources that the bill provides will be critical
to ensure that we can recruit, retain, and build out that
infrastructure so that we have a cyber-resilient system. As we
have seen in the past with the Colonial Pipeline or others,
digital assets will be a vulnerable point, will be a touchpoint
for bad actors to try to attack the U.S. through different
systemically important infrastructure.
Senator Gillibrand. Thank you, Mr. Chairman.
Thank you, Madam Chairwoman.
Chairwoman Stabenow. Thank you very much.
Senator Tuberville.
Senator Tuberville. Thank you very much, Madam Chair,
Senator Boozman. Thank you all for doing this. We need this; we
need this bill. We need to regulate. We got people out there
investing in this and do not have a clue what they are doing,
including me. There is not a handful of people in this room
right now that really understand what we are talking about, and
I have been to hours of seminars and read books. It is
complicated, and we need to help the American people. Thank
you. Thank you all for doing this.
Mr. Chairman, thank you for being here. Thank you for being
accessible and the hard work that you are doing. Some of your
counterparts in some of these other agencies could learn from
you and your accessibility.
Just a few questions. You know, I recently learned that
over 90 percent of all crypto trades are executed outside the
United States. Our country dominates equity and bond and
derivatives trading. Why are we so far behind in this?
Mr. Behnam. Senator, as I was talking to Senator Ernst, it
is a great question. I think we are moving at a good clip, but
we are certainly not moving as fast as others. I think we have
to balance the need to preserve the financial integrity, the
financial resilience that has made our capital and derivatives
markets the best in the world but also making sure that we are
giving a clear sense to the marketplace that we are moving
forward.
There are several jurisdictions around the world which will
naturally use this as an opportunity. They think that this is a
way to increase economic development so that they are going to
either lower standards or lower their sort of regulatory bar so
that they have more individuals or institutions coming into
their jurisdiction, and that is fair.
I think from a U.S. perspective, given our size, given our
legal structure, and given the accountability through
enforcement, we can move at a clip that is safe, that is
cautious, that is thoughtful, but has to be deliberate.
I agree with you, and I get your sense that we need to move
forward. This is a step in the right direction. We need to
continue this conversation and see this through the finish line
so that we have that certainty for market participants so that
they can start the business there and that statistic which you
named, having that volume greater outside of the U.S. as
opposed to inside of the U.S., can be flipped.
Senator Tuberville. You know, other countries are starting
their digital currencies, including our biggest adversary,
China. What do you think about that, and what is their
regulatory system going to look like? Have you read anything on
that?
Mr. Behnam. Senator, you know, I want to--I certainly
recognize that, and I am very aware of what is going on. There
are a number of issues that--or approaches, I would say, that
China is taking that I do not think we should or are taking
here in the U.S., specifically around privacy issues.
With that, I know that the Federal Reserve and the
Chairman, Chair Powell, is working very carefully and
thoughtfully, not unlike what I said earlier, to contemplate
the idea of what a digital dollar would look like. It is a
balance. It is a lot of technical issues, monetary policy
issues, and infrastructure issues that have to be really worked
through, thoughtfully and comprehensively, before we can push
that out in either a beta mode or in full.
I think we are moving at the right clip. It has got to be
cautious, but we are keeping an eye on the ball, engaging, and
moving the conversation forward.
Senator Tuberville. If we were to pass this bill tomorrow,
do you have the assets to implement this?
Mr. Behnam. Senator, one of the great elements and
provisions of the bill is the user fee, which Senator Boozman
pointed to, the Chairwoman did as well. This is a critical
component of this bill. With the user fee that is exclusively
focused on the digital platforms, we would be able to implement
the bill.
Senator Tuberville. How is your relationship with SEC?
Mr. Behnam. Historically and presently, it has always been
very positive. I speak regularly with Chair Gensler, and I know
my staff does as well. We have to work together. We are
building off a relationship that is decades old. In order for
us to serve customers, taxpayers, and market participants, we
have to work together well, and I think we are doing a good job
at that.
Senator Tuberville. I think one of our biggest protections
in this area is going to be education, people really understand
what is going on, because as I said earlier a lot of us are
behind. You know? It is pretty complicated, obviously.
I am starting to see digital ATM machines in my State. What
are your thoughts on that?
Mr. Behnam. Senator--and I do want to commend the Alabama
Security Commission. You know, they have been very forward
thinking and very thoughtful about, obviously, at the State
level, protecting customers. We have worked very closely with
them, so I appreciate that relationship.
There are a lot of things emerging. I have seen the same
sort of ATM machines that you are pointing out, and yes, this
concerns me. I think on the one hand we have to let individuals
make choices, but I think collectively, as policymakers, we
have to make sure that the individuals are informed, they are
informed with facts, and that they can make the most informed
decisions about what they are doing with their capital and how
they are allocating it.
That is--what concerns me today is that we are not doing
that right now because this market is operating in the shadows.
We do our best at the CFTC to put advisories and customer
alerts on our website, but it is simply not enough. We have to
leverage States and work with their individuals who are really
boots on the ground, to get individuals at, you know, VFWs,
town halls, churches, schools, to get information, to have
access to information, so that when they go to that ATM they
know what they are doing and they can make the most informed
decision. We are not there right now, but this bill takes a
step to accomplish that.
Senator Tuberville. Thank you. I am like Senator
Gillibrand. People think this is a phase. This is not a phase.
This is not going away. You are at the head of this, and we
hope we can help you in any way. We are behind you 100 percent,
and we just want to continue to be educated and market it the
right way and regulate it. I think that is going to be a big
key.
Thank you, Madam Chair.
Mr. Behnam. Thank you.
Chairwoman Stabenow. Well, thank you, Senator, and I agree.
That is why we have the legislation. It is our job to make sure
that those things are in place.
Senator Smith and then Senator Fischer.
Senator Smith. Great. Thank you, Madam Chair and Ranking
Member, and I want to just let you know I appreciate the work
that you are doing with this bill to address the regulatory
gaps that we have, particularly when we are thinking about
digital commodities.
You know, it is interesting. Along with my colleagues,
Senator Brown and Senator Warnock, I have the privilege of
sitting on both this Committee and the Banking, Housing
Committee. In fact, Chair Gensler is testifying in front of the
Banking Committee as we speak, which is where I am going to be
going next, not on this topic specifically.
I do think that this gives us a unique view, an important
view, not only of the spot and derivatives markets for digital
asset commodities but also the market overall. I would like to
dive in a little bit on how this can work together.
I appreciate what you are saying, Chair Behnam, about the
importance of having a comprehensive approach and also the fact
that your Agency has worked with SEC together for many, many
years. Could you just talk in a little bit more detail about
how you see--with this bill and the needs for regulation and
other capacities around digital assets, how you see that
working together, coming together?
Mr. Behnam. Well, Senator, it is a good question. I think
as I was pointing out to Senator Gillibrand, this bill is a
huge step in the right direction, but there are going to be--
there are missing components. There are other parts that we
need to address around stablecoins, around the securities law,
around payments and settlement and what not.
I think it creates clarity around the commodity markets and
around the definition of what a digital commodity is, and just
by virtue of that--and I think the definition is drafted quite
well because it, you know, very clearly talks about a digital
form of personal property, it excludes physical commodities, it
excludes securities, and it excludes dollars or, essentially, a
digital dollar, something that is backed by the U.S.
Government. With that framework, we then have at the CFTC a
sense of what constitutes a digital commodity.
In the inverse, you know, my colleagues across town or at
prudential regulators could then use this bill as a marker for
how the rest of the patchwork or the puzzle may look, and I
think that is extremely helpful in the process of identifying
what is a commodity, what is a security, what is a stablecoin,
and how everything should fit within each different regulator
that oversees financial markets.
Senator Smith. What would be--just as an example, what
would be the implications of having--you know, you have one
platform. You have digital assets being offered on that
platform, side by side, that are regulated under different
regimes. Are there implications to that? Is that something we
should be thinking about?
Mr. Behnam. Well, you know, in many respects--so you would
probably have dually registered platforms. In a case where you
had a security token and a commodity token, the trading
platform would be regulated by both the CFTC and the SEC.
Depending on how the platform wanted to list the contracts,
they would either be siloed within a commodities space, a
securities space; you could potentially segregate the customer
accounts and the custodian sort of services that you are
providing to the client. Alternatively, you could have a single
account, an omnibus account, for a client that services both
the securities side and commodities side.
It may sound complicated, but with the efficiencies of
technology and, quite frankly, the experience we have had in
the swaps market--we have security swaps. We have commodity
swaps. We have security futures. We have commodity futures. We
have done this before. We have dual registrants, from
investment advisors to broker-dealers and futures commission
merchants.
We are not reinventing the wheel. There is a level of
complexity we can certainly figure out with--in partnership
with the private sector but, of course, with our sister agency
to ensure that we are doing it in the most efficient way but,
ultimately, the most productive way from a customer protection
and market resilience perspective.
Senator Smith. Your view is that while there might be some
complexity to that that is complexity that can be addressed
through good coordination and--good coordination between the
agencies.
Mr. Behnam. Absolutely.
Senator Smith. Yes. As I understand it, the bill takes the
regulatory structure for commodities that exists and applies it
to digital assets that are being marketed to retail investors.
Could you talk about--yet, your Agency does not have--does not
work directly with retail investors. Could you talk about how
that framework will apply to retail investors and how you can
address how that works for retail investors?
Mr. Behnam. Yes, you are absolutely right, Senator, that
the majority of our investors, our customers, our market
participants are institutional. We do have a fair amount of
retail participation in our market. We work closely with the
National Futures Association, which is an SRO, which is
contemplated in this bill, to make sure that we have boots on
the ground, that we have appropriate disclosures. We have the
core principles, which I have mentioned a couple times, about
you know, preventing contracts that are readily susceptible to
manipulation, protecting customers, making sure that
information is getting to customers through disclosures.
I would say that, as you sit on both the Banking and this
Committee, this distinction needs to be drawn, and I have said
this before. Commodities have a very different disclosure
regime and requirement than a security does. Security
requirements require, in good faith, bridging of information
gaps between an issuer of a security and an investor. That is
because there is management. There is a centralized management.
