    [House Hearing, 118 Congress]
    [From the U.S. Government Publishing Office]

                        COINCIDENCE OR COORDINATED? THE

                         ADMINISTRATION'S ATTACK ON THE

                            DIGITAL ASSET ECOSYSTEM

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

                                    HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON DIGITAL ASSETS,
                             FINANCIAL TECHNOLOGY,
                                 AND INCLUSION

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED EIGHTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 9, 2023

                                   __________

           Printed for the use of the Committee on Financial Services

                                Serial No. 118-9

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 ______

                 U.S. GOVERNMENT PUBLISHING OFFICE
     52-364                WASHINGTON : 2023

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                   PATRICK McHENRY, North Carolina, Chairman

    FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking
    PETE SESSIONS, Texas                     Member
    BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
    BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
    BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
    ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
    ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
    ROGER WILLIAMS, Texas                AL GREEN, Texas
    FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
    TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
    BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
    ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
    WARREN DAVIDSON, Ohio                JUAN VARGAS, California
    JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
    BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
    WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
    RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
    DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
    SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
    ANDREW GARBARINO, New York           RITCHIE TORRES, New York
    YOUNG KIM, California                SYLVIA GARCIA, Texas
    BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
    MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
    MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
    ZACH NUNN, Iowa
    MONICA DE LA CRUZ, Texas
    ERIN HOUCHIN, Indiana
    ANDY OGLES, Tennessee

                         Matt Hoffmann, Staff Director
                        SUBCOMMITTEE ON DIGITAL ASSETS,
                      FINANCIAL TECHNOLOGY, AND INCLUSION

                        FRENCH HILL, Arkansas, Chairman

    FRANK D. LUCAS, Oklahoma             STEPHEN F. LYNCH, Massachusetts,
    TOM EMMER, Minnesota                     Ranking Member
    WARREN DAVIDSON, Ohio, Vice          BILL FOSTER, Illinois
        Chairman                         JOSH GOTTHEIMER, New Jersey
    JOHN ROSE, Tennessee                 RITCHIE TORRES, New York
    BRYAN STEIL, Wisconsin               BRAD SHERMAN, California
    WILLIAM TIMMONS, South Carolina      AL GREEN, Texas
    BYRON DONALDS, Florida               SEAN CASTEN, Illinois
    MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
    ERIN HOUCHIN, Indiana
                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        March 9, 2023................................................     1
    Appendix:
        March 9, 2023................................................    45

                                   WITNESSES
                            Thursday, March 9, 2023

    Belshe, Mike, CEO and Co-Founder, BitGo..........................     5
    Evans, Tonya M., Professor, Penn State Dickinson Law.............     7
    Gould, Jonathan V., Partner, Jones Day...........................     8
    Grewal, Paul, Chief Legal Officer, Coinbase Global, Inc..........    10
    Reiners, Lee, Policy Director, Duke Financial Economics Center,
      Duke University................................................    12

                                    APPENDIX

    Prepared statements:
        Belshe, Mike.................................................    46
        Evans, Tonya M...............................................    50
        Gould, Jonathan V............................................    60
        Grewal, Paul.................................................    65
        Reiners, Lee.................................................   124

                  Additional Material Submitted for the Record

    McHenry, Hon. Patrick:
        Written statement of the American Bankers Association (ABA)..   158
        Written statement of the Chamber of Progress.................   163
        Written statement of the USDF Consortium.....................   166
    Davidson, Hon. Warren:
        Written statement of the Chamber of Digital Commerce.........   176
        Written statement of the Club for Growth.....................   178
        Written statement of the Crypto Council for Innovation.......   182
        Written statement of the National Association of Federally-
          Insured Credit Unions (NAFCU)..............................   186
    Waters, Hon. Maxine:
        Joint written statement of Americans for Financial Reform and
          Demand Progress............................................   188
        Written statement of the Blockchain Association..............   200
        Written statement of the Credit Union National Association
          (CUNA).....................................................   205
        Written statement of the National Consumer Law Center (NCLC).   210
        Written statement of Public Citizen..........................   218
        Written responses to questions for the record submitted to
          Jonathan V. Gould..........................................   242
        Written responses to questions for the record submitted to
          Lee Reiners................................................   243
        Slide, ``The SEC Has Issued Approximately 130 Enforcement
          Actions on Crypto Assets''.................................   247
        Letter from Dr. Nicholas Weaver, dated March 7, 2023.........   248

                          COINCIDENCE OR COORDINATED?

                          THE ADMINISTRATION'S ATTACK

                         ON THE DIGITAL ASSET ECOSYSTEM

                                  ----------

                            Thursday, March 9, 2023

                 U.S. House of Representatives,
                        Subcommittee on Digital Assets,
                                  Financial Technology,
                                         and Inclusion,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 2 p.m., in
    room 2128, Rayburn House Office Building, Hon. French Hill
    [chairman of the subcommittee] presiding.
        Members present: Representatives Hill, Lucas, Emmer,
    Davidson, Rose, Steil, Timmons, Donalds, Flood, Houchin; Lynch,
    Foster, Gottheimer, Torres, Sherman, Green, Casten, and Nickel.
        Ex officio present: Representative Waters.
        Also present: Representative Nunn.
        Chairman Hill. The Subcommittee on Digital Assets,
    Financial Technology, and Inclusion will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time.
        I want to thank our witnesses for being here today. It is
    an outstanding panel, and I now recognize myself for 4 minutes
    to give an opening statement.
        Today, I am very excited to hold the inaugural meeting of
    the new Subcommittee on Digital Assets, Financial Technology,
    and Inclusion. To start, I want to thank Full Committee
    Chairman McHenry for asking me to lead this new subcommittee
    and for his leadership in recognizing the important need to
    comprehensively address the topic of digital assets. I also
    want to thank Full Committee Ranking Member Waters for her
    foresight in holding that first Libra hearing back in 2019, and
    for creating the Task Forces on Fintech and Artificial
    Intelligence, and for her continued engagement and willingness
    to work in a bipartisan manner.
        Finally, I am looking forward to working with my good
    friend from Massachusetts, the ranking member of this
    subcommittee, Congressman Lynch. He is always a thoughtful
    partner, and we are reprising our roles that we had together
    leading the Fintech Task Force a few years ago.
        To all of the members of this committee, no matter what
    your views are about crypto, it is imperative that we recognize
    the unique role of Congress to legislate, and that no amount of
    enforcement actions or regulatory guidance can ever replace
    that or be a substitute. As a legal matter, only Congress can
    establish the regulatory framework for digital assets, and I
    strongly believe that we need that in this country. That is why
    this subcommittee is holding its first hearing to examine the
    Administration's recent actions on digital assets.
        But let me be very clear. This hearing is not a partisan
    attack on the Securities and Exchange Commission or the banking
    regulators. We will hold other hearings to discuss the
    comprehensive policies as well as the fraud and failure of FTX
    and Sam Bankman-Fried and the millions of people hurt by his
    dishonesty and scam. But it is absolutely critical that we
    first discuss the scope and significance of recent regulatory
    pronouncements and supervisory failures of the past year. By
    assessing the regulatory gaps, supervisory failures, and
    enforcement actions, we can build a case for a shared
    bipartisan vision of this regulatory framework.
        The shared goal is to protect investors, foster innovation,
    and ensure that America continues to lead rather than follow in
    this space, but that means Congress has to do the hard work of
    working across the aisle to reach a consensus and not just
    posturing or sticking our heads in the sand. That is why I was
    so glad to see Ranking Member Waters recently call on the
    Treasury, the Fed, the CFTC, and the SEC to get together with
    Congress and address digital asset regulation. We cannot have
    the agencies trying to front-run the Legislative Branch.
        Last Congress, this committee, under then-Chairwoman Waters
    and Ranking Member McHenry, made good progress on payment
    stablecoin legislation, and I believe we should work together
    on a product that can pass out of this committee with
    bipartisan support. The Treasury and the Fed were constructive
    partners in that process, and we want that to continue.
        That being said, payment stablecoins are just one part of
    the broader digital economic system, and I hope we can bring in
    customer protections that exist in the current financial
    regulatory system to cover digital assets. I am a strong
    proponent of the theory and the approach, same risks, same
    activities, same rules, and I believe we should create a
    functional framework that is tailored to the specific risks of
    digital assets.
        In fact, we need to support technological innovation. We
    need to ensure appropriate controls and accountability. We need
    to give no quarter to fraudsters, scammers, or criminals, and
    we need to reinforce leadership in the global financial system
    for U.S. competitiveness. These are the Administration's own
    principles as outlined in their Executive Order for looking at
    digital assets.
        So, I look forward to hearing from our witnesses on the
    impact of the Administration's approach and how Congress can
    work together on that. With that, I yield back, and I yield to
    my friend, Ranking Member Lynch, for an opening statement.
        Mr. Lynch. Thank you very much, Mr. Chairman. Let me
    congratulate you, as well as Congressman Warren Davidson as
    Vice Chair, on your recent elevations. It was an honor to serve
    with you as the Chair of the Task Force on Financial Technology
    last Congress, and I hope that we might continue some of the
    work that we began in that task force. We can play an important
    role in shaping policy in the digital assets and fintech space,
    and I believe there are areas in which we can immediately find
    common ground. Innovation has the potential to increase the
    accessibility and lower the costs of financial service
    products. But I am also likely to exercise some caution about
    the risk to consumer financial data, some of the hidden fees,
    the lack of transparency, and the misleading marketing
    practices that were heretofore exercised in this industry. I
    plan to continue to voice those concerns in this Congress.
        I do remain optimistic in the potential for great
    innovation in financial services and the myriad possibilities
    of blockchain technology. Given the collapse of much of the
    crypto industry this year, including the recent news involving
    Silvergate Bank and the scrutiny over Binance's practices, I
    have some lingering concerns about the volatility and risks
    that crypto assets pose to consumers, particularly low-income
    and underrepresented communities.
        The collapse of TerraUSD, Celsius, BlockFi, and FTX speak
    to the larger regulatory gaps in this space, including lack of
    corporate controls, inadequate liquidity or reserves,
    commingling of assets, and irresponsible practices. I do worry
    that these practices exist across the industries and are a
    result of insufficient oversight and lack of regulatory
    guidance. I commend the actions of our Administration, the
    Biden Administration, through its reports, guidance, and
    Executive Orders, to thoughtfully examine the benefits and
    risks of crypto products.
        I also have concerns about the exposure of crypto companies
    to our traditional banking system. I am encouraged to see that
    our prudential banking regulators are recommending caution.
    Yesterday's announcement about the liquidation of Silvergate
    Bank illustrates why we need a separation between crypto assets
    and the traditional banking system, and why guidance from the
    Fed, the OCC, and the FDIC is needed.
        Prior to the collapse of the crypto industry, the hype was
    astounding. From celebrity endorsements to Super Bowl ads,
    companies sold crypto assets as revolutionary products that
    would transform our financial ecosystem. Crypto companies
    deliberately misled consumers about the risks of their
    products, some even going so far as to falsely claim that their
    products were FDIC-insured. It is clear that Congress must play
    a role in reining in some of these crypto companies.
        While I am confident that my colleagues across the aisle
    agree that we need a legislative solution to the digital asset
    space, how we get there may pose a challenge. There appear to
    be conflicts between the crypto industry and the SEC
    surrounding how crypto assets should be regulated. SEC Chair
    Gensler has stated that the vast majority of crypto assets are
    indeed securities, as illustrated and just defined by the Howey
    test, and should be regulated as such.
        Crypto companies must come in compliance with existing
    security laws which ensure that investors and markets are
    protected. The crypto industry and many of my Republican
    colleagues have spun a false narrative that the SEC regulates
    through enforcement, and makes it impossible for the industry
    to come into compliance, when in reality, the SEC is enforcing
    the law and has provided appropriate direction. These arguments
    also conflict with the accusation that the SEC did not go far
    enough in taking actions to prevent the FTX collapse. This
    attack on the SEC is a tactic employed by the crypto industry
    to evade compliance with the laws because the industry knows
    that it would not meet the justifiably-high standards that make
    our financial system the envy of the world.
        In closing, I am disappointed that the consumers' voice has
    been missing from all of these conversations, and I am
    disturbed by the way in which crypto companies, specifically in
    the past, have targeted low-income and minority communities.
    Many have made misleading claims about the promises of their
    products, such as faster payments, lower-cost remittances, and
    wealth-building vehicles. This type of predatory inclusion is
    not unique to the crypto industry; it is common in fintech, and
    is reminiscent of the 2008 financial crisis and prior events.
    So, I plan to explore these issues more this year.
        I urge my colleagues to look beyond industry talking points
    about regulatory overreach, and instead I ask that we direct
    our attention to thoughtfully addressing the risks of the
    crypto industry as well as its potential. Thank you. I yield
    back.
        Chairman Hill. I thank the gentleman from Massachusetts. I
    look forward to working with him. And now, I will turn to the
    Vice Chair of the subcommittee, the gentleman from Ohio, Mr.
    Davidson, who is also the Chair of our Housing and Insurance
    Subcommittee, for 1 minute.
        Mr. Davidson. Thank you, Mr. Chairman. The regulatory
    environment for the digital asset ecosystem has come to a
    critical inflection point. Because there are no clear rules of
    the road for centralized digital asset trading platforms that
    list non-security digital assets, American users, our
    constituents and consumers, are not adequately protected while
    participating in these markets.
        It is our job in Congress to craft an appropriate, fit-for-
    purpose legal framework for these assets and this space. It is
    our job. It is our duty. It is long-overdue. We must establish
    clear rules for trading platforms that provide Americans with
    the necessary protections and ensure market integrity. However,
    these rules must provide a clear framework that is flexible
    enough to accommodate innovation. These rules must also
    preserve Americans' ability to self-custody their digital
    assets.
        Congress must do everything in its power to ensure that
    American citizens can access this transformational technology
    and have the right to possess their stake and ownership right--
    private property--in the technology. Preserving self-custody is
    a critical step in this effort. Because of this, I am working
    on a reintroduction of the Keep Your Coins Act, to protect
    Americans' ability to manage their own digital assets and to
    make permissionless peer-to-peer transactions.
        Thank you for your attention, and I look forward to diving
    into these critical issues with our witnesses today.
        Chairman Hill. Thank you, Mr. Davidson. We now welcome the
    testimony of our witnesses. First, Mr. Mike Belshe. Mr. Belshe
    is a 30-year Silicon Valley veteran, and co-founded BitGo, a
    digital asset financial services provider, where he currently
    serves as CEO.
        Second, Dr. Tonya Evans. Dr. Evans is a full tenured
    professor at the Pennsylvania State University Dickinson School
    of Law, specializing in entrepreneurship, innovation,
    intellectual property, and new technologies such as blockchain
    and digital assets.
        Third, Mr.Jonathan Gould. Mr. Gould is a partner at Jones
    Day law firm where he specializes in bank and financial
    regulatory strategy. Before Jones Day, he served as the Senior
    Deputy Comptroller and Chief Counsel for the Office of the
    Comptroller of the Currency.
        Fourth, Mr. Paul Grewal. Mr. Grewal has served as chief
    legal officer at Coinbase since August of 2020. Mr. Grewal can
    provide perspective on how digital asset products, services,
    and firms can be incorporated in the U.S. framework.
        And our final witness is Mr. Lee Reiners. Mr. Reiners is
    the policy director at the Duke Financial Economics Center at
    Duke University.
        We thank each of you for taking the time to be here. Each
    of you will be recognized for 5 minutes to give an oral
    presentation of your testimony.
        And without objection, each of your written statements will
    be made a part of the record.
        We will start with Mr. Belshe. You are now recognized for 5
    minutes for your oral remarks.

