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


                     THE FUTURE OF DIGITAL ASSETS:
                    IDENTIFYING THE REGULATORY GAPS
                 IN THE DIGITAL ASSET MARKET STRUCTURE

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

                                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

                               __________

                             APRIL 27, 2023

                               __________

       Printed for the use of the Committee on Financial Services      
    
                           Serial No. 118-17
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                            

                              __________

                                
                    U.S. GOVERNMENT PUBLISHING OFFICE                    
52-395 PDF                  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                BILL FOSTER, Illinois
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               RITCHIE TORRES, New York
WILLIAM TIMMONS, South Carolina      BRAD SHERMAN, California
BYRON DONALDS, Florida               AL GREEN, Texas
MIKE FLOOD, Nebraska                 SEAN CASTEN, Illinois
ERIN HOUCHIN, Indiana                WILEY NICKEL, North Carolina
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 27, 2023...............................................     1
Appendix:
    April 27, 2023...............................................    37

                               WITNESSES
                        Thursday, April 27, 2023

Allen, Hillary J., Professor of Law, American University 
  Washington College of Law......................................    12
Belcher, Marta, President and Chair, Filecoin Foundation.........     5
Gorfine, Daniel S., Founder & CEO, Gattaca Horizons LLC; Adjunct 
  Professor of Law, Georgetown University Law Center; and former 
  Chief Innovation Officer and Director, LabCFTC, U.S. Commodity 
  Futures Trading Commission (CFTC)..............................     6
Rivera, H. Joshua, General Counsel, Blockchain Capital...........     8
Zweihorn, Zachary J., Partner, Davis Polk & Wardwell LLP.........    10

                                APPENDIX

Prepared statements:
    Allen, Hillary J.............................................    38
    Belcher, Marta...............................................    55
    Gorfine, Daniel S............................................    58
    Rivera, H. Joshua............................................    68
    Zweihorn, Zachary J..........................................    72

              Additional Material Submitted for the Record

Hill, Hon. French:
    Written statement of the Crypto Council for Innovation.......    83
Waters, Hon. Maxine:
    Better Markets Fact Sheet: Crypto Regulation.................    87
    Written statement of the Credit Union National Association 
      (CUNA).....................................................    95
    Written statement of the National Association of Federally-
      Insured Credit Unions (NAFCU)..............................    99
    Written statement of Public Citizen..........................   100
    Written responses to questions for the record from Marta 
      Belcher and Hillary Allen..................................   120

 
                     THE FUTURE OF DIGITAL ASSETS:
                       IDENTIFYING THE REGULATORY
                       GAPS IN THE DIGITAL ASSET
                            MARKET STRUCTURE

                              ----------                              


                        Thursday, April 27, 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 2:02 p.m., in 
room 2128, Rayburn House Office Building, Hon. French Hill 
[chairman of the subcommittee] presiding.
    Members present: Representatives Hill, Davidson, Rose, 
Timmons, Donalds, Flood, Houchin; Lynch, Foster, Torres, 
Sherman, Casten, and Nickel.
    Ex officio present: Representatives McHenry and Waters.
    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.
    Today's hearing is entitled, ``The Future of Digital 
Assets: Identifying the Regulatory Gaps in the Digital Asset 
Market Structure.''
    I now recognize myself for 4 minutes for an opening 
statement.
    Thank you for joining us at today's hearing. We have an 
unique opportunity as members of this subcommittee to be on the 
cutting edge of crafting an effective, functional regulatory 
system for the digital assets ecosystem.
    At this very moment, Chair Johnson and other members of the 
House Agriculture Committee are also holding a similar hearing 
discussing this same issue. That means that more than 40 
Members of the U.S. House have an opportunity to work together 
to ensure that our regulatory framework embodies the key 
principles of the same activity, with the same risk, and the 
same regulation.
    Moreover, we will be holding a joint hearing next month 
with the House Agriculture Committee to explore these issues 
together. Two committees working hand in hand on a joint 
legislative product like this is unprecedented, and I believe 
it vastly increases our chances of getting it right.
    Why is legislation needed? The U.S. Securities and Exchange 
Commission (SEC) and the Commodity Futures Trading Commission 
(CFTC) have created an impossible situation where the same 
firms are subject to competing enforcement actions by the two 
different agencies. Asset legislation and our regulators are 
only pushing entrepreneurs, developers, and job creators 
offshore and out of the U.S. system.
    We have a responsibility to protect our constituents. There 
are glaring gaps in consumer and investor protections, and 
regulation by enforcement does nothing to fill that gap. And 
contrary to arguments by some that the problem is simply 
nonconformity or noncompliance, it is much more complicated 
than that. Also, money transmission licenses--as one of today's 
witnesses, Mr. Gorfine, points out--are insufficient in scope.
    So today, we are going to dive into the current rules that 
govern our securities and commodity markets and assess how we 
can address these potential gaps. First, we will examine the 
current test to determine if a digital asset is offered as a 
part of an investment contract and therefore a security. 
Currently, the SEC and the CFTC disagree on the classification 
of many digital assets, which is unworkable for entrepreneurs 
and consumers. The agencies need direction from Congress.
    Second, the current disclosure regime does not produce 
information that a reasonable consumer would need to know 
before considering the purchase of a digital asset. The 
information that is relevant to the purchaser of a digital 
asset is different from the information that is relevant when 
an investor considers purchasing a stock of a public company.
    Third, we will explore whether digital asset trading 
platforms perfectly fit under existing laws and regulations and 
the rules applicable to digital asset trading platforms.
    We have a diverse, knowledgeable panel before us today. 
Their experiences will help us understand how we can fill these 
gaps and build a better, more-functioning framework. I implore 
members of this subcommittee to be thoughtful and open-minded 
with their questions as we seek to take a deep dive into the 
current regulatory requirements.
    I look forward to working together on both sides of the 
aisle to craft a digital asset market structure framework and 
to lead in the right way.
    I now recognize the ranking member of the subcommittee, Mr. 
Lynch, for a 4-minute opening statement.
    Mr. Lynch. Thank you very much, Mr. Chairman.
    And today is Take Your Child to Work Day, so some of our 
staff--
    Chairman Hill. Did you bring Bill Foster?
    Mr. Lynch. No. He is much younger than my son. My dad was 
an iron worker, so he did not take me to work, thankfully.
    But anyway, I want to thank you, Mr. Chairman, for holding 
this hearing. And I thank our witnesses for your willingness to 
share your expertise and to help this committee with its work.
    As we consider the future of digital assets, I believe that 
this is an important opportunity to really understand the 
intended and unintended impacts on our traditional financial 
system that might come about as our collective efforts combine 
to change the regulatory landscape for some of these digital 
products.
    This hearing focuses on possible gaps in regulation and the 
need for legislation to fill those gaps, which is a fair and 
legitimate topic. I do have some concerns, however, that we may 
be feeding into a narrative that has been shaped by the digital 
assets industry itself, and it will turn into a tax on the 
regulatory structure and those individuals leading the 
regulatory institutions.
    Digital asset companies often claim that their technology 
is incompatible with existing laws and regulations, when in 
reality, it may be simply that their business models are 
incompatible with existing law.
    Over the last of couple of years, as the digital asset 
space has matured, there have been ongoing questions about the 
ways in which digital assets should be regulated. The industry 
continues to claim that it lacks regulatory clarity and that 
its products are so innovative that they require their own 
regulatory regime.
    The financial services industry has innovated for decades 
and will likely continue to do so. The U.S. has a comprehensive 
and long-standing framework of securities law and rules 
designed to protect investors, promote market integrity, and 
facilitate capital formation.
    As I have stated before, I align with SEC Chair Gensler's 
assertion that most crypto assets are indeed securities and 
should be regulated as such. Chair Gensler has called for 
cryptocurrency intermediaries to register with the SEC, warning 
that they may be subject to enforcement action if they do not 
do so. My hunch is that companies do not do so because they 
know that they would not meet the standards required, and that 
these rules are not compatible with their individual business 
models.
    Securities laws exist for a reason. They prevent many of 
the issues we have seen from failed crypto companies, and they 
cover a multitude of products and services. The SEC has 
important requirements to protect investors in markets, 
including the segregation of customer funds and voiding 
commingling and capital requirements, customer protection 
rules, Know Your Customer (KYC) supervision and compliance, and 
transparency and disclosure.
    Rather than complying with existing rules, various crypto 
firms have engaged in legal battles against the SEC, and often 
argue that they lack guidance on their products. Additional 
criticism of the SEC appears to conflict. On one hand, the 
industry and some of my Republican colleagues argue that the 
SEC has not provided adequate guidance, but, on the other hand, 
they complain that the SEC pursues too many rulemakings and 
enforcement actions designed to remove that lack of clarity.
    As we consider legislation, it is important to note that 
neither the Administration, investors, the SEC, or financial 
regulators have called for any. It seems unnecessary to 
reinvent the rules when we already have a regulatory regime 
that is indeed effective. Our financial system is the envy of 
the world because of investor confidence, which comes from 
these rules. And we could easily become the envy of the world 
in the digital asset space if we simply had digital asset 
companies comply with existing laws.
    So, I look forward to the debate and discussion and to 
learning more from our experts. And Mr. Chairman, I yield back.
    Chairman Hill. I thank the ranking member.
    And I now recognize the Chair of the full Financial 
Services Committee, Mr. McHenry of North Carolina, for 1 
minute.
    Chairman McHenry. Thank you, Mr. Chairman. I want to thank 
you for how you have conducted this subcommittee and the 
collegial efforts you are trying to lead to build consensus 
here.
    Digital assets are here to stay. This ecosystem has been 
denied legal clarity for too long, and both market participants 
and consumers are worse off because of it. We have a market 
that lacks clarity, and we have a duty to create a regulatory 
environment that allows responsible innovation and responsible 
consumer protection to sit side by side with appropriate legal 
clarity. We need that innovation here in the United States.
    If Congress doesn't act, the rest of the world will. The 
Europeans are ahead of us in a market structure bill. The U.K. 
regime is ahead of us. They have provided legal clarity, while 
we have not. We need to do our work, and it starts here in this 
subcommittee with these members.
    And I want to thank this panel for their expertise in 
bringing forward ideas on how to protect consumers and ensure 
that innovation happens here.
    I yield back.
    Chairman Hill. Thank you, Chairman McHenry.
    And now, it is my pleasure to call on the ranking member of 
the Full Committee, Ms. Waters of California, for 1 minute.
    Ms. Waters. Thank you very much.
    Last week, I questioned SEC Chair Gensler about whether the 
agency has the authorities it needs to bring crypto companies 
and exchanges into compliance with our securities laws, which 
have served investors and the markets for the past 90 years. 
His response was unequivocally, yes, and the SEC's success in 
the courts proves his point.
    Despite what those across the aisle may say, we do not need 
to create an entirely new and special framework for crypto; we 
already have one. Rather, crypto firms, like other tech 
companies before them, must recognize that they are not 
exceptional. They need to comply with the laws of the land. To 
the extent that there are actual gaps in our laws, such as 
limitations on the SEC's reach overseas, we should focus on 
those and not on creating more complexity through a whole new 
regulatory framework.
    Later on, I hope I will be able to ask some questions. I 
yield back. And thank you very much.
    Chairman Hill. I thank the ranking member.
    Today, we welcome the testimony of a great panel of 
witnesses. First, Ms. Marta Belcher is the president and chair 
of the Filecoin Foundation, as well as the general counsel and 
head of policy for Protocol Labs.
    Second, Mr. Daniel Gorfine is an adjunct professor of law 
at Georgetown Law School, as well as the founder and CEO of 
Gattaca Horizons LLC. Previously, he was the CFTC's first Chief 
Innovation Officer and the Director of LabCFTC.
    Third, Mr. Joshua Rivera serves as general counsel of 
Blockchain Capital, a leading venture capital firm in the 
industry.
    Fourth, Mr. Zachary Zweihorn is a partner at Davis Polk & 
Wardwell LLP, where he specializes in financial institutions, 
fintech, and digital assets.
    And finally, Ms. Hillary Allen is a professor of law and 
associate dean for scholarship at American University 
Washington College of Law, where she teaches courses on 
banking, securities regulation, and business associations.
    We thank each of you for taking the time to be with us 
today. 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 our 
record.
    Ms. Belcher, we will start with you. You are now recognized 
for 5 minutes.