There is a financial statement. Any of these things that we see
in reports from the SEC, quarterly, annual, or period. That
does not exist on the commodities side.
What we have to do is protect markets, make sure markets
remain transparent, fair, orderly, and that customers
understand market-based risk as they decide how to allocate
capital.
Senator Smith. Thank you very much.
Thank you, Madam Chair.
Chairwoman Stabenow. Thank you.
Senator Fischer.
Senator Fischer. Thank you, Madam Chair.
We have seen reports that the SEC Chairman Gensler has said
he is working with the CFTC on a formal memorandum of
understanding which would create one rulebook between
regulators for the regulation of digital assets and digital
asset exchanges. My question to you, Mr. Chairman: How
important is it that we have that one notebook between all the
regulators?
Mr. Behnam. Senator, thank you. It is a great question. I
think it is important that we have a mutual understanding
between regulators, especially the two market regulators, us
and the SEC, about how we are going to collectively regulate
markets. Regardless of the type of market or the financial
asset, there always is an intersection between the two
regulators because you are going to have dually registered
entities or individuals. It is very important that we have this
mutual understanding in the form of an MOU or just a handshake
agreement in certain times because we need to know what and how
we are going to contemplate these different financial assets
within the context of the law.
That said----
Senator Fischer. Are you working on an MOU right now?
Mr. Behnam. Currently, we are not working on an MOU. I
know, you know, Chairman Gensler and I talk frequently. We
understand what may occur within the context of the securities
laws if entities were to be registered as securities platforms
or securities ICOs, and if there is a situation where we need
to work on an MOU-type document I certainly would be open to it
and willing to make sure that it works for market participants.
Senator Fischer. Have you reached out at this point to try
and do that?
Mr. Behnam. I----
Senator Fischer. Does Congress have to provide guidance on
that? Are you able to do that on your own?
Mr. Behnam. No. Yes, we are able to do that. We have
several MOUs between the two agencies on enforcement matters or
other matters of mutual interest.
Senator Fischer. Okay. Nebraska passed a law that was
introduced by our newest Congressman, Congressman Mike Flood,
when he was in the Nebraska legislature, and it allows digital
asset depositories to be created, which have allowed State
chartered banks in Nebraska to offer services to customers who
have those digital assets. Nebraska is just the second State to
pass that legislation.
As we see these digital assets grow, questions will
continue to be raised about how they should be regulated and
the role that State regulators play alongside the Federal
regulators, particularly as it relates to protecting and
educating investors, as Senator Tuberville was referring to.
Can you discuss your views on that relationship between the
State regulators and the CFTC, please?
Mr. Behnam. Thanks, Senator. I would say, as a former State
regulator myself, having State regulators is so important as a
matter, and I used this phrase with Senator Tuberville, ``boots
on the ground.'' Right? We in Washington do not have the
capacity or the resources to have that comprehensive reach
across the country, whether it is in Nebraska, California, or
any other State. The State regulators play a key role, and that
partnership is so critical to make sure that those individuals
at the State regulator are touching individuals at the local
level, at the county level or the district level.
We have a very close relationship through MOUs, actually,
with NASAA, which is essentially a national association of
securities regulators. Crypto is top of mind right now, and it
has been for several years. I think the bill does a very good
job from a markets perspective in preempting States from
registering the entities that the bill contemplates, but what
it does do is it preserves States' authority over anti fraud,
which is a critical authority for States attorney generals to
have for bad actors at a local level.
We will continue to use the relationships, the existing
relationships we have with State regulators and understand that
they play a critical role in making sure that information and
disclosure and education is received by local investors but
also those protections around fraud are preserved.
Senator Fischer. Have you had any contact with States at
this point in time? Has Nebraska reached out to you or the
other States who may be looking at passing similar laws? Have
they contacted you at all on this for any kind of guidance?
Mr. Behnam. I have spoken with the Alabama State Security
Commissioner, in part, because we have known each other for a
number of years in my professional capacity and his as well. He
is also the president of this association I said, the national
association of State securities regulators. He may act as the
sort of voice for the larger association and each individual
State member. I did speak at the annual fly in they had a few
months ago.
I have not heard from Nebraska. I would certainly welcome
the opportunity to build a relationship, to talk with them, to
learn what they are doing, and to support them with the
resources and the expertise we have.
Senator Fischer. Okay. Thank you, sir.
Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Senator Durbin.
Senator Durbin. Thank you, Madam Chairman.
Chairman Behnam, thanks for coming here. Representing the
city of Chicago, I am more familiar with the CFTC than some
members, and I think you do a great job.
Mr. Behnam. Thank you.
Senator Durbin. In fact, because of your good work, we have
been able to establish global leadership in many areas,
particularly when it comes to the Mercantile Exchange and the
futures market. People trust it. It has a level of integrity
that makes a difference. There is global competition, but we
seem to do pretty well in that competition. The question is
whether or not we can establish the same standard of integrity
when it comes to this whole crypto world.
I was surprised in preparing for this to learn that one in
five Americans has invested in or traded cryptocurrency. Your
testimony notes the fact that a significant number of these
investors are lower-income individuals who took quite a hit
recently. It is no wonder that the average American is
interested in this. After all, respected investment advisors
like Matt Damon and Larry David have told them this is a good
investment, everybody is doing it, and everybody is winning.
We know the reality, and you pointed out the reality. That
is not the case when we look at the record. Over the last year,
the value of the crypto market has fallen below $1 trillion,
losing about 70 percent of its value. Bitcoin alone has seen
its value plummet below $20,000 from a peak of $67,000. In
June, Celsius, a crypto platform, suspended customer
withdrawals and transfers, filed for bankruptcy. In May, the
``stablecoin'' Terra collapsed, resulting in a $300 billion
loss across crypto markets; yet, it was marketed as a
``stablecoin.''
Do not get me wrong. There is risk in speculation, and it
applies to a lot of different circumstances. Lucky for us that
cryptocurrencies have not been inextricably tied to our banking
system or a $2 trillion loss would have been felt in a
different way.
Now we have companies like Fidelity saying they are going
to include Bitcoins and cryptocurrency in retirement accounts.
If we went through another meltdown as we did this last year
with retirement accounts and life savings at stake, it would
have much greater impact.
I would say my concern is this. I am glad we are talking
about regulation. We have to have it. I worry that we are doing
enough to salve our conscience, that we are doing something,
but not doing enough to put up guardrails and stop signs on the
``Crypto Express.''
This term ``regulatory certainty,'' I have run into that
before as a term, that if we do not provide regulatory
certainty to this industry they will leave. They will go to
Malta or El Salvador or Portugal or somewhere. Really? Do you
think that is a possibility?
Mr. Behnam. It is, but it is not a concern of mine.
Senator, I appreciate the point. It is what I said to Senator
Ernst. We in the U.S. have to balance our approach to
regulation, and we have done this very well for decades. We
have to be deliberate. We have to be cautious. We have to be
patient and instill the principles of regulatory foundations
that have made our capital markets, our derivatives markets,
including the Board of Trade, the best in the world.
I do think coupled with that caution and deliberation we do
need to move forward. We need to engage. We need to understand
that this is a new technology that is disrupting financial
markets.
Senator Durbin. How much money does CFTC need to regulate
cryptocurrency?
Mr. Behnam. Senator, I think about a year ago--I think it
was my November hearing before this Committee. It could have
been February, and I apologize for not knowing specifically--I
said $100 million. I used that number because that was
approximately the number that we received over the past few
years since the financial crisis and what our funding level
went prior to the financial crisis to after the financial
crisis.
In an effort to get a more specific number, I had my staff
work on this exercise specifically for a number of months. We
have come up with $112 million over the first three years,
divided not equally. We would be weighted on the front end of
the three-years. This would be for rulemaking. This would be
for hiring. This would be for training, expertise. This would
be with outreach.
Senator Durbin. What is your current annual budget?
Mr. Behnam. Current annual budget is $320 million.
Senator Durbin. You are talking about a substantial
infusion through the user fee of $112 million.
Mr. Behnam. $112 million over three years. The first year
would be about $40 million.
Senator Durbin. Really?
Mr. Behnam. Yes. We did calculations based on the
rulemakings and some of the reports that are due and then the
engagement with the industry.
Senator Durbin. Well, I would like to talk to you about
that because I honestly believe that you are lowballing it,
that if you are serious about regulation of an industry where
one in five Americans now has invested and had some risk, and
we are now getting into retirement accounts----
Mr. Behnam. Yes.
Senator Durbin [continuing]. and 401(k)'s and the like, and
the major brokers like Fidelity and others are starting to
include this in their plan, there is a lot more exposure and a
lot more risk than just a year or two ago.
Mr. Behnam. Senator, I welcome the conversation. We did
sort of off-the-cuff analysis based on examinations of who is
registered with FinCEN and just doing a survey of markets. This
is certainly not a hard number, and you may be right. I
certainly would welcome an upward movement of that funding
level, but I did want to come back with some evidence to
support a number as opposed to just saying $100 million, which
is what I did last time.
Time will tell, and I do not know how the market will
either consolidate or grow after this bill would be passed. It
is hard for me to give an exact number, but I just wanted to do
my best to defend a number that I am sharing with the
Committee.
Senator Durbin. This number, whatever it may be, is going
to be generated from the crypto world in a user fee.
Mr. Behnam. Exactly.
Senator Durbin. Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Senator Thune and then Senator Booker.
Senator Thune. Thank you, Chairwoman Stabenow and Ranking
Member Boozman, for holding today's legislative hearing to
consider the Digital Commodities Consumer Protection Act. I
also want to thank both of you for your leadership on this
legislation and on the responsible regulation of digital
commodities.
Technology continues to transform digital commodities, and
it is critical the Federal Government has the proper tools to
regulate this growing market and to provide certainty when it
comes to digital commodity platforms, which is why I am an
original co-sponsor of the bill that we are considering today.
It would clarify the regulatory uncertainty surrounding
cryptocurrencies and give the CFTC explicit authority to
establish rules and regulations to oversee digital commodities
and establish guardrails for the market, which I think we all
agree needs to happen.
