[Senate Hearing 117-859]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 117-859


   PROTECTING INVESTORS AND SAVERS: UNDERSTANDING SCAMS AND RISKS IN 
                     CRYPTO AND SECURITIES MARKETS

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

                                HEARING

                               BEFORE THE

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

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                                   ON

 EXAMINING HOW STATE SECURITIES REGULATION AND BROKER-DEALER OVERSIGHT 
ORGANIZATION ADDRESSES FRAUDS AND RISKY INVESTMENT OFFERS AND THE RISKS 
    FACING INVESTORS AND SAVERS IN THE CRYPTO AND SECURITIES MARKETS
                               __________

                             JULY 28, 2022
                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                

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


                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
55-805 PDF                WASHINGTON : 2024  


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

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

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                 Dan Sullivan, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                        Pat Lally, Hearing Clerk

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 28, 2022

                                                                   Page

Opening statement of Chairman Brown..............................     1
        Prepared statement.......................................    29

Opening statements, comments, or prepared statements of:
    Senator Toomey...............................................     3
        Prepared statement.......................................    30

                               WITNESSES

Melanie Senter Lubin, President, North American Securities 
  Administrators Association.....................................     5
    Prepared statement...........................................    32
    Responses to written questions of:
        Senator Reed.............................................    92
Gerri Walsh, Senior Vice President of Investor Education, 
  Financial Industry Regulatory Authority........................     7
    Prepared statement...........................................    57

              Additional Material Supplied for the Record

Statement submitted by ICBA......................................    94

                                 (iii)

 
   PROTECTING INVESTORS AND SAVERS: UNDERSTANDING SCAMS AND RISKS IN 
                     CRYPTO AND SECURITIES MARKETS

                              ----------                              


                        THURSDAY, JULY 28, 2022

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

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Senate Committee on Banking, Housing, 
and Urban Affairs will come to order. Today's hearing, as many 
have been in the past, is in a hybrid format. Our witnesses are 
in person. Thank you for joining us. Members have the option to 
appear either in person or virtually.
    Financial fraud and schemes, as we know, have always been 
with us. In fact, they are older than money itself. Criminals 
have always found inventive ways to cheat people out of money 
that they have earned.
    Crypto is no different. Scams that have persisted in the 
securities markets can easily be translated to crypto assets. 
They may seem even more enticing to potential victims when 
wrapped in a new technology, and with the promise of quick and 
outsized returns.
    In the early years of Bitcoin, scammers hacked exchanges to 
steal from early adopters. It did not take long for 
cryptofraudsters to figure out Bitcoin can be used for old-time 
schemes and frauds like Ponzi schemes and bogus investments, 
promising big returns with only upside and no risk.
    Back in March, this Committee looked at how 
cryptocurrencies could be used in illicit finance like 
terrorism and human trafficking. Today's hearing considers how 
the increasing presence of fraud and speculation in the crypto 
and securities markets threaten savers and investors.
    In the last 2 months, we have witnessed spectacular blowups 
in the cryptomarkets, exposing both the alarming 
interconnectedness and the enormous risks among cryptofirms. 
Consumers and investors were misled with promises that their 
crypto would earn double-digit interest rates, in perpetuity.
    Think back to multimillion dollar Super Bowl ads, and think 
about whom they were targeting.
    But one collapse after another revealed how quickly 
supposedly ``stable'' investments could fall apart. We saw that 
unregulated and unlicensed entities could both borrow and lend 
hundreds of millions of dollars to engage in risky 
cryptotrading.
    Our witnesses are all too familiar with fraud and risks in 
the growing cryptomarkets. They have been on the front lines in 
the securities markets, chasing bad actors, exposing frauds, 
and educating investors and investment firms.
    While the work of State securities regulators and FINRA is 
always important, it is especially critical during periods of 
market volatility and economic uncertainty. Those are the times 
when diligent savers see their retirement accounts decline, and 
offers of supposed ``guaranteed profits'' or, quote, ``no 
risk'' investments may sound even more tempting.
    Crypto's appeal is understandable. Promises of double-digit 
interest and lies about FDIC insurance or SIPC protection 
entice Americans frightened by volatile markets and worried 
about retirement, or bills that are piling up. Times of crisis 
also create opportunity for those looking to exploit economic 
anxiety.
    In the early days of the pandemic, all of our financial 
watchdogs began issuing warnings about COVID-19 related scams. 
From frauds connected to investments tied to vaccines, to sales 
of useless PPE, fraudsters used our fears to steal and cheat, 
and our witnesses are perhaps more aware of that than anybody 
in the room.
    Our witnesses today will also discuss scams and frauds that 
target vulnerable groups or close-knit communities where trust 
and preexisting relationships can be abused. This is another 
area financial watchdogs know all too well.
    Seniors and other vulnerable Americans are too often the 
victims of scam artists, peddling Ponzi schemes or using high-
pressure tactics to get victims to part with their money, right 
away.
    This Committee has seen the predatory behavior that targets 
servicemembers looking for affordable short-term credit, who 
are instead sold high-cost payday loans. Bad actors touting 
supposedly ``safe'' investments use similar predatory methods 
to defraud military families. And we know those frauds, these 
examples, are often underreported.
    Victims blame themselves, or do not want to admit what 
happened. We have to fix that, and Ms. Walsh will talk about 
that today. Thank you for that.
    American markets are the envy of the world. Our diverse 
economy and the rule of law help families and workers save for 
the future. We have to keep it that way. That is why law 
enforcement and our regulators, like our witnesses today, must 
be alert. They must be able to identify scams, and move quickly 
to punish bad actors.
    Just last week, the FBI issued a warning for financial 
institutions about cybercriminals creating fraudulent 
cryptocurrency investment apps. Agents found hundreds of 
victims who collectively lost tens of millions of dollars. And 
we know that is just the beginning. There are more victims and 
more losses every day. My colleagues across the aisle seem a 
bit confused about where our priorities should lie.
    Our markets are the envy of the world, because of, not in 
spite of, the ways we protect Americans' money. Supposed 
``innovation'' and ``opportunity'' do not mean much if they 
come at the cost of massive fraud.
    New ways to cheat people out of their money is not the kind 
of innovation most people want in our economy. We hear industry 
players call for ``rules of the road'' when a big fraud is 
uncovered, and after a bad actor has knowingly violated the 
law. The rules are there, the roadmap is clear, and this 
Committee needs to make sure our regulators enforce the law and 
protect the workers and families that keep our economy going 
and markets running.
    As this Committee and the American people learn more about 
crypto-based investments, and understand how frauds and scams 
are growing, we will push our regulators to do more. Of course, 
that means the SEC. It also means the banking regulators. 
Industry should not be allowed to write the rules that they 
want to play by.
    Senator Toomey.

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Mr. Chairman, and welcome to our 
witnesses. Our hearing today looks at scams and risks in the 
securities markets with a specific focus on crypto. Given the 
recent collapse of an algorithmic stablecoin and the bankruptcy 
of several cryptolending platforms, this is a well-timed 
hearing.
    And, of course, one would think that we would hear from the 
SEC, the primary Federal regulator of securities, especially 
considering the Chairman there considers nearly every 
cryptocurrency to be a security. That is the request 
Republicans made.
    There must be some good reason why Chairman Gensler or one 
of his subordinates cannot appear before the Senate Banking 
Committee to explain what the SEC was doing while several 
cryptolending platforms, including Celsius and Voyager, 
imploded, especially since the Chairman himself would likely 
claim these companies fall into his jurisdiction.
    Our Democratic colleagues have said he is not testifying 
today because it is possible he may appear at the Committee 
this fall. Well, that is little comfort to the thousands of 
Americans who lent their crypto to Celsius and Voyager, some of 
whom will be unsecured creditors now in those companies' 
bankruptcy proceedings.
    What was the SEC doing while these companies and others 
were offering lending products that looked an awful lot like 
securities? And what is the SEC doing now to help ensure the 
cryptocommunity gets the regulatory clarity it has repeatedly 
asked for?
    People, we all deserve answers now. We deserved them a long 
time ago. And Chairman Gensler has the answers to those and 
other questions. He just refuses to share them with us.
    Now it is clear that some Americans invested in 
unsustainable schemes, and even fraud, and we need to 
investigate that fraud and prosecute any violations of the law. 
But at least since September of last year I have argued that 
some digital asset projects were offering returns that did not 
make any sense to me, and that some of these endeavors would 
inevitably end badly.
    Well, over the past couple of months, those risks became 
reality. As I mentioned, Celsius and Voyager were offering 
interest rates as high as 18 percent if customers would lend 
their digital assets to these companies. Well, the firms would 
then lend that crypto to other larger investors to make short-
term bets on cryptomarkets. Well, once the crypto selloff began 
the borrowers could not pay their debts, the platforms froze 
customer accounts, and now both companies are in bankruptcy and 
investors are staring at billions in losses.
    These circumstances beg the question: Where was the SEC? 
Had the SEC responded to calls for clarity on how it would 
apply existing securities laws to novel digital assets and 
services, something that I and others repeatedly asked for, 
things might have been different.
    For instance, the SEC could have said how it intended to 
apply the Howey and Reves tests, which the SEC uses as a 
primary mechanism for determining when something is a security. 
The Howey test has four basic prongs in determining whether 
something is a security. To be a security there must be an 
investment of money, in a common enterprise, with a reasonable 
expectation of profits, that are derived from the efforts of 
others.
    Well, it seems like the cryptolending products that I have 
mentioned had all four of these features. The SEC almost 
certainly believed so, too, because in February, they went 
after BlockFi for offering a similar lending product.
    Here is the problem with the SEC refusing to publish 
regulatory clarity about when digital assets or services are 
securities. In the absence of that clarity, you are left 
instead with an ad hoc approach to consumer protection known as 
``regulation by enforcement.''
    Now there are at least four problems with this capricious 
and unevenly applied strategy that the SEC is pursuing. One, it 
is a serious challenge for any well-meaning innovator striving 
to comply with existing laws and regulations if he does not 
know how they will be applied. Number two, it stifles 
innovation. Market participants who lack the benefit of 
understanding the SEC's thinking prior to designing a product, 
they may never create something that could be very useful to 
consumers out of a fear of how the SEC will interpret it.
    Number three. It creates a legal grey area that allows 
entities with a higher tolerance for legal risk to offer 
products that might be bad for consumers. And number four, it 
is ineffective. Just ask those who lost money on these 
cryptolending products.
    Let me give another example. When the SEC announced insider 
trading charges involving a former Coinbase employee last week, 
it claimed the offenders had illegally traded nine digital 
assets that were securities.
    The SEC, finally, in their complaint, they lay out the 
reasons why they believe these digital assets are securities. I 
am very skeptical of their arguments. Yet, they have still 
failed to disclose the rationale publicly before launching the 
investigation. That kind of approach is patently unfair to 
investors and developers alike.
    Republicans have been arguing for a more thoughtful 
approach to regulating digital assets. The first place where we 
should be able to find common ground, and I actually think in 
many cases we are close, is to chart a path forward for clear, 
sensible regulation on stablecoins. There is clear bipartisan 
agreement that stablecoins should have consumer protections. 
There are virtually none now. I have proposed a framework to do 
that. I am in discussion with several Members to make this 
proposal a bipartisan one.
    Let me conclude with this. It is absolutely essential to 
investigate any fraud in the cryptomarket, and any violations 
of existing law, and prosecute those who are committing those 
crimes. So while I appreciate today's hearing topic, it is a 
missed opportunity without having the SEC here.
    Moving forward, I hope my colleagues will take a balanced 
look at these technologies, studying both the consumer risks 
that we need to deal with, that we will, I think, hear about 
today, but also the enormous potential for consumer benefits 
that distributed ledger technology could bring.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    I will introduce today's witnesses. Today we will hear form 
Melanie Senter Lubin. She is a member of NASAA's board of 
directors and NASAA's '21-'22 President. She is a 36-year 
veteran of the Division of Securities within Maryland's Office 
of the Attorney General. In 1998, she became the Maryland 
Securities Commissioner.
    Our other witness, Gerri Walsh, is Senior Vice President of 
Investor Education at the Financial Industry Regulatory 
Authority, where she is responsible for the development and 
operations of FINRA's investor education programs. She also 
serves as president of the FINRA Investor Education Foundation.
    I will begin with you, Ms. Lubin. Thank you for joining us.