          STATEMENT OF MIKE BELSHE, CEO AND CO-FOUNDER, BITGO

        Mr. Belshe. Chairman Hill, Ranking Member Lynch, and
    members of the subcommittee, thank you for the opportunity to
    offer testimony today about the digital asset regulatory
    environment in America. I am co-founder and CEO of BitGo, an
    institutionally-focused digital assets company based in Palo
    Alto, California. We have been building regulated products and
    platforms for digital assets and are regulated by numerous
    State and Federal regulators, including the New York Department
    of Financial Services, the South Dakota Division of Banking,
    the SEC, and the Financial Crimes Enforcement Network (FinCEN).
    We are primarily known for our role as the first purpose-built
    digital asset custodian. Trust companies are different than
    banks in that we are not depositories. We do not lend assets.
    We are solely focused on the technology and compliance related
    to the safekeeping of our clients' assets in segregated
    accounts.
        I hope it is clear that BitGo and all of the regulated
    firms building digital asset technologies and services in
    America are absolutely and unequivocally committed to
    preventing financial crime, providing the utmost investor
    protections, abiding by sanctions controls, building safety and
    soundness in our custodians and banks, and building stable
    market structure. We are not seeking to avoid regulatory
    oversight. We are not here for the purpose of building
    speculative assets in markets. We are here to make the
    financial services system better.
        It has been over 10 years now since the invention of
    bitcoin and the blockchain unlocked the creation of digital
    property and the ability to transfer digital property in a
    peer-to-peer fashion. This seemingly-simple technology has a
    profound effect: It enables the instant transfer of value
    between anyone across the globe. It also creates smart
    contracts which have the potential to replace much of modern
    finance in a more transparent and fair manner. Stockbrokers,
    money managers, and market makers can all be implemented as
    transparent code.
        Innovation is what I want to talk about today. Software has
    a tendency that once it enters an industry, it pushes
    innovation and change faster than that industry has ever
    experienced before, and that is what has happened to our
    financial industry in recent years. Software is changing it
    fast. But unlike other industries which software has upended,
    American finance is highly-regulated. It is not enough for our
    businesses to move quickly. Our regulators need to move
    quickly, too, and if they do not, we will all be surpassed by
    other nations who will.
        When BitGo decided to pursue a trust company charter back
    in 2017, we first reached out to the OCC for Federal oversight
    of our safekeeping activity. At the time, the OCC clearly
    stated that it would not allow a charter for any business in
    the digital asset space, so instead, we pursued a State-
    chartered trust company. This left us with a question as to
    whether our fiduciary safekeeping powers will be considered a
    qualified custodian in the eyes of the SEC.
        To answer this very basic question of how to provide
    custody of assets to regulated firms under the Investment
    Advisers Act, BitGo proactively and voluntarily approached the
    SEC back in 2018 and submitted a formal no-action letter to the
    SEC. Ultimately, the SEC declined to opine on our letter. With
    the OCC closed for business, and the SEC unwilling to answer,
    the question remains how to custody digital assets under the
    Advisers Act. That question has lingered for years until just a
    few weeks ago when the SEC issued a draft amendment to the
    custody rule. While we are happy that the amendment affirms
    that BitGo's State-chartered fiduciary trust company is indeed
    a qualified custodian, it took over 4 years to answer that
    single question. If it takes that long to answer the most basic
    of questions, how can we expect to answer the myriad of other
    questions that will follow without falling behind global
    competing markets?
        The year 2022 was an undeniably miserable year for digital
    assets, with a number of dramatic failures in the system. This
    has led opponents of digital assets to wrongly proclaim, ``I
    told you so. Digital assets are unsafe for banks and the
    financial system.'' But the underlying problem is not caused by
    including digital assets in our markets. The problem is caused
    by excluding digital assets from our markets. Our regulatory
    failure to keep pace with innovation has created a regulatory
    exclusion, which is directly responsible for harming the very
    investors that we are supposed to protect.
        In 2020, the OCC briefly opened its doors to digital assets
    and encouraged OCC-chartered custodians to participate in the
    market. This was short-lived, however, and the door was closed
    less than a year later with no plan for regulators as to what
    the right approach should be.
        At some point, we have to ask ourselves the question, why
    do Americans flock to weak digital asset opportunities that are
    managed offshore? The reason is not because they want to. It is
    hard to do and risky. The reason is because we have failed to
    keep pace and to create safe paths to invest under the safety
    of American regulatory supervision. Thank you very much.
        [The prepared statement of Mr. Belshe can be found on page
    46 of the appendix.]
        Chairman Hill. Thank you, sir. Dr. Evans, you are
    recognized for 5 minutes.

     STATEMENT OF TONYA M. EVANS, PROFESSOR, PENN STATE DICKINSON
                                  LAW

        Ms. Evans. Chairman Hill, Ranking Member Lynch, and
    distinguished members of the subcommittee, thank you for the
    opportunity to testify today about the current U.S. regulatory
    landscape as applied to emerging crypto asset ecosystems. I
    view today's hearing through a nonpartisan academic lens, and I
    accepted the invitation to help inform and calibrate the
    conversation about the current regulatory environment in this
    latest wave of financial and technological innovation in a $1-
    trillion emerging market.
        I also wish to express concerns about the future of
    America's leadership in innovation in this area when a powerful
    agency uses its broad discretionary powers on a piecemeal basis
    without also providing commensurate clarity for regulated
    parties or a fair opportunity for good-faith actors to
    understand the rules and the consequences that apply in an
    entire industry.
        And I intend to also highlight the tremendous loss of
    wealth accumulation opportunities for communities of color,
    especially the Black community, if investment and innovation
    opportunities in the crypto asset ecosystem are driven
    offshore. Accordingly, as Congress considers how best to
    reevaluate its delegation of powers to the SEC, and whether to
    empower the CFTC further in some capacity, I offer three points
    to consider.
        One, given that the heads of the SEC and the CFTC do not
    actually agree on the character and nature of whether and under
    what circumstances certain crypto assets, especially Ether, or
    commodities, or securities, reconsider bipartisan legislation
    across oversight committees that would clarify the taxonomy of
    crypto assets, limit unpredictable and incongruous executive
    agency actions, and consider empowering the CFTC to regulate
    spot crypto asset markets.
        Two, ensure that all citizens, especially those who have
    been systemically marginalized, have equal access and
    opportunity to thrive safely, legally, and confidently in the
    future of wealth and innovation.
        And three, request the SEC Chair to appear before
    congressional oversight committees to explain how its current
    practice of an aggressive piecemeal approach to regulation of
    crypto assets comports with the efficient and effective
    regulation, and how this practice aligns or doesn't align with
    the legislative mandate to protect investors; to maintain fair,
    orderly, and efficient markets; and to facilitate capital
    formation.
        I want to punctuate briefly my concerns that in this latest
    economic boom, systemically-marginalized populations will
    continue to be left behind under the well-intentioned guise of
    investor and consumer protections, as well as not so well-
    intentioned streams of fear, uncertainty, and doubt from legacy
    financial institutions and other parties with a vested interest
    in seeing the crypto economy fail, that wealthy early adopters
    and legacy institutions protecting their high-net-worth
    clientele will again reap the upside risk and reward of early
    adoption, leaving another generation of systemically-
    marginalized people behind.
        For example, legacy financial institutions have seized the
    early mover opportunity among their peers to innovate in
    delivering products and services in the digital future by
    leveraging blockchain technology or offering direct or indirect
    exposure. Despite public comments, injecting misguided
    narratives about crypto assets, major banking and financial
    institutions, like Deutsche Bank, Morgan Stanley, and even
    longtime bitcoin skeptic, JPMorgan Chase, have all recognized
    the value proposition of crypto and blockchain.
        In conclusion, the technology provides an opportunity to
    include crypto assets taxed as capital assets in a portfolio,
    build new and innovative products for the decentralized web,
    re-skill to bring a legacy company into the future of
    innovation, prepare students for the future of work and
    industry, or to sit before this esteemed body today with a seat
    at the table to inform and influence the direction of
    legislation and the regulation of digital money. With every
    country, including the United States, working on its own
    protected sandbox of digital asset innovation, private markets
    deserve the same, to innovate safely, legally, and with clarity
    right here in the United States.
        Again, thank you for this opportunity, and I look forward
    to your questions.
        [The prepared statement of Dr. Evans can be found on page
    50 of the appendix.]
        Chairman Hill. Thank you, Dr. Evans.
        Mr. Gould, you are now recognized for 5 minutes.

           STATEMENT OF JONATHAN V. GOULD, PARTNER, JONES DAY

        Mr. Gould. Chairman Hill, Ranking Member Lynch, and members
    of the subcommittee, thank you for the opportunity to discuss
    the Administration's actions with respect to the digital asset
    ecosystem. I am speaking today solely in my personal capacity.
    I am not speaking on behalf of any clients or of my law firm.
    My testimony is my own.
        Over the last 18 months, the Federal banking agencies have
    issued a number of public guidance documents. This guidance has
    articulated agency concerns with risks associated with digital
    asset activities of banks, expressed their skepticism that many
    of these activities can be conducted in a safe and sound
    manner, and imposed procedural barriers to their commencement.
    My written testimony summarizes these guidance documents. The
    pace and coordination of these issuances have increased this
    year, with two joint agency statements in as many months, and
    an important policy statement from the Federal Reserve.
        As Congress considers the actions of the Federal banking
    agencies, there are three attributes of bank supervision that I
    would like to highlight. First, bank supervision is, by design,
    confidential, particularized, and potent. Although the agency
    issuances I mentioned are public, their application is not. The
    confidential nature of this supervisory relationship
    facilitates the flow of information between bank and regulator,
    but it can also frustrate accountability and oversight.
        Second, safety and soundness. The primary lens through
    which these agency issuances are framed in the goal of
    prudential regulators like the OCC, the Federal Reserve, and
    the FDIC, can be a subjective concept. Banking agencies have
    issued thousands of pages of public, non-binding guidance
    detailing their interpretations of what safety and soundness
    means in a variety of contexts to help banks achieve it, and to
    facilitate consistency and the agencies' supervisory
    expectations and approach.
        Finally, although agency guidance is technically non-
    binding, banks rarely challenge or disregard it. The practical
    consequences of doing so can be significant in light of the
    supervisory process through which guidance is applied. Given
    these attributes of bank supervision, generalized and negative
    statements raising safety and soundness concerns about
    particular industry sectors must be made carefully lest they be
    interpreted by the public or bank examiners as an outright
    prohibition.
        Anecdotal evidence suggests that agency actions over the
    last 18 months, while responsive to developments in the digital
    asset ecosystem, are indeed having a chilling effect on banks'
    practical ability to engage in digital asset activities, as
    well as their willingness to entertain or maintain digital
    asset entities as banking customers. Because of the
    confidential nature of the supervisory relationship, it is
    impossible for the public to assess the actual causal effect of
    these agency actions.
        There are several areas that would benefit from
    congressional attention. First, the agencies' actions might be
    disproportionate, whether in nature or magnitude, to the risks
    posed by digital assets. Relatedly, the strategy to address the
    risks posed by digital assets may be less than optimal. Risk
    elimination strategies are often less-effective over the long-
    term than risk management strategies, as the former tend to
    push financial risks into less-visible corners of the economy
    where our ability to monitor and manage it can be challenging.
        Second, the agencies' actions might be overbroad and risk
    chilling innovative activities. Precluding banks from exploring
    new technologies, like distributed ledgers or decentralized
    networks, to achieve traditional banking activities, like
    payments or deposit taking, risks diminishing the important
    role played by banks in our economy.
        Finally, safety and soundness pronouncements are, in some
    sense, a reflection of the agencies' risk tolerance for
    individual banks and the banking system as a whole. Congress
    should have a key role in defining the risk tolerance of our
    banking system, especially when it involves industry-specific
    attention, as seems to be the case here. And if it disagrees
    with the agencies' risk assessment or risk tolerance, it can
    and should do something about it.
        The confidential nature of the supervisory relationship
    necessarily limits the public's ability to assess the actual
    effects of the banking agencies' guidance. Congress is not so
    limited. It has the oversight ability to move beyond anecdote
    to examine how these guidance documents are being implemented
    and their effect. Armed with this information, it can then make
    an informed decision about the propriety or prudence of the
    banking agencies' actions. I encourage it to do so.
        Thank you again for the opportunity to testify. I look
    forward to your questions.
        [The prepared statement of Mr. Gould can be found on page
    60 of the appendix.]
        Chairman Hill. Thank you, Mr. Gould.
        Mr. Grewal, you are now recognized for 5 minutes.

    STATEMENT OF PAUL GREWAL, CHIEF LEGAL OFFICER, COINBASE GLOBAL,
                                  INC.