I want to thank all the witnesses who are here today, for
your input. I look forward to working with my colleagues on
this Committee to advance what I think is very important
legislation.
Mr. Chairman, in your testimony, you highlighted the
regulatory role CFTC has played over the digital asset
commodity market in recent years. Could you sort of walk us
through--and I do not have a lot of time--fairly quickly
through CFTC's experience and successes in regulating digital
commodities?
Mr. Behnam. Thank you, Senator. Yes, we have been
overseeing this market through mostly an enforcement mechanism
since 2014, utilizing our fraud and manipulation authority. We
have brought over 60 enforcement cases, some as large as $1.7
billion, $100 million, $40 million, again, some of the largest
incumbent crypto firms. We, since 2017, have delisted futures
contracts relating to digital assets, Bitcoin, Ether, and
others. We are continuing to see even in the past few years
native or incumbent crypto firms purchasing CFTC-regulated
entities or licensed entities.
The move is swift. It is quick. It is forcing us to learn,
to up our game, and to leverage our expertise, and I think that
puts us in a good position to implement this bill and oversee
the market.
Senator Thune. Given that, just what you shared, the CFTC's
recent enforcement actions and efforts, what is your response
to concerns that the CFTC is not equipped to play the lead
regulatory role for digital commodities?
Mr. Behnam. Well, I do not think that statement is really
backed by facts, I think, if anyone took some time to look at
what we have done over the past few years going back to 2014. I
shared with Chairwoman Stabenow some of our enforcement
statistics at large. We are one of the toughest cops on the
beat across the globe. We have expertise because of our
experience with this technology. I think with the user fee that
is included within the bill we would be able to leverage that
authority, hire the right individuals, train existing
individuals, and really hit the ground running, and do what we
need it to do.
Senator Thune. Let me ask again quickly, and I know that
you have probably addressed this issue already. Where would you
say the United States ranks globally in terms of digital asset
and blockchain technology, and if enacted, what effect would
this legislation have on U.S. competitiveness in this space?
Mr. Behnam. Senator, you know, naturally, because of the
size of our markets, the capital available through venture
capital and fundraising and private equity, you know, we are
always at the top, but I think there are other jurisdictions
that have taken a very aggressive approach to this technology,
hoping to sort of capture the innovators within their
jurisdiction.
As Senator Durbin pointed out, I think that comes with
risks, and that is not something I support moving or
arbitraging our regulatory system. I think we do it very well
here in the U.S., of moving cautiously and deliberately, but as
I said, we have to move forward.
I do think this bill, if passed, would create the
authority, give regulatory certainty, and I think give
incentives to innovators and entrepreneurs to stay here in the
U.S. and leverage the venture capital, the private equity, and
the legal infrastructure, the enforceability of the law, which
really is one of the most important things of all within global
jurisdictions, and elevate our status within other countries
regarding this technology.
Senator Thune. One of the objectives of the bill--and we
all talk about this--is how essential it is that there be
strong, robust consumer protections to protect customers in the
digital asset marketplace from fraud and manipulation. Can you
kind of just speak to how this legislation would help buildupon
the CFTC's already robust customer protection and enforcement
actions?
Mr. Behnam. Yes, Senator. It is a great question, but it
really is built on multiple layers. It is the core principles
which is reporting and recordkeeping. It is conflicts of
interest. It is cybersecurity through system safeguards. It is
prohibition of listing contracts that are susceptible to
manipulation. It is this baseline, foundational level that
pushes us toward writing more prescriptive rules and then
enforcing those rules through inspections, examinations,
investigations, and then ultimately, if someone breaks the law,
keeping them accountable and making sure that we are deterring
future actions.
It is a series. It is a layered customer protection regime.
It is largely replicating what we do now and what has been very
successful for decades, and I have no doubt that this regime
that we do in traditional derivatives could be applied as
equally and as successfully in digital assets.
Senator Thune. All right. Thank you, Madam Chair. My time
is expired.
Thank you, Mr. Chairman.
Chairwoman Stabenow. Thank you very much.
Senator Booker.
Senator Booker. Madam Chairwoman, Ranking Member, I am
really grateful for your leadership in this space, and I am
honored to be a partner on what I think is an important bill.
I just want to say, first and foremost, it is good to see
you, another bald Jersey boy doing okay.
Just really quickly, I am really optimistic, not
necessarily about the coins and the commodities, but the
technology underlying all of his opens up a whole new realm of
possibility for Web3 when it comes to blockchain.
We have some real issues and concerns right now that I
think this bill addresses. We have seen scams being perpetrated
by outright fraudsters, taking advantage of eager investors. We
have seen risky projects with inadequate disclosures, not
giving consumers chances to accurately evaluate the assets they
are purchasing with their hard-earned money. We have seen these
advertisements, which some of my colleagues have already talked
about, promising guaranteed profits and almost seeming like
hucksters as they put forward.
We do not have significant guardrails right now. We do not
have transparency that we need right now. We need better
regulations, and so there is only three things to do as
Congress.
We can do nothing, which would allow a lot of this to
continue. There are some people that want to create rules that
basically make it illegal or impossible for everyday people to
access tokens, strangling a market.
We could undermine the strong securities laws and customer
protections that already exist in the financial sector, opening
floodgates that would enrich a select few, creating chaos and
uncertainty for businesses and regular people alike.
Or, we can do what this bill does, which is dig in with the
goal of allowing this space to thrive for innovation to occur
but also give solid protections that would curb scams, frauds,
increase transparency, accountability, and increase the safety
and the strength of our financial system. That is why this
bill, to me, is so utterly important, and doing nothing is
unacceptable.
I just want you to address some of the criticisms I hear
out there specifically about the CFTC. Some people say that
this is just going to be some kind of ``light touch''
regulation in the crypto market without the real capacity to
hold bad actors accountable and bring stability. You know,
Chairman, what do you have to say to those who think the CFTC,
with this legislation, would bring a regulatory touch that
would be too light and how you as Chair will work with Chairman
Gensler and other commissioners of the SEC to make sure that
there are strong regulatory provisions in place?
Mr. Behnam. Thanks, Senator. You know, I said this to the
Chairwoman; I could unequivocally say, you know, our rules are
based on customer protections.
The data, if someone took time, who is drawing this
narrative that we are weak or ``light touch,'' if they took
time to see what the CFTC does, if they took time to examine
how our rules are structured and what they are based on, and
the success of the markets, which Senator Durbin was pointing
out, they would know that we are one of the toughest cops on
the beat in the world, and we are known for that. Our
enforcement statistics speak for themselves, returning six
times what our budget is every year for the past 10 years.
These are the individuals within the Agency that--these are
sophisticated contracts, too, whether it is swaps, futures, or
options. I mentioned a case against a commodity trader: very,
very sophisticated trading strategies, manipulative trading
strategies to create some arbitrage or some net benefit between
cash and futures markets.
Senator Booker. Just for the sake of time, with the extra
resources as well, you would be able to do even more
significant enforcement as well.
I just want to shift to another big criticism----
Mr. Behnam. Sure. Yes.
Senator Booker [continuing]. that I hear a lot about the
energy consumption----
Mr. Behnam. Yes.
Senator Booker [continuing]. involved in crypto even though
some people are moving away from proof of work. I just want you
to touch on that real quick about--obviously, President Biden
has tried to address this. What would you be able to do as a
result of this legislation even more so to deal with this?
Mr. Behnam. Thanks, Senator. You know, as a first starting
point, the bill is very effective in requiring us to write a
report. It requires us to consult and work with other
regulators within the U.S. Government, specifically those who
have expertise in physical energy markets, do tooth-and-nail
examination of what the energy consumption is, how it relates
to the output and the utility of the technology, and then come
back to this Committee in 6 months with a report of what our
recommendations are to either create a disclosure regime or
incentives for folks, as you mentioned, indirectly to move away
from proof of work, to move to proof of stake or other methods
to reduce carbon emission consumption.
Senator Booker. The last thing I just want to really cover
really quickly with you is some part of the bill, and I have
been so grateful to the Chairwoman for allowing me to help to
shape this. I am concerned about equity issues that are out
there, the disparities in wealth that we have in this country
that are persisting. Women, African Americans are
overrepresented right now and participating in the world of
digital assets, which is concerning given the lack of
regulation that we are looking. It also is something that I
think could actually help to create more opportunity for
democratization of wealth in our Nation.
This bill directs the CFTC to examine racial, ethnic, and
gender demographics of customers participating in the digital
markets and to use that information to inform your rulemaking.
Do you want to comment on that provision of the bill real quick
for me?
Mr. Behnam. Senator, I am extremely excited about it, and I
am excited--you know, I am very proud that I created the first
Chief Diversity Officer at the CFTC a few months ago. We have
moved the Office of Customer Education within our Public
Affairs Office. We now have an infrastructure to leverage what
the bill requires us to do to have a wider outreach to
communities, lower-income communities, historically
marginalized communities, and get boots on the ground to
educate, to inform, to do the outreach so that we understand
where these pockets of speculative investors are, where these
individuals are, who are risking capital without being informed
about the risks associated with this technology.
That is going to be a priority of mine. I certainly look
forward to working with you, but I think we are in a good place
right now with some actions that have been taken in the past
year. This bill's authority, coupled with the user fee, should
really springboard us to get information out to consumers.
Senator Booker. Thank you. Damn it, you make Jersey proud.
You are not quite Bon Jovi-Bruce level, man, but you are
climbing the hill.
I am not going to be able to stay for the next panel
because I have got sickle cell work to do. I just want to say,
thank you, Chairwoman. The next panel does not have quite the
Jersey authenticity, but there are some really good folks----
Chairwoman Stabenow. Really good.
Senator Booker [continuing]. and I hope great conversations
with you all here. Thanks.
Chairwoman Stabenow. Thank you so much for your input in
general on the bill but specifically on those provisions that
are very important as we go forward to evaluate impact. Thank
you very much for all of your leadership.
Senator Booker. Thank you.
Chairwoman Stabenow. Senator Hoeven.