   STATEMENT OF MARTA BELCHER, PRESIDENT AND CHAIR, FILECOIN 
                           FOUNDATION

    Ms. Belcher. Thank you, Subcommittee Chairman Hill, 
Subcommittee Ranking Member Lynch, Full Committee Chairman 
McHenry, and Full Committee Ranking Member Waters for inviting 
me to testify today.
    I am Marta Belcher, president and chair of Filecoin 
Foundation, one of many organizations working on a 
cryptocurrency called Filecoin.
    While this hearing is being held by the Committee on 
Financial Services, I want to emphasize today that 
cryptocurrency is about so much more than finance. 
Cryptocurrency is already creating a better internet, providing 
an alternative to Big Tech that puts people in control of their 
own data. This technology is also preserving some of the 
world's most important information, including government data, 
evidence of human rights abuses, and critical scientific 
datasets. Today, I would like to explain how.
    Today's internet is centralized. The vast majority of data 
is stored by three companies: Amazon, Microsoft, and Google. 
This creates single points of failure. When these companies 
suffer blackouts, large swaths of the web go down for hours. 
This also means that we live our lives through a handful of 
corporations. We have no choice but to trust them with our 
data, and they have unilateral control over what we can do and 
say online.
    Cryptocurrency provides an alternative. Cryptocurrency 
creates the ability to program money, to send value across the 
globe instantly and automatically with no intermediary when a 
condition is met. For example, you can write a computer program 
that says for every second of a song I play, automatically 
transfer a millionth of a cent from me to the songwriter. 
Filecoin uses programmable money to create a decentralized file 
storage network.
    It is like Airbnb for file storage. You can rent out your 
digital storage space to people who pay you to store their 
files or pieces of their files. A computer program regularly 
checks that you are still storing the files, and you are 
automatically paid in Filecoin. Using the Filecoin token 
enables the network to operate in a way that is peer-to-peer, 
instant, automatic, and trustless.
    Filecoin is a foundational technology for the next 
generation of the Web. Filecoin puts users in control of their 
data, finally giving them an alternative to Big Tech. It also 
allows users to store many copies of their files so that data 
remains accessible even if some devices fail. There are 
thousands of individuals and small businesses serving as 
Filecoin storage providers, some of them in the audience today. 
They are contributing more than 15 billion gigabytes of 
capacity to the Filecoin network, which is enough to store all 
written works since the beginning of recorded history 10 times 
over. That storage space is being used to preserve humanity's 
most-important information.
    For example, Filecoin is storing copies of open datasets 
created by NASA, NIH, and the National Weather Service. 
Filecoin is also important for government documents because it 
can solve the problem of link rot, the fact that over time, 
many links and important documents like congressional records 
no longer work. Harvard's Library Innovation Lab is exploring 
how these technologies can ensure that links work permanently.
    Human rights defenders leverage Filecoin to help collect, 
verify, and preserve data. For example, Starling Lab, a project 
of Stanford and USC, recently submitted evidence of Russian war 
crimes in Ukraine. They submitted that to the International 
Criminal Court, and used Filecoin to both preserve this digital 
evidence and also verify that it was authentic and had not been 
tampered with.
    Filecoin also stores important scientific generation like 
genomic, satellite, and climate datasets from institutions like 
the ATLAS Experiment at CERN. Filecoin Foundation is also 
working with Lockheed Martin on a satellite launch to 
demonstrate how the technology underlying Filecoin can speed up 
communications in space.
    As these examples show, cryptocurrency is about so much 
more than financial services, and regulating cryptocurrencies 
like financial services could undermine these valuable use 
cases. Regulations that insert intermediaries and add friction 
are incompatible with these technologies.
    It is critical that any cryptocurrency regulation protects 
users' ability to transact directly with each other. It is 
critical to recognize the open source decentralized nature of 
this technology and to acknowledge our country's free speech 
protections for writing computer code. And it is critical to 
provide clarity, safe harbors, and compliance on-ramps so that 
innovators can continue to operate in the United States.
    In drafting cryptocurrency regulation, I urge the committee 
to consider the many valuable use cases of cryptocurrency 
beyond financial services to ensure this innovation can 
continue to thrive. I look forward to your questions. Thank 
you.
    [The prepared statement of Ms. Belcher can be found on page 
55 of the appendix.]
    Chairman Hill. Thank you.
    Mr. Gorfine, you are now recognized for 5 minutes.

STATEMENT OF DANIEL S. GORFINE, FOUNDER & CEO, GATTACA HORIZONS 
   LLC; ADJUNCT PROFESSOR OF LAW, GEORGETOWN UNIVERSITY LAW 
   CENTER; AND FORMER CHIEF INNOVATION OFFICER AND DIRECTOR, 
   LABCFTC, U.S. COMMODITY FUTURES TRADING COMMISSION (CFTC)

    Mr. Gorfine. Thank you, Subcommittee Chairman Hill and 
Ranking Member Lynch, Full Committee Chairman McHenry and 
Ranking Member Waters, and members of the subcommittee for the 
opportunity to testify before you today.
    My name is Daniel Gorfine. I am the founder and CEO of 
Gattaca Horizons, an adjunct professor at Georgetown Law, and 
the former Chief Innovation Officer at the CFTC. The testimony 
presented here today reflects my own views.
    The topic of today's discussion has featured prominently 
both during and after my time in government. Nevertheless, the 
fundamental regulatory landscape for digital assets in the 
U.S., especially at the Federal level, has not changed 
significantly since the inception of Bitcoin in 2009.
    The current landscape remains one where spot or cash 
digital commodity trading activity, which means the buying and 
selling of an asset for immediate delivery, is largely 
regulated at the State level. Notably, under the status quo, 
spot market digital commodity exchanges are not subject to 
comprehensive Federal market oversight and supervision. This 
would require new and explicit authorization from Congress.
    But let me step back and unpack the current landscape a bit 
further. The Financial Crimes Enforcement Network (FinCEN) 
determined in 2013 that digital asset exchanges are money 
services businesses. Following FinCEN, many States have 
required exchanges to secure a money transmission license 
pursuant to each State's respective laws. Some States have gone 
further and created tailored crypto regulatory frameworks, 
including, for example, the New York BitLicense.
    State frameworks do impose meaningful requirements on 
intermediaries. These frameworks do not, however, uniformly 
impose the same types of markets and trading oversight as is 
common with Federal market regulation. For example, State money 
transmitter regulation would typically not impose market 
surveillance requirements intended to detect fraudulent or 
manipulative trading activity, including wash trading and 
spoofing.
    Beyond FinCEN and the States, the CFTC, the SEC, and the 
Federal banking regulators apply their respective rules 
depending on the type of digital asset intermediary and the 
involved activity.
    The CFTC's jurisdiction over digital assets was established 
in 2015 when the Commission determined that Bitcoin met the 
definition of, ``commodity.'' However, the CFTC's jurisdiction 
over spot commodity markets is quite limited. While the CFTC 
does have enforcement authority to police for fraud and 
manipulation, this authority is backward-looking and is invoked 
only when wrongdoing is suspected. And this authority is not 
oversight authority, which entails rulemaking and the 
registration and regular examination of intermediaries.
    This key point is commonly confused because the CFTC does 
have authority over derivatives products that may be predicated 
on an underlying commodity, for example, oil, gold, or even 
Bitcoin futures contracts. Involved intermediaries are then 
subject to CFTC requirements, including with respect to 
registration, trade surveillance, and customer education and 
protection.
    Since 2018, the CFTC has overseen well-regulated, robust, 
and transparent Bitcoin futures in options markets. These 
products were offered under the CFTC's tailored heightened 
review framework in order to address unique digital commodity 
characteristics, including their high degree of retail 
participation and unique custody considerations.
    The CFTC accordingly established the basis for differential 
treatment of digital commodities and ensured that Americans 
have access to well-regulated markets. This outcome is far 
preferable to seeing investors lured to offshore, illegal 
derivatives exchanges that are prone to fraud and financial 
crime.
    With respect to the SEC, it has broadly asserted its 
enforcement authority and suggested that many cryptocurrencies 
are securities. While many enforcement actions--especially 
during the ICO mania--targeted clear cases of an issuer selling 
tokens to raise capital or defraud investors, there remains a 
lack of clarity in determining when an asset is a security. 
This ambiguity has implications, since market participants and 
regulators alike may struggle in determining which rules apply.
    Looking ahead, while some States like New York have 
developed mature regulatory frameworks, there is no current 
Federal market regulator overseeing spot digital commodity 
markets. By statute, the CFTC is a principles-based regulator 
established by Congress to deter and prevent price 
manipulation, uphold market integrity, protect market 
participants, and promote responsible innovation. The CFTC, 
however, would need specific statutory authority to oversee 
spot digital commodity markets.
    Additionally, even if the CFTC were granted such authority, 
it would still be necessary to increase definitional clarity 
regarding when a token is or is not a security. This is an area 
where more work needs to be done, whether by the courts, 
regulators, or Congress.
    Today's panel, as well as many others before us, have 
identified existing gaps and opportunities to create a more 
efficient and comprehensive national regulatory framework. 
Against this backdrop, I think there is a great opportunity for 
policymakers to work collaboratively to craft that framework in 
order to ensure the responsible development of digital assets 
and markets in the United States.
    Thank you, and I am happy to answer any questions you may 
have.
    [The prepared statement of Mr. Gorfine can be found on page 
58 of the appendix.]
    Chairman Hill. Thank you very much.
    Mr. Rivera, you are now recognized for 5 minutes for your 
oral presentation.