        Mr. Grewal. Good afternoon. Thank you, Chairman Hill,
    Ranking Member Lynch, and members of the subcommittee for
    inviting me to testify today about how crypto can make our
    financial system better and why we need new rules for crypto. I
    also wish to express my appreciation to Full Committee Chairman
    McHenry and Ranking Member Waters.
        My name is Paul Grewal, and I am the chief legal officer at
    Coinbase. Coinbase was founded in 2012 with a mission to
    increase economic freedom in the world and to be the most
    trusted, secure, and compliant onramp to the crypto economy. We
    are the largest crypto trading platform in the United States
    and became a public company on April 14, 2021. Our products
    enable tens of millions of consumers, institutions, and
    developers in the United States, and more around the world, to
    discover, transact, and engage with crypto and Web3
    applications in a safe and reliable way.
        Today, I would like to share with you three points that
    underscore the urgent need for sound rules for crypto. First,
    we need to update our financial system, and the time to act is
    now: 80 percent of Americans believe the financial system is
    unfair, and 67 percent believe it needs a serious upgrade.
    Crypto, along with the blockchain technology that underpins it,
    should be part of the solution. With 20 percent of Americans
    holding crypto today, the American people are voting with their
    feet and their wallets. They want a financial system that is
    easier, faster, and more efficient. They are already using
    crypto for payments because it is cheaper and more secure. They
    are sending remittances to family and friends in countries
    where the local currency is unstable, and creating a lifeline
    in places that are being torn apart by war.
        In Ukraine, for example, the power of crypto is obvious.
    The country has embraced crypto to raise money for humanitarian
    efforts and to reduce stress on its financial system since the
    invasion by Russia. Simply put, crypto and blockchain
    technology are helping to make the financial system operate
    more efficiently and securely. With just a phone and an
    internet connection, Americans and individuals around the world
    can securely and safely transfer value or ownership.
        Second, if we fail to adopt rules that both permit and
    foster this next-generation technology, the United States will
    lose its position as a global leader in finance. The rest of
    the world is not waiting for us. The European Union, the U.K.,
    Australia, Hong Kong, and Singapore, just to name a few, are
    putting in place regulatory frameworks that are creating high
    standards for crypto. America seems to be the only developed
    country dragging its feet. As other countries are bringing
    crypto safely into the regulatory perimeter, we should be doing
    the same. We should not be pushing it into the shadows and
    hoping it will simply go away. It will not go away. Crypto is
    built on a transformational technology that consumers want and
    innovators know can make our financial system better. This is a
    race to the top that the United States cannot afford to lose.
        Third, we need to protect consumers. Emerging technologies
    can attract bad actors, and crypto has seen its fair share. We
    need a regulatory framework that promotes the benefits of
    crypto, while keeping people safe. On this, we do not need to
    compromise. For our part, Coinbase has embraced consumer
    protection and regulation for over a decade. We protect
    consumers by prioritizing prudent risk management, employing
    rigorous standards for listing digital assets, and fighting
    every day against illicit finance, market manipulation, and
    fraud.
        Let me be clear: Coinbase fully complies with all sanctions
    and all anti-money laundering rules in the United States and
    abroad. We work tirelessly with law enforcement and have built
    and continue to build industry-leading tools to help find and
    stop criminals. We also protect customers through transparency.
    As a public company, we disclose audited financial statements,
    our methods for safeguarding customer assets, our business
    operations, and any risk factors as part of our quarterly
    reporting that makes Coinbase distinct in the crypto economy.
        But transparency is not enough. We need clear rules that
    work. To that end, last July we filed a petition for rulemaking
    with the SEC. We provided 50 questions that need to be answered
    to create a registration pathway for crypto developers and
    trading platforms like Coinbase. These regulatory issues are
    complex, and Americans are best-served by having the
    opportunity to engage with their government on decisions that
    affect their everyday lives.
        Although the SEC could resolve these questions under
    existing authority, we also urge Congress to act. The 20
    percent of Americans who already own crypto need clear rules
    just as much as Coinbase and the rest of the industry.
    Legislation should contain strong consumer and investor
    protection standards for digital asset intermediaries, create a
    registration pathway for offering digital assets securities and
    non-securities, and develop a comprehensive framework for
    stablecoins.
        In closing, we need to get the rules right for crypto.
    Imagine if the United States failed to embrace the
    transformational potential of the internet in the 1990s or
    smartphones in the 2000s. Without pro-innovation regulation, we
    live in a far less connected, enriching, and dynamic place.
    This is the approach we need to take with crypto. We don't want
    to be looking back and thinking, ``What if?''
        I look forward to answering all of your questions. Thank
    you.
        [The prepared statement of Mr. Grewal can be found on page
    65 of the appendix.]
        Chairman Hill. Thank you, Mr. Grewal.
        And Mr. Reiners, you are now recognized for 5 minutes.