Senator Hoeven. Thank you, Madam Chairman. I appreciate it
very much.
Chairman Behnam, thanks for being here. Appreciate it. Now
you are going to be regulating in the spot market versus
futures. Can you tell me what your thoughts are in regard to
that? Is that going to make a difference for you in a
significant way, and does it portend other future regulation in
the spot market?
Mr. Behnam. Senator, thanks for the question. I do not
think it portends future regulation in the cash market or the
spot market. I think, as I have said a few times, this
particular commodity market is unique as it relates to
traditional agricultural, energy, or metal commodity markets
because it is highly speculative and it is retail-oriented, and
that is why I think we have a very important role to play in
this specific commodity market as compared to some more
traditional commodity markets?
Senator Hoeven. Thank you. How should this work? I mean,
there is going to be multiple agencies now that have a role.
What should that look like? Not just your role, but how do you
interface with others so we do not end up with one of these
bureaucratic mazes that nobody can figure out what is going on
or who is responsible for what? Which is not only difficult for
the providers but for the consumers.
Mr. Behnam. Sure.
Senator Hoeven. What should it look like in your opinion?
Mr. Behnam. Senator, I think it needs to look like what we
do now in traditional financial markets because--and I will
just use our sister market regulator agency, the SEC, as an
example, but we have relationships with the banking regulators
because we have dually registered entities as well. We have
been forced to work together for the better part of 50 years
with them because the registrants, the market participants have
access and intersections with both our markets. They are dually
registered as advisors for, you know, commodity pools or
investment pools. They are dually registered as broker-dealers
or futures commission merchants.
We have the framework and the foundation to do exactly what
we have been doing for decades in this space, and I have no
doubt that we will be able to do it successfully. There is good
will, good faith. We can get to it. I think ultimately the
reason why I think it is going to work well and the reason why
I think it has worked well is most clearly demonstrated in the
fact that the U.S. has the strongest, deepest, largest capital
markets and derivatives markets. If we did not do our job well
from a regulatory perspective in matching these differences, we
would not have those statistics and that data to support it.
Senator Hoeven. Are you interfacing now with those other
agencies that will be involved in the oversight regulatory
function, and is there a blueprint as to how that interface
will work? Are there other bills with other committees of
jurisdiction that you are coordinating with this legislation?
Mr. Behnam. Senator, I am mostly working--I have the most
contact with the SEC and Chairman Gensler because of the
relationship we have through our markets.
I work closely with all other Federal regulators. Both from
a professional level, it is important to do it, but through the
President's Working Group and the Financial Stability Oversight
Council. We are working on several projects focused on the
digital asset area. President Biden's EO has forced us,
thankfully, to work on these issues specifically. We will
continue to do it.
We do not have any set structure necessarily now because
there is a little bit of a vacuum in terms of what regulation
might look like. We have seen several bills, most notably on
stablecoin, some on cash markets.
But this, as I said to Senator Gillibrand, is a step in the
right direction. It needs to be moved as quickly as possible,
one piece of the puzzle, but I think as that puzzle becomes
more clear and we see what the landscape is going to be then we
will be able to credibly move forward as regulators and lay out
the plan of how we are going to work together and how we are
going to put this out in an effective way.
Senator Hoeven. Who, legislatively, makes sure that that
package of legislation pulling in, you know, all these agencies
actually works?
Mr. Behnam. Senator----
Senator Hoeven. Who does that versus, you know, various
committees of jurisdiction, various agencies each kind of doing
their thing?
Mr. Behnam. I would say the best blueprint to look at now,
the most recent one, is Dodd-Frank and after the financial
crisis. This Committee played the most important and the sole
role in Title VII, which was the derivatives title, but there
were multiple titles to the Dodd-Frank bill which affected
several financial regulators which we work currently with.
Senator Hoeven. Yes, well, not everybody is a fan of Dodd-
Frank or the CFPB, so I am not sure.
Mr. Behnam. I appreciate that, but it has been still a
blueprint of how Congress passes the law, multiple
jurisdictions, multiple agencies, and then we need to work
together to implement the law in an effective way with
appropriate oversight on a continual basis.
Senator Hoeven. Right. I do think that coordination is
important to get a--particularly with the complexity of
cryptocurrency. You know? I mean, we are all still trying to
understand it. Right?
Mr. Behnam. Agree.
Senator Hoeven. One other question. I know the MERC is
concerned about it, but you know, you have not used the user
fee concept before. Obviously, that is something we are very
familiar with because of FDA. You know, I serve on Ag
Appropriations, so we deal with that all the time. It has good
aspects, and it has some that are not as good.
What is your thought on now for the first time actually
using that user fee concept?
Mr. Behnam. I think, structurally, it should not be very
difficult to implement. I think it is critically important that
the user fee is structured in a way where we have to work with
appropriators to set the level of what we can assess in terms
of fees. We will not be able to just assess fees individual or
independently. We have to work in coordination, which I think
is consistent with most user fees assessed right now.
Overall, Senator, I would say it is critically important.
We will not be able to do the job the bill requires us to do
unless we have the resources to do it.
Senator Hoeven. Thank you. Appreciate it.
Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much. Seeing no further
questions from colleagues for Chairman Behnam, we want to thank
you very much for joining us today. Look forward to continuing
to work with you.
We will take a moment to bring up our witnesses, our second
panel. We are so pleased that all of you are with us.
I will indicate that we will see a vote starting shortly,
which will just mean you will see us coming and going. It does
not mean that Senator Boozman does not like what you are saying
or that I do not like what you are saying. We will be going
back and forth, and probably have other colleagues as well, so
I do not believe that has started yet.
Welcome. Appreciate all of you taking the time to be with
us, and I will begin our introductions.
First, I want to welcome Todd Phillips, the Director of
Financial Regulation and Corporate Governance at the Center for
American Progress, is experienced in both Congress and the
executive branch, having served as an attorney for the Federal
Deposit Insurance Corporation and the Administrative Conference
of the United States and on the staff of the Oversight and
Reform Committee of the U.S. House of Representatives, so we
welcome you.
Sheila Warren is the CEO of the Crypto Council for
Innovation, a digital asset trade association. Prior to joining
CCI, Ms. Warren served as the World Economic Forum's Deputy
Global Head of Data, Blockchain, and Digital Assets, with a
focus on making the crypto industry more inclusive, equitable,
and sustainable, so thank you so much for being with us.
Christine Parker is Vice President and Deputy General
Counsel for Coinbase, the largest U.S.-based cryptocurrency
exchange. Ms. Parker recently joined Coinbase from Reed Smith,
where she was a partner in the Fintech Practice Group and
before that practiced at Sullivan & Cromwell, and she is no
stranger to Congress, having worked as counsel to Senator
Schumer. We will not hold that against you. Welcome.
Denelle Dixon is the CEO of the Stellar Development
Foundation, a nonprofit that seeks to create equitable access
to global financial systems. Before joining Stellar, Ms. Dixon
was the COO of Mozilla and General Counsel and Legal Advisor in
private equity and technology.
I am now going to turn to Senator Boozman for our last
introduction.
Senator Boozman. Thank you, Madam Chair. Our next
bipartisan witness is Dr. Heath Tarbert. Dr. Tarbert is the
Chief Legal Officer of Citadel Securities, where he is
responsible for the global legal compliance, surveillance,
regulatory affairs, and corporate governance functions for one
of the world's leading market makers.
Dr. Tarbert served as the 14th Chair and Chief Executive of
the Commodity Futures Trading Commission and Vice Chairman of
the International Organization of Securities Commissions.
During his tenure, the CFTC advanced 41 final rules and 21
proposals, 90 percent of them on a bipartisan basis. The CFTC
also set numerous records in enforcement and more than 20
actions supporting liquidity and orderly trading.
Before joining the CFTC, Dr. Tarbert was Assistant
Secretary of Treasury for International Markets and served as a
Supreme Court clerk, Associate White House Counsel, and Special
Counsel to the Senate Banking Committee.
Thank you for joining us, and thank you for all of the
witnesses. This is just an outstanding panel, so thank you,
Madam Chair.
Chairwoman Stabenow. Yes, thank you. Yes. Absolutely, we
are so pleased you are all here, and we will recognize each of
our witnesses for 5 minutes. We welcome any other information
you would like to give to the Committee as well, in writing.
We will begin with Mr. Phillips. Welcome.
STATEMENT OF TODD PHILLIPS, DIRECTOR, FINANCIAL REGULATION AND
CORPORATE GOVERNANCE, CENTER FOR AMERICAN PROGRESS, WASHINGTON,
D.C.
Mr. Phillips. Thank you. Chairwoman Stabenow, Ranking
Member Boozman, and members of the Committee, thank you for the
opportunity to discuss the Digital Commodities Consumer
Protection Act. I applaud your collaboration and the work of
your staff in its development and am pleased to support this
bipartisan bill which would provide much-needed regulatory
oversight of the digital commodities markets.
In recent years, crypto assets have grown significantly in
usage and prominence in the economy and culture. The expansion
can likely be explained not only by the innovativeness of the
underlying technology but also a general hype and narrative
that crypto is revolutionizing the financial system. However,
practices such as market manipulation, ``rug pulls,'' fraud,
and outright theft plague crypto markets. According to one
estimate $2.9 billion worth of crypto was stolen in the first 4
months of 2022 alone. These types of problems pose significant
risks to retail investors who, in some cases, invest their life
savings into crypto and might reasonably assume that they are
protected from these threats by the routine Federal regulations
that apply to other financial assets.
One reason these harms occur is because there is a lack of
Federal regulation for crypto commodities. Crypto assets are
largely either securities or commodities. If a token is a
security a plethora of essential investor protections apply. If
it is a commodity, the CFTC only has limited anti-fraud and
manipulation authority over it. Because the crypto industry
maintains that most crypto assets are commodities, issuers,
exchanges, and depositories are largely not enforcing the
securities laws' guardrails to protect retail investors.
The question of whether a crypto asset is a security or a
commodity is a facts-and-circumstances determination that is
appropriately left to the courts. I expect many crypto assets
to be deemed securities and the platforms that list them to be
subject to SEC rules. However, at least one crypto asset,
Bitcoin, is a commodity, meaning that the securities laws will
not apply. Today, Bitcoin accounts for nearly 40 percent of the
crypto market by volume, and we lack a regulatory regime for
it.