  STATEMENT OF H. JOSHUA RIVERA, GENERAL COUNSEL, BLOCKCHAIN 
                            CAPITAL

    Mr. Rivera. Thank you, Subcommittee Chairman Hill and 
Ranking Member Lynch, Full Committee Chairman McHenry and 
Ranking Member Waters, and the members of the subcommittee for 
inviting me to testify today.
    My name is Joshua Rivera. I serve as general counsel of 
Blockchain Capital, a venture capital firm focused on digital 
assets technology. I am a lawyer by training and practice and 
have represented traditional global financial institutions in 
various financial transactions, including capital markets, 
financings, mergers and acquisitions, and asset management.
    I also have the great privilege of sitting on our 
investment committee of Blockchain Capital and participating in 
the critical investment decisions we make on behalf of our 
limited partners.
    Blockchain Capital manages approximately $2 billion in 
assets and has invested in more than 100 portfolio companies, 
protocol teams, and projects in the digital assets industry. 
Our team fields approximately 1,500 proposal decks and pitches 
each year from entrepreneurs building in the industry, 
providing us with an unique macro perspective on industry 
developments.
    Thank you for allowing me to testify about the incredible 
opportunities as well as the challenges the digital assets 
industry presents to an innovative American marketplace. My 
message for you today is that the industry wants to work with 
you, the members of this subcommittee, other Members of 
Congress, and regulators on developing appropriate market 
structure regulation for addressing the novel challenges and 
opportunities this technology presents.
    First, I will explain pain points in our current financial 
system and how blockchain technology can enhance our society. 
The current financial system is overly-reliant on centralized 
intermediaries. This is a paradigm that constrains innovation.
    The U.S. consumer credit rating system provides a prime 
example of the inefficient and flawed systems that can arise 
out of overly-intermediated value systems. Monopolized by three 
ratings bureaus, this system is often ineffective, and excludes 
those who need safe and affordable access to credit, while also 
creating immense privacy and security concerns.
    It is not only legacy financial systems that suffer from 
intermediaries. Social media enterprises like Facebook and 
Twitter, as well as content platforms like Spotify and YouTube, 
have all leveraged the free and instantaneous transfer of data 
originally pioneered by the internet, not to democratize 
participation in value creation, but rather to monopolize it. 
They do this by commoditizing their own users and preventing 
actual content creators from realizing more value from the 
content they create. Blockchain technology creates alternative 
solutions to the services and infrastructure controlled by 
these intermediaries.
    In the case of financial ecosystems, blockchain networks 
can be accessed anywhere in the world by anyone with an 
internet connection. Using these networks, participants can 
transfer any amount of value to virtually any location in the 
world 24 hours a day, 7 days a week, 365 days a year with 
instantaneous settlement at much lower cost to the user.
    So the question is, how should we engage with this 
innovation? The fundamental innovation of blockchain networks 
is to allow anyone, anywhere, to participate in commerce or 
other systems of value without an intermediary. This is novel, 
and a fundamental shift from the traditional ways in which 
finance and commerce are both organized and regulated. It 
requires a new approach.
    There is an unfortunate perception that participants, 
investors, and founders in the digital assets industry do not 
want to be regulated. This is false. A great number of 
participants, myself included, have sought over many years to 
engage with regulators in a collaborative attempt to set out 
clear and workable rules of the road. While there have been 
some rulemaking efforts, these efforts have not come early or 
often enough, and unfortunately have been made with almost no 
meaningful industry engagement. The undesirable result has been 
rule proposals that are largely unworkable, both in technical 
implementation and policy outcomes. We should work with this 
innovation, not against it.
    According to data from PitchBook, the share of venture 
capital funding from blockchain start-ups in the European Union 
surpassed the allocation for U.S. firms for the first time ever 
in the first quarter of this year. This may signal a 
potentially devastating outcome, one from which the U.S. may 
not be able to recover. It is something that every member of 
this subcommittee should actively seek to correct.
    In closing, the world-changing innovations introduced by 
the digital assets industry have only scratched the surface of 
their potential. We are on the cusp of the next wave of 
technological change, but the United States must act quickly to 
ensure it develops here and not abroad.
    Tailored, fit-for-purpose rules for this nascent ecosystem 
are critical, and must protect consumers, while also promoting 
innovation. Industry stands ready to work with you on this 
balanced approach to ensuring that the U.S. remains a leader, 
as it often is, in all vanguard fields of innovation, 
especially blockchain technology.
    Thank you for the opportunity to testify. I look forward to 
your questions.
    [The prepared statement of Mr. Rivera can be found on page 
68 of the appendix.]
    Chairman Hill. Thank you very much.
    Mr. Zweihorn, you are now recognized for 5 minutes for your 
presentation.

    STATEMENT OF ZACHARY J. ZWEIHORN, PARTNER, DAVIS POLK & 
                          WARDWELL LLP

    Mr. Zweihorn. Chairman Hill, Ranking Member Lynch, and 
members of the subcommitte, thank you for inviting me to 
testify today. My name is Zach Zweihorn, and I am a partner at 
the law firm of Davis Polk & Wardwell. My legal practice 
focuses on the regulation of the securities markets, and in 
particular, laws and rules that govern the activity and conduct 
of market intermediaries, such as securities exchanges and 
broker-dealers.
    I have worked with many industry members, both in 
traditional finance as well as those that are crypto native, to 
consider their digital asset activities and the potential 
securities law compliance obligations.
    It has been a challenging landscape to navigate due to the 
regulatory uncertainty and some legal dead-ends. There is much 
debate on the question of whether a particular digital asset is 
or should be considered to be a security. This is a critical 
question, and one that Congress needs to clarify.
    What I would like to highlight today is that if a digital 
asset is a security, not only is the initial sale subject to 
registration, but secondary market trading must occur through a 
web of registered and regulated market intermediaries: brokers, 
dealers, exchanges, transfer agents, and clearing agencies.
    We have all heard the siren's call that trading platforms 
should come in and register. It sounds enticingly attractive, 
but it is an oversimplification that conflates registration, 
which may theoretically be possible, with compliance, which 
really is not.
    Registration is not simply a matter of filling out forms 
and sending them in. Instead, it is a substantive exercise of 
showing the regulator how a firm's proposed activities will 
comply with the existing laws and rules. Because these existing 
laws and rules were designed for traditional securities such as 
debt and equity, compliance for trading in digital assets 
securities is challenging or virtually impossible.
    To point out a couple of examples, under current law and 
rules, a registered exchange can generally only facilitate 
trading in a security if that security is registered. 
Similarly, broker-dealers are prohibited from facilitating 
trade in a security unless the issuer has taken steps to 
register it or otherwise make certain disclosures.
    This results in a catch-22. The intermediary is required to 
register with the SEC in order to facilitate trading, but if it 
has registered with the SEC, it is prohibited from facilitating 
trading unless the issuer--somebody different than the 
intermediary that it can't control--has taken further steps and 
actions.
    As another example, in order for centralized trading 
platforms to operate, someone needs to hold securities for 
investors. But SEC accounting and custody guidance has made it 
legally or economically infeasible for either banks or broker-
dealers to provide custody services for digital assets. So, 
again, if a firm were to register, there would be no way for it 
to facilitate trading, because there is nobody that can provide 
custody.
    In light of these and other challenges, and absent a litany 
of exceptions or new guidance from the SEC, a digital asset 
security that did seek to register with the SEC would have its 
application rejected.
    There are also differences in market structure that raise 
unnecessary legal challenges. Digital asset trading platforms 
operate under a model that allows end-users to directly trade 
on a platform, with the platform maintaining custody of the 
digital assets of the user, matching buyers and sellers and 
settling transactions. This is different from how our 
traditional securities markets work, where separate firms 
provide exchange, broker services, and clearing.
    Because the securities laws and rules were developed to 
regulate the heavily-intermediated structures that are already 
involved in the securities market, that model has been baked 
into the laws. As a result, current law assumes that there 
would be a high level of intermediation, and effectively 
requires intermediation if an asset is a security, regardless 
of whether new innovations mean that model is not necessarily 
practical or better for investors.
    It may be popular in the crypto community to blame the SEC 
for bringing enforcement actions while failing to adopt a 
regulatory regime that is compatible with digital assets, but 
the SEC is a creature of statute, created by Congress in charge 
of administrating the Federal securities laws that Congress has 
adopted. While the SEC has authority to provide exemptions, 
wholesale changes and entirely new regulatory regimes should 
come from Congress and not from the Commission.
    The only real solution is for Congress to establish a 
regulatory framework under which digital asset market structure 
can exist, giving the SEC a mandate to implement and facilitate 
it. Congress has amended the laws to address changes to the 
securities market before. Congress could and should take the 
same approach today.
    Thank you, again, for the opportunity to participate today, 
and I look forward to your questions.
    [The prepared statement of Mr. Zweihorn can be found on 
page 72 of the appendix.]
    Chairman Hill. Thank you very much.
    And Professor Allen, you are now recognized for 5 minutes 
for your oral presentation.