       STATEMENT OF LEE REINERS, POLICY DIRECTOR, DUKE FINANCIAL
                   ECONOMICS CENTER, DUKE UNIVERSITY

        Mr. Reiners. Chairman Hill, Ranking Member Lynch, and
    distinguished members of the subcommittee, thank you for
    inviting me to testify in today's hearing. My name is Lee
    Reiners, and I am the policy director at the Duke Financial
    Economics Center, and a lecturing fellow at Duke Law. At Duke,
    I teach courses in cryptocurrency law and policy, and financial
    regulation. Prior to entering academia, I spent 5 years
    examining systemically-important financial institutions at the
    Federal Reserve Bank of New York.
        The title of today's hearing implies that the main
    impediment to the growth and success of the digital asset or
    crypto industry is regulation, specifically overzealous
    enforcement by existing financial regulatory agencies, but I
    would argue that the crypto industry's main problem is the
    product it is selling. Cryptocurrency is wholly unconnected to
    the productive purpose that defines finance, which is helping
    businesses, individuals, and governments raise, save, transmit,
    and use money for socially- and economically-useful ends. This
    leaves you with an asset class with no fundamentals that trades
    entirely on sentiment. In fact, I have repeatedly asked crypto
    proponents to explain their valuation methodology to me, and I
    have yet to receive a straight answer.
        Despite this inherent flaw with their product, and the
    fragilities revealed by the implosion of FTX, and multiple
    other crypto entities over the past year, the crypto industry
    wants us to believe that their salvation lies in Congress
    granting them, ``regulatory clarity,'' but regulation is not
    some magical pixie dust you can sprinkle on an asset class and
    transform its fundamental essence. The truth is that the crypto
    industry wants the same thing as every industry that came
    before: light touch regulation and favorable taxation.
        Most of the crypto industries' ire is directed towards the
    SEC for simply doing its job. It is important to remember that
    Congress intentionally crafted our securities laws to be
    principles-based. In the seminal case, SEC v. Howey, the
    Supreme Court found that, ``the term, `investment contract,'
    embodies a flexible rather than a static principle, one that is
    capable of adaptation to meet the countless and variable
    schemes devised by those who see the use of the money of others
    on the promise of profits.'' Cryptocurrency and blockchain
    technology are simply the latest scheme deployed by those
    seeking to profit from other people's money.
        And despite the industry's claims, the SEC has been clear
    and consistent about crypto, dating to the chairmanship of Jay
    Clayton. Both Chair Clayton, and his successor, Chair Gensler,
    have said that most cryptocurrencies are securities that need
    to be registered with the Commission. The SEC has also brought
    over 130 cryptocurrency-related enforcement actions, and they
    have yet to lose a single case.
        For any neutral observer, the law is very clear: The SEC is
    not a merit-based regulator. Anyone can raise money from the
    public regardless of how bad the business idea may be, provided
    they register with the Commission and disclose the relevant
    risks to prospective investors. However, the entity must have
    something to disclose if they are to register.
        Imagine if a corporation approached the SEC because they
    wanted to do an IPO of common stock, but the company had no
    cash flows or a credible plan to generate cash flows, no
    audited financial statements, and the stock it was selling
    conferred no legal rights on the purchaser. If the SEC told
    that corporation that it wasn't ready to sell to the public
    markets, would you say that the SEC was acting inappropriately?
    Incredibly, many token issuers and crypto firms who fit this
    example claim that the SEC is treating them unfairly.
        I applaud the SEC and other financial regulatory agencies
    for enforcing the law. However, more must be done. While I
    agree with Chairman Gensler that most cryptocurrencies are
    securities that are subject to registration and disclosure
    requirements, some cryptocurrencies are most likely
    commodities. While the CFTC regulates commodity derivatives,
    they do not regulate commodity spot markets. The practical
    effect of this structure is that cryptocurrency exchanges in
    the U.S. are presently not regulated at the Federal level.
        In my written testimony, I provide a detailed roadmap for
    how Congress can close this gap by carving out cryptocurrency
    from the definition of, ``commodity,'' in the Commodity
    Exchange Act, and recognizing cryptocurrencies as securities
    under special definition to the securities laws. This will give
    the SEC exclusive authority to regulate all aspects of the
    crypto industry. I realize that giving the SEC additional
    authority under its present leadership is unpalatable to some
    members of this committee. However, SEC Chairs come and go. The
    American people are looking to Congress to exercise foresight
    in determining how to regulate the crypto industry for the long
    term. The SEC was endowed with a mandate to protect investors,
    and investor protections are sorely lacking in crypto markets.
        I appreciate the committee's focus on this crucial task,
    but it is worth noting that this is not a race. As you know,
    passing financial regulatory legislation is hard, and once in
    place, it tends not to change, absent some future crisis. I
    look forward to working with you to make sure we get it right
    the first time. Thank you.
        [The prepared statement of Mr. Reiners can be found on page
    124 of the appendix.]
        Chairman Hill. I appreciate your testimony. We will now
    turn to Members' questions, and I will first recognize myself
    for 5 minutes.
        First, let me say thanks to the panel. It is an excellent,
    diverse set of views on a very complicated subject, so all of
    you have been very helpful to our committee. We are grateful
    for that. And even inside a regulated framework, we have huge
    dislocation and the potential for malfeasance, fraud, and there
    is just plain mismanagement. Look at the dot-com boom, which
    was fully under the scope of the SEC, between March of 2000 and
    October of 2002, and $5 trillion was lost by people who
    followed the rules effectively. I am excluding WorldCom and
    Enron in that pure fraud; I am just talking about how Mr.
    Reiners is not buying his pets on Pets.com.
        And then, you go to the next crisis in our society, which
    was the mortgage crisis created by the policies of the Bush and
    Clinton Administrations for housing, fully under the most-
    regulated thing on the planet, and yet it was taken advantage
    of, and there were huge losses that led to the crisis. So, we
    all recognize that inside or outside a regulatory framework, we
    can still have huge financial challenges and criminal issues as
    well. And in my view, you are better off with that regulatory
    framework, and I think each of you have given your perspective
    on that.
        SEC Chair Gensler has insisted that the SEC's 2019
    Framework provides sufficient clarity now for market
    participants to apply the securities laws to the digital asset
    ecosystem. And he has repeated on his routine CNBC appearances
    and other television appearances that one just has to come in
    and register, which is sort of a theme for him, and that he
    will work with them. And that is how it is going to be since
    2019, and it has been effective.
        Let me start with you, Mr. Grewal. You are the chief legal
    officer for one of the largest andmost recognized-platforms.
    What does that look like in practice? Is there a path for
    companies to come in and register as a national securities
    exchange?
        Mr. Grewal. Thank you, Chairman Hill. The answer to your
    question is, at present, no, and I say so definitively because
    Coinbase very much wishes to register with the SEC. We do not
    currently list digital asset securities, but we have a great
    interest in making these products and services available to
    Americans who want them. In order to be able to do that, a
    national security exchange registration must be made available.
    Perhaps alternatively, a broker-dealer or ATS alternative might
    be considered. But in either case, we have not been able to
    successfully register with the SEC, despite our best efforts
    and despite conversations with the Commission that go back now
    many, many months.
        Chairman Hill. Thank you for that. How about BitGo's
    experience, Mr. Belshe? How was your experience with, ``come in
    and visit?'' And can you come in and register, in your
    experience?
        Mr. Belshe. As I mentioned in my testimony, we did visit
    the SEC all the way back in 2018. It is worth noting that this
    is not the current Administration's SEC, this was the prior
    Administration's SEC, so the problem is not any specific
    Administration. It is actually systemic to just getting
    questions answered. The basic question of how should those
    covered by the Investment Advisers Act have custody obviously
    should be answered.
        A second point to note is that the common problem around
    ruling by enforcement as opposed to ruling by direct answering
    of what is allowed and what is not. Recent enforcement actions
    around staking as a service left the entire industry confused.
    We can see, in an enforcement action, a long list of potential
    problems that the SEC might have with that particular product,
    but we can't tell exactly which parts of that were specifically
    problematic and if any of those parts of that service were
    acceptable behaviors.
        Chairman Hill. Thank you. Let me turn to Mr. Gould, and
    let's switch subjects. I think that come in and register is not
    quite as straightforward as perhaps it is being presented by
    the Commission. Mr. Gould, I am looking at the American Bankers
    Association statement for the record: ``Prudential regulators
    have instructed banks to proceed in the digital asset ecosystem
    with extreme caution, requiring advanced supervisory notice and
    formal approval.'' And yet, it says that banking agencies are
    not prohibited or discouraged from providing banking services
    to customers. That seems kind of contradictory to me. You
    referenced risk elimination versus risk management, so as a
    former Comptroller, how should the banking agencies look at
    that?
        Mr. Gould. The way I think about safety and soundness
    guidance is that it provides a path, one path to get to how to
    do the activity and perform the activity in a safe and sound
    manner. I think a lot of the guidance that we are seeing is
    more negatively-phrased. It is focusing on kind of the risks
    associated, but it is not necessarily showing any kind of
    credible path to actually be able to perform whatever the
    activity is in a safe and sound manner.
        Chairman Hill. Thank you. My time has expired. And I
    recognize the ranking member of the subcommittee, Mr. Lynch,
    for 5 minutes.
        Mr. Lynch. Thank you, Mr. Chairman. Mr. Reiners, we hear
    that it has been suggested that the, ``come on in and
    register,'' model does not work. Are there deeper reasons in
    your mind as to why these crypto firms are unwilling to come in
    and register with the SEC?
        Mr. Reiners. Yes. Thank you, Congressman. It is important
    to note that the crypto industry, despite knowing the rules,
    has willfully chosen to operate outside the regulatory
    perimeter. I think the main reason that they haven't come in
    and been registered is because it would be unprofitable for
    them to do so. When you look at crypto platforms or exchanges,
    how they are currently structured, that model is not allowed in
    traditional securities markets. You cannot be the broker, the
    exchange, the market maker, the clearing agent, the custodian,
    and in some cases, they have venture arms that are investing in
    tokens that they end up listing. You can't do that. The
    national securities exchange has to make themselves open to
    registered broker-dealers. So, the reason that they are not,
    ``coming in and registering,'' is because it would be
    unprofitable for them to do so. And they are trying to convince
    you and the public that the SEC is acting unfairly and
    arbitrarily when they are making a deliberate choice.
        Mr. Lynch. Let me go to that point. As you mentioned, both
    the former Chair, Chair Clayton, and the current Chair, Chair
    Gensler, have both taken basically the exact same position with
    respect to cryptocurrencies, well, most of them, the vast
    majority of them as securities. So, there has been no
    difference in terms of Mr. Clayton's position, who was
    appointed by a Republican Administration, and Mr. Gensler, who
    was appointed by President Biden.
        The underlying mission of the SEC, the reason it was
    created was to provide a counterbalance to the asymmetry
    between investors and the industry itself. There was an
    asymmetry of information and knowledge, expertise between a
    customer or an investor and the seller of that security, which
    is what triggers the whole requirement for disclosure.
        From my own experience in trying to investigate some of
    these cryptocurrencies and stablecoins, sometimes it is nothing
    more than a very, very technical--and I have an engineering
    degree--White Paper, and that is it. That is it for the average
    person who wants to invest in some of these products. Following
    the collapse of FTX, a lot of the crypto players attempted to
    distance themselves by claiming that FTX was the bad apple, but
    until that point, up until their collapse, they were actually
    sort of the model. They were actually an industry leader. And I
    am just wondering, if you share the concerns, could you speak
    to the potential future risks that can occur in this space if
    this activity continues to go unregulated?
        Mr. Reiners. FTX was just one of many bad apples. I would
    suggest that the entire industry is rotten, frankly, and we are
    going to see more unless we bring this industry inside the
    regulatory perimeter. We are going to continue to see more
    everyday Americans get harmed by crypto platforms and crypto
    firms. FTX, the crypto industry likes to point out, is just
    like you said, ``a bad apple.'' This is not an indictment of
    crypto with underlying blockchain technology, but it was all
    made possible by crypto.
        FTX was founded in 2019, and 3 years later, at the time of
    its failure, it was worth $32 billion. That is only possible
    with crypto, where you can just mint tokens out of thin air.
    And when you look at how the FTX fraud was run, it was the FTT
    exchange token that was underpinning the whole thing. Alameda
    Research was borrowing customer assets from FTX, using FTT, a
    token that FTX created out of thin air, as collateral, and when
    users were withdrawing their funds from the platform, FTX was
    selling FTT. The moment that the Binance CEO, Changpeng Zhao,
    tweeted that he was selling his stash of FTT, the game was
    over. So, crypto and the unique nature of crypto was what
    fueled FTX's rise, and it is what made FTX collapse in the
    blink of an eye.
        Mr. Lynch. Thank you, Mr. Chairman. My time has expired,
    and I yield back.
        Chairman Hill. I thank the ranking member.
        I now turn to the distinguished ranking member of the full
    Financial Services Committee, my friend, Ms. Waters, for 5
    minutes for her questions.
        Ms. Waters. Thank you very much, Mr. Hill. Mr. Reiners,
    recently, Full Committee Chairman McHenry and Subcommittee
    Chair Huizenga sent a letter to SEC Chair Gensler demanding
    records and communications between the SEC's Enforcement
    Division and the Justice Department regarding charges against
    FTX founder, Sam Bankman-Fried, and his subsequent arrest. I
    was deeply perplexed by this approach from our Republican
    leadership, as the bad actor here is not the SEC, but Mr.
    Bankman-Fried and his colleagues. When I was the Chair of the
    Full Committee, we regularly brought in the heads of companies
    to answer to Congress. It is this reason that I wrote to
    Chairman McHenry urging him to compel testimony from Sam
    Bankman-Fried as soon as possible. Was it wrong for the SEC to
    bring a civil enforcement against him, Sam Bankman-Fried, for
    harming U.S. investors? Was the SEC wrong for doing its job?
        Mr. Reiners. Not at all, and I applaud the SEC, as well as
    the CFTC, for bringing enforcement actions very quickly. And I
    also should give credit to the Department of Justice and the
    Southern District of New York for bringing criminal charges
    very, very quickly. Sam Bankman-Fried will have his day in
    court, and we will learn more about what happened during that
    time, but I think the authorities acted very quickly and very
    aggressively, and rightfully so.
        Ms. Waters. Okay. Let me continue. Last month, the OCC,
    along with the Fed and the FDIC, released a joint statement on
    the liquidity risks to banks resulting from crypto market
    vulnerabilities, including examples of effective risk
    mismanagement practices. Nevertheless, the California
    Department of Financial Protection and Innovation announced
    that Silvergate Bank, a prominent banking partner for crypto
    companies, had voluntarily begun the process of liquidation.
    This came after the collapse of FTX, which led to a run on
    Silvergate late last year. It seems to me that these
    developments validate the bank regulators in expressing
    caution, the banks dealing with crypto currencies. Do you
    agree?
        Mr. Reiners. I do agree, and I think this is another
    example of the banking agency simply doing their job and
    enforcing their safety and soundness mandate.
        Ms. Waters. I want you to know that when I became
    chairwoman, we took a close look at Facebook as it tried to
    launch its own global Stablecoin, which it called Libra, if you
    remember. When Mark Zuckerberg testified before our committee,
    I challenged him to not proceed with their project unless they
    had regulatory approval to do so. Later on, Facebook tried to
    partner with Silvergate Bank, but Treasury Secretary Janet
    Yellen opposed this, and Facebook subsequently folded its
    operation. So given the problems that Silvergate Bank and the
    crypto market are now facing, had Facebook been approved back
    then, I wonder whether millions of additional investors could
    have lost their money? In light of these lessons we are
    learning, Mr. Reiners, do you believe regulators are
    overreaching in their cautious approach towards crypto
    currencies?
        Mr. Reiners. Not at all, and I appreciate your focus a few
    years ago, Ranking Member Waters, on Facebook's Libra project.
    I think the main reason it generated so much attention was
    Facebook's scale. We still live in a fiat currency world. If
    you use crypto, at some point, you are going to have to cash
    out. That is where we can enforce regulation, and that is where
    I think this committee's focus should be. But because Facebook
    has over 2 billion active monthly users across its suite of
    products--Instagram, Messenger, WhatsApp--there was the real
    possibility that people could be essentially living their lives
    in Libra, and maybe someday, in Mark Zuckerberg's version of
    the metaverse, they will be again, I don't know.
        But the reason that Facebook ultimately backed down was
    because of political pressure and the focus that you and many
    others here put on them. But from my vantage point, there were
    really no legal or regulatory restrictions that forced them or
    required them to back down. So I think as this committee moves
    forward and thinks about how to regulate crypto, it is very
    clear that we should button that up and not allow these Big
    Tech companies to issue stablecoins or something similar.
        Ms. Waters. I have to yield back, but let me just say, you
    said you had some recommendations that you are letting us have
    access to, and I would love to take a look at those, and then
    talk with you.
        Thank you. I yield back the balance of my time, and thank
    you, Chairman Hill.
        Chairman Hill. The gentlewoman yields back. Now, we will
    turn to the gentleman from Oklahoma, Mr. Lucas, for 5 minutes.
        Mr. Lucas. Thank you, Chairman Hill, for holding this
    hearing, the first of the Digital Assets Subcommittee. And I
    look forward to working with you, and Ranking Member Lynch, and
    the rest of the subcommittee as we look to bring much-needed
    regulatory clarity to the digital assets arena.
        I would first like to focus on the SEC's regulatory
    approach. The SEC has decided the best way to communicate on
    what the law is regarding digital assets is through enforcement
    actions. The SEC contends that digital asset intermediaries can
    simply go in and register, while at the same time not giving
    real guidance or any indication of what a special registration
    process looks like. More practical, I should say. Someone
    called it special. Professor Evans, could you discuss how to
    square the SEC's enforcement approach with its mandate to
    protect investors and maintain fair, orderly, and efficient
    markets, please?
        Ms. Evans. Yes, thank you for the question. In thinking
    about the mandate for the SEC and regulating, and encouraging,