Further, although some courts have applied legal tests to
declare specific crypto assets as securities, the case law is
in its infancy. If courts deem some or most crypto assets
commodities, Federal regulators would be hamstrung in their
ability to regulate them.
Under these circumstances, the Digital Commodities Consumer
Protection Act provides a much-needed and right-sized
regulatory framework for decentralized digital commodities and
grants the CFTC the desperately needed authority to oversee
these markets. Here are some of the bill's most important
provisions:
First, while the DCCPA grants the CFTC regulatory authority
over digital commodities, the bill excludes from the definition
anything that is a security. Existing securities laws would
appropriately continue applying to crypto assets deemed
securities with oversight from the SEC.
Second, the DCCPA would implement consumer protections for
digital commodities, including prohibitions from trading
platforms listing assets that are readily susceptible to
manipulation, from engaging in fraudulent, deceptive, or
manipulative practices, from trading against their clients or
insider trading, and more. These are protections that currently
apply to the securities markets.
Further, whereas investors in securities have ready access
to a variety of written disclosures, investors in crypto
commodities are largely limited to scouring projects' discord
servers for inconsistent and unverifiable information. To
address the lack of consolidated disclosures, the DCCPA would
require crypto commodity platforms to disclose conspicuous and
plain language information about listed assets to customers.
The DCCPA would also protect investors by requiring
platforms to hold customer assets in segregated funds, not
comingled with the platforms' property, and would update the
bankruptcy code to better protect platforms' clients.
Third, the DCCPA would require the CFTC to help address the
effects of crypto on both climate change and financial
inclusion. The bill would require the CFTC to examine the
energy consumption used in connection with the most widely
traded crypto commodities and publish those estimates. This
information could help incentivize token issuers to migrate to
more energy efficient blockchains and miners to utilize cleaner
electricity as investors migrate their capital following the
environmental impacts of their investments.
The bill also would require the CFTC to study the
participation of historically underserved communities in crypto
markets and use this information to inform its customer
protection regulations.
Although my written testimony contains several suggestions
for amendments, the DCCPA is a critical step in the right
direction, and I applaud the Chair, Ranking Member, and
Senators Booker and Thune for developing this bill. I highly
support the Digital Commodities Consumer Protection Act, and I
encourage this Committee and Congress to approve this
bipartisan bill.
Thank you. I am happy to answer any questions.
[The prepared statement of Mr. Phillips can be found on
page 53 in the appendix.]
Chairwoman Stabenow. Thank you so much.
We will now hear from Ms. Warren. Welcome.
STATEMENT OF SHEILA WARREN, CHIEF EXECUTIVE OFFICER, CRYPTO
COUNCIL FOR INNOVATION, SAN FRANCISCO, CA
Ms. Warren. Thank you. Chairwoman Stabenow, Ranking Member
Boozman, members of the Committee, thank you for the
opportunity to testify today on both the tremendous benefits
and opportunities associated with the adoption of digital
assets in the United States. I am grateful for the engagement
leadership shown by so many on this Committee.
There is a pressing need for regulatory clarity that
promotes innovation while protecting consumers. The legislation
being considered today can provide some of the certainty needed
to help spur international economic growth, create jobs,
improve financial inclusion, and enhance privacy and security.
I am pleased to represent the Crypto Council, a global
alliance of industry leaders across digital assets and the Web3
space. We use an evidence-based approach to support
institutions and leaders worldwide who are shaping and
encouraging the responsible regulation of this innovation.
Over the past two decades, my time as an attorney,
entrepreneur, product builder, and NGO executive has focused on
the intersection of technology, law, diversity and inclusion,
civil rights, and Web3. Over the 6 years, I have worked across
16 countries of leaders to advance the responsible and
inclusive adoption of this new technology.
Now I see crypto as this generation's best chance of
addressing inequity in current financial and technical systems.
Crypto can provide a more equal playing field for people in
communities that do not have meaningful access to these
systems. As we shift to a more ownership-based global digital
economy, the building of an open and transparent regulatory
framework is crucial. The DCCPA is a pivotal step in achieving
the clarity and oversight that are greatly needed, and I
applaud this Committee for its bipartisan work on this
legislation.
Crypto improves efficiency and accessibility, reduces
costs, and removes frictions from financial transactions.
Cross-border payments underpinned by blockchains could save
about four billion U.S. dollars a year. For example,
remittances comprise a $630 billion market globally, with high
fees of 6 percent according to the World Bank. By contrast,
crypto service providers can process remittance payments with
fees of one to three percent, a significant cost savings to
consumers.
Crypto also represents an unprecedented opportunity to
increase financial equity. A Federal Reserve study found that
nearly 20 percent of Americans have neither access to a bank
account nor adequate access to financial services through other
means, and this problem is significantly higher among those who
are low-income, less educated, or racial minorities. This is,
in part, because these groups often do not trust traditional
banks, as a recent FDIC survey found. By contrast, a 2021
Morning Consult poll found that in the United States 37 percent
of the underbanked population and 12 percent of people without
access to financial services reported owning crypto currency.
An ownership-based model is key to providing meaningful
opportunities to these historically excluded populations.
In the case of foreign aid, within days of the invasion of
Ukraine, crypto was a catalyst and bridge to crucial financial
support. Roughly $100 million in crypto donations enabled
purchases of medical supplies and essentials before the bulk of
foreign aid could arrive.
The reality is that crypto is global by nature. Simply put,
other countries are not waiting for the United States to act.
The European Union recently came to a landmark political
agreement on their Markets in Crypto Assets package. The United
Kingdom has set out its plan ``to make the UK a global crypto
asset technology hub.'' South Korea's Digital Asset Basic Act
is set to be in shape by the first half of 2023. It is clear
that China is already poised to leverage its Digital Yuan as a
tool to achieve its foreign policy goals in emerging markets
and beyond.
Relatedly, forward-looking regulation is paramount to
national security. Financial services have always represented
an important lever for the U.S. Government, and risks will be
heightened if U.S. companies become less predominant in this
space. Proactive policymaking now is critical to maintain a
competitive position.
Of course, in an industry this complex, details are
important. It will be critical to thoroughly study things like
decentralized finance, or DeFi, prior to including them in
formal policymaking. It will also be equally important that the
SEC, as we have heard, act as a regulatory partner to the CFTC
and that the question, what is a security, is definitively
answered through the appropriate legislative process.
I was particularly excited to see the report on
historically underserved communities and the energy reports
included in this proposal. I believe the actual facts that
these reports surface will show that crypto can be a tool to
support and impact critical policy goals in these spaces.
Thank you again for the opportunity to discuss these
important questions. I look forward to answering your
questions.
[The prepared statement of Ms. Warren can be found on page
72 in the appendix.]
Chairwoman Stabenow. Thank you very much.
Ms. Parker, welcome.
STATEMENT OF CHRISTINE PARKER, VICE PRESIDENT AND DEPUTY
GENERAL COUNSEL, COINBASE, SAN FRANCISCO, CA
Ms. Parker. Thank you. Good morning, Chairwoman Stabenow,
Ranking Member Boozman, and members of the Committee. Thank you
for inviting me to testify about the Digital Commodities
Consumer Protection Act and the need for a comprehensive
regulatory regime for crypto.
My name is Christine Parker, and I am the Vice President
and Deputy General Counsel for Regulatory Legal at Coinbase.
Prior to joining Coinbase, I was a lawyer in private practice
where I focused on commodities, derivatives, and digital
assets. I spent years advising clients on the regulatory and
compliance obligations associated with Title VII of Dodd-Frank
as well as the Commodity Exchange Act, more generally. I also
had the pleasure of working for Senate Majority Leader Chuck
Schumer for five years prior to joining a private practice.
I believe that we are at a crossroads when it comes to
crypto. The U.S. Government can either create a regulatory
framework that embraces the transformative nature of crypto and
protect consumers or it can impose an unworkable regulatory
framework that will push technological innovation and the jobs
of the future overseas, a trend that we are already seeing.
I would caution members who are skeptical about crypto that
the second path will lead to the unfortunate reality in which
retail U.S. investors will continue to access Web3 but will be
forced to do so through unregulated foreign companies that are
not obligated to comply with the anti-money laundering consumer
protection and safety standards that define U.S. financial
markets.
As the largest crypto trading platform in the United States
and the only one that is a U.S. public company, we are
committed to the first path. That is why we applaud Chairwoman
Stabenow, Ranking Member Boozman, and the other co-sponsors for
introducing a bill we believe will create a robust framework
for the effective regulation of digital assets. I also want to
thank the staff of the Committee for their hard work and focus
in solving the technological challenges presented in drafting
this legislation.
The current regulatory environment for crypto is complex
and disjointed. At the Federal level, the government has relied
on laws that have not kept up with the technology. At the State
level, laws and regulations for digital assets have emerged in
recent years with little consistency across jurisdictions.
The bill amends the Commodity Exchange Act to create a
much-needed framework for spot markets for digital asset
commodities. The framework would fill an existing gap in
Federal oversight and lead to a more consistent consumer
protection across the country.
The bill, importantly, draws on the CFTC's existing
framework for regulating futures and derivatives, which is
comprehensive and well understood. To that point, I note that
Coinbase operates a CFTC-regulated DCM, CFTC-regulated
exchange, and we are hopefully a few months away from operating
our own CFTC-regulated futures commission merchant.
The bill defines digital commodities to include, but
critically, not limited to, Bitcoin and Eth. The bill does not,
however, cut the Gordian knot as to what is or is not a digital
asset security. That is one of the fundamental issues that
remains unsolved today. What is a digital asset? Is it a
currency, a commodity, a security, all of those, or something
entirely different?
At Coinbase, we employ a rigorous listing process to
determine if an asset is legal, compliant, and secure before we
list it on our platform. Key to that analysis is whether or not
the asset has characteristics that would make it a security
under U.S. securities laws. We have approved and currently list
219 assets for trading, and we are confident that they are not
securities. However, this process is not scalable across the
industry, and it forces Coinbase to reject many assets that we
might otherwise lawfully be permitted to list.