   STATEMENT OF HILLARY J. ALLEN, PROFESSOR OF LAW, AMERICAN 
              UNIVERSITY WASHINGTON COLLEGE OF LAW

    Ms. Allen. Thank you, Chairman Hill, Ranking Member Lynch, 
and members of the subcommittee. Thank you for inviting me to 
testify at today's hearing.
    My name is Hillary Allen, and I am a professor of law at 
the American University Washington College of Law, and the 
author of the book, ``Driverless Finance: Fintech's Impact on 
Financial Stability.''
    We are here to talk about regulation of the digital asset 
markets, and the other witnesses here have urged legislative 
and regulatory reform in order to let crypto business models 
thrive.
    The main point I would like to make today is to urge you to 
be very wary of peeling back laws designed to protect the 
public from harm. In my research, I have explored in detail the 
financial stability and investor harms associated with the 
crypto markets. And in connection with the latter, I would like 
to read you a quote from Congress in 1933.
    ``During the postwar decade, some $50 billion of new 
securities were floated in the United States. Fully half or $25 
billion worth of securities floated during this period have 
been proved to be worthless. These cold figures spell tragedy 
in the lives of thousands of individuals who invested their 
life savings, accumulated after years of effort, in these 
worthless securities. The flotation of such a mass of 
essentially fraudulent securities was made possible because of 
the complete abandonment by many underwriters and dealers in 
securities of those standards of fair, honest, and prudent 
dealing that should be basic to the encouragement of investment 
in any enterprise.
    ``Alluring promises of easy wealth were freely made with 
little or no attempt to bring to the investor's attention those 
facts essential to estimating the worth of any security. High-
pressure salesmanship rather than careful counsel was the rule 
in this most dangerous enterprise.''
    I think this statement would resonate very much with those 
who have lost money with Celsius or FTX or any of the other 
failed crypto intermediaries. I believe it would also resonate 
with those exposed to the DeFi platform, Terra LUNA, or any 
number of other DeFi scams.
    I read this statement here to illustrate that with crypto, 
not much has changed since 1933. Of course, the technology used 
is different now, but technology is only a tool, and the 
impacts of any technology are inextricably intertwined with the 
people who use it.
    With crypto, the existence of blockchain technology does 
nothing to change the economic incentives of those deploying 
it, and those incentives have not changed significantly since 
1933.
    The crypto industry often demands that lawmakers and 
regulators understand the intricacies of blockchain technology 
before creating or enforcing law or rules. But I would submit 
that the crypto industry needs to learn some basics about 
economics and finance before they argue that the rules 
shouldn't apply to them.
    If they understood even a little bit about economics and 
finance, they would understand that technological 
decentralization and decentralized economic control are two 
very different things. A system can have lots of nodes, but if 
someone controls a lot of those nodes, they will control the 
system.
    Of course, it is possible that some members of the crypto 
industry already do understand these things, and their rhetoric 
about decentralization is entirely disingenuous because there 
is nothing economically decentralized about the crypto markets 
where we see concentrations of economic power that sometimes 
rival or exceed what we would see in traditional finance. The 
technological decentralization achieved through blockchain 
technology, that is far less efficient than centralized 
systems, has all been for naught.
    While I see little of value in blockchain technology, I 
want to make it clear that enforcement of existing law is not 
incompatible with blockchain technology. It is entirely 
possible for a business using blockchain technology to comply 
with existing investor protection and financial stability 
regulation.
    However, for many crypto businesses, it may be true that 
existing regulation is incompatible with the economics of their 
business model, especially if their business model depends on 
doing things that we have learned over the years tend to harm 
people, like a hedge fund that profits by trading against the 
customers of an affiliated exchange without those customers 
knowing, or an exchange that profits by commingling its own 
assets with customer assets and then using those commingled 
assets to trade, or an issuer that profits by making up assets 
out of thin air at almost zero cost engaging in some wash 
trades to inflate their market price, hyping the assets on 
social media, using them as collateral for loans, and then 
dumping them on unsuspecting investors.
    As my written testimony explains, existing financial law 
and regulations are already well-suited to dealing with these 
kinds of harms associated with crypto business models. We 
shouldn't dispense with those protections lightly in any 
circumstances, and we really shouldn't dispense with them for 
the sake of letting business models based on speculation and 
predation thrive and become too-big-to-fail.
    Remember that laws make markets, and bespoke crypto 
legislation could create a market for business models that 
don't have enough utility to survive on their own. More robust 
enforcement of existing laws and regulations would certainly be 
desirable.
    In particular, Congress should support the SEC's 
enforcement in securities registration and broker-dealer 
registration requirements with increased funding and with 
increased political support, but the legal fundamentals are by 
and large there.
    I look forward to your questions.
    [The prepared statement of Ms. Allen can be found on page 
38 of the appendix.]
    Chairman Hill. Thank you very much.
    We will now turn to Member questions. And the Chair now 
recognizes himself for 5 minutes for questioning.
    I will just start out by saying that I appreciate, 
Professor Allen, your talk about the securities markets, and I 
think you have made many, many good points.
    Let me say that between March of 2000 and October of 2002, 
the insider regulatory framework, with all of their 
surveillance and people involved in overseeing it, and 
following every 1933 and 1934 Act, we lost $5.5 trillion from 
investors in the United States. Silicon Valley Bank, just a few 
weeks ago--super-regulated, over-regulated, massively-
regulated, inside the regulatory framework, but due to a lack 
of supervision and a terrible business policy, people lost a 
lot of money there.
    So what we are talking about today is crafting a regulatory 
framework that is fit for purpose and that fits the activity 
and absolutely doesn't undercut any fraud or anything 
whatsoever about consumer-investor compliance.
    I don't think anybody here is suggesting that. No one on 
this panel supports fraud and misbehavior, a lack of 
compliance, not following the rules, et cetera. But we 
definitely have the need for a regulatory framework that fits 
the purpose and protects investors to the best that Federal 
regulation can do so.
    Although some digital assets will fall under the definition 
of a security or a commodity--and we have heard testimony today 
about both--there are digital assets like a digital sports card 
or a digital collectible or maybe a token connected to an 
activity like a game or Filecoin that we have had described 
today pretty thoroughly, I think, that make a use case for 
precisely what that company is doing that is distinguishable 
from a security or a commodity. And these assets merit, in my 
view, being classified in a third category altogether, which is 
why the existing regulatory framework does not work.
    So, Mr. Gorfine, would you agree that there is a third 
bucket of digital assets that need oversight, need clarity, 
need all of the investor and security protections, but they 
don't fit in the bucket of either Mr. Rivera's background at 
the CFTC or Chair Gensler's world at the SEC?
    Mr. Gorfine. Yes. It is a good question. And I would 
actually suggest that the problem with the term, ``digital 
asset,'' is that it is incredibly broad. And I would say we 
have even more than three buckets. The reason I say that is you 
can effectively tokenize any asset, especially if you are 
tokenizing the ownership interest in that asset. You could 
tokenize a car title. You could tokenize a title to a home. You 
could tokenize an actual item of digital art or ownership over 
existing artwork.
    So, I think we have to be careful because the reality is 
that regulation looks at things through the lens of what type 
of an asset or an instrument is it, and we apply certain rules 
based on what the asset actually is. So in that sense, the 
term, ``digital asset,'' is incredibly broad, and there 
certainly may be items, collectibles, that fall outside of at 
least the securities law definition, and potentially even the 
way that the CFTC, for example, would view, ``commodity,'' 
because the term, ``commodity,'' under the Commodity Exchange 
Act is incredibly broad. That doesn't mean that the CFTC is 
seeking to at least police the spot market for every 
conceivable commodity or instrument that can transact in 
society. It is a broad topic.
    Chairman Hill. Thank you. I like the idea of a gaming 
company that raises money to create a new game; let's say they 
have to raise $10 million to create a game. It is clearly a 
security. It is a private placement to create the game. But if 
you invest in the game, you also get some tokens that are going 
to be used in the game, if the game ever works. If the game is 
unveiled and nobody comes to play and it is a flop, then those 
tokens are useless. But if the game is up and running a year 
later, those tokens have value.
    Are those tokens securities, or are those tokens just 
things in the game?
    Mr. Gorfine. That is where we are going to need some 
clarity around the potential for something to transition from 
being in one state, maybe down the line to something else. If 
people purchase a token in order to help the company raise 
money--
    Chairman Hill. But that wasn't my example.
    Mr. Gorfine. Right. This is something that is actually 
being used functionally within the game.
    Chairman Hill. Yes. We will dumb it down and make it for a 
broader audience, perhaps.
    So, $10 million to create a new musical. You are going to 
star in it on Broadway. And if the musical goes from off-
Broadway to Broadway and is successful, everybody who put 
$100,000 in my $10 million-offering gets 25 tickets to the show 
that they could use for the whole run of the show.
    So, it's clearly a security. The Broadway show is a 
success. I am earning a return on my investment, I hope. But I 
now have 25 tickets that are just a thing to go to this show. I 
can keep them. I can give them to my kids. I can sell them. Are 
those tickets a security?
    Mr. Gorfine. It sounds like it is a perk as being part of 
that--
    Chairman Hill. A perk. Yes. It is an offshoot of it. And if 
the play was a flop, then those tickets would have no value.
    I think this is why we need to really carefully think about 
this. I appreciate your responses.
    Now, let me yield to my friend, the ranking member of the 
subcommittee, Mr. Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    Professor Allen, the SEC first warned investors of the 
dangers of investing in crypto back in 2013, when the Office of 
Investor Education and Advocacy issued an investor alert on, 
``Ponzi schemes involving cryptocurrencies.'' Then in 2014, the 
same office issued another investor alert on Bitcoin and other 
virtual currency-related investments.
    In 2019, the SEC issued a Framework for Investment Contract 
Analysis of Digital Assets. And that was to provide clarity on 
when a digital asset has the characteristic of a security and 
when the sale of a digital asset is a securities transaction.
    And in addition, there had been 130 enforcement actions 
brought by the SEC against crypto firms that have engaged in 
marketing securities without providing the necessary 
disclosures, audited financials, or investor protections that 
would allow investors to make a meaningful and informed 
decision regarding the value of a crypto product or the 
viability of the underlying business.
    Two points are notable. One, the SEC has won every single 
one of those 130 cases that they have brought under existing 
law. And two, each of those cases went through a legal process 
which culminated, in every case, in a written regulatory 
decision, and many had judicial decisions or administrative 
opinions written on appeal that actually do provide clear and 
unambiguous guidance to the crypto industry and provide clarity 
and lay out the rules of the road that should guide our crypto 
firms.
    So the claims that there is no direction, there is no 
clarity, in at least that part of it, can you speak to that?
    Ms. Allen. I do think it is quite clear. And it ties back 
to the investor harms that I mentioned earlier. The Howey test 
is all about protecting people who have invested their money in 
a common enterprise with the expectation of profits to come 
predominantly from the efforts of others.
    That offers scope for harm, and I think that probably 
accurately reflects why most people are investing in these 
crypto things. I think there is the clarity. But if we wanted 
more, Congress could pass legislation that inserted crypto 
assets into the definition of security in both the 1933 Act and 
the 1934 Act, and that would settle it for all time.
    Mr. Lynch. Let me ask you, the fact that--and others have 
said here this morning that you can basically tokenize 
anything. If you did have a system for crypto that was--that 
didn't--so all of those rules that apply to traditional finance 
don't apply, okay? Because they are all acting right now in 
noncompliance.
    If there was another whole system that is set up where 
there is no compliance requirements for disclosure or 
commingling of funds, which is happening rampantly in the 
crypto world, what would that do to the traditional finance 
system where you have financial firms that are under the burden 
and have to observe the protections that are provided to 
investors and to the public?
    Ms. Allen. This is really important. A bespoke crypto 
regime would be a massive regulatory loophole for all of 
financial services. I don't actually use the term, ``digital 
assets,'' in this space because I think all our assets are 
already digital, right? So, I talk about crypto as being 
something that is associated with the blockchain, because all 
of our assets are already digital.
    It is very easy, as we have heard, to tokenize them and put 
them on the blockchain. So if you create a special bespoke 
crypto regime that has fewer protections than the existing 
regulatory regime, it doesn't take a genius to see what is 
going to happen to traditional finance. They are going to put 
it all on the blockchain and take advantage of that lighter 
touch regime.
    Mr. Lynch. Right. And with the commingling of funds--many 