 STATEMENT OF MELANIE SENTER LUBIN, PRESIDENT, NORTH AMERICAN 
             SECURITIES ADMINISTRATORS ASSOCIATION

    Ms. Lubin. Thank you, Chairman Brown. I want to thank the 
entire Committee and its dedicated staff for organizing this 
hearing. I am honored to be here today on behalf of the 
hardworking State securities regulators who, in each of your 
States, are charged with protecting investors with promoting 
responsible capital formation and with supporting inclusion and 
innovation in our capital markets. I am also honored to share 
NASAA's perspective regarding the primary threats to investors 
in today's securities markets and ways to mitigate these 
threats.
    At this time, and based on available information from our 
members, we believe that the top threats to retail investors 
are (1) fraudulent investments tied to digital assets, (2) 
fraudulent offerings related to promissory notes, (3) scams 
offered through social media, (4) scams otherwise offered 
online, and (5) financial scheme connected to self-directed 
individual retirement accounts, or SDIRAs for short. With 
regard to digital assets, we are particularly concerned by 
recent events including bankruptcies and collapses of several 
digital asset businesses.
    As we discuss these and other threats today I urge all of 
us to consider the greater context in which we are having this 
discussion. Nearly 15 years after the 2008-2009 financial 
crisis, a concerning amount of distrust in our regulated 
capital markets persists. In a recent survey, the percentages 
of Gen Z, millennial, Gen X, and baby boomer respondents who 
expressed trust in Wall Street ranged from 32 to 36 percent. 
That is hardly a vote of confidence.
    In another survey conducted in March 2021, among those 
invested in the stock market, including those invested through 
retirement plans, an alarming 56 percent agreed that the 
markets are rigged against individual investors. Moreover, 
evidence suggests that the distrust of our regulated capital 
markets is higher among communities of color.
    In my view, we may be at a tipping point in the history of 
our capital markets. The choices we make in the next few years 
may affect our ability to sustain these markets for generations 
to come. To ensure that our markets continue to grow for the 
benefit of businesses and investors alike, we need to do an 
even better job of promoting lasting trust in, and informed use 
of, the regulated capital markets.
    Promoting lasting trust starts with making improvements in 
how we prevent and detect investor harm and how we ensure that 
those charged with enforcing the laws have the tools needed to 
do the job. The Empowering States to Protect Seniors Against 
Bad Actors Act, which would establish a grant program at the 
SEC for State securities and insurance regulators, is a 
terrific example of legislation that would help achieve those 
goals.
    Promoting lasting trust also means that we must make sure 
that regulators have the tools and resources necessary to 
accomplish our investor protection missions. Legislative 
efforts to weaken regulatory oversight will not serve the best 
interest of investors. This is true regardless of whether the 
legislation relates to traditional or emerging areas of our 
markets.
    When it comes to regulation, we believe in a robust 
policymaking process that may or may not reveal that we need to 
supplement certain areas of the law. Thus, Congress should 
oppose rushed legislation relating to digital assets that 
merely serves to offer special treatment to certain market 
participants and that weakens the importance of State and 
Federal securities regulators in our economy.
    For our part, we are participating in efforts associated 
with the President's Executive order, including meetings with 
our Federal regulatory counterparts. We engage regularly with 
SEC Chair Gensler's staff on digital assets, including the 
Crypto Rulebook Project that the Chair is spearheading. Within 
NASAA, our members discuss and share experiences they have with 
various local legislative frameworks related to digital assets.
    In closing, I want to urge Congress to oppose efforts 
underway to pass legislation that would restrict or limit the 
role of regulators, particularly State regulators. As I 
explained in my written testimony, efforts to further expand 
the markets with limited or no regulatory oversight, coupled 
with further limiting State authority is dangerous for 
businesses, for investors, and for our capital markets. This 
approach is simply a recipe for producing additional distrust 
by the very investors we are supposed to be protecting.
    I look forward to your questions. Thank you very much.
    Chairman Brown. Thank you, Ms. Lubin.
    Ms. Walsh, you are recognized for 5 minutes. Thank you for 
joining us.