We believe the bill could be strengthened by further
defining digital asset commodities to ensure assets that do not
meet the definition of securities are regulated by the CFTC and
not by enforcement through the SEC. We urge Congress to draw
these distinct lines between the different types of digital
assets to ensure they are overseen by the appropriate Federal
regulator. Statutory clarity would help existing and new market
participants confidently offer new innovations to consumer in a
safe and reliable way.
In sum, Coinbase believes the Digital Commodities Consumer
Protection Act creates a strong foundation for the regulation
of digital assets. We understand the bill will continue to
evolve, particularly as the full Senate considers the other
issues and agencies that intersect with the regulation of
digital assets, and we will continue working with all
interested parties to pass a law as soon as possible in this
important area.
I look forward to answering your questions.
[The prepared statement of Ms. Parker can be found on page
93 in the appendix.]
Chairwoman Stabenow. Thank you very much.
Dr. Tarbert, welcome.
STATEMENT OF HEATH TARBERT, PH.D., CHIEF LEGAL OFFICER, CITADEL
SECURITIES, CHICAGO, IL
Mr. Tarbert. Chairwoman Stabenow, Ranking Member Boozman,
and distinguished members of the Committee, thank you for
inviting me. I dealt with digital assets as CFTC Chair, and I
am here today as Chief Legal Officer of Citadel Securities, one
of the world's leading market makers. It is great to be back to
support the Committee's historic work on digital commodities.
As I see it, the Digital Commodities Consumer Protection
Act achieves three essential goals.
No. 1, it addresses a critical gap in the CFTC's
jurisdiction. While I was CFTC Chair, we brought nearly 20
crypto-related enforcement cases to protect market integrity,
but we could not write any rules to stop bad behavior before it
happened. The CFTC just does not have that authority.
A number of States have attempted to fill the gap, but the
patchwork of differing regulatory regimes is simply ill suited
for a national market. That has, unfortunately, been
demonstrated by the so called ``crypto winter.'' Many of the
most vulnerable Americans have suffered massive losses as a
result of hacks, bankruptcies, and outright fraud.
This bill addresses that glaring regulatory gap. It would
grant the CFTC authority to directly regulate digital commodity
trading. That would help these markets grow responsibly. They
would have the same kinds of regulatory guardrails that have
made our other financial markets the envy of the world.
We at Citadel Securities are proud of our 20-year track
record of reducing cost, increasing transparency, improving
resilience, and broadening access in markets here and around
the world. With rules of the road in place for digital
commodities, Citadel Securities and other traditional players
are more likely to get off the sidelines and get on the field.
They would bring real stability to these markets and replace
the bucket shops and boiler rooms.
No. 2, the bill promotes U.S. leadership in digital asset
markets. It would help Americans by enhancing customer
protection, focusing specifically on abusive trading practices,
a lack of transparency, and conflicts of interest. In addition,
all platforms would be subject to financial and system
safeguard requirements to improve their resilience, and
optional self certification of new exchange products would
encourage responsible American innovation.
No. 3, this bill is designed to stand the test of time. Let
us start with the obvious. This is a bipartisan bill, and
history teaches that laws with broad bipartisan support are
more likely to weather political change.
Another enduring feature is the bill's appropriate use of
principles based regulation. The bill would allow reasonable,
yet flexible compliance with core principles.
It would also avoid the loopholes that inevitably come when
regulations are too detailed to keep up with markets undergoing
rapid change. Relatedly, the bill would supplement the CFTC's
new authority with a self-regulatory first line of defense.
Finally, the bill recognizes the important contributions of
regulators other than the CFTC. It also will not tie Congress's
hands on the many other issues digital assets raise for the
U.S. financial system.
All in all, this bill is a huge step forward. At the same
time, I think there are at least three ways the bill could be
fine-tuned.
First, the Committee should refine the definitions of
digital commodity brokers and dealers. This is to avoid
sweeping in firms that are not considered broker-dealers in
other well-regulated markets.
Second, the bill should have safeguards to protect those
who trade digital commodities that have been self-certified or
otherwise approved but then are later reclassified as
securities.
Third, I recognize that when principles needed fleshing out
in the past, the CFTC proactively wrote rules or provided
guidance, but I think Congress should make its intent crystal
clear that the bill does not grant a license for reactive
rulemaking by enforcement.
As the legislation moves ahead, my colleagues and I at
Citadel Securities look forward to discussing these and other
aspects of the bill. We also look forward to sharing our
expertise in improving investor protection, transparency, and
market resilience.
Let me end by saying, paradoxically, that 2022 looks a lot
like 1922. A hundred years ago, this very Committee helped to
create the Grain Futures Act. Passed in September 1922, it
established the Grain Futures Commission, an early forerunner
of the CFTC. The problem then was strikingly similar to the one
now; futures in wheat, corn, and other grains emerged as a
truly national financial market, but they were subject to a
patchwork of conflicting State laws that failed to protect
Americans.
The answer then is the answer now: a robust, yet flexible,
regulatory framework that provides clarity and coherence for
everyone. I, therefore, applaud the Committee and your staff
for advancing this critically important initiative and thank
you so much for having me.
[The prepared statement of Mr. Tarbert can be found on page
108 in the appendix.]
Chairwoman Stabenow. Thank you very much.
Ms. Dixon, welcome.
STATEMENT OF DENELLE DIXON, CHIEF EXECUTIVE OFFICER, STELLAR
DEVELOPMENT FOUNDATION, SAN FRANCISCO, CA
Ms. Dixon. Good morning, Chairwoman Stabenow, Ranking
Member Boozman, and members of the Committee. Thank you for
inviting me to testify today. I am so honored to be here, and I
look forward to discussing the Digital Commodities Consumer
Protection Act.
My name is Denelle Dixon, and I am the CEO and Executive
Director of the Stellar Development Foundation. Before I speak
about the opportunities that are presented by the DCCPA, I
would like to share a bit more about the Stellar Development
Foundation and the Stellar Network and, most importantly, the
real-world solutions built with this technology.
The Stellar Development Foundation, or SDF, was established
alongside the Stellar Network in 2014 with the mission of
creating equitable access to the global financial system by
using the underlying technology presented by Stellar. The
Stellar Network is an open, permissionless, decentralized
ledger, or a blockchain network, optimized for payments and
asset issuance, particularly useful with stablecoins in
payments.
Today, rather than talking about the things that we read
about in the press with respect to trading or speculation, I
would like to highlight a payment service that was built on
Stellar, launched in the dead of the ``crypto winter'' this
summer. In June, MoneyGram, Circle, and a growing number of
digital wallets launched a first-of-its-kind global service
that enables anyone to convert cash to digital assets without a
bank, without a bank account, and without a credit card.
This service utilizes the Stellar blockchain and Circle's
USDC coin--it is a stablecoin--to allow cash funding and payout
in different currencies all around the world. The Stellar
Network provides the digital rails to make payments fast and
secure. USDC provides a truly stable digital asset and while
MoneyGram provides a global network of cash-in and cash-out
locations. This is true interoperability with the existing
financial system.
In practical terms, what this means is that an immigrant
farm worker in Michigan or Kansas or California or anywhere in
the world can send her hard-earned cash to her family and to
her home country without experiencing outsized fees or
uncertain wait times. She can walk into a local MoneyGram
location, typically a supermarket or a pharmacy, with $100 in
cash, and in minutes, from start to finish, she can convert
that $100 into virtual dollars in USDC, and that is deposited
directly into her digital wallet. On the other side of the
transaction, her parents could visit their local MoneyGram
location and cash out of their own USDC from their digital
wallet that she sent to them into their local fiat currency
when they need that.
This is available right now and is being used right now.
This novel service gives neglected, unbanked, underbanked, and
cash-reliant populations a pathway to enter the digital
economy.
Let me turn now to the legislation. The DCCPA goes a long
way toward allowing the kind of regulatory framework that will
offer the opportunity for these types of payment services to
be--to flourish and, also, by identifying the CFTC as the spot
market regulator. The Agency's history of vetting and approving
new products demonstrates it is well suited for this type of
responsibility.
We also applaud the focus on consumer protection and
education and its inclusion of the study on energy consumption
related to digital commodities.
It is also encouraging to see that this bill sets out a
process for listing stablecoins and that it is consistent with
the PWG report with payment stablecoins not being included as
securities. We agree with that, and they are necessary for
payments. Rightfully, the DCCPA has defined a digital commodity
while recognizing the SEC's jurisdiction.
Unfortunately, it fails to address the fundamental question
that plagues this industry and has for far too long. When is a
digital asset considered a commodity versus a security? The
Howey Test does not include a clear definition, and it was not
an agency-created rule. The industry desperately needs a
definition, and the DCCPA is the perfect vehicle for it. Not
all digital assets are created equal.
As an example of the challenges we face defining digital
assets, I reference the Minnesota and Iowa State Fairs in my
written testimony, which require tickets in order to experience
the full fair experiences much like you need digital assets to
engage with particular networks and services.
We need a practice, principles-based framework that focuses
on asset functionality. With an appropriate and clear policy
and regulatory framework, digital assets and blockchain have
great potential to improve access to financial services for
millions of people. I believe that the DCCPA is a consequential
step toward creating this vision.
Thank you again for the opportunity to testify today.
[The prepared statement of Ms. Dixon can be found on page
124 in the appendix.]
Chairwoman Stabenow. Thank you very much and very much
appreciate all of these suggestions about further ways that we
can improve this legislation, so thank you very much.
Let me start with Mr. Phillips. One of the important goals,
of course, of the legislation is to make sure that we are
bringing the trading of digital assets under Federal oversight,
that we are bringing all of it. We know the Securities and
Exchange Commission regulates securities, and we want them to
do that and want them to do their work. Not all, as we know, of
the digital assets are securities. What are the risks for
Congress, or what are the risks for consumers, actually, if
Congress does not pass legislation giving the CFTC oversight
over digital commodities?