    and supporting orderly markets, they have quite broad
    discretion, as you know, and part of that discretion is the
    ability to leverage the full power that it has. Obviously,
    Congress cannot become a subject matter expert on everything,
    and so when delegating your legislative authority to an agency,
    you are trusting them to use that discretion wisely.
        Part of that process is also the ability to leverage the
    tools that they have at their disposal. That is, the
    adjudication procedure and also rulemaking to selectively use
    adjudication and to select the actual parties or regulated
    interests that they would focus on leaves the rest of the
    industry to wonder, because it is case-by-case rather than the
    broad rulemaking or even guidance that would give some
    perspective to the ecosystem.
        Mr. Lucas. Many of the legislative proposals to provide
    clarity in this space grant the Commodity Futures Trading
    Commission (CFTC) spot market authority over crypto. Since the
    CFTC was first established through the Commodity Futures
    Trading Commission Act of 1974, the agency has been a
    principles-based regulator. This principles-based approach is
    fundamental to the CFTC's regulatory framework, which enables
    it to be an innovative and proactive regulator. Now, with that
    said, jurisdiction over the spot market authority deserves a
    robust conversation around what is best for investors,
    consumers, and even the agencies.
        Mr. Grewal, could you share your thoughts on where spot
    market authority for crypto assets should belong?
        Mr. Grewal. Thank you very much, Congressman. You are
    correct in identifying that spot market authority for crypto
    assets currently represents a gap in the overall legislative
    landscape. We would certainly support any legislation which
    made clear that the CFTC had such authority in order to enforce
    and establish those principles which are appropriate for the
    spot market.
        Mr. Lucas. Professor Evans, would you like to tackle this
    question as well?
        Ms. Evans. There is a clear gap, a concerning one, when you
    think of the nature of programmable currency that can change
    form from commodity to security during the life cycle of a
    currency, to be sure. So, ensuring that there is no gap between
    derivatives markets on the commodity side and the securities
    market is critical.
        Mr. Lucas. Yesterday, after months of uncertainty, a major
    lender in the crypto industry, Silvergate, announced it would
    be winding down and liquidating its bank.
        Mr. Grewal, there is real anxiety about crypto market
    downturns like we are currently experiencing having an impact
    on the traditional financial sector. Can you speak to this
    concern?
        Mr. Grewal. Congressman, I appreciate the question. The
    concern is real, and important, and, of course, legitimate.
    With respect to Silvergate, we were certainly made aware, as
    was the rest of the market, that it had made the voluntary
    decision to wind down operations this week. Prior to this,
    Coinbase executed a longstanding plan for the orderly
    disposition of corporate and customer funds, so we have no
    particular exposure to that bank at present.
        But the issue generally of crypto firms, and exposure to
    banks which may be at risk, is an important one. We think
    transparency offers the solution here. It is very, very
    important for investors and for market regulators to understand
    what these risks are, what exposure individual firms may have,
    and, of course, most importantly, for firms to have prudent
    risk management plans in place so that in the event of a
    failure, a wind-down, or anything else, customer funds are
    always kept safe. And that is exactly what we think could
    happen as part of not only legislation, but regulatory
    oversight pursuant to rulemaking.
        Mr. Lucas. My time has expired. Thank you, Mr. Chairman.
        Chairman Hill. Thank you, Mr. Lucas.
        The Chair now recognizes the distinguished ranking member
    of the subcommittee, my friend, Dr. Foster, for 5 minutes.
        Mr. Foster. Thank you, Mr. Chairman, and thank you to our
    witnesses. A little more than a year ago, when we had Sam
    Bankman-Fried and various crypto luminaries in front of this
    committee, I asked them what I considered the foundational
    question about crypto assets, which is that if we wish to
    prevent crypto assets from being used for ransomware, if we
    wish to prevent wash trades and other market manipulation, is
    there any alternative to having every crypto transaction
    ultimately associated with a traceable legal identity issued by
    a country with which we have extradition treaties? And their
    answer at the time was, no, that this was necessary if you are
    going to have self-custody, and if you are going to allow self-
    custody and permissionless transactions, you will have
    ransomware, and you will not be able to prevent wash trades.
        Has anything changed in the last year? Is there a magic
    technology that would allow us to prevent crypto assets from
    being used for ransomware and so on that does not rely on
    having ultimately a traceable legal identity, a license plate,
    if you will, on every crypto wallet? Just for the record, no
    one volunteered such a magic technology.
        Yes, Mr. Reiners, are you aware of one?
        Mr. Reiners. I am not aware, other than if you have every
    country in the world comply with the guidance put out by the
    Financial Action Task Force (FATF) around preventing crypto
    from being used by money launderers, ransomware hackers and
    whatnot, but we know that is not happening. And when it comes
    to ransomware, really, all roads lead to Russia. I think
    Chainalysis has said that over 70 percent of ransomware
    proceeds ultimately get cashed out in Russia. And certainly,
    the Office of Foreign Assets Control (OFAC) has ramped up its
    designation activity when it comes to those Russian-based
    exchanges, but, again, it is very easy to open a new one.
        Mr. Foster. Yes, that is right. It is a lack of a legally-
    traceable identity from a country with which we have
    extradition treaties. That is where the rubber hits the road on
    this, so it is interesting that that has not changed. The way I
    view this is, just imagine that we are at the birth of the
    automobile industry, and someone says, I have this great new
    product called the automobile, but if you ask me to put license
    plates on the automobile, if you ask for a driver's license for
    operators, you will crush innovation. And the exact opposite is
    actually true, that it was essential to the healthy development
    of the automobile industry that we have this system of license
    plates, of driver's license, of VIN numbers to prevent theft in
    vehicles and vehicle parts, so all of this, and it is something
    that is recognized by every civilized country. And an analogous
    licensing regime is certainly technically possible.
        I had a discussion yesterday with Mr. Grewal about this,
    and you recognize its utility and its feasibility, and it is
    simply that when you want to possess a crypto asset, you say,
    okay, get it in your wallet, and I will go register your wallet
    using a secure digital ID, mobile driver's license, or
    passport, or something like that, to register yourself in that
    wallet. And it can be a secret number, it can be
    cryptographically-secured, but sort of like James Bond's
    rotating license plates, if you remember the movie, but that
    would allow you to have the same guarantee that you have with
    cars, that normally when you are driving down the road, you
    have no idea who is in the car next to you, but you know that
    there is a valid license plate on it. And you know that if they
    come into your neighborhood and they run over your dog, you can
    go to a judge, prove a crime has been committed, and drag that
    person into court for running over your dog or whatever. And
    this has been essential, and it would be completely
    unacceptable to live in a world where automobiles could drive
    through your neighborhood or cross international borders with
    unlicensed operators and unlicensed cars.
        And this is the essential thing that has to be provided for
    the healthy development of the crypto industry. Somewhere,
    there has to be an Application Programming Interface (API)
    provided by a trusted third party to register your crypto
    wallets, and then at that point, it can be anonymous and
    everything else. But that is, I think, the essential ingredient
    that we have to come to terms with and where I hope this
    Congress eventually settles as the only way to prevent these
    from being used for ransomware, market manipulation, you name
    it. Does anyone have thoughts on this?
        I will start with Mr. Grewal. You have had 18 hours to
    think about this concept.
        Mr. Grewal. Thank you, Congressman. I appreciate the
    opportunity to think another hour or two about this very
    important subject. What you are describing, sir, of course is
    the critical importance of attribution so that we can link
    illicit activity or other activity, which is properly the
    subject of government action or civil law action, to
    individuals. I would also call out and underscore two other
    points in your comments, which I think are important to any
    system, which makes sense, court supervision or appropriate
    government oversight in an independent branch. I think that is
    critical. You mentioned the importance of extradition from
    countries with which we have treaties. The point is that we
    need to be able to, through legal process, link illicit
    activity to actors who are responsible for that activity.
        We think there is a way to do this technically that does
    not involve the mass collection of personally-identifiable
    information. I do not think that is what your comments or
    questions were suggesting, but I think that is important as
    well so we can strike the right balance between personal
    privacy and holding people accountable for committing illegal
    activity.
        Mr. Foster. Thank you.
        Chairman Hill. The gentleman's time has expired. We now
    recognize the gentleman from Minnesota, Mr. Emmer, who is also
    the Majority Whip of the U.S. House, for 5 minutes.
        Mr. Emmer. Thank you, Chairman Hill and Ranking Member
    Lynch, for holding this important hearing today, and thank you
    again to our witnesses for your testimony.
        Crypto technology is shifting economic power from
    centralized institutions back into the hands of the people. It
    is transformational, and it can be threatening to unelected
    bureaucrats and, quite frankly, some elected people here in
    Washington, D.C. This threat is most saliently observed through
    several recent administrative actions. On January 3, 2023, the
    Fed, the FDIC, and the OCC issued a statement discouraging
    banks from holding crypto or servicing crypto clients on a,
    ``safety and soundness basis.'' On February 7, 2023, the
    Federal Reserve published a statement in the Federal Register,
    seemingly turning this perspective into a final rule without
    following the public comment process outlined in the
    Administrative Procedure Act.
        In the midst of this, on January 27, 2023, the White House
    National Economic Council published the Administration's
    roadmap to mitigate cryptocurrency risks. This report
    summarizes President Biden's political plan to lawlessly abuse
    the administrative state to push American crypto firms and
    their United States customers into offshore, unregulated,
    opaque, and unsafe markets.
        These recent actions are an explicit display of what
    Congress and the American people already noticed: This
    Administration is weaponizing the banking sector to de-bank
    legal crypto activity here in the U.S., using scare tactics to
    run an entire industry out of the country. And the collapse of
    FTX should warn us of the vulnerable position we are putting
    American consumers in when we do not compete to keep crypto
    firms onshore. Clearly, the Administration's policies are
    motivated by a thirst for increased control over the American
    people, because here in Congress, crypto is not partisan.
    Republicans and Democrats have an 8-year history of working
    productively together on solutions to this space.
        Mr. Gould, no regulator has understood the importance of
    unlocking access to financial services for crypto companies
    better than the OCC, under Brian Brooks. Of course, you did
    great work on that team, so I am going to ask you a series of
    questions that will, I hope, assist our committee's work.
    First, in your view, is the Administration's regulatory posture
    towards digital assets encouraging or discouraging financial
    institutions from offering services to digital asset firms?
        Mr. Gould. Discouraging.
        Mr. Emmer. In your view, is the Administration's regulatory
    posture towards digital assets encouraging or discouraging
    financial institutions from innovating themselves, and offering
    digital asset products and services to their clients?
        Mr. Gould. Discouraging.
        Mr. Emmer. As it concerns innovation and consumers, what is
    the potential impact of the Administration's negative wide-
    ranging statements on safety and soundness with financial
    institutions engaging in digital asset activities?
        Mr. Gould. One possible consequence is that it drives it
    into less-visible areas of our economy where we can't monitor
    it. We can't manage the risks associated with it. Another
    possible outcome is that it increases the technology gap
    between the larger banks, which continue to invest and expand
    in technology versus the smaller banks, which, frankly, do not
    have the same resources and aren't able to pursue as
    aggressively investments in technology.
        Mr. Emmer. Can you please give us an example of when an
    Administration has taken this type of regulatory posture toward
    an industry in the past, and what the effects were?
        Mr. Gould. Many people have suggested that it is similar to
    what happened with Operation Choke Point, but there are
    important differences. Number one is that what the
    Administration is doing currently is transparent, at least to
    the extent you can do that within the confidential supervisory
    system. They have been very clear, to their credit, on what
    their views are and what their concerns are.
        Number two, I think it is different from Operation Choke
    Point in the sense that, as I understood Choke Point, it was
    more focused on discouraging banks from banking in certain
    industry sectors. This is actually broader than that because
    this also applies to essentially discourage existing banks from
    exploring new technologies, including digital assets.
        Mr. Emmer. Thank you. This Administration's attempt to de-
    bank the crypto community and prevent financial institutions
    from offering digital asset products and services to customers
    is a lazy and destructive regulatory strategy that is already
    chilling innovation and subjecting users of digital assets to
    less-sophisticated jurisdictions that are not equipped to
    manage the potential risks. Again, I appreciate everybody being
    here today, and hopefully we are going to do some productive
    work going forward.
        Thank you, Mr. Chairman. I yield back.
        Chairman Hill. The gentleman yields back. I will now
    recognize the gentleman from New York, Mr. Torres, for 5
    minutes.
        Mr. Torres. Thank you, Mr. Chairman. The lesson learned
    from the FTX collapse is that companies like FTX--offshore,
    deregulated, centralized, overleveraged companies--have the
    highest risk of losing customer funds and defrauding their
    customers.
        My first question is for Mr. Belshe regarding the
    enforcement priorities of the SEC. Is the SEC prioritizing
    enforcement actions against the worst actors like FTX--
    offshore, deregulated, overleveraged, centralized actors--or is
    the SEC taking action against companies that are the opposite
    of FTX, onshore regulated companies?
        Mr. Belshe. I am not aware of any actions that the SEC took
    against FTX or Sam Bankman-Fried prior to its collapse, so you
    have to argue that it is the latter, that it is actually the
    folks are trying to do it right. And you do have to wonder if
    we couldn't have avoided the massive amounts of money that
    flowed to FTX if the basic principle of a bitcoin exchange-
    traded fund (ETF) had been provided and approved by the SEC
    when there had been 25-plus valid applications, some from
    Invesco and other reputable firms who have done ETFs for many
    years in the past.
        Mr. Torres. The CFTC and the SEC seem to be engaged in a
    regulatory turf war over digital assets. In December 2022, the
    CFTC, in a court filing, declared Ether to be a commodity. Yet
    in February 2023, SEC Chair Gary Gensler, in an interview with
    New York Magazine, disagreed with the CFTC, declaring
    everything other than bitcoin to be a security.
        Mr. Grewal, is it fair to say that the mixed messaging from
    the SEC and the CFTC and the regulatory confusion it creates
    underscores the need for Congress to step in and bring legal
    clarity to the status of digital assets?
        Mr. Grewal. I believe it does underscore that point,
    Congressman Torres. As you point out, if the Chairs of two of
    the most important regulators applicable to our industry and to
    this part of the economy can't agree on the security status of
    one particular token, that obviously speaks to the challenge
    for anyone else looking to stay on the right side of the rules
    and make proper determinations that are in accordance with
    legal expectations. That is a long way of saying, yes, sir.
        Mr. Torres. Bloomberg Opinion writer, Matt Levine, who is
    no crypto cheerleader, made the following observation about the
    SEC's approach to regulating crypto: ``The SEC is being
    ruthless and creative about exploiting legal provisions to
    expand its powers, and the industry seems to be playing catch-
    up.'' What Mr. Levine describes as Chair Gensler's creative use
    of his authority led him to declare Ether as a security and
    stablecoin as a security, even though neither one clearly
    constitutes a security under the Howey test.
        The Howey test has four criteria, as I understand it,
    including an investment of money in a common enterprise with
    the expectation of profit to be derived from the efforts of
    others. When it comes to a stablecoin, one might wonder, where
    is the expectation of profit? If I buy a stablecoin pegged to
    the U.S. dollar, I am not buying it because I expect the
    profit. I am buying it in order to use that stablecoin as a
    digital dollar on the blockchain. Is that a fair assessment, or
    am I missing something, Mr. Grewal?
        Mr. Grewal. I think that is a fair assessment, Congressman
    Torres. It is absolutely the case that USD-backed stablecoins,
    such as those that you described, come with no expectations of
    profit. There may be other problems with the Howey test, but of
    course, that one fatal flaw renders it anything but a security.
        Mr. Torres. And, Mr. Belshe, when it comes to Ether, where
    is the centralization? What is the central entity from whose
    efforts I, as an investor, would expect to derive profits with
    respect to a decentralized asset like Ether?
        Mr. Belshe. I think the determinations for this will have
    to be argued kind of from both sides. It shows that
    decentralization is something that forms over time. It shows
    that the determination of these assets is clearly not clear at
    all. Perhaps bitcoin, when it was started by one guy, was
    centralized, and yet today, no one argues that it is
    centralized, and the same thing applies for any new innovation.
    Some sort of incubation period where something can grow from a
    centralized status to decentralized seems warranted, and this
    is unique to digital assets.
        Mr. Torres. I actually want to address that question to
    Coinbase. Are there assets that could begin as securities and
    then morph into something else as it becomes decentralized? The
    example would be Ether, that it was likely a security at the
    time of an initial coin offering (ICO), but has become
    decentralized over time. What do you think of that analysis?
        Mr. Grewal. Speaking generally, Congressman Torres, I agree
    that assets can change character over time, and to be
    completely fair, I suppose it is equally true that an asset
    that began as a commodity might evolve into security in some
    form as well. But certainly, assets which are centralized,
    which are controlled by a managerial group, can, over time,
    decentralize in ways that would take them clearly outside of
    any reasonable understanding of the definition of a security.
        Chairman Hill. The gentleman from New York yields back.
        We now turn to the Vice Chair of the subcommittee, Mr.
    Davidson, who is also the Chair of our Housing and Insurance
    Subcommittee, for 5 minutes.
        Mr. Davidson. I thank the chairman, I thank our witnesses,
    and I am excited to finally have this subcommittee in
    existence. And to have this hearing; as someone who has
    basically pleaded for this day since 2017, it is pretty
    exciting. On the other side, as somebody who has paid attention
    to this space, essentially since I got on the committee 6 years
    ago, it is painful to hear arguments that we have worked