of the crypto firms don't provide audited financials. They 
don't make those necessary disclosures. If we held the crypto 
industry to the same standards, would that be one way of 
legitimatizing or protecting the public even in the crypto 
realm?
    Ms. Allen. Yes, that is right. We have to thread the needle 
where we protect the public without giving special treatment to 
crypto. And I think by applying existing registration 
requirements for the securities themselves and also for the 
broker-dealer regulation and exchange regulation--just to take 
one example, that would mean that the current crypto exchange 
model with all of the conflicts of interest that is just rife 
in that model couldn't continue to exist. And so, customers 
would be protected from all of those conflicts of interest by 
requiring those exchanges to register.
    Mr. Lynch. Thank you.
    Mr. Chairman, I yield back.
    Chairman Hill. I thank my friend.
    I now turn to Mr. Rose of Tennessee for 5 minutes.
    Mr. Rose. Thank you, Chairman Hill, and thank you, Ranking 
Member Lynch, for holding this hearing.
    And thank you to our distinguished witnesses for being here 
and sharing your time with us.
    Mr. Rivera, AI-linked blockchain products include payment 
systems, trading, models, machine-generated nonfungible tokens, 
and blockchain-based marketplaces for AI applications. As we 
think through how to play catch-up in the broader crypto 
regulatory landscape, what are some of the unique regulatory 
gaps created by AI-linked crypto projects?
    Mr. Rivera. The question on AI is a difficult one. It is 
still a very burgeoning and growing industry. It is moving 
extremely rapidly with the recent rise of ChatGPT. Its 
application to crypto is something that we are looking at very 
closely, and how that will be regulated, I think, is extremely 
important.
    But I think the focus needs to be on regulating entities 
that we understand how they work, intermediaries--exchanges, 
custodians--who provide services in a centralized way to the 
digital asset ecosystem. And making sure that regulation is 
focused, and not so broad that it stifles innovation for things 
that we understand less, like how AI is going to interplay with 
digital assets in the next 3 to 5 years.
    There surely will be a large number of innovations that 
will come from the interplay of those two things, and many of 
them will be extremely useful. They will be extremely 
beneficial to society, and we should give space for those 
innovations to happen, and in the meantime, really focus on 
providing targeted regulation for entities that we understand.
    Mr. Rose. Thank you.
    Shifting to Mr. Gorfine, SEC Chair Gensler has insisted 
that digital assets' legal status depends on, ``individual 
facts and circumstances,'' and that projects should, ``come in 
and talk to the SEC,'' to identify a path towards compliance.
    Only about four crypto projects have been able to come into 
compliance as defined by the SEC.
    Mr. Gorfine, at your former agency, the CFTC, is there a 
path towards compliance, specifically for exchanges, and what 
does that look like?
    Mr. Gorfine. Yes. To level set, remember that spot 
commodities are not directly regulated by the CFTC. So, 
exchanges that are engaging in spot activity do not register 
with the CFTC. But the CFTC has registered and oversees a 
number of exchanges that do offer Bitcoin or ether futures and 
options products, and those can be both physically settled and 
cash settled.
    So, there is a robust, well-regulated marketplace regulated 
by the CFTC where registrants have been able to come in and 
offer those types of products.
    Mr. Rose. Thank you.
    Mr. Zweihorn, Chair Gensler has said--and I am going to 
give you about four of his quotes. In August of 2021, he said 
that the SEC needs additional authorities to prevent 
transactions, products, and platforms from falling between 
regulatory cracks. In December of 2022, he said that he feels 
that the SEC has enough authority in this space. In May of 
2021, he said that, right now, there is not a market regulator 
for crypto exchanges. And then, in December of 2022, he said 
that exchanges can come into compliance by appropriately 
working with the SEC.
    So, Mr. Zweihorn, do you believe that these comments 
provide regulatory clarity and promote stability in digital 
markets?
    Mr. Zweihorn. Thank you, Congressman Rose.
    I think those comments, depending on whether he is 
referring to a digital asset as a security or as not a 
security, could mean different things. There is a lot of lack 
of clarity about that. But the SEC admittedly, by its own 
admission, doesn't regulate Bitcoin or Bitcoin exchanges. So, I 
don't think he could mean that Bitcoin exchanges would need to 
register.
    But as he has said, he believes--and the market does not 
agree with this--that many other digital assets are securities. 
But there is certainly some lack of clarity in terms of which 
ones and therefore what obligations they have.
    Mr. Rose. Thank you.
    Mr. Rivera, SEC Commissioner Peirce has noted that there 
has been a reluctance on the part of the SEC to, ``provide 
additional guidance about how to determine whether a token is 
being sold as part of the securities offering or which tokens 
are securities.''
    In your view, would additional guidance from the SEC on 
this issue be helpful?
    Mr. Rivera. Yes. I think it is pretty telling when one of 
the Commissioners of the SEC has directly stated that there is 
reticence in the agency to provide guidance. We have been 
asking for this with the SEC for a long time. As they say, 
everything is facts and circumstances, so it is hard to say 
that whether something is a security is based on facts and 
circumstances, but everything is a security.
    Mr. Rose. Thank you.
    My time has expired. I yield back.
    Chairman Hill. I thank the gentleman.
    And I now recognize my friend from Illinois, Dr. Foster, 
for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman.
    Ms. Belcher, how does Filecoin handle anonymity and 
censorship? For example, if someone steals the designs of 
nuclear weapons and posts them on Filecoin, can you find out 
who did it, remove the material, and take it down and identify 
the person?
    Ms. Belcher. Thank you so much for that question.
    Filecoin is an open source technology, and many people are 
building tools on top of the Filecoin network--
    Mr. Foster. My question is, can you do it today? As it is 
set up right now, if someone tomorrow posts the designs of 
nuclear weapons, can you identify the person, haul them into 
court, and remove the material?
    Ms. Belcher. Yes. We have content moderation tools that are 
built on top of the Filecoin network by--
    Mr. Foster. And do you have a governing structure that 
allows you--let's say that taking down material is disputed. 
What court system do you go to to resolve that?
    Ms. Belcher. The way that it works is basically the same 
content moderation rules apply.
    Mr. Foster. Which court system ultimately has jurisdiction?
    Ms. Belcher. Again, the same rules that would apply to 
content--
    Mr. Foster. Are you saying no court system has jurisdiction 
to ultimately decide if there is a disputed takedown of 
material?
    Ms. Belcher. I am saying the same rules apply to content 
moderation on the Filecoin network that apply to Facebook or 
any other protocol.
    Mr. Foster. What jurisdiction are you registered in that 
allows the court to say, I'm sorry, I order you to take that 
down?
    Ms. Belcher. Just like with Facebook, there isn't 
registration for content moderation. The way that it works is 
you can go to any individual node or storage provider, and we 
actually have tools that provide for decentralized content 
moderation.
    Mr. Foster. Okay. That is an important question that we 
have to think through, because it will happen and maybe already 
has.
    Mr. Gorfine, there are estimates from Forbes and other 
places that more than 50 percent of all Bitcoin transactions 
are fakes, mostly wash trades between anonymous participants.
    So, how can you possibly have a well-regulated market in, 
say, Bitcoin futures, when the majority of transactions in the 
underlying assets are fraudulent?
    Mr. Gorfine. When the CFTC allowed the self-certification 
in Bitcoin futures, it did so under a heightened review 
framework where there were requirements for the derivatives 
exchanges to have information-sharing relationships with the 
underlying exchanges being used to create--
    Mr. Foster. But there are a lot of trades that are not on 
underlying exchanges. How do you get the information to know 
that this is a wash trade?
    Mr. Gorfine. The underlying exchanges were U.S.-based 
exchanges participating in the index formation. But to your 
point, that is the gap in the underlying spot market, is there 
is no Federal market supervision of spot trading activity as 
you would typically see with market regulation.
    Mr. Foster. Right. Yes, when trading derivatives, you need 
a trader ID so you know exactly who--there is a regulator that 
sees the true identity of both participants of all trades, and 
they can identify wash trades and other market abuses.
    Mr. Gorfine. That is right.
    Mr. Foster. That is not present in Bitcoin, correct?
    Mr. Gorfine. That is right. The same is the case, though, 
for many other commodities. Precious metals like gold-based 
futures, you don't have--spot markets tend to operate 
differently than the regulated markets. But in the context of 
digital commodities, there are these characteristics around the 
trading activity, the retail facing aspect, which could warrant 
this type of market--
    Mr. Foster. Right. Which are much more surveilled than 
Bitcoin, I guess is the point.
    Mr. Rivera, one of the fundamental rules of the road is 
that you cannot drive a car on the road without a license plate 
and without a licensed driver. The automobile industry would 
never have gone anywhere without that convention.
    And for the same reason, it seems to me that all crypto 
wallets must require a verifiable driver's license, that can be 
anonymous under most circumstances, but when a crime has been 
committed, you have to use that to deanonymize the true owner.
    In addition, for commodities or any item which has a market 
defined value, we have to prevent wash trades and other front-
running market abuses like that. So, is there any alternative 
in this case to have a regulator somewhere that sees the true 
identity between all participants of all crypto transactions? 
Is there any alternative to that?
    Mr. Rivera. We are investing in companies that are building 
something called zero knowledge--
    Mr. Foster. I understand there is a dream. Is there 
anything that works today, that will allow you to prevent wash 
trades, for example?
    Mr. Rivera. Crypto networks are extremely transparent. And 
Federal regulators actually--
    Mr. Foster. But there are ones, like Monero and more 
advanced ones, that have deliberate and very effective efforts 
to make it impossible to identify the true participants.
    My question is, does the technology exist today to prevent 
wash trades unless there is a regulator that sees the true 
identity?
    And if you can respond. My time is up. If you can respond--
    Mr. Rivera. Yes, it is developing, sir.
    Mr. Foster. I understand. But this question is for 
everyone, and I would like you all to respond for the record. 
Does the technology exist today that does not require having a 
regulator see the true identities behind both sides of any 
crypto transaction if we wish to prevent wash trades and other 
market abuses?
    My time is up. I yield back.
    Chairman Hill. Yes. You can respond in writing if you would 
like to on that. Thank you very much.
    The gentleman from Ohio, Mr. Davidson, who is the Vice 
Chair of this subcommittee, and also the Chair of our Housing 
and Insurance Subcommittee, is recognized for 5 minutes.
    Mr. Davidson. I thank the chairman, and I thank our 
witnesses. I also thank my colleagues who are taking the time 
to continue to study this issue. As someone who has tried to 
get regulatory clarity for this since I got on the committee in 
2017, it has been painful. You just see people ask questions 
that you explain over and over and over and over and over 
again, and that is why it means a lot that people do take time 
to understand the issue.
    It seems that even then, you will have people who draw 
different conclusions. For example, that the only reason you 
would want to own these things is to evade the law.
    The reality is people have been pleading for this ever 
since I got here, ever since the Initial Coin Offering (ICO) 
market. The people with good use cases have come here saying, 
please solve this problem. They are asking to be regulated, and 
not the way a lot of people are being asked to be regulated. 
They are saying, basically, hey, could you protect our market 
share by making it illegal for people to actually compete with 
us? They are saying, let's compete.
    I think the challenge is that people think of this space in 
the same--if they can't get rid of Bitcoin altogether, they at 
least want to make it account-based, because they don't 
actually trust you with custody. Just like they haven't 
actually outlawed cash, but almost, right?
    Mr. Rivera, as you're aware, the European Union recently 
passed the Markets in Crypto-Assets Regulation, which puts them 
well ahead of us; they actually passed a law. But alongside 
this proposal, the EU also passed a Transfer of Funds 
Regulation, which imposes a strict Know Your Customer (KYC) 
regime whenever more than 1,000 euros is transferred between 
self-custody wallets.
    If I move more than $1,000 of value to someone else in any 
form, cash or something else of worth, you have to get a third 
party. We don't trust our citizens. They can't do 
permissionless transactions. Everything has to be permissioned.
    It seems like some of my colleagues actually think that is 
a good thing. I think it is kind of dystopian, personally, but 
the reality is, how do you have DeFi without the, ``de'' part, 
the ``decentralized?''
    Mr. Rivera. Yes, the Transfer of Funds Regulation is the 
European Union's effort to clarify the existing travel rule. I 
think the rule itself is not perfect, but, importantly, what it 
does is it limits the application of the rule to institutions 
communicating with each other and making transfers of value to 
each other. While doing so, it aims to protect the privacy of 
individuals who want to self-custody their assets.
    So, the objective of the rule is to actually allow 
individuals to participate in decentralized systems without 
having to divulge personal information about themselves and the 
financial activities that they engage in, while still 
regulating institutions that send that information, like our 
travel rule.
    It is unclear how it is going to be implemented, as it has 
just been passed, but it does make the right efforts, at least 
initially.
    Mr. Davidson. That is encouraging, and it is a little more 
narrow than I had understood it to be, if not in law, in 
intent, maybe.
    But how important is custody to the concept of market 