Mr. Phillips. Yes, thank you, Senator. There are so many
risks to consumers that, we have seen over the past couple of
years. Consumers have lost millions, hundreds of millions,
billions of dollars through scams, through ``rug pulls,''
through hacks, and this bill would enable the CFTC to write
appropriate rules to protect consumers against all of those
things.
For example, the access to exchange data feeds would allow
the CFTC to use technology to find market manipulation and
enforce its anti-fraud and anti-manipulation authorities. It
would require platforms to provide appropriate disclosures. It
would allow the CFTC to write enforceable rules around
cybersecurity protections for the various platforms. This bill
would do so much to protect customers, and I appreciate the
fact that all these provisions are in the bill.
Chairwoman Stabenow. Thank you very much.
Ms. Warren, we know that a large number of individuals, as
you have indicated, including those in historically underserved
communities, are using and trading crypto right now. Our bill,
of course, directs the CFTC to study the racial, ethnic, and
gender demographics of traders--Senator Booker already spoke to
this--and use data to educate, to really inform around outreach
and education during--in rulemaking efforts, actually.
Drawing on your experience in the industry and the
nonprofit sector, do you have recommendations for the CFTC
about how to do outreach so that we can really reach all of
these customers?
Ms. Warren. I certainly do, Senator, and thank you for the
question. I think it is critically important to begin with
community need. I am the co-founder of something, a project
called the Crypto Research and Design Lab, which uses tech
ethnography to center these communities that have been
historically underserved or even fully excluded by formal
financial and technical systems, to articulate what exactly
their needs are and how crypto can be a tool of support and
provide the kind of financial access that they so desperately
need both for themselves and their families.
I think it is critical that this kind of analysis inform
everything from disclosure regimes, which need to be in plain
language, very clear, so that consumers can make the risk
assessments that they themselves are best qualified to make in
determining how crypto can best serve them and their families.
I think that engaging in factual analysis is critically
important, but beginning with the communities themselves is of
paramount importance.
In addition, I think we need to have education that begins
focusing on not just crypto itself but on fundamental and
baseline digital literacy, and that is something I think needs
to be seen and spread throughout our community college system,
our post-secondary in general but even in secondary schools, to
ensure that Americans are prepared for the global digital
economy regardless of their background and regardless of the
opportunities they have through being, you know, from wealthier
families or from higher-income populations.
Chairwoman Stabenow. Thank you very much.
Ms. Dixon, colleagues on the House Financial Services
Committee are working on a bill to regulate stablecoins, as we
know. How would that legislation interact with our bill giving
the CFTC the authority to regulate digital commodities?
Ms. Dixon. Thank you, Senator. It is such a great
opportunity to be able to have these bills work together.
Having a clear definition of what truly is a stablecoin is
so important. We already see in this bill there is a process
for listing stablecoins, but it is really important because a
lot of what we read about in the early days of the summer
focused on things that were labeled stablecoins but not were
not one-to-one backed with fiat, did not have audit
requirements, did not have the transparency that we think is
important not just for American consumers but also for
businesses who want to leverage these stablecoins, as I
mentioned in the MoneyGram example.
Creating that very clear definition of what is a
stablecoin, holding those assets in a secured financial
depository account, making sure that you cannot have--that if
you do have a run on the bank that there is not going to be a
problem for the constituents that choose to get their money
out, these are all really, really important pieces that we
think need to be addressed.
We see not just the bill in the House but also the proposal
that Senators Gillibrand and Lummis put together with respect
to stablecoins and defining stablecoins.
We would love to see the idea that we continue to have
innovation in this space, but it is regulated innovation around
stablecoins.
Chairwoman Stabenow. Thank you very much. I have numerous
other questions, but I am going to stop at this point. I am
going to go and vote and leave the Committee in the capable
hands of Senator Boozman.
So, don't mess it up.
Senator Boozman.
[Presiding.] I am getting a little responsibility. That is
great.
Senator Gillibrand, would you like to go now, or do you
want to--this is our star pitcher, so we will defer to her.
Chairwoman Stabenow. That is right.
Senator Gillibrand. Thank you, Senator.
Senator Boozman. Would you like to go now and then vote?
Senator Gillibrand. Yes. Then I will go vote, yes. I
wanted--Ms. Warren, I wanted to talk a little bit about DeFi
because this is an area where I think we could improve this
bill. Right now, for those who are focused on this issue,
decentralized finance has enormous opportunity to improve
innovation, to work collectively toward creating more financial
inclusivity, as many of you have testified about, fewer
intermediaries, more opportunities of all income levels to
engage in the financial system.
While this bill does include decentralized finance in its
regulatory framework, I do not know that it is being treated in
the way it would need to be treated to actually continue to
participate. I want to talk a little bit more, specifically for
the benefit of the staff who are working on the next iteration
of this bill, what you would suggest laying out in terms of
protocols that would apply and map for decentralized finance
better than the definitions right now that seem to be overly
broad and encompassing too many things that do not really
apply.
Ms. Warren. Thank you, Senator. I agree; I think that the
definition proposed as now is, frankly, a bit unworkable in
terms of how DeFi actually operates. I think it is important to
note that crypto is not a monolith and so DeFi--I have been in
this space full-time now for almost six years, and DeFi did not
exist when I entered this space, as a concept. It was brand,
brand new.
We are really at a point where the cutting edge of
innovation is reflected in what we are seeing in this space,
and the market has not even had time to decide which models
make sense, let alone settle into parameters and models that
are consistent across different kinds of offerings and services
here.
I echo your sentiment that this is a critically important
edge for financial inclusion in our system. It is going to
provide, I believe over time, increasing advantages to those
who simply cannot access other forms of financial services
because they have been, again, historically underserved as the
report that is named in the DCCPA so aptly--it is so aptly
named.
I think what is also really important is to ensure that
DeFi remains in the United States as a locus of innovation. The
concern that I have, which I have shared with you previously,
is that we are going to see offshoring of this innovation space
in a way that, as our colleagues on the panel have noted, is
going to not embed the principles-based frameworks that are so
critical to ensure that Americans receive the adequate
protections that they need and deserve, let alone the global
citizenry that is going to benefit from this innovation.
As a general matter, you know, we do recommend that this is
a space that requires a lot of study and requires a lot of
focus on what is happening, what is coming, the trajectory
here, but also a bit more time for the space to settle a bit
before we try to box it into something that may wind up cutting
off avenues that could benefit tremendous groups of people.
Senator Gillibrand. Can you just explain it a little more
in detail because a lot of people do not understand the
difference? If you have a DeFi protocol that never takes
custody of assets, does it need to make sure they are not
comingled, like a bank or something more in a traditional
finance basis?
Can you explain the difference and why these definitions,
unfortunately, may include and, therefore, exclude DeFi
entirely? Can you just explain the difference for the
Committee, particularly for Chairman Boozman and the staff, so
they understand why it needs a separate study for this part and
to make sure it is not being excluded?
Ms. Warren. Swept up, really, in these unworkable
definitions.
Senator Gillibrand. Yes.
Ms. Warren. The way that DeFi works is it is basically an
immediate pass-through. It enables a precise peer-to-peer
connection between two parties that are engaging in a
transaction without a centralized intermediary that is in the
middle of that. Then it is software, and it is not an entity.
Senator Gillibrand. Then it is software, and it is not an
entity.
Ms. Warren. Exactly right.
Senator Gillibrand. It is not like a group of people
managing an organization. It is a software program.
Ms. Warren. That is exactly right. It is code. It is code
that is actually governing this exchange. That leads to a lot
of exciting innovation, but it is also challenging to figure
out how do you create a framework around that because
everything that has come before--we have talked a lot about
1922. This is about as opposite from that kind of model as you
could get because there is not an entity in the middle of this
that is directing the flow of funds and pointing, you know,
things to where they ought to go. It is code that is
essentially conducting that same service and providing that
same opportunity.
We do--it does behoove us, I think, to think very carefully
about the precedent that is being set when we think about a
code base that is serving a primary financial service function.
How ought we to think about regulation there in a way that
protects consumers but again retains that innovation edge and,
most importantly, ensures that a principles-based framework
that is grounded in historical--the U.S. historical approach of
financial services is underlying all of that?
Senator Gillibrand. Thank you, Ms. Warren.
Mr. Phillips, I want to thank you as well for your
leadership and the work you have done with this Committee and
with my staff on writing portions of this legislation in terms
of ideas and thoughtfulness.
I want to talk a little bit about the issue that people
have concerns about, about energy use and the way this bill
will create a study and a protocol to create better disclosures
perhaps or other recommendations so that the participants can
make informed choices.
Can you talk a little bit about how you do that, which
other regulatory agencies, such as FERC, we may ask for
information from, and explain how we are doing that and how you
think ultimately it will help long-term?
Mr. Phillips. Absolutely, Senator. Thank you. This bill
would require the CFTC to conduct a study, along with other
regulators, examining the energy impacts of a variety of
digital asset commodities. In addition to studying and creating
recommendations for Congress and the Agency on how to reduce
those energy impacts, it would also require the CFTC to list
the energy impacts of a variety of different digital asset
commodities so that investors can see those disclosures and
accordingly make investing decisions.
If there is a token that has an extremely high energy
impact compared to a similar token, it is reasonable to believe
that investors would move to the lower energy-intensive asset,
incentivizing the higher energy ones to reduce their energy
impacts by moving to a different blockchain or doing something
else, reducing the overall impact of energy usage in the crypto
market overall.
As for other regulators that the CFTC should speak with in
doing this, I would recommend consulting with FERC, which has
oversight of the nation's energy markets, the Securities and
Exchange Commission, which I would want to also examine the
energy impacts of digital asset securities, and potentially the
bank regulators and FSOC, who oversee other parts of the
digital asset markets.
Senator Gillibrand. Thank you.
Thank you, Mr. Chairman. I have more questions if you want
me to filibuster, but if you have questions, your turn.
Senator Boozman. If you want to ask another question, you
are welcome.
Senator Gillibrand. I have one more, yes.
Senator Boozman. As long as they do not get mad at you over
on the floor.
