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

                         THE FUTURE OF DIGITAL ASSETS:
                         MEASURING THE REGULATORY GAPS
                          IN THE DIGITAL ASSET MARKETS

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

                                 JOINT HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON DIGITAL ASSETS,
                             FINANCIAL TECHNOLOGY,
                                 AND INCLUSION

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                                    AND THE

                       SUBCOMMITTEE ON COMMODITY MARKETS,
                              DIGITAL ASSETS, AND
                               RURAL DEVELOPMENT

                                     OF THE

                            COMMITTEE ON AGRICULTURE

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED EIGHTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  MAY 10, 2023

                                   __________

      Printed for the use of the Committee on Financial Services and the
                            Committee on Agriculture

                               Serial No. 118-19

                        Committee on Financial Services

                            Serial No. 118-9, Pt. 2

                            Committee on Agriculture

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                  __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    52-397 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

                            COMMITTEE ON AGRICULTURE

                     GLENN THOMPSON, Pennsylvania, Chairman
    FRANK D. LUCAS, Oklahoma             DAVID SCOTT, Georgia, Ranking
    AUSTIN SCOTT, Georgia, Vice              Minority Member
        Chairman                         JIM COSTA, California
    ERIC A. ``RICK'' CRAWFORD, Arkansas  JAMES P. McGOVERN, Massachusetts
    SCOTT DesJARLAIS, Tennessee          ALMA S. ADAMS, North Carolina
    DOUG LaMALFA, California             ABIGAIL DAVIS SPANBERGER, Virginia
    DAVID ROUZER, North Carolina         JAHANA HAYES, Connecticut
    TRENT KELLY, Mississippi             SHONTEL M. BROWN, Ohio
    DON BACON, Nebraska                  SHARICE DAVIDS, Kansas
    MIKE BOST, Illinois                  ELISSA SLOTKIN, Michigan
    DUSTY JOHNSON, South Dakota          YADIRA CARAVEO, Colorado
    JAMES R. BAIRD, Indiana              ANDREA SALINAS, Oregon
    TRACEY MANN, Kansas                  MARIE GLUESENKAMP PEREZ,
    RANDY FEENSTRA, Iowa                     Washington
    MARY E. MILLER, Illinois             DONALD G. DAVIS, North Carolina,
    BARRY MOORE, Alabama                     Vice Ranking Minority Member
    KAT CAMMACK, Florida                 JILL N. TOKUDA, Hawaii
    BRAD FINSTAD, Minnesota              NIKKI BUDZINSKI, Illinois
    JOHN W. ROSE, Tennessee              ERIC SORENSEN, Illinois
    RONNY JACKSON, Texas                 GABE VASQUEZ, New Mexico
    MARCUS J. MOLINARO, New York         JASMINE CROCKETT, Texas
    MONICA De La CRUZ, Texas             JONATHAN L. JACKSON, Illinois
    NICHOLAS A. LANGWORTHY, New York     GREG CASAR, Texas
    JOHN S. DUARTE, California           CHELLIE PINGREE, Maine
    ZACHARY NUNN, Iowa                   SALUD O. CARBAJAL, California
    MARK ALFORD, Missouri                ANGIE CRAIG, Minnesota
    DERRICK VAN ORDEN, Wisconsin         DARREN SOTO, Florida
    LORI CHAVEZ-DeREMER, Oregon          SANFORD D. BISHOP, Jr., Georgia
    MAX L. MILLER, Ohio
                                     ------
                         Parish Braden, Staff Director
                     Anne Simmons, Minority Staff Director
                                     ------

         Subcommittee on Commodity Markets, Digital Assets, and Rural
                                  Development

                     DUSTY JOHNSON, South Dakota, Chairman
    FRANK D. LUCAS, Oklahoma             YADIRA CARAVEO, Colorado, Ranking
    AUSTIN SCOTT, Georgia                    Minority Member
    DAVID ROUZER, North Carolina         DONALD G. DAVIS, North Carolina
    DON BACON, Nebraska                  JIM COSTA, California
    TRACEY MANN, Kansas                  ANDREA SALINAS, Oregon
    JOHN W. ROSE, Tennessee              MARIE GLUESENKAMP PEREZ,
    MARCUS J. MOLINARO, New York             Washington
    NICHOLAS A. LANGWORTHY, New York     NIKKI BUDZINSKI, Illinois
    ZACHARY NUNN, Iowa                   JONATHAN L. JACKSON, Illinois
    LORI CHAVEZ-DeREMER, Oregon          GREG CASAR, Texas
    MAX L. MILLER, Ohio                  ANGIE CRAIG, Minnesota
                                         JASMINE CROCKETT, Texas
                                         ------