structure? When some of the same people in the room helped in 
2018 to craft what became the base text for the 100-percent 
bipartisan Token Taxonomy Act, we wanted to define a bright-
line test that translates the Howey test into language that 
people can understand, including the regulators. But it also 
dealt with custody.
    So, we have custody challenges in our T+2 trading of actual 
securities, but since you have a real-time 24/7, in theory, 
permissionless peer-to-peer transaction capability, how 
important is custody to market structure? And I will open that 
up to the panel.
    Mr. Rivera. Custody is extremely important, and it is 
extremely important to understand the differences between 
traditional custody, which is paper-based and ledger-based and 
relies on an intermediary that is keeping track, and digital 
assets custody, which actually relies on a decentralized 
blockchain to identify who has what. In order to ensure 
protection of client funds under a custodial regime, digital 
asset custodians have to have incredible technical expertise, 
and it is technical expertise that they have developed over the 
course of the last 10 years.
    Mr. Davidson. Can more than one person have custody of 
something at the same time?
    Mr. Rivera. No. But someone can gain access to funds in the 
same way that someone could kind of steal funds in a bank, but 
the way you do that is very different.
    Mr. Davidson. Right.
    I think the important point when you look at some of the 
markets where you will see asymmetry in naked short selling and 
derivatives contracts and so on and so forth, is that the idea 
is really solved with the custody rules here.
    I wish I had more time to get into this. But my time has 
expired, and I yield back.
    Chairman Hill. I thank the gentleman.
    The gentleman from New York, Mr. Torres, is now recognized 
for 5 minutes.
    Mr. Torres. Thank you, Mr. Chairman.
    If the United States continues driving crypto offshore, 
there will be more offshore companies, more companies in the 
offshore deregulated mold of FTX, so it seems to me that it 
would be in the interest of consumer and investor protection to 
bring crypto into a workable but rigorous regulatory regime 
here in the United States.
    FTX fraud has no greater friend than the status quo, and no 
greater friend than congressional inertia.
    New York State has shown that it is possible to create a 
rigorous regulatory regime for crypto without causing the 
apocalypse for 9 decades of securities law. There is a question 
of whether Congress should create a new regulatory framework 
for crypto, as New York State has successfully done, or whether 
Congress should seek to fit crypto within the existing Federal 
framework for regulating financial assets, which strikes me as 
the more-probable outcome.
    If Congress elects to adapt the existing framework rather 
than create an entirely new one, the question then becomes, 
which digital assets qualify as securities and which qualify as 
commodities or something else? But if an asset qualifies as a 
security, then there is a question of registration, and that is 
where blockchain technology has run into a buzz saw.
    Even if Congress were to pass a law that provides perfect 
regulatory clarity as to which assets are securities, none of 
it matters if there is no workable path to registration and 
compliance. And under the status quo, SEC registration is 
little more than a mirage for blockchain businesses. The number 
of blockchain businesses that have found a workable path to 
registration is close to zero. One observer put it cogently: 
``The SEC has created a world where project founders are 
required to register as ice cream while making freezers 
illegal. Good luck.''
    Mr. Zweihorn, how can Congress best tailor registration to 
accommodate blockchain technology without compromising investor 
protection?
    Mr. Zweihorn. Thank you, Congressman Torres. I think that 
is a very good way of thinking about it.
    My client, certainly, and nobody I know who is respectable 
in the blockchain space believes that it should be unregulated, 
that we need fewer regulations. They want a system that sort of 
gives them an out. I think they want tailored regulations.
    As I said in my testimony, there are a lot of SEC rules and 
part of the Federal securities laws that are sort of round peg 
and square hole when it comes to digital assets, because 
digital assets are just different. And if you compare the White 
Papers that came out during the ICO boom and compare them to a 
prospectus, they are, obviously, a lot shorter. There is a lot 
less information, but there is also a lot of information that 
is not in SEC prospectuses because digital asset purchasers are 
interested in other topics that are not ones that the SEC has 
asked about in its forums.
    Mr. Torres. And as I understand it, Chair Gensler himself 
has said that the SEC has tailored disclosure requirements to 
accommodate the particularities of industry. So, there is 
nothing unprecedented about the notion of tailoring.
    Mr. Zweihorn. That is correct. The SEC has adopted 
particularized disclosure regimes for certain assets. But they 
have not yet done so for digital asset securities.
    Mr. Torres. The SEC, statutorily, is designed to be a 
merit-neutral regulator, but it hardly requires a suspension of 
disbelief to imagine a regulator who has a personal or 
ideological antipathy for crypto and, therefore, seeks to 
regulate the industry out of existence.
    But even if you are a critic of crypto, the fact remains 
that regulatory sabotage of crypto is the antithesis of merit-
neutral regulation, which is the kind of regulation that 
Congress contemplated for the SEC.
    So, how can Congress ensure that the SEC is, in fact, a 
merit-neutral regulator? And how do you prevent the use of the 
registration process to punish or sabotage an industry that has 
fallen out of political favor?
    Mr. Zweihorn. Thank you.
    I don't want to impugn the motives of anybody at the SEC. 
They are hardworking and well-meaning people, and I think they 
are acting in good faith, but they are subject to the 
securities laws. Congress has mandated that they apply the 
securities laws as Congress has written them. I think their 
incentive is to make sure that the securities laws are 
followed, at least as they interpret them.
    I think if Congress wanted to make it more likely that 
there would be a workable path, Congress would need to mandate 
that the SEC adopt something that is actually functional and 
possible for the market to comply with.
    Mr. Torres. A distinction has been drawn between regulating 
financial activity and regulating the technology that underlies 
the activity. Some people call it regulating applications 
versus regulating protocols. When crafting a regulatory 
framework, how should we think about that distinction? Should 
financial regulators be limited to their core competency of 
regulating financial activity rather than the underlying 
technology?
    Mr. Zweihorn. Of course. The one challenge with digital 
assets, as I think Mr. Gorfine said earlier, is that you can 
have a car title, or you can have a home title in NFT or a 
security or a commodity, and they are all a digital asset of 
some sort or another. And I think we, in this country, do 
regulate different items and different assets differently 
depending on what the risks are because the risks of buying a 
house are different than the risks of buying a security.
    So, there would need to be a way to differentiate in terms 
of whether this asset is an investment product, it is--
    Chairman Hill. The gentleman's time has expired.
    The gentleman yields back.
    Mr. Timmons is now recognized for 5 minutes.
    Mr. Timmons. Thank you, Mr. Chairman.
    And I want to thank all of our witnesses for taking the 
time to come and testify before us here today.
    In 1946, the Justices of the United States Supreme Court 
could not have fathomed the internet, nevertheless digital 
assets. It seems absurd that the future of digital assets will 
be decided using such an archaic test. Nevertheless, the Howey 
test has dominated the conversation around how to classify 
digital assets.
    Mr. Zweihorn, can you talk about any other classification 
frameworks that exist?
    Mr. Zweihorn. A case subsequent to Howey, the Forman case, 
questioned whether a sheriff's stock in a co-op, a residential 
apartment co-op, was a security, and the court said, well, a 
co-op is used to live in. There is a functional purpose for it, 
and if something has a functional purpose, and it is not just 
an investment, then it is not a security.
    So there is this tension there, particularly with digital 
assets, of whether the asset is just an investment or it 
actually has a functional purpose, such as Filecoin that the 
other member of the panel has talked about.
    Mr. Timmons. What suggestions would you have if we were to 
create a test from scratch to classify digital assets?
    Mr. Zweihorn. It is a challenging question, Congressman, 
because a lot of these assets are dual purpose, and while 
Filecoin, as an example, is useful and has utility to use for 
purchasing storage space, there are plenty of people who 
speculate on it. But that is true with lots of commodities. You 
go buy gold as an investment. You go buy a property as an 
investment.
    I think there has to be some kind of threshold for utility 
where if this thing actually is just a share of interest in a 
company, and it is a claim on its debtor equity, then it is a 
security, and if there is actual utility, then it is not a 
security.
    Mr. Timmons. Thank you for that.
    Turning back to Howey, Mr. Rivera, can you talk about the 
need for a definition for when a digital asset is or has become 
sufficiently decentralized to fall out of Howey? How should we 
think about this?
    Mr. Rivera. Yes, that is a very good question. It is going 
to take a lot of collaboration from Congress to think through 
principle-based legislation that will allow regulators to make 
specific applications for different assets. Facts and 
circumstances isn't incorrect, like the SEC likes to say, but 
it does mean that we need to have more principled legislative 
approaches to make that determination.
    There are thousands of digital assets. Some of them are 
securities, but many of them are not, and understanding the 
ways in which they are used, whether they have use case, 
understanding both the technical and the economic 
decentralization in the networks that they operate on, are key 
principles that Congress really needs to understand well and 
think about implementing.
    So, it is going to take some time and require some 
collaboration.
    Mr. Timmons. Thank you.
    Ms. Belcher, what about when blockchain technology is used, 
say, in the business-to-business (B2B) process solution? I have 
met with many companies which are utilizing blockchain 
technology to trim hours, and in some cases days, off the B2B 
processes in the financial services world. The efficiency and 
cost savings presented by these companies is incredibly 
compelling.
    Are there any risks of getting in the way of blockchain 
innovation by not considering this important use of blockchain 
technology while we are working on the market structure 
legislation?
    Ms. Belcher. Absolutely. Filecoin is really just one 
example of so many protocols that are enabling a huge number of 
businesses, including small businesses, to thrive. For example, 
many of our thousands of storage providers are small businesses 
in the United States.
    In fact, as one example, Lucky Storage converted a former 
Lucky Strike tobacco factory in North Carolina into a data 
storage facility. They are actually here today. They have 65 
employees in North Carolina; and that is one of thousands of 
storage providers on just one cryptocurrency network.
    And, in addition, we have many applications that are built 
on top of the Filecoin network that are business-to-business 
and that also are themselves small businesses.
    One example is Audius. I mentioned in my testimony the 
ability to say, for every second of a song I play, 
automatically transfer a millionth of a cent to the songwriter. 
And they are actually doing that, building on top of the 
Filecoin network.
    These are things that are really revolutionizing the way 
that small businesses work, and it is very important not to get 
in the way of that innovation in order to ensure that these 
businesses continue to thrive.
    Mr. Timmons. Thank you for that.
    One final question, Ms. Belcher. Just broadly speaking, do 
you believe that blockchain technology can deliver on the 
industry's promise of efficiency, decentralization, and 
financial inclusion?
    Ms. Belcher. Absolutely. All you have to do is think about 
what happened within hours of Russia invading Ukraine. Within 
hours, Ukraine had posted their wallet address and millions and 
millions of dollars were donated via cryptocurrency. Why? 
Because it was the most efficient way to do it.
    Mr. Timmons. Thank you, Mr. Chairman. I yield back.
    Chairman Hill. Thank you.
    I now yield to the gentleman from California, Mr. Sherman, 
for 5 minutes.
    Mr. Sherman. Billions and billions of dollars have been 
transferred to Ukraine using traditional currencies, and lots 
of money has gone to Russia, evading our sanctions, using 
cryptocurrency.
    Fear of missing out. Somebody else may get ahead of us in 
this technology. The Bahamas is ahead of us. Peru is ahead of 
us in cocaine cultivation. China is ahead of us in organ 
harvesting, and the Cayman Islands is ahead of us in financial 
crime. We don't need to catch up.
    Fentanyl is a new, innovative technology. We don't need a 
regulatory system that rewards those who created that 
innovation.
    There are gaps in our regulatory system because Congress 
fails to pass a law prohibiting Americans from buying 
cryptocurrency. There are gaps in our law because we have not, 
in the alternative, passed a law saying that cryptocurrency is 
clearly a security. So, we are going to leave it to the courts 
to decide, based on the Howey test.
    And there are gaps because the crypto industry cannot 
prosper unless much of it is underwater, immune from familiar 
currency, familiar customer anti-money laundering statutes. 
That doesn't mean everybody who invests in cryptocurrency is 
trying to hide money, although, ``cryptocurrency,'' literally 
means, ``hidden money.''
    Sometimes, they think they can just make a profit investing 
in cryptocurrency and selling it to someone else who needs to 
hide their money, just as you can make money by investing in a 
burglary tool factory without actually being a burglar.
    Sam Bankman-Fried is out on bail, unfortunately, living in 
my State, and living much better than most of my constituents, 
but his ghost is still in this room. He haunts the halls of 
Rayburn. But let's remember why he was here, for one reason: To 
prevent the SEC from having jurisdiction over cryptocurrency 
and to give cryptocurrency the baby regulation, the patina of 
regulation that would be provided through the CFTC.
    If you want to know whether crypto is a currency or whether 
crypto is a security, just ask yourself: Are those in the 
crypto business engaged in the financial services business or 