  STATEMENT OF GERRI WALSH, SENIOR VICE PRESIDENT OF INVESTOR 
       EDUCATION, FINANCIAL INDUSTRY REGULATORY AUTHORITY

    Ms. Walsh. Chairman Brown, Ranking Member Toomey, Members 
of the Committee, on behalf of FINRA and the FINRA Foundation 
thank you for the opportunity to appear today to discuss the 
risks investors and savers face in today's securities and 
cryptomarkets.
    FINRA's mission is to protect investors and promote market 
integrity. In my role as President of FINRA's Investor 
Education Foundation, my team and I focus on research and 
education to help Americans achieve their investing goals, 
navigate increasingly complex financial markets, and avoid 
fraud.
    In my testimony today I would like to emphasize three 
points. First, FINRA and the FINRA Foundation have dedicated 
significant resources to combating financial fraud. My written 
testimony details the extensive oversight activities and 
strategies that my colleagues at FINRA use to look for 
misconduct or fraud by broker-dealers and to take action when 
we find it.
    Second, in carrying out fraud, bad actors often capitalize 
on trending investment practices and vehicles. For example, 
social media has become a powerful medium for investing but it 
also can be a vector for fraud. And the number of bad actors 
exploiting the hype around cryptocurrencies and digital assets 
has surged.
    According to the Federal Trade Commission, fraud using 
crypto as the payment vehicle increased fivefold between 2020 
and 2021. Most of those losses involved crypto investment 
scams. FINRA and other regulators have seen similar trends, 
with bad actors designing fake cryptotrading platforms or 
running Ponzi or pump-and-dump schemes to drain investors' 
cryptowallets.
    As the contours of cryptoregulation continue to evolve, we 
welcome greater direction from Congress and the agencies' 
responses to the President's Executive order in this area, 
which we understand will be due soon. In the meantime, FINRA 
continues to monitor the limited broker-dealer activity in this 
space. Not all cryptoproducts are fraudulent. Some can be 
reasonable choices for certain investors. Still, market history 
is thin, and without clear regulatory oversight, caution is 
warranted.
    My third point is that while FINRA acts quickly when 
broker-dealers harm customers, fraud takes many forms and comes 
from many quarters, often beyond the limits of FINRA's 
jurisdiction or from outside U.S. borders. The research the 
FINRA Foundation and others have conducted suggests that 
equipping investors to spot and avoid the persuasion tactics 
scammers use can help.
    Most investment fraud dangles the possibility of riches 
without risk, and the bad actors behind these schemes cast 
themselves as experts. They tell lies to gain trust, and they 
bombard investors with sophisticated influence techniques like 
creating a fear of missing out. While the adage ``If it sounds 
too good to be true, it probably is'' is good advice, today's 
bad actors use sophisticated techniques to make their pitches 
appear both good and true.
    We believe investor knowledge is one critical way to 
prevent harm. That is why we provide free, unbiased resources 
covering numerous topics, from investing basics to 
understanding complex products and strategies to avoiding scams 
and other financial pitfalls. We work with the SEC, State 
regulators, dozens of national nonprofits, and others to 
disseminate these materials widely and to reach people where 
they live, learn, and earn.
    It is also why the FINRA Foundation spends significant 
resources on research that we share with the public. Just 2 
weeks ago, we released the findings from the latest National 
Financial Capability Study, capturing how the pandemic affected 
Americans with respect to their financial capability. Our 
datasets empower researchers to explore financial behaviors, 
attitudes, and knowledge across multiple demographics.
    Other studies we have funded examine scam susceptibility 
and test interventions to help both older and younger Americans 
alike protect their assets from fraud. You can find more in the 
appendix to my written testimony and at finra.org/investors.
    In conclusion, FINRA and the Foundation are fully committed 
to helping Americans build a secure financial future. We stand 
ready to offer our expertise as Congress tackles tough issues, 
including how best to approach oversight of crypto and digital 
assets.
    Thank you again for inviting me to testify. I am pleased to 
answer any questions you may have.
    Chairman Brown. Thank you, Ms. Walsh.
    Ms. Lubin and Ms. Walsh said that fraud can come from many 
corners. Your testimony highlights how cryptofraud continues to 
be a top concern for your member agencies. Elaborate if you 
would on what makes crypto assets so attractive to scam artists 
and so risky for investors. Walk that through with us.
    Ms. Lubin. Thank you, Senator, for that question. One of 
the things that makes it very attractive to scam artists is 
that the market is not transparent. So when we educate 
investors we say to them, ``OK, get in touch with your 
regulator. Look the person up. Look the promoter up. Look the 
product up.'' But with crypto there is no place to look it up. 
There is no disclosure that is given to investors for them to 
understand the risks attendant to purchasing that product. 
There is nothing to say that the market might tank. There is 
nothing to say that these are the people who are involved in 
making sure that the market works. So there is no place for 
them to go to really get information and the material 
information that they need in order to make an informed 
decision.
    The other thing that is really important is that, as Gerri 
alluded to, scam artists are always paying attention to what is 
in the news. It is what I like to call the ``scam du jour.'' So 
investors are out there and they are hearing crypto, crypto, 
crypto, and they think this is a great idea, and then the scam 
artists custom-tailor their pitches to investors for something 
that is attractive to them or that they are hearing about so 
they think this is a good idea. So they are that more 
susceptible to being pitched on an investment and investing 
their hard-earned money into these kinds of products.
    Thank you. Ms. Walsh, taking off on what she said, we know 
that bad actors often target groups. They read about it daily 
in the paper, she said, where they can exploit trust and 
relationships or community ties. This type of affinity fraud is 
especially destructive because, in some sense, victims suffer 
twice. First they lose their hard-earned money and then they 
feel betrayed by someone whom they trusted.
    How have those frauds evolved in recent years?
    Ms. Walsh. In many ways the frauds have new clothing. 
Fraudsters can turn on a dime when it comes to changing their 
pitches, but the fundamentals of the fraud remain the same. The 
criminals behind these scams try to gain trust, they infiltrate 
a community, they build social consensus, exactly to bring down 
the barriers that an investor might otherwise have to 
considering the fraud. They gain that trust. It is the use of 
psychological tactics and persuasion.
    But we do see that there are frauds that are targeted 
toward particular communities, and that is why it is so 
important to reach out to communities, to be in communities 
where people live and learn and work, so that we can share the 
information that we have as regulators.
    Chairman Brown. Too often the victim is blamed for these 
losses. Talk through what more can be done to shift the focus 
on the perpetrators rather than blaming the victim as we so 
often do.
    Ms. Walsh. Absolutely, because when we blame victims, when 
we shame them when they come forward to talk about what 
happened to them, that actually discourages people from coming 
forward. And as FINRA has found, and as I am sure State 
securities regulators have found, other regulators, we need 
people who have been harmed to come forward and complain. We 
need them to talk about what is happening. Because fraud has 
devastating consequences, not only with respect to financial 
loss, but there are nonfinancial elements of loss to financial 
fraud. That can include losing sleep, losing a job, losing a 
spouse. There are all these additional consequences that cannot 
be measured by the amount of money that was lost, that can 
happen when fraud occurs.
    And so the FINRA Foundation has been working with AARP and 
a research firm to better understand victim blaming and 
shaming, why it happens, how it happens, and how we can combat 
it. Just recently we issued a report on this issue, which is 
available in the testimony that I provided to you, in the 
appendix. We would be happy to discuss it further with you or 
with any Members of the Committee.
    Chairman Brown. And as victims are shamed it seems--and 
going back to Ms. Lubin's comments about the daily news putting 
this out there and encouraging the scam artists, and I want you 
both to comment, starting with Ms. Walsh--one of the talking 
points, and I hear it among, including some of my Democratic 
colleagues, one of talking points of cryptoproponents is that 
technology will not promote financial inclusion, that the 
unbanked especially can benefit from this. That appeals to many 
working families who just do not, as you said, Ms. Lubin, do 
not trust Wall Street and financial institutions generally, in 
many cases for good reason.
    So my question for Ms. Walsh, if you would start, following 
the recent collapse of cryptoplatforms we have heard stories 
about significant losses by investors in communities of color. 
Has financial inclusion using crypto been a realistic goal or 
is it just another sales gimmick?
    Ms. Walsh. Senator, I appreciate the question because 
advancing financial inclusion is one of the most important 
pillars of the work that the FINRA Foundation is doing through 
investor education. It is critical that we educate people about 
our financial markets, how they work, what the risks are, so 
that they do feel comfortable engaging in those markets and the 
understand the risks that are involved.
    Education is not a panacea. There needs to be clear and 
consistent regulation that allows for disclosure of important 
issues so that investors can, in fact, in the cryptospace, 
understand the risks that they are taking, understand how their 
investments might be used, for example, through lending, and 
also getting information from the companies.
    Chairman Brown. Ms. Lubin, your comments, and then I will 
close. Thanks.
    Ms. Lubin. Thank you, Senator. As I had mentioned in my 
opening statement, we have a lot of concerns about the 
marketing in this space generally, and the marketing pitches 
are tailored to the recipients of the pitches. So the idea, 
with some communities of color, that people are being shut out 
of the markets and things like that resonates. So the idea that 
this would somehow democratize investing has been an attractive 
pitch to people, but it has not panned out to be that way, and 
unfortunately communities of color have been disproportionately 
affected by the losses.
    Again, it is the opportunistic marketing materials and the 
pitches by the promoters are really what will resonate with the 
investor, and the investors that are attracted to that kind of 
pitch and with whom those representations resonate end up being 
disproportionately affected by what has happened.
    So I think really what has ended up happening is 
unfortunately for certain demographics this has been not as 
much of an opportunity to catch the American dream as an 
opportunity to become a victim of fraud.
    Chairman Brown. And surely the biggest gainers from crypto 
have not been people of color.
    Thank you. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman. Let me start by 
drawing a distinction that I think is important as we consider 
this. There are applications, there are transactions one could 
contemplate, transactions we have seen that involve tokens of 
cryptoprojects, the transaction which any reasonable person 
would say, ``That looks like a security and, therefore, comes 
under the regulatory purview of securities.''
    That, however, is very distinct from saying that the token 
itself is a security. So, for instance, you could imagine a 
transaction. Let's take something that I think there is 
universal agreement--gold is not a security. Gold is a metal 
and it is a commodity, under American law. But you could use 
gold in a transaction that the SEC would certainly have 
jurisdiction over. If, for instance, someone were to make an 
investment vehicle, the repayment of which was denominated in 
gold bullion, the transaction would be a security. It would be 
regulated by the SEC. But it would not turn gold into a 
security. Gold would still be a commodity.
    Now in the last several weeks we have seen the sensational 
and terrible cases where companies whose cryptolending 
services, the activity regarding these tokens, were very 
arguably within the SEC's purview and they collapsed. 
Sensational collapse. Firms were offering interest rates as 
high as 18 percent if customers would lend the company their 
digital assets. The firms, as I mentioned earlier, would then 
take that crypto, lend it to presumably larger investors who 
were speculating in the cryptomarkets, and one of these firms, 
Celsius, reportedly had nearly $12 billion under management. 
This is not small.
    And when the wheels came off and it all collapsed, the 
customers' funds had been frozen since mid-June, leaving in 
serious jeopardy the status of billions of dollars of deposits 
that, frankly, I think many people will not get back everything 
that they lent.
    So we have this activity that certainly looks like it is 
securities activity. The SEC, though, did nothing. They failed 
to act before Celsius went bankrupt, and that is despite--there 
are press reports that indicate as early as January of this 
year the SEC was investigating whether this particular firm was 
in compliance with securities law. It is under investigation. 
Six months later, nothing happens and the firm blows up.
    Now I realize that in the face of SEC inaction a number of 
States did take action. Securities regulators in various States 
did take action, specifically against Celsius, with cease-and-
desist orders that go back as far as last September. I 
understand Maryland did not. And I wonder if part of that is 
because, really, this should have been the responsibility of 
the SEC to deal with this.
    Ms. Lubin, let me just ask you, do you think that a 
cryptolending product falls under the jurisdiction of the SEC?
    Ms. Lubin. Thank you, Senator, for that question. The State 
securities regulators have overlapping jurisdiction with the 
Securities and Exchange Commission over many, many things, and 
one of those things includes different types of securities. And 
depending on the type of security it is will depend on what the 
requirements are at the Federal level and then at the State 
level.
    At both the Federal and the State level I believe that 
these products are securities. We have very similar 
definitions, and the list within our statutes of how securities 
are defined are very similar.
    Senator Toomey. So you just answered the question that this 
falls under the SEC's jurisdiction. It falls under the State 
securities jurisdictions. Unfortunately, no clarity was 
provided about what constitutes a security, which might have 
dissuaded people from making the investment in the first place. 
Who knows how things might have been different if we had had 
clarity about this.
    By the way, you may be aware of the SEC's action against 
BlockFi. It was taking action for very similar activity. So 
clearly the SEC had a theory about why this constitutes a 