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        May 10, 2023.................................................     1
    Appendix:
        May 10, 2023.................................................    61

                                   WITNESSES
                            Wednesday, May 10, 2023

    Blaugrund, Michael, Chief Operating Officer, New York Stock
      Exchange (NYSE)................................................    15
    Durgee, Andrew, Executive Vice President, OpenDeal, Inc. d/b/a
      Republic.......................................................     7
    Kulkin, Matthew, Partner and Chair, Futures and Derivatives
      Practice, Wilmer Cutler Pickering Hale and Dorr LLP, and former
      Director, CFTC Division of Swap Dealer and Intermediary
      Oversight......................................................     9
    Massad, Hon. Timothy, Research Fellow and Director, Digital
      Assets Policy Project, Harvard Kennedy School Mossavar-Rahmani
      Center for Business and Government.............................    14
    Santori, Marco, Chief Legal Officer, Kraken Digital Asset
      Exchange.......................................................    11
    Schoenberger, Daniel, Chief Legal Officer, Web3 Foundation.......    12

                                    APPENDIX

    Prepared statements:
        Blaugrund, Michael...........................................    62
        Durgee, Andrew...............................................    66
        Kulkin, Matthew..............................................    78
        Massad, Hon. Timothy.........................................    89
        Santori, Marco...............................................   105
        Schoenberger, Daniel.........................................   113

                  Additional Material Submitted for the Record

    Casten, Hon. Sean:
        Bank for International Settlements (BIS)--BIS Working Papers
          No. 1049-``Crypto trading and Bitcoin prices; evidence from
          a new database of retail adoption,'' November 2022.........   124
        The Washington Post, ``Crypto is not the key to Black
          generational wealth,'' by Michelle Singletary, dated April
          26, 2023...................................................   152
    Hill, Hon. French:
        FTX Investigation Summary As of May 10, 2023.................   156
    Waters, Hon. Maxine:
        Written statement of Americans for Financial Reform..........   157
        Written responses to questions for the record submitted to
          Matthew Kulkin.............................................   164
        Written responses to questions for the record submitted to
          Marco Santori..............................................   165
        Written responses to questions for the record submitted to
          Daniel Schoenberger........................................   166
        Written responses to questions for the record submitted to
          Hon. Timothy Massad........................................   167
        Written responses to questions for the record submitted to
          Michael Blaugrund..........................................   168

                         THE FUTURE OF DIGITAL ASSETS:
                         MEASURING THE REGULATORY GAPS
                          IN THE DIGITAL ASSET MARKETS