the agriculture business? It is clear that they weren't the 
Agriculture Committee regulator on this to provide a patina of 
regulation.
    All of the money and power in this town is in the crypto 
side because crypto bros make money literally by making money, 
and they have made over a trillion dollars out of thin air. 
They will accuse the U.S. Government of making money out of 
thin air. Maybe we do, but we are the U.S. Government. What we 
are able to do benefits the American people in a democratic 
system. Nobody elected Sam Bankman-Fried.
    But I want to pursue one other area and that is taxation. 
We have this capital gains allowance, very low tax or, if you 
hold it until you die, no tax on your gain, and we justify that 
on the basis that we are trying to encourage people to invest 
in something that will create jobs and build the American 
economy.
    Professor Allen, can you think of a reason why we allow 
gains on cryptocurrency, when they are reported, to be taxed 
under a favorable rate, a lower tax rate than is paid by our 
staff?
    Ms. Allen. I think you have hit on something important in 
your remarks, which is that we are talking about crypto as 
something it actually isn't, so let me demystify the blockchain 
a little bit. A blockchain is a database, right? That is what 
it is. It has no magical powers. The thing that makes it a 
blockchain is that there is no, ``centralized technological 
node,'' that controls that database, who updates it, et cetera. 
But there are economic forces that centralize control of that 
database, so we have created something that is really 
replicating what we already have.
    Now, I am not an apologist for traditional finance. There 
are a lot of problems with traditional finance, but what we 
have here is all of those problems being replicated or 
exacerbated. And when we talk about sort of giving capital 
gains treatment or tailored regulation, et cetera, to this 
space, we have to ask the question: Why are we doing this?
    Traditional finance, with all of its flaws, facilitates 
capital formation and credit allocation. Crypto does neither, 
so I think we need to keep that in mind as we think about how 
we regulate this space.
    Mr. Sherman. Thank you.
    Chairman Hill. I thank the gentleman. He yields back.
    Mrs. Houchin is now recognized for 5 minutes.
    Mrs. Houchin. Thank you, Chairman Hill, and Ranking Member 
Lynch.
    I appreciate the opportunity to talk to the witnesses, and 
thank you for being here.
    There has been talk today about FinHub's guidance. In 2019, 
the SEC's FinHub released guidance regarding how an issuer of a 
digital asset can determine whether it would fall under the 
definition of an investment contract and, thus, be required to 
comply with securities laws. The guidance consists of a list of 
factors and subfactors that digital assets projects should 
consider.
    Mr. Zweihorn, in your view, is this guidance useful for 
projects in determining whether or not they will be classified 
as a security by the SEC?
    Mr. Zweihorn. Thank you for the question.
    I think when the guidance first came out, the industry was 
very excited to have some guidance, and it was useful in terms 
of showing what the SEC was thinking and was a good-faith 
effort by the SEC to tell the industry.
    But in time, it has turned out to not be all that helpful. 
It consists of 50-plus factors, none of which is determinative. 
It is a question of weighing and, therefore, resulting in how 
likely something will be, so it leaves people sort of not with 
a definitive answer on any particular token they are 
considering.
    Mrs. Houchin. As a follow-up to that, how does a purchaser 
determine how many factors it needs to meet and how to weigh 
the factors against each other under this current structure?
    Mr. Zweihorn. It is a difficult question. A colleague of 
mine referred to it as a ruler with no lines, so you can't 
really tell where on the ruler you are. You kind of get a 
feeling of how many factors and how important those factors 
are, but there is not a way to answer that.
    Mrs. Houchin. During Chairman Gensler's term, has the SEC 
provided any other guidance on how the Commission will 
determine whether a digital asset is offered as part of an 
investment contract?
    Mr. Zweihorn. I am not aware of them putting out further 
guidance as such. Chairman Gensler obviously speaks his mind 
openly before Congress and in other venues, and the SEC has 
brought a number of enforcement actions where the SEC sets out 
its view of whether particular assets are or are not securities 
and explains it to some degree.
    They haven't turned back to the framework in those 
enforcement actions as far as I am aware to evaluate it against 
the framework. And in some ways, some of the enforcement 
actions of late have been inconsistent with the framework, 
where the enforcement action says this asset was sold as a 
security initially many, many years ago, whereas, the framework 
looks to what is it today. What are its uses today? Is it 
decentralized?
    So, it looks like there has been a bit of a shift in 
thinking.
    Mrs. Houchin. What has been, in your opinion, the result of 
the SEC's failure to provide guidance on this issue?
    Mr. Zweihorn. It is very challenging for members of the 
industry and clients of mine because they really are at the 
whim of, are they going to get an enforcement action if they do 
something here? They can have very strong views, very strong 
legal views, opinions, or guidance from counsel, but at the end 
of the day, if they are doing anything in this space, they have 
to worry that the regulator may disagree with them.
    Mrs. Houchin. Switching gears a little bit here, one of the 
problems with the current regulatory framework is that digital 
asset projects have a disincentive to register, as they are 
less likely to be listed on a trading platform if they are 
classified as a security.
    Mr. Zweihorn, would you discuss the perverse incentives 
that this dynamic creates and how our market structure 
legislation can ensure that firms are not penalized for 
complying with the law?
    Mr. Zweihorn. Yes. I think the firms that are not listing 
on exchanges are not doing so because they don't believe that 
the asset involved is a security, and the disincentive is that 
if the asset is a security, those exchanges, which are not 
registered with the SEC, would not list it.
    So if they want to have a liquid market for the asset, they 
need to take steps to ensure that, in their view, they are 
comfortable that it is not a security. The SEC may or may not 
agree with that, because if it is a security, it won't be 
listed.
    I think market structure regulation would be to create a 
viable market structure where if it finds that these are 
securities, make it so that exchanges can actually list them, 
which they really can't today. Or if it finds them as not 
securities, create a market structure where exchanges can exist 
that do list them and trade them in such a way that consumers 
are protected.
    Mrs. Houchin. Thank you.
    From the financial sector to alternative uses and 
applications, digital assets and the underlying technologies 
are here to stay. It is important that we create clear rules of 
the road to stop the threat of regulation by enforcement and 
establish a field where anyone who wants to play by the rules 
has the ability to do so.
    Thank you, Mr. Chairman. I yield back.
    Chairman Hill. The gentlewoman yields back.
    The gentleman from Illinois, Mr. Casten, is recognized for 
5 minutes.
    Mr. Casten. Thank you, Mr. Chairman. And thanks to all of 
our witnesses.
    Ms. Belcher, I want to start with you. In your testimony, 
you described some of your customers as being musicians who 
have to put their music on Spotify or something like that and 
get paid in fractions of a penny for every listen. And I want 
to first say that I completely agree that there is an enormous 
value of the blockchain technology, distributed ledger, as a 
way to monetize the digital asset.
    You said fractions of a cent, which is not a 
cryptocurrency. For people who are engaging in that 
transaction, is what they are putting on the blockchain, 
essentially, an invoice to be repaid in U.S. currency? Or is it 
an invoice to be repaid in a token that is separate from the 
dollar? I just didn't quite follow from how you explained that 
distinction.
    Ms. Belcher. Thank you for the question.
    It is a token, but the point I was trying to make is that 
it can be micro, micro amounts.
    Mr. Casten. No, no. Sure. Why? Why is it a token? Because I 
don't have any need for rapid settlement of 3/10 of a penny.
    Ms. Belcher. Sure. A couple of things. First of all, that 
enables us to program money, to send it instantly and 
automatically across the world with no intermediary, as though 
I am handing a fraction of a cent to someone.
    Mr. Casten. So, it is primarily a settlement time issue?
    Ms. Belcher. No, it is a programmability issue.
    Mr. Casten. No, but I could program an invoice. If you and 
I have--if I want to have a legal contract that you owe me 
money, I can program it and have a blockchain that you owe me 
money, right?
    Ms. Belcher. Yes. Basically, to give you an example from 
Filecoin, it is important that we use a bespoke token, as 
opposed to a stablecoin or the traditional financial system, 
because that is actually what allows us to operate the way that 
the Filecoin token does operate.
    Mr. Casten. Okay. We are going to get wonkier here than we 
have time for, but it seems to me that a token could be an 
invoice that is dollar-denominated. I don't have to retokenize.
    And the reason that I mention it is, Mr. Chairman, I would 
like to enter for the record an article from last week's New 
Yorker entitled, ``Crooks' Mistaken Bet on Encrypted Phones.''
    Chairman Hill. Without objection, it is so ordered.
    Mr. Casten. I would encourage everybody to read this 
article because it is fascinating and has nothing and 
everything to do with crypto. It is, essentially, a lot of our 
international financial regulators hacked into the bad guys' 
cell phones that they thought were encrypted and have unearthed 
these massive financial fraud networks where you can go take a 
picture of a low denomination $5 bill and then send that serial 
number through an encrypted cell phone network to somebody in 
the Netherlands or Mexico or wherever you are moving money. 
Take it to the bank or the illicit bank. Get $30 million with a 
cell phone.
    Mr. Rivera, you mentioned that, sort of, rapid settlement 
was an innovation of the crypto industry. I would submit to you 
that encrypted tokenization was invented a long time before by 
a lot of shady characters.
    The value--
    Mr. Rivera. You mean the U.S. Government.
    Mr. Casten. The value--the U.S. Government is not trying to 
break the law.
    This has tremendous value for people who want to break the 
law. I am not saying that every crypto user is trying to break 
the law, but encrypted tokenization--because I really want to 
separate the value proposition of the blockchain from the value 
proposition of an encrypted token that can get around KYC laws.
    Professor Allen, are you aware of anyone in the crypto 
space, anywhere within the system, who is tracking enough 
information about buyers and sellers on either side of the 
trade so that they are capable of complying with Know Your 
Customer/Anti-Money Laundering (KYC/AML) laws and are doing so?
    Ms. Allen. I do not know if that is happening. I do know 
that avoiding the anti-money laundering regulation is, in many 
respects, a feature rather than a bug of this business model.
    The problem with the blockchain is that it is actually 
quite inefficient when compared with centralized alternatives 
because if you think about it, if you have a database where you 
have to create some kind of proof of work consensus or proof of 
state to deter bad actors, that is going to be more 
computationally expensive than just having a centralized person 
add things to the blockchain.
    So because it is more expensive, the way that you usually 
see efficiency gains is from doing end runs around AML and 
KYC--
    Mr. Casten. I want to get into other things, because I do 
think there is a case to be made. Again, if I am--people often 
confuse me with Jay-Z. If I write a song, sell it to you, like 
the digital transaction, that is a value for the blockchain 
there because it is a digital thing that I can't get around.
    I want to introduce one more thing for the record, but, 
Professor Allen, you had mentioned I think in your testimony 
that a lot of the profits in the crypto industry are made by 
founders in Wales. We have had a tremendous number of people 
here who say this is about closing the racial wealth gap.
    Mr. Chairman, I would like to introduce a Washington Post 
article, ``Crypto is not the key to Black generational 
wealth,'' which notes that from 2017 to 2022, the median 
cryptocurrency declined by 46 percent, and the average stock 
market index rose by 56 percent, and that the losers are 
disproportionately Black and Brown communities who got in late.
    Chairman Hill. Without objection, that will be included in 
the record.
    Mr. Casten. Thank you. I will yield back to you, Chairman 
Hill.
    Chairman Hill. I thank my friend.
    Mr. Flood is now recognized for 5 minutes.
    Mr. Flood. Thank you, Mr. Chairman.
    Let's briefly take a step back and identify why we are 
here. The SEC and Chair Gary Gensler have forced this 
committee's hand. There is simply no way that the digital 
assets ecosystem within the United States will survive without 
some kind of action from Congress to combat the regulatory 
deluge we have seen in the past few months.
    We have all heard from firms like Coinbase that they will 
move offshore. The reality is that in this environment, it is 
hard to blame them.
    In February, the SEC issued a proposed rulemaking that 
would severely restrict the ability of current custodians for 
registered investment advisors to continue to hold custody of 
those assets.
    Mr. Rivera, I would like you to briefly speak to some of 
the challenges associated with the proposed rulemaking from the 
SEC for qualified custodians and how it would affect your firm. 
Specifically, as it stands, how many options does your firm 
have to custody digital assets, and would you expect this 
rulemaking to reduce your firm's options for providing custody 
services of digital assets?
    Mr. Rivera. Our firm has a very limited number of digital 
asset custodians. There are three, perhaps four; there are 
three that we trust. This rulemaking effectively reduces that 
to maybe zero. It seems like the intent is to make it extremely 
difficult to comply with the rule as proposed, which would mean 
that we could effectively be disenfranchised from being able to 
invest in the ecosystem.
    Mr. Flood. Thank you.
    Next, I would like to pivot to how broker-dealers work in 
the digital asset space and whether today's securities rules 
could possibly apply to the digital asset space as written. 
Broker-dealers that work with equities typically custody 
securities for their customers. However, with the current SEC 
custody rules, there is no way for a broker-dealer to directly 