security, but they never disclosed that. They do not share this 
information with us.
    Let me move on, because I am running out of time, on the 
question of the token itself. As opposed to a transaction 
involving a token, let's talk about the token itself. Chairman 
Gensler has expressed the view that most digital assets are 
securities. I think he said virtually all of them are actually 
securities themselves. But once again he has refused to respond 
to calls for clarity as to why he comes to that conclusion, and 
I think there are a lot of good reasons to be very skeptical 
about the logic.
    Among those reasons is that a token, that is associated 
with a distributed ledger technology, typically is lacking 
features that we commonly associate with securities. So, for 
instance, let's look at the Howey test. I went through the four 
criteria of the Howey test. One of the things that a token very 
seldom has is a specific claim for any return or a specific 
claim on the income of a project or an enterprise, any specific 
claim on the assets. There is no such thing. But yet those 
features, I think, are universal among securities.
    So in the absence of a commitment by an issuer to provide a 
return, in the absence of any kind of claim of ownership or 
assets or anything about the issuer, how does the token meet 
the Howey test's expectation of profits prong or even the 
investment in a common enterprise if there is no claim on that 
enterprise?
    Ms. Lubin. Senator, thank you for raising that issue. I 
think when you evaluate a product as to whether or not it is a 
security under the Howey test it is the expectation of profits, 
but the expectation of profits can be the appreciation and the 
value of the token. So if somebody is purchasing that from a 
promoter and they expect there to be an appreciation of value, 
that can meet the expectation of profits requirement.
    Senator Toomey. Except that there is no guarantee of that. 
There is no claim on the issuer. Can you think of a security, 
that we all acknowledge as a security, prior to crypto, where 
there is no claim on the issuer in any form?
    Ms. Lubin. I think there are a lot of different types of 
tokens out there, and you really need to evaluate each one on a 
case-by-case basis.
    Senator Toomey. OK. Yeah, OK. Fair enough. And if there is 
a token out there that does offer a percentage of profits of 
the enterprise or it offers a particular return, then that 
starts to look a lot like a security.
    But you are making my point for me. There are different 
kinds of tokens. They are different from what we have always 
considered securities to be, and it would be really helpful to 
have some clarity in this space, and we have none.
    And that is why, frankly, I think we need to legislate on 
that, because this is a new category of assets that does not 
look like all previous categories of assets, and it is a 
failure of Congress to provide that clarity, and it is a 
failure of the SEC not to at least provide the clarity of their 
interpretation, which, by the way, is controversial, is not 
shared by, say, the CFTC, is not shared by the bipartisan folks 
on the Ag Committee.
    I see I am out of time, but I think we need that clarity.
    I am sorry I ran over. I think Senator Cortez Masto is 
next.
    Senator Cortez Masto. Thank you. Thank you to the panelists 
for this discussion. Let me bring it back to, I am interested 
in how we address and help investors that are at risk of fraud 
and some sort of scams when it comes to investments in the 
cryptosecurities market.
    Since January 2021, more than 46,000 Americans have 
reported losing $1 billion in crypto to scams. The average loss 
was $2,660, I believe. And we also know it is difficult for 
people to recover their money. You guys basically said that 
here. It is difficult after the money has been stolen, and you 
are now a victim of fraud, to recover that money, especially 
for investors with less than $100,000 in losses. And I think 
that is what the scammers are counting on, right?
    In 2009, FINRA provided startup grants to law schools to 
establish investor advocacy clinics in high-need areas. I 
understand FINRA funded these clinics for 3 years, 2009 to 
2012. I am interested in what can be done to help these 
investors, particularly that have losses less than $100,000, 
who really have difficulty getting access sometimes to 
attorneys. I am curious, Ms. Walsh. Can you tell me the 
successes with these advocacy clinics, or what did FINRA learn 
from providing this type of support to investors who were 
defrauded or scammed?
    Ms. Walsh. I would be delighted to, Senator, and thank you 
for that question. One of the very earliest grants that the 
FINRA Foundation made in 2004 was to Northwestern, to establish 
a Securities Arbitration Clinic in the State of Illinois--it 
previously did not have such a clinic. And then using the 
learnings, including the thoughtful guide that the law 
professors at Northwestern prepared on how to establish a 
securities clinic like that. We went out with a program in 
2009, which continued until 2015.
    These Securities Arbitration Clinics provide an important 
vehicle for individuals, particularly people who have low-
dollar securities claims, so under $100,000. In addition to 
representing those clients in arbitration or mediation, 
actually taking those cases to fruition they provide a very 
important screening mechanism for people who come to the 
clinics, who believe that something has happened, believe that 
they have been, in some way, harmed, and they provide 
counseling, because not all harm is, in fact, related to 
misconduct by a broker or by an investment advisor. And so they 
provide that very important counseling element.
    And they also provide outreach and education to the 
community. We have provided a number of the securities law 
clinics with resources that they distribute, including an 
arbitration guide, so that people who do want to represent 
themselves can, but then also information on fighting fraud.
    Senator Cortez Masto. Yeah, no, thank you because I think 
it is an important service provided. I am actually hearing from 
our law school, similarly, that they would like to provide this 
essential service, and I think it is important. That is why 
Senators Menendez, Feinstein, and I are introducing the 
Investor Justice Act, and the bill requires the Securities and 
Exchange Commission to establish a similar grant program for 
interested law schools to operate investor assistance clinics, 
for the very reasons that you just said. So thank you.
    Ms. Walsh, let me ask you this, and you have talked some 
about some of these types of scams and schemes as well. But 
recently uncovered Ponzi scheme we are aware of swindled 
investors of $59 million under the pretext of at least 5 
percent in weekly returns. And you have both talked about the 
scams and the schemes that are out there.
    My question to you is, how can Congress enhance the ability 
of regulators to pursue these criminals? What else do we need 
to be aware of, that we should be doing to support regulators? 
And Ms. Walsh and Ms. Lubin, I am going to open it up to both 
of you. However, whoever would like to start first.
    Ms. Lubin. Thank you, Senator, for that question. It is 
really important to make sure that the regulators have the 
adequate resources in order to make sure we have people in our 
offices who can pursue these kinds of cases. And we work 
together at the State level, with our Federal counterparts, 
with FINRA, depending on the nature of the case, in order to 
pursue these things.
    So the things that are really helpful are to help provide 
additional resources. For example, there is a bill pending 
called the Empowering States to Protect Seniors Against Bad 
Actors Act that, along with your Clinics bill, would provide 
additional resources. The Seniors bill would place with the SEC 
the authority to give State securities and insurance regulators 
additional resources on a grant basis, to help fund our offices 
to pursue matters involving seniors and vulnerable adults.
    So what is really important is that we have the 
jurisdiction, we have the freedom, and we have the authority to 
pursue these actions. The kinds of actions that preempt anyone 
at any level or take State regulators out of it or limit our 
authority to pursue these kinds of actions or, frankly, to be 
the gatekeeper up front and know these transactions are 
registered or appropriately exempted before they are sold is 
really what we are concerned about. Because the more the 
regulators are taken out of the game and the fewer eyes that 
are watching over what is going on, the less effective we can 
be in protecting investors.
    Ms. Walsh. And if I may add, Senator, that in addition to 
my colleague, Ms. Lubin's, remarks, in addition to the 
resources for regulators, it is important to focus on research 
too, to understand the mechanisms of fraud, to understand the 
sort of personality characteristics that lead to scam 
susceptibility, and to foster networks within the Federal 
Government and across State governments to share this 
information on fraud and fraud susceptibility.
    Senator Cortez Masto [presiding]. Thank you. OK. I 
understand Chairman Brown has had to step away, and next in the 
queue is, I believe, Senator Warner online. Are you there, 
Senator?
    Senator Warner. Yes, I am. Thank you, Senator Cortez Masto, 
and when Sherrod comes back tell him thanks for holding this 
hearing.
    I want to make sure I take advantage of my time 
appropriately. I know a lot of my Republican colleagues always 
cite The Wall Street Journal, a great periodical. I am not 
going to waste a lot of time but I have got six recent 
headlines, all from The Wall Street Journal, who talk about 
crypto scams and frauds, so this is a timely effort, and I will 
perhaps send them around to my Republican colleagues so they 
can review it as well.
    I guess I am going to start with Ms. Lubin and Ms. Walsh on 
the same theme that I often raise in these hearings, which is I 
am still trying to wrap my head around, particularly around 
stablecoins, how they make money. Because if you truly have a 
one-for-one backing with a dollar-per-dollar backing, for 
example, somebody has got to be, in effect, borrowing some of 
the money from investors or others. You have got to pay for the 
float.
    So I do not get how they actually can make enough off of 
fees, since often people, advocates for stablecoins, and I want 
to believe they are saying that stablecoins and other tools are 
going to be used, frankly, as a way to deal with a currency 
risk, payment to third-world countries, when, in effect, it 
feels like a lot of these stablecoins are used as a--you know, 
if somebody wants to buy a cryptocurrency, they use a 
stablecoin as the tool to invest in another crypto, whether it 
is Bitcoin or others, or the whole world of DiFi.
    So Ms. Rubin and Ms. Walsh, I mean, can you explain kind of 
the underlying basis of how a supposedly one-to-one backed 
stablecoin actually makes enough money, and if they are making 
it off of fees do you feel that those investors in these 
entities, you know, are giving appropriate enough disclosure to 
understand the basic economic premise?
    Ms. Lubin. Thank you, Senator. I think you raised very 
important points. Part of the question is are stablecoins 
actually really stable. Is there a way for them for the 
enterprise to make enough money to back up the entire 
operation?
    From what we understand, and there is a tremendous lack of 
transparency in here, you know, there are fees at each level of 
the transaction. There also could be excess earnings on the 
backup reserves for the stablecoins, and that is also a place 
where there possibly is some revenue coming in.
    But the real issue here is there is not disclosure. There 
is a total lack of transparency in this market, so you do not 
have the kind of information you have with typical securities 
investments, where you say, this is where we are making money, 
these are the fees we are going to earn, this is what it costs 
us to run this business, and this is what we expect the profits 
to be. So the tremendous lack of transparency here keeps this 
as an evergreen question of how are people affording to do 
this.
    Senator Warner. Ms. Walsh.
    Ms. Walsh. Senator, thank you. I echo Ms. Lubin's comments 
and underscore that more disclosure, greater clarity is needed 
with respect to crypto assets and digital assets. Market forces 
can drive up the value of various securities, and that is 
something that we have seen time and again, in different 
iterations over the years. I have been doing this for 25 years.
    But having clarity and more disclosure so that people 
understand what the product is, how it works, what the fees 
are, how they might incur losses, even if those losses are 
caused by something other than a market decline in the value of 
their particular security, those are all important questions 
for regulators and Congress to be tackling.
    Senator Warner. Yeah, and I appreciate both of you because 
again, you know, I can see a stablecoin world where you might 
have, within the universal so-called algorithmic stablecoins, 
where there is not this promise of one-to-one backing. And 
clearly we think about--I always think about It's A Wonderful 
Life and Jimmy Stewart, you know, telling folks, when there was 
a run on the savings and loan, your money is in somebody else's 
house. And there was not this promise of a one-to-one backing. 
Some level of leverage on stablecoin usage makes sense. But 
when people are saying, no, we have an immediate, one-to-one 
backing on a dollar or other similar legitimate currency, I 
just think the business model needs a lot more review.
    I know, Ms. Lubin, my time is up, but I am 100 percent with 
you, the idea that anywhere in this field, this early on, that 
we would have any kind of self-regulatory or SRO organization 
would be absolute lunacy.
    So I appreciate this and I really hope we get more chance 
to investigate. I also hope that we can maybe do this, the 
Committee could maybe get some kind of classified briefing. As 
Chairman of the Intel Committee, I think there are a number of 
misuses in this field that need to be explored.
    My understand is I have been handed a note that I am now 
supposed to call on my colleague, Senator Menendez, who I think 
is next in the queue.
    Senator Menendez. Thank you. I was happy to yield to my 
colleague from Virginia since he needed to go.
    Cryptoscams have real impacts on hardworking Americans. In 
my State of New Jersey, a retired police officer lost $15,000 
of his savings in a long and complex cryptomining scam. 
According to The Washington Post, blockchain records reveal 
that the scammer conned over 5,000 people for over $66 million, 
and that is just one scam operation. The FTC estimates $750 
million was lost to scammers in all of last year.
    Victims have tried to contact law enforcement but many have 
yet to receive the help they need. There is a real concern that 
these scams are not being adequately investigated, leaving the 
victims with no recourse.
    So Ms. Lubin, if someone falls victim to a cryptoscam, who 
should they contact to seek justice?
    Ms. Lubin. Thank you for that question, Senator. It is 
really important, and sometimes it takes investors a little 
while to figure out who they should call to get some help. We 
strongly recommend that you start with your State Securities 
Division. We are the local cops on the beat. As we like to say, 
if you are mugged you are not going to call the FBI. You are 
going to call your local police department. So if somebody has 
a securities issue or an investment issue they should call 
their local Securities Division, and they can find us by 
checking on the NASAA website.
    We do work with our Federal counterparts. We have 