                                  ----------

                            Wednesday, May 10, 2023

                 U.S. House of Representatives,
                        Subcommittee on Digital Assets,
                   Financial Technology, and Inclusion,
                               Committee on Financial Services,
                                 joint with the
                     Subcommittee on Commodity Markets,
                 Digital Assets, and Rural Development,
                                      Committee on Agriculture,
                                                       Washington, D.C.
        The subcommittees met, pursuant to notice at 9:30 a.m., in
    room 1100, Longworth House Office Building, Hon. French Hill
    [chairman of the Subcommittee on Digital Assets, Financial
    Technology, and Inclusion] presiding.
        Members present from the Committee on Financial Services
    [Subcommittee on Digital Assets, Financial Technology, and
    Inclusion]: Representatives Hill, Lucas, Davidson, Rose, Steil,
    Timmons, Flood, Houchin; Lynch, Foster, Torres, Sherman, Green,
    Casten, and Nickel.
        Members present from the Committee on Agriculture
    [Subcommittee on Commodity Markets, Digital Assets, and Rural
    Development]: Representatives Johnson, Rose, Molinaro, Nunn;
    Caraveo, Davis of North Carolina, Salinas, Perez, Budzinski,
    Jackson of Illinois, Casar, and Craig.
        Ex officio present from the Committee on Financial
    Services: Chairman Patrick McHenry and Ranking Member Maxine
    Waters.
        Ex officio present from the Committee on Agriculture:
    Chairman Glenn Thompson and Ranking Member David Scott.
        Chairman Hill. Good morning. The subcommittees will come to
    order. Welcome to the historic Ways and Means Committee room,
    and for the Members here not on the Ways and Means Committee,
    now you see how the other half of Congress lives.
        Pursuant to an agreement by the chairmen and the ranking
    members of the Committees on Financial Services and
    Agriculture, this joint subcommittee hearing will come to
    order.
        The agreement provides that today's hearing will be in
    accordance with the committee rules for the Committee on
    Financial Services. However, for the purposes of recognition
    for opening statements and for questioning, I will recognize
    first the Commodity Markets, Digital Assets, and Rural
    Development subcommittee chairman and ranking member, and then
    proceed to recognize myself and Mr. Lynch, then the chairman
    and ranking member of the full Agriculture Committee, and
    lastly, the chairman and ranking member of the full Financial
    Services Committee.
        From there, the questioning will alternate between
    Republican and Democratic members of the subcommittees, with
    the members on the Commodity Markets, Digital Assets, and Rural
    Development Subcommittee recognized first, and then the members
    of the Digital Assets, Financial Technology, and Inclusion
    Subcommittee. We will then proceed in order of seniority.
        Without objection, the Chair is authorized to declare a
    recess of the subcommittees at any time.
        Today's hearing is entitled, ``The Future of Digital
    Assets: Measuring the Regulatory Gaps in the Digital Asset
    Markets.'' I will note at the outset that this hearing has a
    hard stop at 1:00 p.m., which we will strictly observe.
        With that, I will now recognize the gentleman from South
    Dakota, the Chair of the Subcommittee on Commodity Markets,
    Digital Assets, and Rural Development, Mr. Johnson, for 4
    minutes.
        Chairman Johnson. Mr. Hill, thank you, and it is historic.
    There are not very many times that we do things together like
    this in this town, but I think this is altogether appropriate.
    And you are right, this is an august hearing room, there is no
    question.
        Frankly, if we are going to get the kinds of progress that
    we need to get, we are going to have to do it working together.
    And I think our committees have been working together for weeks
    and months now trying to make sure that we bring certainty and
    sensible compliance to the digital asset space. We know that
    digital assets and blockchain technology hold real promise,
    from facilitating payments to increasing data privacy and
    managing supply chain logistics. These networks represent a new
    way for individuals, a new freedom for them to make better
    business decisions. However, current Federal laws and
    regulations provide few rules of the road for those who want to
    engage with those emerging technologies. I think all of us know
    the current uncertainty does not serve us well, and it doesn't
    serve the marketplace well.
        The CFTC and the SEC continue to debate whether certain
    digital assets or securities or commodities--those conflicting
    enforcement decisions create further confusion in the industry
    and the market. And I thought hearing folks today and their
    pre-filed testimony did a good job at explaining how
    problematic that has been. Collaboration between our committees
    will allow us to answer the important questions that face us.
    And congressional action is essential to provide clear rules of
    the road and robust oversight for digital asset market
    participants and intermediaries. The right policy solution
    involves both committees, speaking with one voice to
    appropriately direct the CFTC and the SEC to each focus on what
    they do best.
        Market participants will benefit from the longstanding
    investor protections in the securities and commodities markets,
    but they will also benefit from new ideas, new services, and
    the new opportunities that innovation can bring. Our central
    question today is how best to promote both advantages. We can
    do that, and we must. Governments around the world are
    grappling with these same questions and they are coming up with
    answers. One of the pieces of testimony, I think, noted that
    most of the G20 countries are ahead of us. And in the absence
    of U.S. leadership, they are creating frameworks and
    establishing themselves as hubs for the development of the
    digital asset ecosystem.
        Just last month, the European Union approved its Markets in
    Crypto-Assets (MiCA) regulation, and that really became the
    first comprehensive framework for digital assets in the world.
    And as the use of these assets grow, Congress must be clear
    about how best to regulate this growing sector to ensure the
    United States remains the leader in financial and technological
    innovation. Today's hearing will get us quite a bit closer to