custody customer assets.
    Mr. Zweihorn, can you describe what kinds of challenges 
this presents for broker-dealers within the digital asset 
space?
    Mr. Zweihorn. Sure. Thank you for the question, 
Congressman.
    As you said, broker-dealers typically will custody their 
investor securities on their behalf, and that is part of the 
services they provide that facilitates the customer trading. 
The SEC has a rule that regulates how broker-dealers do so in 
order to protect customers, called the Customer Protection 
Rule, to ensure that those brokers don't mishandle or lose or 
steal those assets.
    That rule was adopted in the 1970s originally, and it has 
been amended over time, and, not surprisingly, it doesn't refer 
to holding a crypto private key as one of the ways that a 
broker-dealer can permissibly hold a customer's assets.
    The SEC has struggled with determining what would be a safe 
mechanism for broker-dealers to hold crypto assets for 
customers, and the most recent step they took was to put out 
guidance that was time-limited; it expires, actually, 3 years 
from today. It would allow broker-dealers to hold custody if 
they have reasonable policies and procedures, but then, there 
is a list of other conditions that brokers, essentially, can't 
meet because it would mean they couldn't do any other business.
    Mr. Flood. Thank you.
    Let's move on to clearing and settling. Within the 
securities market, you need some sort of entity which ensures 
that a trade placed by an investor is ultimately settled 
between the buyer and the seller. The Depository Trust and 
Clearing Corporation is the clearing agency that fills that 
role for securities.
    The current model, which requires a clearing agency to 
clear and settle trades, just doesn't really make sense for 
digital assets operated on a blockchain. Transactions clear in 
real time, and there is no need for one centralized 
intermediary.
    Continuing with this question, you mentioned in your 
testimony the perils of applying the definition of clearing 
agency under the Securities Exchange Act to validators and 
miners on a blockchain that participate in the settlement 
process. Can you just elaborate on that a little bit for me?
    Mr. Zweihorn. Sure. The definition of, ``clearing agency,'' 
under the Securities Exchange Act is very broad, and it 
includes anyone that is facilitating a settlement of a 
securities transaction without the physical delivery of paper 
security certificates. That definition made sense in its 
context where it was regulating the securities market, the 
traditional securities market, and trying to bring a higher 
level of safety and security to the market where paper 
certificates were moving or where they were becoming 
dematerialized.
    Everyone in digital assets is facilitating the transfer of 
the asset without physical delivery, whether they are 
securities or not. But if they are securities, then, arguably, 
the definition would encompass a lot of different parties.
    Now, if a firm, like a digital asset trading platform, 
holds all the assets itself so that it can update its books in 
real time with every trade, it doesn't really seem like you 
need a separate clearing agency to just add an intermediation 
that is not actually technically necessary.
    Mr. Flood. Thank you for your answer.
    The final point I will make is this: Legislation is needed 
to fix this.
    Thank you.
    Chairman Hill. Thank you.
    Mr. Flood. I yield back.
    Chairman Hill. Thank you, Mr. Flood.
    And I will turn to my friend from North Carolina, Mr. 
Nickel, for 5 minutes.
    Mr. Nickel. Thank you. I would like to thank Chairman Hill 
for holding today's hearing on digital asset market structure. 
I am looking forward to working together in a bipartisan way to 
learn more about this issue and pass meaningful legislation.
    Mr. Rivera, you write in your testimony that you are 
worried there is a growing sentiment that crypto technology 
will, ``go away if we don't create new regulations.'' I am 
concerned that if this is the case, and all the trading venues 
were to exit the U.S. market, that any American looking to 
trade digital assets would find themselves having to use an 
offshore exchange.
    As we learned with the failure of Bahamas-based FTX.com and 
others, foreign firms are not always well-regulated.
    It is my priority to protect my constituents.
    Mr. Rivera, do you have any concerns that a decline in the 
number of U.S. trading venues might produce new risks for 
American consumers?
    Mr. Rivera. I do. I think that this is an example of a 
really unfortunate policy outcome resulting from the 
enforcement actions that have happened from regulators, 
particularly the SEC. If there are trading venues that move 
offshore and U.S. persons want to trade in those venues, they 
will probably try to find ways to trade them, and the U.S. 
Government will have much less of an ability to regulate the 
activity on those venues, and that would be unfortunate.
    Mr. Nickel. And I have to apologize. I forgot to thank and 
acknowledge Ranking Member Lynch for his outstanding leadership 
on this subcommittee and, most specifically, thank him for 
keeping us all fed last night on this side of the aisle, with 
some very well-timed pizza. We were here until 11:30 last night 
for a markup. So, I am grateful for your leadership on well-
timed pizza.
    Back to Mr. Rivera. In March of 2022, the SEC released 
Staff Accounting Bulletin (SAB) 121, which effectively 
precludes banks from offering a digital asset custody at scale 
by requiring them to include on their balance sheets crypto 
assets that are custody on behalf of their clients. This is a 
shift in historical practices. Custody assets have always been 
treated as off-balance sheet assets. If crypto companies don't 
have access to safe and security banking, U.S. investors will 
be at risk.
    Mr. Rivera, if banks can't provide this service, who would? 
Are you concerned that some may turn to offshore solutions?
    Mr. Rivera. Indeed. There should be meaningful engagement 
with custodial providers in the ecosystem, and banks, to the 
extent that they want to provide custody to digital assets, 
they should have avenues that they can pursue to do that. SAB 
121 effectively limits their ability to do that in any 
meaningful way. It would be entirely too costly for them to 
have to over-collateralize the digital assets they hold as 
liabilities on their balance sheet.
    Mr. Nickel. Thank you.
    Ms. Belcher, some have claimed that digital asset market 
structure legislation would only legitimize an industry seeking 
to facilitate illicit activities. Some have also claimed that 
digital assets are unnecessary and fail to add any new, real 
value to our financial and technological systems.
    I am doing my best to try to understand this issue and dig 
in. Could you provide us with some background on the use cases 
for Filecoin and the service that it is helping to provide?
    Ms. Belcher. Absolutely. Thank you so much for the 
question.
    Filecoin is just one example of cryptocurrency, but it is 
enabling hundreds of applications and use cases. Those include 
human rights applications. In addition to Starling Lab's 
international criminal court evidence verification, they are 
also storing the USC Shoah Foundation's genocide survivor 
testimony archives.
    We also have with us here today the Prelinger Archives, 
which is using decentralized technologies to store rare films. 
We have the Freedom of the Press Foundation that is exploring 
using decentralized technologies for secure document exchange 
between journalists and anonymous sources. And the Guardian 
Project, which is building a mobile app for eyewitnesses that 
authenticates content captured on smartphones.
    And the Human Rights Data Analysis Group, which is 
exploring how this storage can be useful for accessing 
sensitive human rights data. We also have investigative 
journalists using this technology with enterprise use cases.
    There is an organization called the Decentralized Storage 
Alliance that uses these technologies, which includes EY, 
Seagate, and AMD. Scientific data, not only stored by the ATLAS 
Project at CERN, but also the University of Maryland, the 
University of Utah, and Berkeley's Underground Physics Group.
    And government datasets, an absolutely enormous amount of 
open datasets, not just the ones that I mentioned, but also the 
National Library of Medicine, the National Oceanic and 
Atmospheric Administration, the National Center for Atmospheric 
Research, et cetera, et cetera.
    So, there are just an enormous number of use cases, and all 
of those are enabled by the Filecoin network.
    Mr. Nickel. Thank you so much.
    And I yield back.
    Chairman Hill. I appreciate that. The gentleman yields 
back.
    Mr. Donalds is now recognized for 5 minutes.
    Mr. Donalds. Thank you, Mr. Chairman.
    And I am actually glad I get to go last. I heard a lot in 
today's hearing. Obviously, we have some serious questions that 
Congress is going to need to address. And let's just be very 
clear: The SEC, or the CFTC, or frankly, any other agency has 
not been empowered by Congress to just decide this stuff on the 
fly. Sorry, relative Commissioners and Chairmen that exist 
around this town. We have not authorized you to do that yet.
    A couple of things. One, I found it interesting that Sam 
Bankman-Fried is now the ghost of Christmas past. What happened 
at FTX is unconscionable, never tolerated, but that is 
accounting fraud, which is something that was contemplated 
under the Sarbanes-Oxley Act after the Enron scandal. So, you 
have that.
    If we are going to talk about Russia avoiding our sanctions 
regime using cryptocurrency, then maybe the Administration 
should have paid attention to Russia's military buildup on the 
Ukrainian border after the debacle that was the withdrawal from 
Afghanistan.
    If we are going to talk about the fentanyl crisis, maybe 
the Administration should actually secure the border, as 
opposed to just complaining about fentanyl all the time.
    And with respect to Filecoin or anything else, I think one 
of the most fundamental problems we have in this building is 
Members of Congress trying to justify why an American would 
choose to buy a product that they want to acquire. We are not 
talking about narcotics here. We are not talking about food 
that you ingest. We are not talking about contact lenses that 
go in your eye. We are talking about a digital currency or 
assets or token that they might choose to buy with their own 
U.S. dollars. I thought that was okay in the U.S., but I see 
that not all is reality here on Capitol Hill.
    Mr. Gorfine, is the CFTC, or the Federal Government, for 
that matter, currently equipped to serve as a market regulator 
for digital assets?
    Mr. Gorfine. The CFTC, by virtue of overseeing futures, 
swaps options that are predicated on commodities gains very 
good understanding of commodities and the underlying markets 
and the asset. They currently don't have that authority to 
regulate the spot market, but as I noted earlier, there are 
some unique characteristics of digital commodities that may 
make it reasonable to say we need to have Federal market 
supervision.
    Mr. Donalds. I like your answer, but I am also under 2 
minutes and 36 seconds.
    I want to hone in on one thing. The operative word in your 
sentence is, ``may.'' Does the CFTC, if this is the agency that 
looks to be the closest to be able to do so, have the manpower, 
the technical knowledge, and the expertise to adequately be a 
market regulator of digital assets?
    Mr. Gorfine. Yes. They already are, and they do have that 
expertise. They do have that knowledge. Chairman Behnam has 
been testifying as such, so this is something for which they 
may need additional resources, given the size and scope of 
digital commodity markets, but they do have that expertise, and 
the professional staff there is well-equipped to understand the 
underlying commodity market.
    Mr. Donalds. Okay.
    Mr. Zweihorn, can you elaborate on some of the 
incompatibilities between the digital asset marketplace and the 
traditional financial structure marketplaces?
    Mr. Zweihorn. Sure. As we have talked about many times in 
this hearing, there are lots of digital assets that have 
functional uses. In order to use Filecoin, for example--I don't 
believe Filecoin is a security, but if Congress was to say that 
Filecoin is a security, then everybody who touches Filecoin 
would need to be a regulated intermediary.
    Mr. Donalds. Quickly, let me just say, as a Member of 
Congress, that Filecoin is not a security. But go ahead.
    Mr. Zweihorn. Better you than me.
    If you were to buy Filecoin because you want to use it, you 
want to store files, you can only buy it through a registered 
broker-dealer. The system through which it gets transferred to 
you would be through a registered exchange to actually find the 
buyer and seller and a clearing agency in order to actually 
send it to you. And those basically make it impossible to use 
for its intended purpose, because you are not going to have all 
of the entities involved in facilitating storage of data be 
SEC-regulated for financial services activities.
    Mr. Donalds. Okay.
    Last question. Mr. Rivera, given that Congress is already 
behind the curve regarding blockchain technology, how do we 
ensure that what is proposed today applies down the road?
    Mr. Rivera. Applies what?
    Mr. Donalds. How do we ensure that some of the topics in 
conversations that are being talked about today in this 
committee can apply down the road? What do you think is the 
best course of action for this?
    Mr. Rivera. Yes, we want collaboration by Congress, and by 
members of this committee, to take a very good look at the 
industry and understand all of the different issues at play and 
come up with constructive legislation that regulators can then 
apply meaningfully to multiple different use cases and 
different types of assets. So, we need principles-based 
legislation that is bipartisan and effective.
    Mr. Donalds. Okay.
    I yield back. Thank you, Mr. Chairman.
    And thank you, witnesses.
    Chairman Hill. Thank you. Thank you, Mr. Donalds.
    I want to thank the panel today. It has been a very 
informative hearing. I look forward to comparing notes with our 
colleagues over in the House Agriculture Committee's Digital 
Assets Subcommittee today and see what they learned. Again, I 
repeat, we have 40 Members of Congress engaging right now on 
trying to understand the digital asset marketplace or the 
cryptocurrency marketplace and understanding how best the U.S. 
Government should be engaged.
    What I heard today was that we have a real need for fit-
for-purpose regulatory tools at the SEC and the CFTC. I have 
heard in the spot market, in dealing, in registering something 
that is not a security, clarifying how the laws work and, of 
course, custody. So it was a very good discussion.
    I thank my friend, Mr. Lynch, the ranking member of the 
subcommittee, for our collaboration in listening to your 
testimony and working on potential legislation.
    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.
        
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