jurisdiction over--and all the States work this way--we have 
jurisdiction over securities whether they are sold from our 
State or they are sold into our State. So we have very broad 
jurisdiction. And we frequently have to work with our Federal 
counterparts because things might be national and things might 
be international.
    Senator Menendez. What is it about cryptocurrency that is 
causing difficulties in prosecuting cryptoscams?
    Ms. Lubin. Another very good question. I think what is 
difficult is, first of all, it is a new area, and people are 
gathering their expertise and understanding what is going on. 
It also takes a little bit of time for the investor complaints 
to actually be reported to the appropriate regulators and the 
appropriate prosecutors.
    So there is this ability, and we see this in cases all the 
time, for investors to be lulled into believing the money is 
going to come, the money is going to come, and they are worried 
to file a complaint because that might interfere with their 
ability to collect. So you will see some of the cases trailing 
behind when the fraud happened because the promoters and the 
scam artists convince the investors that they should not go to 
regulators.
    Senator Menendez. Well, this an area because it is 
happening, and it is happening. A police officer is not the 
typical person. You know, his antenna would normally be up. He 
is someone who is trained. And yet he fell victim to it, and 
that is just the reality of so many.
    Let me ask you both. For years now I have been calling out 
social media giants such as Facebook, Instagram, WhatsApp for 
their failure to curb the spread of misinformation on their 
apps. And study after study, for example, in the Spanish-
speaking community, 66 percent of Spanish-speaking respondents 
received wrong or harmful information about the COVID vaccine. 
But that is true about so many other things.
    How does the spread of misinformation on social media 
magnify the problem with cryptoscams?
    Ms. Walsh. Thank you, Senator, for that question. Social 
media is a powerful medium that has wide reach, and there are a 
lot of individuals who are using it to promote either their own 
brands or products. You know, so it is widely used and widely 
accepted and very available to the American public.
    And we do see--I know that State securities regulators have 
listed as one of their top scams the rise of social media as a 
mechanism for fraud. And while much of this fraud is happening 
outside of the broker-dealer spaces, so that it is beyond 
FINRA's regulation, FINRA's jurisdiction, FINRA is monitoring 
social media for crypto and other scams, and we recently 
launched a ``Finfluencer'' sweep to try to better analyze how 
broker-dealers, to the extent that they are using social media 
to acquire customers, what is happening in that space.
    So this is an area that we take very, very seriously.
    Senator Menendez. I see it in my Instagram account all the 
time, and, you know, I just say to myself how easy it is, if 
you do not know. Which brings me to my final question with the 
time I have.
    Digital assets are relatively new, and unfortunately 
scammers can take advantage of the novelty to mislead 
investors. It is clear that the technical knowledge required to 
really understand crypto can be a challenge for an average 
investor.
    Ms. Walsh, do you think that the lack of education on 
digital assets is a contributing factor in their rising use in 
scams?
    Ms. Walsh. Senator, I agree 100 percent with you that we 
need more education on digital assets so that people understand 
how they work, they know what disclosures to look for, and in 
the absence of those disclosures to exercise caution. It is 
very important that people understand how a particular 
investment works, how they could lose money in that investment, 
what they pay for that investment, and what recourse they have.
    Because most of the digital asset transactions are 
happening outside of the broker-dealer space, protections that 
come from FINRA's regulatory regime do not apply, and this is a 
concern for all regulators when this is happening outside of 
the space of regulation the recourse for investors can be 
difficult.
    Senator Menendez. Yeah. According to the FTC, reported 
losses in 2021 due to cryptoscams were nearly 60 times what 
they were in 2018, so it just speaks volumes.
    I understand that Senator Lummis is next.
    Senator Lummis. Thank you, Mr. Chairman. The point you just 
made, Mr. Chairman, is indicative of the fact that we need a 
strong consumer protection in the digital asset space. Consumer 
protection in the digital asset space will take a lot of forms. 
It includes robust disclosure made by companies who create 
digital assets, legal segregation and protection of customer 
assets in bankruptcy, and disclosures made by digital asset 
exchanges about the risks and permissible transactions that may 
be undertaken with digital assets.
    We have that framework for robust consumer protection 
standards for digital assets, and I believe my Responsible 
Financial Innovation Act with Senator Gillibrand achieves that 
across the board. I look forward to working with Mr. Chairman, 
the Ranking Member, and other Members of this Committee to 
ensure we get this right.
    Ms. Lubin, thanks for joining us today. The Securities and 
Exchange Commission has previously stated that digital assets 
can transition their legal status between securities and 
commodities and that digital assets may or may not embody an 
investment contract, depending on the facts. Far from being 
settled law, this is the first time in the history of the SEC 
that it has taken that position.
    I know this because my staff has reviewed hundreds of 
circuit and district court cases on the Howey test. We need to 
have an honest discussion on this Committee about what the 
Howey test does and does not mean.
    So Ms. Lubin, do you think there are significant investor 
protection issues when market participants cannot effectively 
tell the difference between a security or a commodity, 
especially where the SEC has acknowledged that their legal 
status can change?
    Ms. Lubin. Thank you, Senator, for that question. Clearly 
it is very important for people to be able to assess and 
determine whether something is a security, but when you have a 
securities lawyer look at the products that are being sold we 
understand what the Howey test is, we understand how it is 
applied, and we can look at it and say yes, that looks like a 
security.
    The Howey test does not only apply to crypto. It can apply 
to any kind of investment. So our job is to take the law and to 
take the facts and take the case law and the statutory law and 
apply it to what is going on in a given situation, and most 
securities lawyers would take a look at that and say, ``Yes, 
that is an investment contract and it needs to be regulated.''
    Senator Lummis. Well, I would welcome your review of the 
Lummis-Gillibrand bill and your comments on how we addressed it 
in the legislation.
    Ms. Walsh, thank you for being here today. As the primary 
self-regulatory organization in the securities space does FINRA 
believe a role for self-regulation should be part of the 
conversation around digital assets?
    Ms. Walsh. Thank you for that question, Senator. FINRA has 
not taken a public position on whether there should or should 
not be a self-regulatory organization in the digital asset 
space, but I will say that, the self-regulatory model that 
Congress enshrined in the Federal securities laws when it 
passed the Maloney Act has led to robust regulation in the 
broker-dealer space. FINRA and its predecessor organizations 
have been registered with, and, in fact, are overseen by the 
Securities and Exchange Commission. There is robust oversight, 
so while ``self'' is in the name, the legislation that Congress 
passed did not envision that FINRA would be solo in regulation. 
We absolutely are overseen.
    Also, the way FINRA is set up, we have a majority public 
board, and so we are informed by but not influenced by the 
industry that we oversee, and I think that is another important 
element that contributes to continued investor protection. So 
FINRA would be delighted to work with you, with other Members 
of the Committee on legislation and to share our expertise and 
our history with the self-regulatory model.
    Senator Lummis. Well, I would welcome that as well. You 
know, we want to get this right. Senator Gillibrand and I want 
to make sure that this piece of legislation that we have, that 
is very comprehensive but that has jurisdiction that spreads 
across multiple committees in the Senate, has been thoroughly 
vetted and that we can piece it together.
    Does FINRA feel that it would have a role in the digital 
asset SRO, or do you think an SRO that is specific to digital 
assets would work better?
    Ms. Walsh. Again, Senator, thank you, but we have not come 
out with any kind of position on that. However, most of what is 
happening in the digital asset space currently is happening 
outside the broker-dealers. Within broker-dealers, FINRA has 
robust examination mechanisms, review of advertising materials, 
review of customer communications, tools at its disposal, 
because those are part of our regulatory toolkit. And so we 
would offer those as you are considering the steps to take.
    Senator Lummis. Thank you. I thank our witnesses and I 
yield back.
    Chairman Brown. Thank you, Senator Lummis.
    Senator Warren, of Massachusetts, is recognized.
    Senator Warren. Thank you, Mr. Chairman.
    So crypto has made it faster and cheaper than ever before 
to rip off consumers. According to the Federal Trade 
Commission, since the start of 2021, about 1 in every 4 dollars 
that consumers were defrauded out of, totaling about $1 
billion, was lost in a cryptoscam, and those are just the scams 
that are reported, not the ones that people are too ashamed to 
tell anyone about or the ones that people never report because 
they know the money is gone, and it just feel like any point in 
it.
    Today is about scams, but crypto is not an industry with a 
few scam artists operating around the fringes. Crypto is an 
industry that is built to favor scammers, and some of the 
biggest players in our financial system are in on the con. 
Venture capital, giant hedge funds, and private equity rake in 
profits from a system that is designed to reward insiders and 
to defraud mom-and-pop investors.
    Ms. Walsh, you are an expert on protecting mom-and-pop 
investors, so I would just like to ask you who those mom-and-
pop investors are up against. Are big, institutional investors 
becoming more prominent players in the cryptomarket?
    Ms. Walsh. Thank you, Senator, for that question. While the 
FINRA Foundation focuses on retail investors and has 
information about retail investors, we have certainly seen, 
from media reports, that there are large investments by 
institutional investors and hedge funds and other entities.
    Senator Warren. In fact, I have some of the data. VC firms 
invested $33 billion in crypto-related companies last year. 
That is more than all the previous years combined. And hedge 
funds and other big investors are now the main source of 
trading activity. Last year, professional investors traded $1.1 
trillion on Coinbase, more than double the amount retail 
investors traded. In other words, some of the biggest players 
in our financial system, these so-called smart money, are all 
in on crypto.
    Two companies that these big investors poured money into 
recently were Voyager and Celsius, which, as it turned out, 
both of them filed for bankruptcy earlier this month. Celsius, 
for example, announced raising $750 million from professional 
investors just months before it collapsed.
    Ms. Walsh, Voyager and Celsius made money by taking 
people's deposits and lending them out, a lot like a 
traditional bank. But they made astonishing claims like 
offering up to 20 percent interest while claiming that they 
were FDIC insured and, quote, ``safer than banks.'' Does that 
have the earmarks of a scam to you?
    Ms. Walsh. Senator, I appreciate that question, and if that 
were happening within the space of broker-dealer regulation 
FINRA would be able to look at the advertising because that is 
what we do. We would be able to look at the disclosures because 
that is what we do. It is important to have clarity in the 
digital asset space.
    Senator Warren. Well, I appreciate clarity, but let us be 
clear here. No risk, 20 percent returns--look, that was a lie 
from the start. It does not take a lot of deep analysis to 
understand what is going on here. But notice it did not stop 
big, professional investors from throwing money at cryptofirms 
that were clearly drawing in mom-and-pop investors in a scam.
    So Ms. Lubin, do you think that mom-and-pop investors who 
handed their money over to Voyager and Celsius are likely to be 
at the head of the line in getting their money back during the 
bankruptcies of those companies?
    Ms. Lubin. Thank you, Senator, for that question, and I 
would not presume to tell you how bankruptcy law works. On the 
other hand, if those investors are considered unsecured 
creditors they are going to be put into the pool with everybody 
else, and they are typically at the end of the line.
    I have some other theories, and there are other things 
being litigated so I am going to invoke investigative privilege 
and not discuss some of the other approaches that investors' 
counsel might want to take in some of those cases.
    Senator Warren. Fair enough, but this is going to be tough, 
right?
    Ms. Lubin. I think it is an uphill battle and there is 
always an uphill battle in bankruptcy or when we put cases into 
receivership because there is rarely enough money to cover the 
investment.
    Senator Warren. Right. Across the cryptomarket these big 
investors are funding, hyping, and then vampire-sucking money 
out of cryptoprojects that scam mom-and-pop investors. 
Regulators need to protect customers from cyber criminals, from 
grifters, from other illicit characters that are scamming 
consumers from the shadows, but these shadowy actors should not 
distract us from the big, seemingly legitimate players that are 
financing crypto and helping crypto attract the mom-and-pop 
customers who are going to lose their money.
    And that is why I will soon be introducing a bill to 
regulate the cryptomarket and stamp out the worst scams by scam 
artists, both big and small.
    Thank you. Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Warren.
    Senator Van Hollen, of Maryland, is recognized.
    Senator Van Hollen. Thank you, Mr. Chairman, and thank both 
of you for your testimony here today. Ms. Lubin, it is great to 
have you here both with your national hat on as well as I want 
to thank you for your work as our Maryland Securities 
Commissioner. Great to have a fellow Marylander here.
    I want to start by thanking you for your input and advice 
as I worked to introduce the Empowering States to Protect 
Seniors from Bad Actors Act, and I believe you may have 
mentioned that this morning in your testimony. I think we are 
all well-aware of the fact that a lot of these fraudsters prey 
on seniors. In fact, we know that according to the Senate 
Special Committee on Aging, seniors lose approximately $3 
billion each year to financial scams.
    So I know you worked with us to put this bill together. It 
is bipartisan. I want to mention to the Chairman and the 
Ranking Member that we have the support and sponsorship of 
Senators Scott, Warnock, and Lummis. I hope we will be moving 
forward on this.
    Could you, Ms. Lubin, just talk to why it would be 
important to pass this bill?
    Ms. Lubin. Thank you, Senator, and thank you for your 
comments and for sponsoring the bill. The bill is really 