    through in industry, and with legislators, and regulators since
    that time, and yet no actions happen. We have legislation that
    has been drafted on the shelves for years, and people in the
    industry are publicly and privately coming in and asking, when
    are we going to actually get something done?
        I will admit I am a little dismayed when I hear some of my
    colleagues essentially continue to push, either purposefully or
    through ignorance, an idea that these assets are the same
    things as a centrally-managed, centrally-controlled database,
    when the entire computing architecture of this space structures
    it differently so that you cannot have the same type of
    compliance tools in every application. You cannot have the same
    effect. You have to comply with it differently. And as we talk
    about that, it is great to kind of bridge the divide, close
    the, ``We do not understand it'' arguments, and just let people
    be exposed for the positions that they have.
        Towards that end, I ask unanimous consent to submit for the
    record statements from the Club for Growth, the Blockchain
    Association, the Chamber of Digital Commerce, the Crypto
    Council for Innovation, and the National Association of
    Federally-Insured Credit Unions.
        Chairman Hill. Without objection, it is so ordered.
        Mr. Davidson. I thank the chairman, and I just would ask
    Professor Evans, does the Securities and Exchange Commission
    regulate the payment system or securities?
        Ms. Evans. Clearly, securities.
        Mr. Davidson. Thank you. And the legal clarity that we are
    seeking, frankly, wants to make sure that investors,
    innovators, and regulators, like Chairman Gary Gensler, also
    know that the Securities and Exchange Commission does not
    regulate the payment system.
        Mr. Grewal, the CEO of Coinbase, Mr. Armstrong, has made
    comments in the past in support of individuals moving crypto
    assets off exchanges and to self-hosted wallet, self-custody.
    Do you believe that protecting their customers' ability to
    eliminate third-party risk through self-custody is an important
    first step in consumer protection?
        Mr. Grewal. I do, Congressman, yes.
        Mr. Davidson. So for people who were caught in bad
    investments in the past, because this area has been
    unregulated, and people have been abusive, and have outright
    misrepresented things, if they had custody of the assets and it
    was in their possession, what was their risk if the centrally-
    managed unit collapsed or went bankrupt?
        Mr. Grewal. There would be none, Congressman.
        Mr. Davidson. Because they actually own their property. It
    is sort of like if the bank goes out of business and you have
    all your cash, even if you have an account with the bank, well,
    you didn't lose any money because you had your cash. Now, not
    everyone is going to choose to do that, but we certainly should
    not prohibit it. Just like cash, we have made it almost
    illegal, but not entirely, and in this space, we have people
    who are overtly trying to make self-custody illegal.
        Mr. Grewal, how does Coinbase work to prevent market
    manipulation, fraud, or conflicts of interest, things that
    would be barriers to making the spot market function?
        Mr. Grewal. Congressman, we have important policies and
    procedures to address each of those concerns, but our programs
    go far beyond just what we write down in paper. We have
    transaction monitoring systems. We also monitor for inside
    activity. All of these things are aimed at identifying behavior
    that would give concern not only to regulators, to lawmakers
    such as yourself, but to Coinbase itself because our entire
    business proposition, our entire value for our customers is
    grounded in trust.
        Mr. Davidson. Yes. Thank you for that, and maybe
    particularly so now as a publicly-traded company, so I thank
    you for that. I think it is important to address one of the
    issues in the space with Silvergate. I wish I had time to go
    into depth with some of the questions, but fundamentally, the
    run on their assets was precipitated by fraud. The shiny object
    was digital assets and crypto that led people to create
    accounts in relationships with FTX, but does anyone care to
    comment on, why did FTX fail? Was it because they held digital
    assets, or was it because they commingled funds, and committed
    fraud, and misrepresented what they did?
        Mr. Belshe. I will try. FTX made a fundamental
    misrepresentation, which is that they claimed to have an
    exchange, which is a part of trading infrastructure. And with
    all of our trading infrastructure, we want to see well-
    understood risks and controls, whether you are a broker-dealer,
    an exchange, or otherwise. And what they did is they took funds
    out of that exchange and sent it over to their prop trading
    firm against the knowledge of their clients.
        Mr. Davidson. Thank you, and I yield back.
        Chairman Hill. Thank you, Mr. Davidson. We now turn to my
    friend from Houston, Texas, Mr. Green, for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman, and I thank the ranking
    member as well for this hearing.
        Friends, I was here when Bernie Madoff made off. Need I say
    more? Now, we have FTX. I am really concerned about the
    investors. I appreciate a desire to innovate, but all
    innovation isn't positive. Credit default swaps were an
    innovation that proved to be quite detrimental.
        Mr. Reiners, you have iterated previously on this topic,
    but what do we need to do to protect investors?
        Mr. Reiners. Thank you, Congressman Green. To protect
    investors in crypto, you simply need to impose the same
    standards and safeguards that have long been present in
    traditional securities markets. You have to have segregation of
    customer assets from firm assets. You have to have adequate
    disclosure so that investors can make informed decisions about
    how to risk their capital. You have to have these firms produce
    audited financial statements, not proof of reserves. You have
    to have prohibitions on conflict of interest. You can't allow
    these firms to front-run their own customers, which is what is
    happening currently in crypto markets.
        This is not rocket science. The blueprint is there. It is
    just a matter of Congress clarifying once and for all that one
    agency--I prefer it to be the SEC because they were created to
    protect investors; the CFTC does not have an investor
    protection mandate. In the markets that the CFTC oversees,
    commodity derivatives markets are principally made up of large,
    sophisticated, institutional investors. They do not have a long
    history of protecting retail markets, so it is not that
    complicated. We figured it out. Generally speaking, of course,
    there are going to be frauds from time to time, just like
    Bernie Madoff, but the recipe is there.
        Mr. Green. Some of your colleagues seem to think that this
    in some way would thwart innovation and prevent these
    businesses from developing appropriately. What is your response
    to that?
        Mr. Reiners. Of course, I reject that premise. U.S. capital
    markets are the envy of the world, and there are a variety of
    reasons for that. But one of them is that we have a robust
    regulatory environment, that you can deploy your capital here
    with adequate information, that you have legal remedies
    available to you. So for the crypto industry to benefit long-
    term, it is going to need those same guardrails. Obviously,
    there is a massive trust deficit right now with crypto. The
    average American just does not trust it, and rightfully so. So
    for this industry to succeed long-term, and people can disagree
    with me on the underlying utility and merits of crypto, but I
    still think we can agree on the need for there to be a robust
    regulatory environment, because that will allow users to trust
    it, and to know that they have protections, and the industry
    will benefit perhaps over the long term. But absent that, those
    guardrails, people are continuing not to trust crypto, and it
    will sort of be the plaything of technologically-sophisticated
    individuals.
        Mr. Green. Thank you. Just a closing comment, I was
    somewhat amazed recently when I pulled up to a service station
    in a neighborhood where most of the people are wage earners,
    probably not sophisticated investors, and there was a bitcoin
    ATM readily available. I really am concerned about people who
    assume that regulations exist that do not, and that they are
    protected when they are not. It causes me consternation, and I
    am not getting a great sense of belief that the industry is as
    interested in the investors as they are in making profits. I
    yield back the balance of my time.
        Chairman Hill. The gentleman yields back. Mr. Rose of
    Tennessee is recognized for 5 minutes.
        Mr. Rose. Thank you, Chairman Hill and Ranking Member
    Lynch, for holding this hearing, and thanks to our witnesses
    for taking the time to be with us today and for sharing your
    expertise. I am going to dive right in.
        Mr. Grewal, will you describe the existing--and this is a
    broad question, I know--regulatory structures for digital asset
    trading platforms, and discuss the current authorities of the
    SEC and the CFTC when it comes to regulating digital asset
    trading platforms?
        Mr. Grewal. Thank you, Congressman. I can certainly speak
    to that issue with respect to Coinbase's own experience as a
    platform that is regulated here in the United States. Just to
    give you some sense of the scope of our oversight, we have
    something like 45 money transmission licenses across the United
    States. We are also licensed as a BitLicensee under New York
    law.
        At the Federal level, we have a registered DCM, and we are
    seeking to register an FCM with the CFTC. We are also
    registered as a money services business (MSB) with FinCEN as
    part of the Department of the Treasury. Even within the SEC, we
    actually have registered broker-dealers, two of them I believe,
    but we are not able to do anything with them because there are
    no digital asset securities that are currently available for
    listing. So, that is the broad landscape that we currently
    face. What we do not have, though, is a viable path for
    registration, either as a national securities exchange or as a
    broker-dealer, ATS, with the SEC, and that is, I think, an
    important part of the gap that we believe legislation could
    help fill.
        Mr. Rose. Thank you, and this next question is for all of
    you, so we will go across the dais down there when I get
    finished asking the question. It seems that in the digital
    asset space, much of the friction, at least in the U.S., is
    between who would be the primary regulator, given that we have
    separate securities and derivatives regulators. Previous
    Congresses have considered merging the two regulators to
    provide more regulatory certainty.
        A 1995 GAO report found that merging the SEC and the CFTC
    could yield a number of benefits, including reducing regulatory
    uncertainty, enhancing market efficiency and innovation, and
    increasing regulatory effectiveness. In 2012, now-SEC
    Commissioner, Hester Peirce, called a merger of the SEC and
    CFTC politically difficult to engineer but added that it would
    be a reasonable step towards much-needed regulatory
    consolidation. Additionally, the Treasury Department, under
    President Trump, also considered an SEC-CFTC merger, but
    ultimately opted not to pursue the policy.
        I am curious about each of your opinions on whether the
    digital assets industry would benefit from having a combined
    securities and derivatives regulator, and we will start on my
    left and go across, if you do not mind. Mr. Belshe?
        Mr. Belshe. It is easy to say, ``digital assets.'' Today,
    we classify at least five different types of assets as digital
    assets. We have stablecoins, we have cryptocurrencies, we have
    DeFi tokens, we have digital property like NFTs. I think I am
    probably leaving off some. Having a single regulator for five
    very diverse and different activities probably is not exactly
    the right approach. I think we talked a lot about the SEC
    because of the definition of what is a security and what is
    not. In terms of what is a security, I think it should be under
    the SEC. I think it is unlikely to see a hybrid of the CFTC and
    the SEC. But then lastly, I think the right approach is what
    was mentioned earlier by Mr. Davidson, which is a principle-
    based approach to regulation of digital assets.
        Mr. Rose. Professor Evans?
        Ms. Evans. Yes. Thank you, Congressman. If we were
    beginning today, and I speak normatively as an academic, what
    you might create, and ideally, some hybrid version might be
    applicable. Although, I agree with my colleague that given the
    complexity and the nuances of the different types of tokens and
    coins, it is not likely. But if I recall correctly, in the
    enabling legislation for both the SEC and the CFTC, there is
    some language that calls upon them to work jointly in some
    capacity, although it is rarely used, and I would lean into
    that language and see what might be created in light of things
    that already exist.
        Mr. Gould. Congressman, although I am not an expert on
    market regulation, I would just note that in the Federal
    banking agency space, there are multiple regulators and they
    serve different functions. And generally speaking, as long as
    those different missions and tensions are handled
    constructively, it is valuable having multiple regulators in
    the banking agency space.
        Mr. Rose. Thank you.
        Mr. Grewal. Congressman, in the past, Coinbase has urged
    the adoption of a unified regulator across securities,
    commodities, and other types of digital assets. We, however,
    have recognized the political challenges that Commissioner
    Peirce and others have pointed to. The main point, we think, is
    to have a unified framework, even if it involves individualized
    or separate regulators. With the right rules, we can manage the
    complexity of different regulators taking their fair share.
        Mr. Reiners. Congressman, I will quickly note that Paul
    Volcker also thought the CFTC and the SEC should be merged, and
    I agree with him on that, and this divergence has very,
    frankly, bizarre outcomes. So in 2017, the CFTC permitted the
    listing of cash settled bitcoin futures contracts, while the
    SEC continues to rightfully--
        Mr. Rose. My time has expired. I'm sorry.
        Mr. Reiners. We have ETF and bitcoin futures as different
    things.
        Mr. Rose. I would welcome your follow-up on that. Thank
    you.
        Chairman Hill. Mr. Reiners, please--
        Mr. Rose. I yield back.
        Chairman Hill. --feel free to answer his question in
    writing.
        Mr. Casten is now recognized for 5 minutes.
        Mr. Casten. Thank you, Mr. Chairman. Mr. Reiners, I hope
    you will forgive me for starting with just a really simple
    question. What, in your estimation, is the market value of the
    total traded crypto assets today?
        Mr. Reiners. You can go to coin market cap, and I think it
    is a little over a trillion dollars, although market cap, when
    it comes to cryptos, is a troubling metric, frankly, because
    anyone can create a token, hold a bunch for themselves, sell 10
    for $100 and then say, oh wow, we have a billion-dollar market
    cap token here.
        Mr. Casten. You have anticipated why I asked the question.
    You mentioned you get one of the pithier explanations of the
    FTX bankruptcy that I have heard, which I appreciate, and
    essentially with what you just described, FTT, there was more
    desire for dollars than FTT, and all of a sudden, there was a
    run on the bank, as it were. If I understand the Silvergate
    bankruptcy, it's sort of the same story. It sounds like they
    were sort of doing dollar settlement of crypto trades, and all
    of a sudden, there was more demand for dollars than they had in
    reserves, and so they had washed that out. Is that a reasonable
    characterization of the Silvergate bankruptcy?
        Mr. Reiners. Yes, Congressman, I think that is fairly
    reasonable. Silvergate suffered a liquidity crisis. Over 90
    percent of their deposits were affiliated with crypto firms,
    and once crypto melted down, of course, there was essentially a
    run on the bank. They had to sell assets to meet that run. A
    lot of those assets were fixed-income assets that have gone
    down in value since the Fed started raising interest rates, so
    they lost money on that. That was a hit to capital, and then it
    became a sort of capital liquidity play on one another and
    brought them to the brink of failure.
        Mr. Casten. The reason I started with the capitalization is
    that as I am sitting here, Silvergate is described as one of
    the most-important banks in crypto, with a $12-billion
    bankruptcy; FTX, one of the major exchanges, an $8-billion
    bankruptcy; Celsius, $4 billion; Genesis, $3 billion. I do not
    think I have left out any of the major bankruptcies. In
    aggregate, that is about $28 billion. If the major players in
    the industry are going bankrupt and accounting for 3 percent of
    the nominal value, I am saying, is the trillion dollars real or
    not? How much of the value of this is inflated? Now, $28
    billion is the market cap of Walgreens. I am happy to be on the
    corner and happy and healthy, but nobody would say that
    Walgreens is systemically important. Given what you have done
    in the systemically-important banking space, are there any
    legitimately systemically-important crypto players? If this
    industry went away tomorrow, from a financial perspective, does
    it matter?
        Mr. Reiners. It wouldn't move the needle one bit on GDP,
    unemployment, or anything. Chair Powell would probably never
    bring it up. We just had obviously a massive crypto failure, a
    crypto winter, $2 trillion in market cap, whatever that is
    worth, just evaporated, and, yet, this is not a systemic risk
    event, as you said. The average person is not feeling this or
    experiencing this in any meaningful way, and, frankly, that is
    a policy success, a little celebrated policy success, because
    it could have been a lot worse.
        As we have heard today, the crypto industry is desperately
    trying to become integrated with the traditional financial
    system, which is, frankly, ironic given that the origins of
    crypto was to exist outside the financial system. The very
    first bitcoin block had a text in there that said, from The
    Times of London newspaper, ``Chancellor on brink of second
    bailout.'' Now, they are looking for the banking system for
    their salvation, which is--
        Mr. Casten. And I agree. I am glad it is not. Maybe there
    is no systemic failure because we have done such a good job up
    here. I am always willing to take credit for that. Maybe it
    just is not really that big because if the trillion dollars is
    ridiculously overinflated, we do not have a special
    subcommittee on Walgreens. I raise all of that because I think
    you have made the good case of much of crypto as a security.
    There are other good cases to be made about it as a commodity.
    Is there any good case for crypto as a currency, because I am
    left saying, what is the value for cryptos or currency? That is
    basically a late-night Glenn Beck Gold Bug ad. It is something
    that is finite, that is valued by a few people, but I can't pay
    my taxes, and I can't pay my mortgage with it.
        Mr. Reiners. It is far too volatile to be used as a medium
    of exchange as a currency. If you are a merchant, why would you
    accept payment in something that could go down by 20 percent
    within an hour because Elon Musk sent out a tweet, right? It
    has completely failed as a currency. People like to talk about
    stablecoins being used as a currency, but the reality is, as
    Gary Gensler said, they are the, ``poker chips,'' at the
    casino. People use stablecoins so they can speculate an
    overseas exchanges and in DeFi, right? That is the main reason
    stablecoins exist.
        Mr. Casten. I realize I am close to time, and I do not want
    to sound like such a Luddite up here, because I think
    blockchain is a fascinating technology. There are fascinating
    conversations about Web 3.0. But it strikes me that this
    conversation has become complicated because we have talked
    about it as a currency instead of acknowledging that this is a
    volatile thing. Blockchain is fine but to be continued, but I
    think if we regulate it as one of the other things that it
    actually claims to be, we will probably find a way through.
    Thank you, and I yield back.
        Chairman Hill. The gentleman yields back. The Chair now
    recognizes Mr. Steil for 5 minutes.
        Mr. Steil. Thank you very much, Mr. Chairman. Mr. Chairman,
    I would like to just make a quick comment that I actually think
    that stablecoins have a lot of potential opportunity here. And
    it is something that I hope we spend a little time on in this
    committee, because I do think I disagree with the previous
    witness' comment. I think it actually provides us a lot of
    opportunity.
        Let me shift gears here, and if I can, Mr. Grewal, I am
    going to direct some of these questions to you. I spent a lot
    of time thinking about how we get the policies here right, in
    large part because I think it is really important that we are
    innovating here in the United States of America rather than
