[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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