important to us. There are never enough resources to go around 
with what we do. Industries, scam artists always have way more 
resources than regulators have. So this grant program would 
allow State securities and insurance regulators to apply for a 
grant to help us combat fraud in the senior space, and it would 
allow us to get more resources, have more attorneys, have more 
investigators, and have more people who can do investor and 
senior outreach to try and help protect seniors and prevent 
fraud.
    Senator Van Hollen. Are there investigations that you might 
want to pursue now that you are not able to, simply for a lack 
of resources?
    Ms. Lubin. We always have cases that we can continue to 
pursue and pursue more in depth that we cannot because of lack 
of resources.
    Senator Van Hollen. Yeah. Just to my colleagues, what the 
bill does is provide a grant program, $10 million a year, I 
believe, to the SEC for States to develop programs and use 
their resources to crack down on fraud against seniors. This 
would apply to fraud in the cryptospace, would it not?
    Ms. Lubin. It would apply to any kind of fraud involving 
seniors. There is a NASAA Model Act to protect seniors and 
vulnerable adults, and financial professionals who believe that 
there has been exploitation have a legal obligation to report 
to us and to Adult Protective Services the fact that there 
might have been or they believed there was exploitation. And 
this kind of grant money would help us resource those 
activities for us to investigate and prosecute those cases.
    Senator Van Hollen. I appreciate that. I hope we will get 
that over the finish line here in this Committee.
    We have had a number of hearings on the risks of different 
crypto assets, but I would like to ask you both about what 
authorities exist, if any, with respect to deceptive 
advertising. Senator Warren mentioned a couple of examples. It 
is hard enough for people to assess the risks of crypto without 
deceptive advertising, and obviously some folks in the 
cryptospace provide information and disclosures but many do 
not.
    So where there are cases of deceptive marketing, Ms. Walsh, 
do you at FINRA have what kind of authorities, if any, or what 
kind of practices do you have in place to try and track and 
expose and hold people accountable for deceptive advertising?
    Ms. Walsh. I appreciate that question, Senator, and I 
appreciate the opportunity to talk about what FINRA does in 
this space because we do take deception very seriously. In 
addition to ongoing risk monitoring activities of our firms and 
examinations of the firms on a regular cycle, FINRA does 
reviews of advertising materials that are used in the sale of 
investment products. And so we have an advertising review team 
that takes actions when we see issues.
    Certainly to the extent that crypto is happening within the 
broker-dealer space, one of the things that we look at are the 
advertisements themselves, whether those are being filed with 
FINRA, and also the nature of the communications with the 
public that are being made, because under FINRA rules those 
have to be fair and full and not misleading.
    Senator Van Hollen. And have you taken any action to date 
against anybody for deceptive advertising in the cryptospace?
    Ms. Walsh. I will have to defer to my colleagues at FINRA. 
As I sit here today I am not aware.
    Senator Van Hollen. OK. Ms. Lubin, as a State regulator 
what kind of legal powers do you have to go after deceptive 
advertising?
    Ms. Lubin. Thank you, Senator. I and my colleagues, you 
know, across the board most of our statute are based on the 
Uniform Securities Act and are very similar to Federal law, and 
we have antifraud authority that applies to any person. So any 
person in connection with the offer of sales of securities who 
commits a fraudulent act or makes material misrepresentation or 
omissions falls within our jurisdiction. So if someone is 
advertising in a misleading way or has material omission, those 
are offers of securities and we would have jurisdiction to take 
action against those advertisers.
    Senator Van Hollen. Well, I appreciate that. I think one of 
the concerns is that some advertisements suggest that, for 
example, investors in crypto have the kind of coverage you do 
through the FDIC for your deposits, which we all know here is 
not true. But I hope both of you will be on the full lookout, 
obviously for deceptive advertising across the board in your 
areas, but because there is such confusion in this particular 
space of crypto I think it is especially ripe for deceptive 
advertising. We need to be on the lookout for it.
    And again, thank you, Ms. Lubin, for your help on that 
bill, and I am confident the Chairman and Ranking Member will 
help get it passed out of the Committee. Thank you.
    Chairman Brown. We hear you. Thank you, Senator Van Hollen.
    Senator Sinema is recognized from her office.
    Senator Sinema. Thank you, Mr. Chairman, and thank you to 
the witnesses for being here today.
    You know, last year I worked with my friend, Republican 
Senator Cynthia Lummis of Wyoming to cofound the Bipartisan 
Senate Financial Innovation Caucus. The caucus strives to 
highlight responsible financial innovation in the U.S. 
financial system and help financial technologies to make 
markets more inclusive, safe, and prosperous for Arizonans and 
all Americans.
    Arizonans are optimistic about blockchain technology and 
they are interested in how the technology can make their lives 
easier, but as my friend and hero, Senator John McCain, would 
put it, Arizonans have no patience for hucksters, those who are 
looking to rip off everyday people to make a quick buck.
    When Congress fails to do its job and provide for a 
thoughtful, clear, and strong regulatory framework for 
blockchain technology and its financial use cases it is not 
just entrepreneurs that lose. It is everyday Arizona investors 
who have no idea what to expect from a business or from their 
government.
    We have enough uncertainty in the world as it is. People 
are tired of the chaos. So we need to provide safeguards and 
information to investors in this space so they can make 
informed financial decisions for themselves and their families.
    So Ms. Lubin, thank you for being here today. Your 
organization, NASAA, has conducted a survey for several years 
and found that investments tied to digital assets are a top 
threat to investors. This space is basically unregulated. On a 
basic level, can you tell me why unregulated investment spaces 
are threats to retail investors?
    Ms. Lubin. Thank you, Senator, for that question. When the 
investment area is not regulated that means we do not have the 
ability, first of all, to be a gatekeeper, to see those 
offerings before they are sold, and investors do not have 
access to the information that they need to make an informed 
investment decision. So they will not get the typical 
disclosure that you get with a regulated offering or an 
offering in the public market that says these are the things 
you need to think about, these are the risk factors, this is 
how you are expected to make money. There is not transparency, 
and that, frankly, is our concern when you are dealing with the 
public versus the private market, that there is not a way to 
look into that market and for investors to get adequate 
disclosure, and frankly, for the market to get adequate 
disclosure so they could affect the pricing.
    So when these kinds of investments end up in the private 
market there is not transparency, there is not liquidity, and 
investors really do not understand what is going on with their 
investment the way they would in the public reporting market, 
where you get quarterly and annual reporting.
    Senator Sinema. Thank you. So let's talk about the harm 
that a lack of regulatory clarity is causing consumers. We 
recently saw that Celsius, a cryptolender that made some 
splashy promises about being superior traditional bank lender, 
filed for Chapter 11 bankruptcy. Prior to doing so, Celsius had 
suspended the ability for customers to access their holdings, 
which effectively trapped consumers in place.
    Consumers who utilized Celsius are panicked because they 
rightfully believe that the Chapter 11 filing will free Celsius 
of its obligations to make good on its promises to consumers, 
costing them thousands or even their life savings.
    Ms. Lubin, many of these consumers may be considered 
unsecured creditors in a bankruptcy proceeding. Given the cash 
shortfall that Celsius has publicly reported, are they right to 
be worried?
    Ms. Lubin. Thank you, Senator, for that question. I think 
the investors are very appropriately concerned. Some of our 
States and NASAA now is working on an investor education piece 
that will be helpful for investors so they understand what they 
might be facing with a company in a platform that files 
bankruptcy and what their options might be in a bankruptcy 
case. So it is appropriate for them to be concerned, and it is 
also appropriate for we, as regulators, to try and assist those 
investors in figuring out what their options are as they move 
forward.
    Senator Sinema. Thank you. Ms. Walsh, thank you for being 
here. From a financial education standpoint, what role could 
easy-to-understand consumer disclosures and a consistent 
regulatory framework play in reducing the instances of fraud 
and financial abuse in crypto and securities markets?
    Ms. Walsh. Senator, thank you for that question. 
Fundamentally, there are multiple pillars of regulation--
examinations, enforcement, and education. And so to the extent 
that there is clarity in the disclosure, about the disclosure 
obligations that crypto and digital asset providers are making, 
that will assist consumer knowledge because not only is that 
information absorbed by consumers but it is also absorbed by 
the market itself. And it is important that we have transparent 
information available about companies so that investors and any 
intermediaries that might be guiding them are able to make 
fully informed decisions.
    And investor education is a complementary tool to the 
disclosure that regulation requires. And so, we work 
collaboratively with our fellow State securities regulators, 
with the Securities and Exchange Commission, many other Federal 
agencies and a network of national nonprofits to get the word 
out as widely as we can about the tactics that con criminals 
are using to separate people from their money, including in the 
digital asset space.
    Senator Sinema. Well, thank you, Ms. Walsh. You know, 
consumers are angry, confused, and frustrated. MarketWatch 
reported that one customer now has less than $1,000 left in the 
checking account to support his family after Celsius froze all 
withdrawals. Another lost his farm, and his family was left 
homeless.
    These are real losses, and while losses are a real risk in 
any type of investing, losses at this scale to consumers, who 
may not have understood what they were getting into, is a 
failure in governance and a failure in policy. We have got to 
hold hucksters accountable and strive to do better.
    And let's be honest. Celsius is far from the only recent 
failure in our cryptomarkets. These companies built businesses 
predicated on transparency and accountability, but for too many 
Arizonans the experience with these businesses no longer feels 
transparent or accountable. So we have to find ways to repair 
and restore that trust while continuing to spur innovation and 
to create opportunity.
    Earlier this week I introduce the Virtual Currency Tax 
Fairness Act with my friend, Senator Toomey. This commonsense 
and bipartisan legislation provides much-needed clarity for 
everyday transactions with digital assets. It creates a de 
minimis exception of just $50, much like we have for foreign 
currencies, to ensure that Arizonans are not caught having to 
pay a surprise capital gains tax when they are just trying to 
buy a cup of coffee with their crypto.
    So I am hopeful that our legislation and other 
conversations that Congress is having on regulation of 
stablecoins and other important subjects can result in new laws 
that protect consumers from scams, and importantly, provide the 
certainty that innovators need to build the next big thing. So 
I am looking forward to us getting to work.
    And thank you, Mr. Chairman. I yield back.
    Chairman Brown. Thank you, Senator Sinema.
    Senator Reed, from Rhode Island, is recognized, if you are 
ready. Would you like to hold a minute?
    Senator Reed. May I defer?
    Chairman Brown. Sure. And do you want to make a little 
statement? Senator Reed will go and then I will just close it.
    Senator Toomey. Thank you, Mr. Chairman, and I do not know 
that I am going to take enough time for you to fully prepare 
there, Senator Reed, but a simple observation.
    During the course of the hearing, I think on several 
occasions there has been a discussion about the lack of 
disclosure regarding the assets backing a stablecoin. Ms. Lubin 
specifically referenced the absence of appropriate disclosure, 
which is very often the case.
    I just want to say, for the record and for my colleagues' 
benefits, my stablecoin legislation, which is not meant to be 
the final word on this--it is meant to be a starting point--
requires full disclosure so that everyone would know exactly 
what is backing a stablecoin. You would be able to see exactly 
what is there.
    Furthermore, it creates a mechanism, it creates a 
regulatory obligation on the part of the OCC to regulate these 
stablecoin issuers. There is no statutory authority to do that 
now. Part of the problem we have is the absence of legislative 
authority for regulators to do the things that I think we all 
agree need to be done.
    So I appreciate underscoring the need to have this 
transparency about these assets. I have got a legislative 
proposal that does it. Thank you.
    Chairman Brown. Thank you, Senator Toomey, and Senator 
Toomey and I have talked about this. We have a different view, 
generally, about the lightness of the touch of regulation or 
the more onerous touch of regulation, if I can put those poles 
out there. But we want to get to that and we want the 
regulators to go as far as they can go, and these conversations 
will continue.
    Senator Reed, you are recognized.
    Senator Reed. Thank you very much, Mr. Chairman.
    Ms. Lubin, with Senator Menendez I introduced S. 3990, the 
Insider Trading Prohibition Act, which would finally define the 
offensive insider trading, by making it an offense for those 
who contribute to a securities market rigged in favor of the 
well-connected. Our legislation focuses on providing everyday 
investors with a fair shot at seeing some returns.
    How would securities regulators, professor traders, and 
retail investors all benefit if Congress were to clearly define 
the standards for insider trading liability?
    Ms. Lubin. Thank you, Senator, for your question, and NASAA 
supports your legislation, the Insider Trading Prohibition Act. 
We think it is important that there is clarity so people 
understand what is and what is not insider trading, and insider 
trading, in my experience, is a very significant inhibitor on 
investors' ability to make money, because if somebody has 
information about what is going on they will trade ahead of the 
investors' ability to trade because they have got information 
that is not out in the public market, and that situation really 
disadvantages individual investors.
    So we think it is very important that people understand 
what is and is not covered under insider trading and that it 
gives the regulators clarity, the prosecutors clarity, and the 
industry clarity about what they can and cannot do.
    Senator Reed. Well thank you. Ms. Walsh, the big issue is 