    allowing a lot of these types of products to be offshore, in
    large part for the protection of Americans and American
    investors, American consumers. And if we look back at the FTX
    implosion, a lot of individuals were hurt, including many in
    the United States.
        As you know, as I know, and as many people have learned,
    FTX was headquartered in the Bahamas, not here. Although it had
    some domestic subsidiaries, the bulk of its operations were
    offshore, outside the protections of the United States
    Government. And if we want to protect investors and foster
    innovation, I think we need to be encouraging digital asset
    businesses to domicile here in the United States, not enforce
    foreign jurisdictions that have less-robust rules of the road
    and regulations to protect people. But, as I am looking at the
    SEC, it seems like they are failing to provide a clear
    framework to facilitate responsible U.S.-based leadership on
    digital assets.
        The question here is, we have seen Chairman Gensler, and he
    recently gave an interview this week in which it seemed like he
    may have waved off concerns that digital asset businesses would
    continue to migrate overseas. He said, ``We lose more if
    investors get harmed here.'' How do you view those comments?
    Where would continued digital assets' offshoring be in relation
    to the investor outcomes that we want here in the United
    States?
        Mr. Grewal. As an American cryptocurrency exchange
    incorporated under the laws of the State of Delaware, we
    obviously have a strong interest in seeing robust protections
    for consumers that recognize the need for innovation right here
    in the United States. I can't help but observe, however,
    Congressman, that even as we are debating issues such as, what
    is the definition of a security, or which agency ought to have
    primary jurisdiction over one element of the regulatory
    framework or another, other countries around the world are
    moving ahead. The U.K., Australia, Singapore--and I could list
    many, many other countries that are taking a sensible approach
    to these issues and are attracting real capital and real jobs
    that create real national security concerns for the United
    States if this gap, if this race continues unaddressed by our
    country.
        Mr. Steil. Let's dig in on that a little bit. There is a
    discussion of whether or not the regulatory path forward is
    clear, so I want to go back to Chairman Gensler's comments on
    that. We have seen a flurry of enforcement actions from the SEC
    after many of the firms in the crypto space, and he was
    recently quoted as saying, ``The path to compliance is clear.''
    I understand, kind of in other words, that he is arguing that
    digital asset firms can and should register with the SEC, and
    the failure to do so is a choice. That is how I heard that
    comment. Maybe you could share with me how you view that
    comment? And then further, in your interaction with the SEC, is
    the path to compliance clear for your firm or for firms in the
    same space?
        Mr. Grewal. Congressman, what I can say with respect to
    registration is that we actually share the goal I laid out just
    a minute ago. Coinbase is eager to be able to offer digital
    asset securities here in the United States under the
    supervision of the SEC. And to that end, we have pursued
    registration under a number of different models, some that we
    have proposed and others that staff of the SEC have suggested.
    But to date, we have been unable to reach an accommodation and
    identify a path towards registration or that would result in
    registration for the simple fact that the current registration
    rules don't make a lot of sense when it comes to digital
    assets.
        Mr. Steil. I am assuming you are going back and forth with
    the SEC. I know last summer, you sent a petition outlining a
    series of questions that you had. Could you characterize your
    interaction with the SEC, and have you received answers to the
    questions that you asked last summer?
        Mr. Grewal. Yes, sir. In July of last year, we filed a
    formal petition for rulemaking under the procedure set out in
    the Administrative Procedure Act, seeking rules along the lines
    that we have been discussing. I would characterize our
    interactions with the SEC as always professional. We held no
    particular grudge towards the Commission, even as we have
    strong policy disagreements. We have received no answer to our
    petition.
        Mr. Steil. You received no answer to your petition. I think
    that says the future and the path year may be less than clear.
    We have an opportunity to clarify that. Thank you for your
    testimony today.
        Mr. Chairman, I yield back.
        Chairman Hill. Thank you, Mr. Steil. Mr. Nickel is
    recognized for 5 minutes.
        Mr. Nickel. Thank you to all of our witnesses for being
    here today, and a special welcome to Mr. Reiners, who is from
    Duke University in the great State of North Carolina. I saw
    that, and I imagine you have not been looking at your phone. I
    did look at mine and did note that Duke is up significantly at
    the half. And, Mr. Chairman, we have been talking a lot about
    the SEC today, but you and the good people of the Great State
    of Arkansas' 2nd District as well will be much more interested
    in another SEC at 7:00 tonight.
        Chairman Hill. I'm looking forward to it.
        Mr. Nickel. But I am glad to be working across the aisle to
    make progress on digital asset regulation. This emerging
    technology has incredible potential. It has the power to bring
    more fair and equitable access to financial services for
    everyday Americans, especially those who are unbanked. It also
    has the power to reduce costs, increase efficiency, and grow
    our economy. However, without proper regulation, digital assets
    can be harmful to consumers.
        Additionally, without clear rules of the road, we risk this
    technology revolution moving outside of the United States. I
    think it is essential to our economy and our national security
    that America remain the world's dominant financial center.
    Because of this, I am happy to be co-sponsoring Chairman
    McHenry's Keep Innovation in America Act, along with
    Congressman Torres. This bill provides the regulatory clarity
    needed to ensure crypto innovation remains in the U.S., and
    directs the Treasury Secretary to conduct a study on this issue
    so that we can better regulate it going forward.
        Mr. Reiners, what additional regulation do you believe is
    needed in this industry to encourage innovation here in America
    while also protecting consumers?
        Mr. Reiners. Congressman, first, I appreciate the update on
    the Duke game, because it has been on my mind, and I will just
    note that we are peaking at the right time of year here.
        I laid out in my written testimony what I think is the
    right approach. And I would just push back slightly on the
    concept that there is any innovation here worth embracing,
    frankly. Crypto has been around for 14 years. That is a pretty
    long track record, to take a step back and look at the harms
    that has caused and the benefits, and on the harm standpoint,
    the ledger is pretty long. It facilitates ransomware attacks,
    which have absolutely crippled America's small businesses,
    municipalities, and healthcare systems. It undermines our
    national security by sanctions evasion and terrorist financing.
        I would just note that North Korea stole $1.7 billion worth
    of crypto last year to fund their ballistic missile program.
    And then, of course, there are the environmental impacts
    associated with proof-of-work mining, and then the numerous
    investor losses, as well as frauds, hacks, and scams. So, when
    you look at that in its totality, what are the benefits that we
    are receiving in return? I don't really see any. I think as
    lawmakers, you need to be clear-eyed about what is happening
    here. And because of that, investor protection, I think, should
    be front and center, while also minimizing risk to financial
    stability. I think letting the SEC fulfill its mandate to
    protect investors and giving them exclusive oversight over
    crypto is the right approach.
        Now, I will concede, it doesn't necessarily mean that all
    of the rules that apply to traditional securities firms should
    apply one-to-one for crypto firms. One area that I think many
    people in crypto would agree with me on is perhaps there is a
    need for a customized disclosure framework, because the
    information that crypto investors want is probably different
    than what a normal equity investor would want. And even Chair
    Gensler has alluded to this point and noted that asset-backed
    securities have a different disclosure regime. That is a long-
    worded answer there, but I think the SEC is best-suited to
    impose some investor protections here.
        Mr. Nickel. Thank you. Mr. Grewal, the Board of Governors
    of the Federal Reserve System issued a policy statement that
    confers new obligations on the State member banks regarding the
    permissibility of engaging in crypto asset-related activities.
    The policy statement seems like it significantly impacts the
    ability of consumers to access the crypto ecosystem through
    safe and well-regulated outlets. How will this rule hurt
    consumers and innovation?
        Mr. Grewal. Congressman, the challenge, of course, with any
    new rule is that it has unintended consequences or downstream
    effects, which aren't necessarily contemplated at the time of
    its enactment. In this particular case, let me be very clear,
    we support rules for disclosures to consumers and investors
    that allow them to make informed decisions about what they are
    investing in, who they are banking with, and the like. So to
    the extent we all share that goal, we think progress in this
    way would be constructive.
        Chairman Hill. The gentleman yields back. Mr. Flood is
    recognized for 5 minutes.
        Mr. Flood. Thank you, Mr. Chairman. I would like to thank
    our witnesses for coming today, and I really look forward to
    hearing your feedback on some of the SEC's recent actions
    related to digital asset custody.
        Mr. Gould, I am referring specifically here to Staff
    Accounting Bulletin (SAB) 121, which asked public banks to hold
    custody in crypto assets on balance sheet. Can you speak to how
    this differs from how the OCC regulates custody?
        Mr. Gould. Sure. The SAB 121 guidance document that you
    referenced begs the question of, if a bank is subject to that
    guidance and, thus, it has to treat the assets it is custodying
    as if they were on its balance sheet, it begs the question of
    what is the appropriate regulatory capital treatment for those
    assets? And at least to my knowledge, the answer is unknown at
    this point. The Basel Committee has proposed regulatory capital
    treatment, which is highly punitive. But to my knowledge, I am
    not sure what banking agencies are telling banks that are
    attempting to custody digital assets and that are subject to
    that SAB 121 guidance, which, again, I think has a chilling
    effect on their willingness to custody those digital assets.
        Mr. Flood. And speaking of that potential risk to
    discourage banks from taking custody, what do you think the
    practical effects will be? If you were advising a bank board,
    if you were advising the CEO of a bank, what would you say to
    them about SAB 121?
        Mr. Gould. I think it would be a question of the bank's
    risk appetite as well as its available capital and whether or
    not they want to devote high levels of capital potentially to
    engage in an activity custody, which, at least traditionally,
    is not the most lucrative of activities.
        Mr. Flood. Mr. Gould, I appreciate the answer, and I fear
    that investors would not be very well-served by an environment
    where banks cannot custody digital assets. If banks can't
    provide these services, can you speak to who might fill the
    void? Is there a risk of American investors' crypto assets
    being custodied largely offshore? And that has been mentioned
    already today.
        Mr. Gould. I agree. I think there is that risk, and
    obviously, banks historically have custodied all manner of
    assets, whether they be electronically-stored assets or
    physical assets. So, banks have a long history of managing
    risks associated with the custodying assets.
        Mr. Flood. Thank you. Chairman Gensler claims that he wants
    investors' digital assets to be protected, but at the same
    time, the SEC has taken actions that have driven some of the
    safest, most highly-regulated institutions out of digital asset
    custody. That just doesn't make much sense. He is creating a
    situation where he is going to drive digital asset activities
    offshore and leave American investors less safe as a result.
        Next, I would like to touch on the SEC's latest custody
    rulemaking. First, I want to express the importance of keeping
    a pathway for custodians with a State charter to become a
    qualified custodian under the rule. I wrote and passed the
    Nebraska Financial Innovation Act, which allows Nebraska State-
    chartered banks to custody digital assets. Other States, like
    Wyoming and New York, have their own pathways to becoming a
    digital asset custodian. I believe it would be a grave mistake
    for the SEC to cut custodians who are already regulated at the
    State level entirely out of the market.
        I am also concerned that the SEC's updated custody rules
    effectively prohibit self-custody, and could block new entrants
    to the marketplace. And from what I have heard, if a startup
    wants to issue a new crypto token, registered investment
    advisors likely would have trouble custodying the asset
    themselves with the rule's new requirements. This could present
    a significant barrier to entry for new issuers because it might
    take some time for qualified custodians to build up the
    technical capability to custody their asset.
        So, Mr. Grewal, if an issuer of a new crypto token wants to
    work with a qualified custodian, but no qualified custodian has
    built up the technical ability to handle their token, what
    would that issuer be blocked out of? The market? Do you view
    that as a potential concern?
        Mr. Grewal. If there were no firm available because it
    lacked the technical capacity to serve that customer, that
    customer remains unserved.
        Mr. Flood. What should we expect? Mr. Grewal, the SEC's new
    custody rule expands its reach beyond funds or securities to
    assets, including all assets. Can you speak briefly to how this
    rule might affect the marketplace for things like paintings,
    baseball cards, or NFTs?
        Mr. Grewal. Artwork and baseball cards are a little outside
    of my day job, Congressman, but I certainly think the fact that
    the rule does extend to all assets, as you suggest, is
    something that needs to be noted and paid very careful
    attention to. That is a dramatic expansion of the very strict
    requirements that apply to qualified custodians, so I think
    that is something in which a lot of industries, not just
    crypto, are going to be very interested.
        Mr. Flood. Thank you, Mr. Grewal. Mr. Chairman, I yield
    back.
        Chairman Hill. Thank you, Mr. Flood. The gentleman from
    California, Mr. Sherman, who is also the ranking member of our
    Capital Markets Subcommittee, is recognized for 5 minutes.
        Mr. Sherman. The title of this hearing says, ``The
    Administration's Attack on the Digital Asset Ecosystem.'' I
    just wish it was true. The Administration is not doing all they
    can to try to keep this scourge out of our economic system. In
    fact, if there was a conspiracy against crypto in the
    Democratic Party, I would know about it. I think they would
    have invited me to it. Unfortunately, it doesn't exist.
        We are told that we need to serve investors, because we
    expect investors to provide the capital that drives our
    economy, because when we hear the word, ``investor,'' we think
    of people who are building apartment buildings so people can
    live there. People are building factories. Here, we are dealing
    with investors in a burglary tool factory or similar to
    investing in the North Korean economy.
        John Maynard Keynes, I think, coined the term, ``animal
    spirits,'' as a very valuable asset for a capitalist economy,
    which is the willingness of the people to take a risk, which is
    an essential element in building an economy. We, in Congress,
    have subsidized that to the tune of hundreds of billions of
    dollars a year. We do that through not only the capital gains
    allowance, but full forgiveness upon death of all capital gains
    on investments.
        Mr. Reiners, can you think of a reason why the incentives
    that we give to have people invest in housing and businesses
    should apply to those who are investing in a chance to
    undermine the dollar, or at least partially displace the dollar
    as the world's reserve currency?
        Mr. Reiners. No, I cannot.
        Mr. Sherman. Now, when you have a strong incumbent in a
    business area and you are trying to partially take market
    share, it is wise to name your company or your product after
    what you perceive to be its advantage. Jolt Cola has more
    caffeine; it says so right in the name. You want to Jolt?
    Cryptocurrency has done the same thing. Cryptocurrency
    literally means, ``hidden money.''
        Mr. Reiners, can you think of some people who would find
    hidden money to be better than unhidden money?
        Mr. Reiners. Of course, people who wanted to do bad things.
        Mr. Sherman. Evade tax laws would be the biggest market.
    Sam Bankman-Fried is right now hoping that he can evade
    bankruptcy laws and keep his assets out of the hands of his
    claimants, and the one thing I do want to say to my colleagues
    here is we can't trash Sam Bankman-Fried and then support his
    bill. He wasn't around here as a shorts fashion model. He was
    around Rayburn and Congress for one purpose, and that was to
    keep the SEC out of crypto. They want the patina of regulation,
    but they don't want the most-effective business regulator.
        Mr. Reiners, a currency is supposed to be a store of value,
    and a medium of exchange, and a measuring stick of value. Does
    the dollar do that?
        Mr. Reiners. Yes, very well, and it has for a long time.
        Mr. Sherman. So, aside from the fact that it is hard to
    hide from the IRS, and sanctions evaders, and those enforcing
    our human trafficking laws, and those enforcing our laws
    against drug dealing, can you think of anything that crypto
    adds to people doing honest transactions in conformity with
    U.S. law?
        Mr. Reiners. I cannot.
        Mr. Sherman. And it is talked about as if crypto is a
    better payment system, but as I understand it, if I want to
    transfer crypto to somebody, and they want to buy a sandwich
    with it, I have to take my dollars, pay a fee, and convert it
    to crypto. They then get the crypto, they have to pay a fee,
    convert it to dollars, and go down to McDonald's and buy a
    hamburger. Is that an efficient payment system?
        Mr. Reiners. No, not at all. And I would point out, the
    fees in the crypto economy are quite high when you compare them
    to securities markets.
        Mr. Sherman. Thank you.
        Chairman Hill. The gentleman yields back. Votes have been
    called on the House Floor, and we will continue our questioning
    until we have about 200 votes left. And we will now turn to Mr.
    Timmons for 5 minutes.
        Mr. Timmons. Thank you, Mr. Chairman. I want to start off
    my time by saying that I look forward to working with all of my
    colleagues on the subcommittee as we continue to shape
    foundational legislation for the digital asset ecosystem. The
    digital asset space has garnered a great deal of headlines
    recently, and I think the call for legislative action is
    building serious momentum, even more so. Recent aggressive
    actions by regulators show that Congress needs to enact
    legislation tailored to the digital asset ecosystem that
    appropriately addresses the risks, while ensuring that the
    clear benefits of this new technology are not held back.
    Republicans on this committee have long advocated for increased
    collaboration with regulators to produce legislation that
    addresses the risk and benefits of the digital asset ecosystem.
        The SEC seems to want to classify all digital assets,
    besides bitcoin, as securities. But I am worried that this
    neglects the actual use cases for this technology and risks
    chilling development and innovation before the value is ever
    realized.
        Mr. Grewal, can you talk about some of the potential use
    cases for this technology outside of the finance space, as that
    is where the greatest promise seems to lie, in my opinion?
        Mr. Grewal. Thank you very much, Congressman. You are right
    to point out that within the financial space, of course,
    payments are important, and I would also call out remittances.
    Workers here in the United States are using crypto to send
    money home as we speak today, and are doing so faster, cheaper,
    and more securely than ever before.
        Outside of financial use cases, there are interesting and
    important new cases emerging every day. I will just highlight a
    couple of them to answer your question directly. When it comes
    to carbon credits and other forms of environmental protection,