Senator Gillibrand. Hopefully not. One more. Ms. Warren, I
have one more. I want to talk a little bit about what happened
after the days of Russia's invasion of Ukraine. People were
concerned that cryptocurrency would be used by Russian
oligarchs to evade sanctions, but that actually was not the
story that we heard. It winded up being a very important
example of how this industry and blockchain technology can be a
solution for families, countries, unstable governments that
need resources, to get them quickly.
I thought Ms. Dixon made some excellent points about
remittances and how important that is for world financial
markets. I care very deeply about access to capital for
communities that are disadvantaged and are unbanked or
underbanked and then the banking community does not serve it.
I would like you to augment Ms. Dixon's testimony and talk
about some of the really positive stories about how this
industry and this technology can transform who has access to
capital at urgent times of need, and I think you can use the
Ukraine example as one but whatever ones you want to add to the
record.
Ms. Warren. Well, I think that is the most acute because I
think there is really no question--and I do not mean to sound
dramatic about this. There is really no question we would be in
a very different situation in that conflict if the crypto
community had not mobilized in response to a request, a
specific request, from the Ukrainian government all the way up
to the President's office, asking for crypto donations to
bridge and serve as a catalyst while the international
community could provide the badly needed aid, the billion
dollars of aid that actually has resulted in where we are and
the ability of the Ukrainian people to stand up to this brutal
invasion.
There is no question crypto was a bridge. It was a
catalyst. It was essential and critical in order to give the
international community time to use traditional financial means
to provide this kind of capital. We know because we can see on
what is called a block explorer where that money went, who it
was given to, and also what it was used for. We know based on
all the accounts that come from the Ukrainian government this
was medical supplies. It was, in some cases, arms. It was just
things that were critically, vitally important at that crucial
time.
In addition, we have seen crypto be a critical tool for
activists, those who are working in some cases with the U.S.
Government against rogue States, to actually provide money,
whether it is money to get them securely out of a country at
times when their lives are in political--they are in crisis
because of political happenings around them. We have seen this
all over the place.
We have also seen women in times of trouble, and
Afghanistan is probably a really great example of this, maybe
the best, where in a patriarchal society, where when the
Taliban came in, they were looking to basically seize and
appropriate funds and the community was using crypto,
particularly women were using crypto in a way to shield assets
from that seizure, which is critical and again provided the
ability for people in that country to resist the authoritarian
regime that was being pushed upon them.
Those are examples that I think are located in other
countries but they are so critical, and they underlie, in my
opinion, the nature of crypto and why it is so important, to
your point, in times of crisis.
The reality is that here in the United States we certainly
have communities in crisis as well. These may not be the
examples that are, you know, as popular or as noted because
they are quieter examples, and they maybe are not as dramatic
in terms of the opposition that is being faced. Nevertheless,
there are communities here that also have been unable to get
access to basic financial services that are turning to crypto.
The numbers speak for themselves, and we quoted them already.
Whether or not you are in an acute situation or a crisis, I
do find that preserving the opportunities that this particular
innovation represents is of critical importance, and again,
grounding that in the principles-based frameworks that underlie
the American financial system are also of critical importance.
Senator Gillibrand. I just want to thank the entire panel.
I appreciate your testimony and the information you are giving
to this panel about the urgency and the importance and the
benefits of really creating these regulatory frameworks now.
Thank you so much.
Senator Boozman. Thank you.
Mr. Phillips, we appreciate the good work that you and your
organization are doing in trying to educate the public as to
what we are trying to accomplish here. This topic is something
that is anything but easy to understand.
One of the things that we are hearing is, you know, from
some of the other consumer advocacy groups is that somehow this
would erode the SEC's authority to police the crypto market and
the CFTC is ill prepared to ensure retail consumers are
protected. Would you agree our bill specifically defers to the
SEC when it comes to those digital assets deemed securities and
only looks to provide the CFTC regulatory authority over
digital commodities?
The other thing that we are hearing along with that is that
somehow, you know, they would be underfunded, they would not be
able to do this. You might, you know, reiterate the importance
of user fees and that that would be fine.
Again, like I say, those are two of the major things that
we are hearing. If you would address that, it would be helpful.
Mr. Phillips. Sure. Thank you, Senator. This bill, as I
read it, specifically defers authority over crypto securities
to the Securities and Exchange Commission and reserves for the
CFTC authority over those assets that are crypto commodities.
My understanding is that since introduction there have been one
or two places where it has been identified that the SEC's
authority may be impinged, and in my written testimony I make
recommendations to address that.
I want the SEC to retain authority over securities----
Senator Boozman. Right.
Mr. Phillips [continuing]. and CFTC authority over
commodities.
I also think that the CFTC, with this bill, would have the
regulatory capacity and expertise to be able to address these
markets. The CFTC is an excellent regulator. The commissioners
and the Chairman are excellent regulators, and I think they
have the best interest of customers, crypto customers, in mind.
As for the underfunding, I think all of our regulators need
additional resources. I encourage Congress to, if it enacts
this bill, to also increase the CFTC's budget. I do think that
the user fees that the CFTC would be able to collect would
perhaps make it easier for Congress to increase the budget to a
point where the CFTC can appropriately regulate this industry.
On the first panel, we heard Chairman Behnam mention that
he expects that the CFTC would need an increase of $112 million
over three years. That sounds like an excellent bang for the
buck to get these assets appropriately regulated.
Senator Boozman. Very good. Thank you.
Ms. Warren, I was going to ask you a question about the
DeFi, but I think, you know, I appreciate the discussion that
you and Senator Gillibrand, you know, had. Certainly that is
something that we are very concerned with getting that right,
so we appreciate that.
Ms. Parker, your testimony discusses the current regulatory
framework under which a cryptocurrency exchange operates.
Please speak about the various State and Federal regulators of
Coinbase, where there might be gaps particularly relating to
consumer protection measures, and why it makes sense to provide
the CFTC with exclusive, mandatory Federal regulation of
digital commodities as set forth in the bill.
Ms. Parker. Thanks, Senator. That is a great question. I
will say there are many State and Federal regulators that
regulate Coinbase. One of our big challenges is particularly
with respect to consumer protection, is that it generally falls
to the State banking regulators under the money transmitter
licenses to carry that mandate.
It is not so much that we are unregulated in this space or
there are gaps in the regulation. It is that it is not
consistent across States, and in particularly, I would point to
our disclosure requirements. Each State has its own set of
disclosure requirements for consumers. Not all are tailored to
digital assets.
This bill solves a critical gap in the sense that it would
bring in a unitary Federal regulator with a consistent--that
would provide a consistent set of consumer protection
requirements that would apply equally to all consumers and
would do so in a way that is tailored to the nature of the
market and the assets. And you know, the CFTC has been active
in this space for a number of years, but this regulation fills
the gap with respect to commodities transactions in the spot
market. We would certainly welcome, you know, that role for the
CFTC in this space.
Senator Boozman. Good. Thank you.
Dr. Tarbert, your testimony raises an important point, how
this Committee may provide further certainty to market
participants who comply with the bill's registration
requirements for listing a digital commodity but somehow,
subsequently, run into an SEC threat to reclassify what appears
to be a digital commodity as a security. How can we address
that problem?
Mr. Tarbert. Thank you so much, Senator, and for your
leadership on this important issue. I think that is really the
key here. You know, many established market participants in
other markets, like Citadel Securities, are looking for that
clarity and coherence. And as you say, one of the issues could
be if something is reclassified after the fact. We would want
the kind of certainty that comes through a safe harbor or
something during the time in which we are trading those
instruments to be able later on to not face, you know, civil
litigation, other kinds of enforcement actions for a change by
the regulator itself.
Senator Boozman. Very good.
Ms. Dixon, again, another thing--and this has been
discussed already, but I think it is important because it does
come up. It is my understanding the energy consumption required
for proof of work, consensus mechanism, transaction validations
can be significant, which is why I am glad our legislation
looks to study the issue. What is your view on measuring energy
usage related to various consensus mechanisms in the crypto
space?
Ms. Dixon. Thank you so much for the question, Senator
Boozman, and thank you for your leadership and that of your
staff on this. The environmental--and what the bill presupposes
about the study that needs to be done with respect to the
environmental impact of all the different consensus mechanisms
is so important. It is something that we do in lots of other
industries to be able to figure out the benefits and the harm
that each of the industries or each of the different challenges
bring to the United States.
All consensus mechanisms are not alike, but importantly,
what we can do and what we are hopeful that this study does is
create a framework for how to measure the carbon output and
figure out what we need to do as an industry to even further
improve it. We just saw last night, I think it was at 2:34 a.m.
in Eastern time, where Ethereum moved from proof of work to
proof of stake. That was already a momentous shift from that in
terms of demonstrating the increased sustainability for that
network by moving to proof of stake.
I think, again, not all consensus mechanisms are created
equally, but if we think about a framework, which we have
done--by the way, we have engaged PWC to create that kind of
framework to consider how you should--and we have done it with
respect to the Stellar Network, what pieces of the Stellar
Network and what pieces of the transaction should be viewed
when you are looking at the sustainability impact as a whole.
We welcome that kind of framework. We think that the
industry needs that to be able to create consistency and to
understand really, truly, the value and also the potential harm
and what we can do to improve on it.
Senator Boozman. Good. Thank you very much.
Madam Chair?
Chairwoman Stabenows.
[Presiding.] Well, thank you very much, Senator Boozman.
Thanks so much to all of you, and we appreciate your
testimony and look forward to continuing to work with you, and
also appreciate so much Chairman Behnam and his leadership at
the CFTC, which is going to be so critical moving forward.
We saw last year a lot of volatility in the marketplace,
and we have a bill that is going to address that, to make
digital commodities safer for Americans to use and to trade
and, again, investing in and supporting the innovation and the
opportunities as well. I think this is a really important
opportunity for us to move forward, and I am hoping our
colleagues will join us on this bipartisan bill so we can get
the CFTC to work.
Again, thank you.
The record will remain open for five business days for
members to submit additional questions or statements.
Without further comment, the meeting is adjourned. Thank
you.
[Whereupon, at 12:28 p.m., the Committee was adjourned.]
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