platforms for retail investors to trade cryptocurrency, operate 
outside of the securities regulatory structure. None of these 
platforms are registered with the SEC or State as a broker-
dealer or a securities exchange. Instead, they rely on State 
money transmission licenses. And this regulatory approach 
strikes me as untenable because it is implausible that not a 
single one of the assets listed on these platforms is a 
security.
    How would getting cryptocurrency trading platforms 
registered as broker-dealers or exchanges help security 
regulators do their jobs, and how would registration result in 
stronger investor protections?
    Ms. Walsh. Thank you for that question, Senator. The 
Federal and State securities regulatory regimes that exist in 
the United States have fostered investor protection and the 
integrity of the market over the years since they have existed. 
So bringing crypto and digital assets into that space of 
regulation could have extraordinary value for consumers and for 
the markets themselves. To the extent that you have 
disclosure--and our system is based on disclosure--that is full 
and fair and not misleading, that adds value to our securities 
markets.
    Senator Reed. Thank you very much.
    Ms. Lubin, with Senator Grassley I have introduced S. 2147, 
the Stronger Enforcement of Civil Penalties Act, and this 
legislation would increase the size of the penalties the SEC 
may impose and authorizes the agency to triple the penalty cap 
for repeat offenders. The recent cryptocurrency meltdown has 
revealed a shocking number of Ponzis and frauds, even among the 
largest participants, and the scale of the damage is 
staggering.
    For example, an unlicensed cryptobank called Celsius has 
failed and owes its users more than $4.7 billion. A 
cryptolender called Voyager is in bankruptcy and its 
liabilities are in a similar range. Thousands of customers have 
had access to the money frozen and they are at the mercy of a 
long and uncertain bankruptcy process.
    How would this legislation empower the SEC to better 
protect the investing public from these kinds of bad actors who 
may defraud and scam them out of their very hard-earned money?
    Ms. Lubin. Thank you, Senator, for that question. We think 
it is important that regulators have multiple tools that we 
could use in order to try and protect investors, and the idea 
that penalties could be enhanced and fines could be higher for 
recidivists and for other actors I think is another tool that 
we will have to discourage bad behavior.
    I think part of the problem that we have seen over the 
years--and I have been doing this for many years--is that a lot 
of the industry considers penalties to just be the cost of 
doing business, and those penalties need to get into the range 
where they are high enough that it provides a deterrent for bad 
behavior.
    Senator Reed. Thank you very much. Just one final point, 
and that is that we have noticed that a lot of private equity 
firms are going down the ladder in terms of income and 
disposable income, particularly, not just the very rich but 
down to what they call the mass affluent, which is interesting 
terminology. It raises the question about who counts as a 
retail investor, and it has blurred the lines of being public 
and private markets. Any comments on that?
    Ms. Lubin. Thank you, Senator, for that question. I think 
that really points out the issue we have with the difference 
between the public and the private markets. The private markets 
are not transparent. Investors do not get the kind of 
information they get in the public markets.
    But because of the accredited investor definition and the 
really low dollar value that is attached to that definition 
that has not been modified in the past 40 years, there are 
investors who are able to avail themselves of the private 
markets that should really not be in there. They should be in 
the public markets where they have a much better chance of 
making money, there is more liquidity, and there is much more 
transparency and less complexity into the investments that they 
are purchasing.
    Senator Reed. Thank you very much. Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Reed. Thanks for coming 
back from your chairmanship.
    Thanks to our witnesses today for their testimony. We 
appreciate the work you do. All of us must continue to put 
protecting families and workers and our communities at the 
center of our financial system.
    For Senators wishing to submit questions, they are due 1 
week from today, Thursday, August 4th. Witnesses will have 45 
days to respond, if you would please do that.
    Thank you again. The hearing is adjourned.
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    Financial fraud and scams have always been with us. In fact, 
they're older than money itself. Criminals have always found inventive 
ways to cheat people out of what they earned.
    Crypto is no different.
    Scams that have persisted in the securities markets can easily be 
translated to crypto assets. They may seem even more enticing to 
potential victims when wrapped in a new technology, and with the 
promise of quick, outsized returns.
    In the early years of Bitcoin, scammers hacked exchanges to steal 
from early adopters. It didn't take long for cryptofraudsters to figure 
out Bitcoin can be used for old-time frauds like Ponzi schemes and 
bogus investments--promising big returns with only upside and no risk.
    Back in March, this Committee looked at how cryptocurrencies could 
be used in illicit finance like terrorism and human trafficking. 
Today's hearing considers how the increasing presence of fraud and 
speculation in the crypto and securities markets threaten investors and 
savers.
    In the last 2 months, we've witnessed spectacular blowups in the 
cryptomarkets, exposing both the alarming interconnectedness and the 
enormous risks among cryptofirms.
    Consumers and investors were misled with promises that their crypto 
would earn double-digit interest rates--in perpetuity.
    Think back to multimillion dollar Super Bowl ads, and whom they 
were targeting.
    But one collapse after another revealed how quickly supposedly 
``stable'' investments could fall apart. We saw that unregulated and 
unlicensed entities could both borrow and lend hundreds of millions of 
dollars to engage in risky cryptotrading.
    Our witnesses are all too familiar with fraud and risks in the 
growing cryptomarkets. They have been on the front lines in the 
securities markets, chasing bad actors, exposing frauds, and educating 
investors and investment firms.
    While the work of State securities regulators and FINRA is always 
important, it is especially critical during periods of market 
volatility and economic uncertainty. Those are the times when diligent 
savers see their retirement accounts decline, and offers of supposed 
``guaranteed profits'' or, quote, ``no risk'' investments may sound 
more tempting.
    Crypto's appeal is understandable.
    Promises of double digit interest and lies about FDIC insurance or 
SIPC protection entice Americans frightened by volatile markets and 
worried about retirement--or bills that are piling up.
    Times of crisis also create opportunity for those looking to 
exploit economic anxiety.
    In the early days of the coronavirus pandemic, all of our financial 
watchdogs began issuing warnings about COVID-19 related scams. From 
frauds connected to investments tied to vaccines, to sales of useless 
PPE, fraudsters used our fears to steal and cheat.
    Our witnesses today will also discuss scams and frauds that target 
vulnerable groups or close-knit communities, where trust and 
preexisting relationships can be abused. This is another area financial 
watchdogs know well.
    Seniors and other vulnerable Americans are too often the victims of 
scam artists, peddling Ponzi schemes or using high-pressure tactics to 
get victims to part with their money, right away.
    This Committee has seen the predatory behavior that targets 
servicemembers looking for affordable short-term credit, who are 
instead sold high-cost payday loans. Bad actors touting supposedly 
``safe'' investments use similar predatory methods to defraud military 
families.
    And we know those frauds are often underreported.
    Victims blame themselves, or don't want to admit what happened. We 
have to fix that, and Ms. Walsh will talk about that today.
    American markets are the envy of the world. Our diverse economy and 
the rule of law help families and workers save for the future.
    We have to keep it that way.
    That's why law enforcement and our regulators, like our witnesses 
today, must be alert. They must be able to identify scams, and move 
quickly to punish bad actors.
    Just last week, the FBI issued a warning for financial institutions 
about cybercriminals creating fraudulent cryptocurrency investment 
apps. Agents found hundreds of victims who lost collectively tens of 
millions of dollars.
    And we know that's just the beginning. There are more victims and 
more losses every day.
    My colleagues across the aisle seem confused about where our 
priorities should lie.
    Our markets are the envy of the world, because of--not in spite 
of--the ways we protect Americans' money. Supposed ``innovation'' and 
``opportunity'' don't mean much if they come at the cost of massive 
fraud.
    New ways to cheat people out of their money is not the kind of 
innovation most people want in our economy.
    We hear industry players call for ``rules of the road'' when a big 
fraud is uncovered, and after a bad actor has knowingly violated the 
law. The rules are there, the road map is clear, and this
    Committee needs to make sure our regulators enforce the law and 
protect the workers and families that keep our economy and markets 
running.
    As this Committee and the American people learn more about crypto-
based investments, and understand how frauds and scams are growing, we 
will push our regulators to do more. Of course, that means the SEC. It 
also means the banking regulators.
    Industry shouldn't be allowed to write the rules they want to play 
by.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
    Mr. Chairman, thank you.
    Our hearing today looks at scams and risks in the securities 
markets with a specific focus on crypto. Given the recent collapse of 
an algorithmic stablecoin and the bankruptcy of several cryptolending 
platforms, this is a well-timed hearing.
    And one would think, we'd hear from the SEC, the primary Federal 
regulator of securities. Especially considering their Chairman 
considers nearly every cryptocurrency to be securities. That's the 
request Republicans made.
    There must be some good reason why Chairman Gensler or one of his 
subordinates can't appear before the Senate to explain what the SEC was 
doing while several cryptolending platforms, like Celsius and Voyager, 
imploded. Especially since the Chairman would likely claim these 
companies fall into his jurisdiction.
    Our Democratic colleagues have said he is not testifying today 
because it's possible he may appear at the Committee this fall. That's 
little comfort to the thousands of Americans who lent their crypto to 
Celsius and Voyager, some of whom will be unsecured creditors in those 
companies' bankruptcy proceedings.
    What was the SEC doing while these companies and others were 
offering lending products that looked an awful lot like securities? And 
what is the SEC doing now to help ensure the crypto community gets the 
regulatory clarity it has repeatedly asked for?
    They deserve answers now, not later. And Chairman Gensler has the 
answers to those and other questions--but refuses to share them with 
us.
    It's clear some Americans invested in unsustainable schemes, and 
even fraud. We should investigate that fraud and prosecute any 
violations of law.
    Since September of last year, I've said that some digital asset 
projects were offering returns that didn't make sense to me, and some 
of these endeavors would end badly. Over the past couple of months, 
that risk became reality.
    As I mentioned, Celsius and Voyager were offering interest rates as 
high as 18 percent if customers would lend their digital assets to 
these companies. The firms would then lend that crypto to other larger 
investors to make short-term bets on cryptomarkets.
    But once the crypto selloff began, borrowers couldn't pay their 
debts, and these platforms froze customer accounts. And now, both 
companies are in bankruptcy and investors are staring at billions in 
losses.
    These circumstances beg the question: Where was Chairman Gensler 
and the SEC? Had the SEC responded to calls for clarity on how it would 
apply existing securities laws to novel digital assets and services, 
something I and others repeatedly asked for, things might have been 
different.
    The SEC could have said how it intended to apply the Howey and 
Reves tests, which the SEC uses to determine when something is a 
security. The Howey test has four basic prongs. There must be: (1) an 
investment of money, (2) in a common enterprise, (3) with a reasonable 
expectation of profits, (4) that are derived from the efforts of 
others.
    It seems like the cryptolending products I've mentioned had all 
four of those features. The SEC almost certainly believed so, too, 
because in February, they went after BlockFi for offering a similar 
lending product.
    Here's the problem with the SEC refusing to publish regulatory 
clarity about when digital assets or services are securities. You're 
left instead with an ad hoc approach to consumer protection known as 
``regulation-by-enforcement.''
    There are four problems with this capricious and unevenly applied 
strategy. It's a serious challenge for any well-meaning innovator 
striving to comply with existing laws and regulations.
    It stifles innovation. Market participants who lack the benefit of 
the SEC's thinking prior to designing a product may never create 
something that uses emerging technologies to solve a previously 
unsolvable problem.
    It creates a legal grey area that allows entities with a higher 
tolerance for legal risk to offer products that might be bad for 
consumers.
    It's ineffective. Just ask those who lost money on these 
cryptolending products.
    Let me give another example. When the SEC announced insider trading 
charges involving a former Coinbase employee last week, it claimed the 
offenders had illegally traded nine digital assets that were 
securities.
    The SEC has reasons for why it thinks these digital assets are 
securities, which I'm very skeptical of. Yet, the SEC still failed to 
disclose its rationale publicly before launching an enforcement action. 
That kind of approach is patently unfair to developers and investors 
alike.
    Republicans have been arguing for a more thoughtful approach to 
regulating digital assets. The first place where we should be able to 
find common ground and chart a path forward for clear, sensible 
regulation is with stablecoins.
    There is clear bipartisan agreement that stablecoins should have 
stronger consumer protections. I've proposed a framework to do that, 
and am in discussions with several Members to make this proposal 
bipartisan.
    Let me conclude with this. It's important to investigate any fraud 
in the cryptomarket, and any violations of existing law. So while I 
appreciate today's hearing topic, it's a missed opportunity without 
talking to the SEC.
    Moving forward, I hope my colleagues will take a balanced look at 
these technologies, studying both the consumer risks we will hear about 
today, as well as the potential for consumer benefits that distributed 
ledger technology could bring.
               PREPARED STATEMENT OF MELANIE SENTER LUBIN
    President, North American Securities Administrators Association
                             July 28, 2022