    blockchain-based technologies are able to help track those
    credits and make sure that they properly account for
    environmental remediation. There are also digital health
    records that are emerging that are blockchain-based and offer
    important value to patients who want to be able to have true
    data portability, while protecting their personal information.
    Decentralized identification offers another important non-
    financial use case that we think facilitates attribution of
    activity online without the collection of highly-intrusive,
    voluminous, personally identifiable information.
        Mr. Timmons. Would any of those potential uses you just
    laid out ever be realized if we regulate every token as a
    security?
        Mr. Grewal. It is not likely, Congressman. The fact of the
    matter is that our Federal securities laws impose significant
    burdens on issuers, and in certain cases, those burdens are
    appropriate where the tokens are, in fact, securities. However,
    many, many tokens are not securities. They offer practical
    utility in certain cases. They may operate as commodities in
    other cases. In any event, the burdens of the Federal
    securities laws yield very little benefit, and, as a result,
    net-net disincentivize productive economic activity.
        Mr. Timmons. Sure. Thank you. Professor Evans, same two
    questions to you. Could you talk about potential uses that
    maybe he didn't touch on, and what would happen if we regulated
    every token as a security?
        Ms. Evans. Thank you, Congressman, for your question. I am
    very excited actually about use cases regarding identity. The
    idea that you could go to a store, if someone has to be 21 to
    buy a product, even as a matter of personal security as a woman
    where I live, you just need to know whether I am over 21 or
    under 21, and so uses of that nature are very intriguing. There
    are other use cases beyond NFTs for collectibles as well that
    go into healthcare and all sorts of other intriguing issues.
    Final point, I think of supply chain issues as well. Not
    everything will use cryptographically-secured assets, but
    certainly the underlying technology for distributed ledgers.
        Mr. Timmons. Thank you for that. Crypto is a trillion-
    dollar industry by market cap, and other regulators may want to
    move quickly to manage risk. It is imperative that this is done
    in a thoughtful and reasonable manner. The January joint
    statement by the banking regulators highlighting liquidity
    risks associated with certain sources of funding from digital
    asset entities, and last month's final rule by the Federal
    Reserve essentially prohibiting State member banks from holding
    digital assets as principal and discouraging Federal banks from
    engaging with the industry--both of those things are very
    concerning to me. I don't find them to be thoughtful or
    reasonable.
        Mr. Gould, with few banks willing to provide banking
    services to companies in the digital asset space, how does the
    example of Silvergate demonstrate the risk of
    overconcentration?
        Mr. Gould. I think, in part, the agency guidance runs the
    risk of being self-fulfilling, in that they are warning about
    concentration risk, and, of course, that is having the
    understandable impact of making banks even more hesitant to
    bank crypto entities or crypto customers. And you can see the
    continuing kind of shrinking of the number of banks that are
    willing to bank those customers and, thus, further
    concentrating the risk in the very few remaining banks that
    will bank them.
        Mr. Timmons. Thank you for that. Thank you, Mr. Chairman. I
    yield back.
        Chairman Hill. The gentleman yields back. Mrs. Houchin is
    now recognized for 5 minutes.
        Mrs. Houchin. Thank you, Chairman Hill and Ranking Member
    Lynch, for holding this hearing, and thank you to the witnesses
    for your testimony, for speaking with us today.
        Crypto digital assets and other areas of financial
    technology have shown immense potential and opportunity over
    the last several years, especially as the total market
    capitalization for digital assets has risen above $1 trillion.
    And technologies, like blockchain and stablecoins, continue to
    change the ways that Americans interact with the financial
    sector. Despite this, you have all highlighted that companies
    in the digital assets industry face great difficulty when
    trying to do business and grow here in America from a lack of
    regulatory clarity from our Federal agencies, to a restrictive
    approach from the Administration. Threats to the industry may
    push innovators elsewhere, causing the U.S. to lose its leading
    role in digital assets.
        Mr. Belshe, in your testimony, you highlighted the need for
    regulators to move quickly, alongside innovative businesses.
    What would be the impact on U.S. competitiveness within the
    global economy if we continue at the current pace?
        Mr. Belshe. I think we are currently on track to move this
    industry mostly out of the United States. Now, some might like
    that in this room. I think those of us on the panel are mostly
    not that way. Look, Americans are seeking out these assets. We
    have heard statistics: 20 percent of Americans are interested
    in touching digital assets today. The use cases are many, and
    they keep coming quickly, so there is a whole technology sector
    here which is at risk. And someone had asked the question, what
    if we just turned it off today, what impact would it have?
    Let's take Paul Krugman's quote from back in, I don't know,
    1998, when he said, ``The entire internet is going to have no
    more value than the fax machine.'' And what if we had taken his
    advice and just turned it off back then?
        Mrs. Houchin. Yes.
        Mr. Belshe. The use cases that we just heard a few moments
    ago, there are many, and there are many that haven't even
    arisen yet. So it will be, I think, devastating to the American
    businesses.
        Mrs. Houchin. Thank you. We have heard some testimony today
    suggesting that a regulatory structure is, ``not a race.'' But
    isn't there great risk to American leadership and
    competitiveness on the world stage and to the stability and
    preeminence of the U.S. dollar if we fail to establish clear
    guidance and rules for digital asset innovators, while other
    countries appear to be moving full speed ahead?
        Mr. Belshe?
        Mr. Belshe. That is what is happening, and then I think it
    gets a little bit worse because this does overlap with money
    and finance. So, it is not just a business issue. It is
    actually a political power and dominance issue. China has a
    central bank digital currency (CBDC). It is not perfect, but
    they are exploring it. They are exporting it all through the
    Belt and Road Initiative, and a few years from now, they will
    have a large economy, which they control. So, the U.S. has a
    choice as to whether it wants to participate, and we need to
    make that decision now.
        Mrs. Houchin. Is it also fair to say that the lack of
    action on how to define and regulate crypto over the last few
    years under this Administration, and the movement of the crypto
    industry overseas to unregulated places like the Cayman
    Islands, might have been avoided with a program of oversight
    like you are seeking?
        Mr. Belshe. For sure. We have flip-flopped even without
    changing the legislation, and I think everybody here should be
    concerned about that. The OCC opened for business for digital
    assets just a couple of years ago and then slammed the door
    shut. The laws didn't change, the regulations didn't change,
    and yet the Administration changed.
        Mrs. Houchin. Yes.
        Mr. Belshe. This is a problem.
        Mrs. Houchin. Mr. Grewal, several countries and
    international organizations have begun to introduce and
    implement regulatory frameworks for the digital asset
    ecosystem, including the European Union, which has worked
    tirelessly in the markets in crypto assets regulation. What is
    the impact that efforts in the U.K., Japan, China, and the EU
    will have on the regulatory environment for digital assets in
    the U.S., and what has prevented the United States from leading
    the charge for a digital asset regulation globally?
        Mr. Grewal. Thank you for the question, Congresswoman.
    There is no question there is tremendous creativity and
    progress being made in many markets all over the world. You
    have listed several of them. And I want to be very clear that
    progress and creativity is not simply about allowing the crypto
    industry to do whatever it wants. These are serious Democratic
    jurisdictions that are imposing strict limits on what these
    crypto firms can do, like ours, and imposing strict
    requirements on the Know Your Customer/Anti-Money Laundering
    (KYC/AML) rules. All of the security issues are important, so
    this is not a race to the bottom, Congresswoman. This is very
    much a race to the top, and right now, we are losing in this
    country.
        Mrs. Houchin. I couldn't agree more. I thank you so much.
    Digital assets and crypto, in my view, is the space race of our
    generation. We have to figure this out, and not that we are
    doing it too quickly, we are going to do it expeditiously, but
    we cannot do it. In order to bolster America's global
    leadership, ensure national security, and support innovation in
    our financial markets, it is vital to cultivate an environment
    that allows these technologies to grow. Thank you, Mr.
    Chairman. I yield back.
        Chairman Hill. The gentlewoman yields back. Mr. Donalds of
    Florida is recognized for 5 minutes.
        Mr. Donalds. Thank you, Mr. Chairman. And witnesses, thanks
    for being here.
        Mr. Chairman, as some of my colleagues were going through
    questioning, I was reading through testimony, and actually
    reading the President's budget right now, which is comical in a
    lot of areas, and it brings up an interesting question for me.
    We here in Washington, D.C., have a habit of creating program
    after program after program and spending hundreds of millions
    and billions of dollars. We pat ourselves on the back. We say
    these programs work. We have no idea of efficacy. We borrow
    trillions of dollars more to continue the spending, and we just
    rinse and repeat the programs, and then add to them, conflating
    that with, we have a burgeoning industry on our hands.
        And the first step is to figure out who is going to
    regulate it, how quickly, without asking the first fundamental
    question of, does the SEC or the CFTC even have the technical
    capacity or know-how to regulate the industry that they both
    are clamoring to get their hands on, especially Chair Gensler?
    He is ready, this guy is, he is frothing at the mouth, Mr.
    Chairman.
        So I am confounded by this, because we have been through
    regulatory schemes in the United States before. The most recent
    large-scale regulatory scheme came after the financial
    collapse. We all know it as Dodd-Frank. Dodd-Frank has been an
    albatross across community banking in these United States. And
    yet, in the President's own budget, he has billions of dollars
    more for programs for small business owners through the Small
    Business Administration (SBA), more program dollars through the
    minority business outlet fund, whatever we want to call it,
    when the real remedy is actually a more streamlined regulatory
    environment for the banking industry so community banks can
    flourish in these United States. And businesses, whether they
    are owned by Black people, Hispanic people, or White people,
    whether rich, middle-income, or poor, all have access to
    capital to grow their businesses without Washington having to
    appropriate dollars into these funky programs that we know are
    average at best, which brings us back to digital assets.
        And this is really a question for all of the witnesses: Do
    the agencies that currently exist have the technical capacity
    to adequately regulate a digital assets space? And then the
    second question is, if they don't, wouldn't it be better for
    Congress to do something novel and actually create a regulatory
    sandbox so that the industry can actually prepare the
    regulatory environment since they have the technical capacity
    way past anybody over at the SEC, especially considering that
    from what I hear, Chair Gensler works everybody like a dog over
    there?
        Mr. Belshe, you can go first, and we can go down the list.
        Mr. Belshe. On the technical capacity, I think, might not
    be the best question, but the principle-based approach will
    give some flexibility in how we move forward. I do agree with
    you, if you hand it to the existing regulators, it will have a
    tremendous gravity to end up with the same market structures
    that we have today. The same market structures we have today
    aren't perfect. There are a lot of inefficiencies. The bankers
    participating in those systems are making more money today than
    they have ever made before. We can do a lot better, so you have
    to foster the innovation to get a better market structure. This
    isn't to avoid market structure. It is to recognize that the
    technology in front of us today can settle transactions in real
    time all the time, not having to go through four different
    middlemen.
        Mr. Donalds. Ms. Evans?
        Ms. Evans. Thank you, Congressman. This is kind of a,
    ``both-and,'' answer for me because on the one hand, I have
    great respect for Hester Peirce, for example, at the SEC. I
    think she has been very thoughtful in how she approaches it.
    And I think of Commissioner Kristin Johnson from the CFTC, who
    has also been very thoughtful for a long time. But to your
    point, technical capacity in this space is critically
    important. As a professor, obviously, I am always going to lean
    into education, but it has to be education to have true subject
    matter experts. Whether they agree or disagree, they have to
    understand the fundamental underlying technology, or it is
    difficult, if not impossible, to regulate efficiently and
    effectively.
        Mr. Donalds. Quick follow-up for you, Ms. Evans, do the
    agencies have that educational know-how for this fledgling
    industry? Yes or no?
        Ms. Evans. It is difficult for me to say without knowing
    the inner workings. I have not seen much from the perspective
    of leaning into the language of it, but I think a lot of
    education can go around in all spaces on the legislative and
    the regulatory side.
        Mr. Donalds. Ms. Evans, I would postulate that answer as,
    ``no.'' And that is no disrespect to your answer, but
    considering how fresh this technology is, I doubt people who
    have been in the agency space for 5 to 7 years have that
    ability. I know I am out of time, and I apologize. I really
    wanted to hear your answer, Mr. Reiners. I really wanted to
    hear that, but you know what? You could submit it to us in
    writing, and I would love to see it.
        Thank you, Mr. Chairman.
        Chairman Hill. Thank you, Mr. Donalds.
        Mr. Nunn is now recognized for 5 minutes.
        Mr. Nunn. Thank you very much, Mr. Chairman, and thank you
    for letting me join in on today's hearing on the
    Administration's attack on the digital asset ecosystem. As we
    have heard from our colleagues today, I think we are very
    excited about the potential for this technology, and we want to
    make sure that if we are not defining the rules of the road,
    someone else in the world will, and we need to be forward-
    leaning on this.
        Unfortunately, through many of the last couple of years,
    the Administration's regulatory enforcement approach has failed
    to provide adequate protections for our digital asset market.
    Blockchain technologies and digital assets, as we noted, are
    here to stay in the United States. Personally, I have served as
    a military officer for nearly 2 decades, particularly in the
    intelligence area, operating against Russia and China. After 9/
    11, I deployed multiple times and served thousands of hours
    working in counterintelligence, specifically serving as the
    Director of Cybersecurity at the National Security Council
    (NSC).
        And that is why I am introducing the Financial Technologies
    Protection Act of 2023, which will establish an independent
    financial technology working group, as my colleague
    highlighted, to combat terrorism and illicit financing through
    use of these financial systems, because not only can digital
    assets be used for good, they are clearly being used for ill.
    This will be chaired by the Secretary of the Treasury, and
    include the Under Secretary for Terrorism and Financial
    Intelligence, and senior-level representatives from the
    Department of Justice, the United States Secret Service, the
    Financial Crimes Enforcement Network (FinCEN), and the Federal
    Bureau of Investigation, among others. Additionally, we include
    five appointed by the Under Secretary for Terrorism and
    Financial Intelligence to represent financial technology
    companies, financial institutions, and organize and engage in
    this research, building both the public and private enterprise
    to be able to address these threats.
        This working group will conduct independent research on
    terrorism, their illicit use of new financial technologies,
    while also developing legislative and regulatory proposals to
    improve anti-money laundering, counterterrorist, and other
    illicit efforts in this space. I believe now, more than ever,
    we have witnessed over the last year with Russia's unprovoked
    attack on Ukraine that our constituents must know their
    Representatives are doing everything they can here in
    Washington. We must protect families, not just in my home State
    of Iowa, but across the United States, and make this space a
    successful area for those who want to do well.
        Mr. Grewal, I will start with you, as the chief legal
    officer at Coinbase. We hear a lot about the risk that crypto
    might move offshore, given the lack of regulatory clarity and
    the approach being taken by our current financial regulators
    seeming to restrain this industry. Could you explain the
    downsides associated with a crypto company that were to move
    offshore and the threat it could have from that terrorist
    element?
        Mr. Grewal. Thank you, Congressman. As I have indicated
    earlier, we are not only an American company incorporated here
    in the United States, we are a proud American company. And we
    very much intend to continue to invest in the United States and
    in this market, even as we pursue other opportunities around
    the world. The fact of the matter is that as regulatory clarity
    emerges in jurisdictions other than the United States, it
    becomes more and more attracted to invest capital, to place
    jobs, and to develop technologies outside the United States for
    the simple fact that we know what the rules are, we know where
    the boundary is, and we know where we have to go to avoid even
    getting close to that boundary.
        And there is a material impact. There will be a material
    impact to the security of the United States if those
    technologies are developed outside the U.S. for one simple
    reason, Congressman. Our sanctions programs, which you alluded
    to in your comments, are at the core of our ability to prevent
    bad actors from gaining access to funds which facilitate bad
    acts. You can't have an effective sanctions program based here
    in the United States if the technologies that would be subject
    to those sanctions programs are being developed elsewhere.
        Mr. Nunn. Very good. Mr. Belshe, I would like to ask you,
    we just talked about the left and right parameters of this,
    being able to control not only the sanctions aspect of it, but
    the additional elements of having an uncontrolled currency that
    the United States would have a very hard time getting its arms
    around if we are not part of the process in developing a
    digital asset, which the United States has control over. Could
    you talk to us about the national security implications?
        Mr. Belshe. Sure. Look, we could ban cryptocurrencies and
    digital assets in the United States, but it won't prevent them
    from being used outside the United States.
        Mr. Nunn. Right.
        Mr. Belshe. So, we either figure out how to bring it in and
    have the best chance of understanding it, helping lead the
    world in terms of the rules around how you manage it, or we
    delegate that to someone else. The choice is ours. I think we
    want to manage that rather than give it to others.
        Mr. Nunn. Thank you very much. I think that we have a
    responsibility to help define this battlespace when it is
    favorable to the United States, when it helps grow our economy,
    that helps us innovate and be a leader in this space, and not
    be on our back heels, being responded to by those who would be
    adversaries towards us or those who would use it for a
    nefarious process. I really appreciate your testimony today and
    the great wealth of knowledge that you have offered us.
        Mr. Chairman, I yield back.
        Chairman Hill. The gentleman yields back. I would like to
    thank our witnesses for an outstanding panel, and I appreciate
    the participation of our Members.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        This hearing is adjourned.
        [Whereupon, at 4:22 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 March 9, 2023

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