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                   PREPARED STATEMENT OF GERRI WALSH
    Senior Vice President of Investor Education, Financial Industry 
                          Regulatory Authority
                             July 28, 2022

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         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                   FROM MELANIE SENTER LUBIN

Q.1. Earlier this year a coalition of 10 worker, consumer, and 
investor advocates sent a letter to SEC Chair Gensler 
expressing concern about what they perceive to be the growing 
use of pre-dispute arbitration clauses by SEC-registered 
investment advisers (RIAs).
    State securities regulators are exclusively responsible for 
registering and examining roughly 17,000 small and mid-sized 
RIAs. Have you or other State securities regulators observed a 
similar increase in the use of forced arbitration provisions by 
State registered RIAs?

A.1. In 2021, there were approximately 17,500 State-registered 
investment advisers. See NASAA 2022 Investment Adviser Section 
Annual Report (April 2022) (attached hereto as Appendix A). In 
general, small investment advisers (less than $25 million of 
regulatory assets under management (RAUM)) and mid-sized 
investment advisers (between $25 million and $100 million of 
RAUM) are registered with and primarily regulated by one or 
more State securities administrators. Conversely, large 
investment advisers (greater than $100 million of RAUM) 
generally are registered with the SEC and are primarily subject 
to Federal regulation instead of State regulation. In some 
cases, a small or mid-sized investment adviser may be permitted 
or required to register with the SEC instead of with one or 
more States and, in more limited circumstances, a small or mid-
sized investment adviser may be registered with the SEC and one 
or more States.
    As NASAA stated in our March 2022 letter to Congress, many 
investment advisers require their clients to agree to mandatory 
arbitration. See NASAA Letter Regarding Mandatory Arbitration 
Agreements in Our Capital Markets (March 8, 2022) (Appendix B). 
In this letter, we cited findings in 2013 by the Massachusetts 
Securities Division that many MA-registered investment advisers 
used a mandatory pre-dispute arbitration clause in their client 
contracts. See Massachusetts Securities Division Staff, Report 
on Massachusetts Investment Advisers' Use of Mandatory Pre-
Dispute Arbitration Clauses in Investment Advisory Contracts 
(Feb. 11, 2013) (Appendix C). We also would note that the 
Consumer Financial Protection Bureau (CFPB) published a study 
to Congress in 2015 that showed companies provide almost all 
consumer financial products and services subject to the terms 
of a written contract and pre-dispute arbitration clauses 
appeared to be common in those contracts. See CFPB, Arbitration 
Study, Report to Congress Pursuant to Dodd-Frank Wall Street 
Reform and Consumer Protection Act 1028(a) (March 2015).
    As NASAA also stated in our March 2022 letter and 
consistent with NASAA's long-standing policy priorities, we 
believe Congress should act now on a swift, bipartisan basis to 
ban the use of mandatory pre-dispute arbitration clauses. As 
stated in our letter to Congress in April 2022, we urge 
Congress to pass the FAIR Act of 2022 (H.R. 963 S. 505) at the 
earliest opportunity. See NASAA Letter Regarding the Promotion 
of Trust in Our Capital Markets (Apr. 5, 2022) (Appendix D). We 
repeated this call for action in our written testimony dated 
July 28, 2022, that was submitted to the U.S. Senate Committee 
on Banking, Housing, and Urban Affairs.
    NASAA welcomes and encourages Members of Congress to share 
information with NASAA and State securities regulators that is 
or may be relevant to future examinations and, if appropriate, 
enforcement actions against State-registered investment 
advisers.

Q.2. Does NASAA have any information regarding the prevalence 
of forced arbitration contracts by State-registered investment 
advisers? If not, is such information something that NASAA, or 
individual State securities regulators, have ample tools and 
authority to collect?

A.2. Please see NASAA's response to Question 1.
              Additional Material Supplied for the Record
                      STATEMENT SUBMITTED BY ICBA

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