    that goal.
        Thank you to each of our witnesses for their willingness to
    share their expertise, knowledge, and time with us. I look
    forward to hearing your perspectives about the current
    regulatory obstacles for the digital asset ecosystem and
    hearing your thoughts on solutions. And with that, Mr.
    Chairman, I yield back.
        Chairman Hill. The gentleman yields back. Thank you. I now
    recognize the gentlewoman from Colorado, the ranking member of
    the Subcommittee on Commodity Markets, Digital Assets, and
    Rural Development, Ms. Caraveo, for 4 minutes.
        Ms. Caraveo. Thank you, Chairman Hill, and I want to extend
    my thanks to you, Chairman Johnson, and Ranking Member Lynch
    for helping bring the Agriculture and the Financial Services
    Committees together for a joint hearing this morning.
        During the recent Agriculture subcommittee hearing on April
    27th, we discussed the swap market regulatory gap, avenues to
    strengthen customer protections, and the need for sufficient
    resources and funding mechanisms to support these efforts at
    the CFTC. Any legislation that passes Congress must, of course,
    address these issues, but the sprawling nature of the digital
    asset industry also highlights the importance of cross-
    jurisdictional cooperation and communication. That is why I am
    happy to be here today with my colleagues from the Financial
    Services Committee.
        The Biden Administration has supported this collaborative
    approach, too, through issuance of an Executive Order entitled,
    ``Ensuring Responsible Development of Digital Assets,'' which
    called on Federal agencies who work jointly to issue reports on
    a variety of subjects, including a report issued last October
    reviewing these specific financial stability risks and
    regulatory gaps. I hope the success of that joint effort will
    be echoed in today's hearing.
        The scale of digital asset activities has increased
    significantly in recent years, both in terms of market
    participation and use cases. And while our Federal financial
    regulators have successfully utilized their existing
    enforcement and regulatory authorities, we still see charges of
    rampant and willful noncompliance with some of the biggest
    market participants. Ultimately, providing regulatory clarity
    to the digital asset industry must also support a robust
    enforcement regime and prioritize market participants.
        Finally, there have been concerns raised as to whether the
    Commodity Futures Trading Commission (CFTC) has the resources
    needed to regulate the digital asset swap market. I would like
    to note that this is not the first expansion of the
    Commission's authorities in recent years. Following the Dodd-
    Frank Act, the Commission successfully wrote and implemented
    rules that expanded their authorities in the swap market.
    Further, as the digital asset industry has grown, we have seen
    the Agency dutifully exercise its enforcement authorities. Yet,
    if we value increased action in the swap market, we must value
    those who do the work for the taxpayers. I strongly believe any
    digital asset legislation passed by Congress must include a
    funding mechanism for the CFTC.
        With that, I would like to thank our witnesses for joining
    us today. I look forward to our conversation, and I yield back,
    Mr. Chairman.
        Chairman Hill. I thank the gentlewoman, and I now recognize
    myself for 4 minutes. Again, thank you for joining us today at
    this historic hearing on digital asset market structure. Like
    Chairman Johnson, I want to celebrate collaboration on Capitol
    Hill anytime it happens, so we are grateful to the House
    Agriculture Committee for partnering with us in this
    unprecedented joint hearing and working to craft legislation,
    and to our Democratic colleagues for working with us through
    today's unusual circumstances in this joint hearing.
        What we decided to do in this Congress, this year, will
    shape whether or not the digital asset ecosystem has the
    opportunity to thrive here in the United States. But right now,
    there is not a workable framework in place for digital asset
    issuers and intermediaries to be regulated effectively by the
    SEC or the CFTC. I have heard a few members in this room say
    that the status quo of existing laws is enough, that the crypto
    firms are just willfully avoiding compliance with the law, and
    that Republicans somehow are often embarking on a partisan
    pursuit of sweeping digital asset legislation.
        But the reason I know that this can't be a partisan
    exercise is because my Democratic colleagues have been telling
    me for months that they support common-sense legislation . For
    example, just last November, our ranking member of the House
    Financial Services Committee, Ms. Waters, said, ``We need
    legislative action to ensure that digital asset entities cannot
    operate in the shadows outside of robust Federal oversight and
    clear rules of the road.'' Ranking Member Waters went on to
    say, ``It is clear that there are major consequences when
    cryptocurrency entities operate without robust Federal
    oversight and protections for customers.'' And my good friend
    from Massachusetts, the ranking member of our subcommittee, Mr.
    Lynch, said, ``While FTX may be headquartered offshore, the
    circumstances surrounding its collapse strongly point to the
    need for developing thoughtful regulation to protect U.S.
    investors.''
        That is a great point. And since we can't trust offshore
    crypto exchanges, as we saw with the FTX collapse, we want to
    work on legislation here in the United States for U.S.
    companies that will follow the rules, protect U.S. investors
    and consumers, and prevent future chaotic things like FTX from
    happening again. However, if we fail to provide a functional
    framework for digital assets in this country, all we are doing
    is forcing this activity to happen in an offshore exchange,
    rather than in a nicely-innovative, properly-regulated U.S.
    working environment. And that will only hurt U.S. investors,
    innovators, and consumers.
        Remember, this committee worked in a nonpartisan way to
    have Sam Bankman-Fried testify last December before he was
    arrested in the Bahamas. It wasn't our decision to cancel his
    appearance, but the bankruptcy process will take a long time
    and his criminal trial in October could even be delayed. And as
    long as FTX remains an ongoing issue for the committee, I want
    to reiterate our commitment on behalf of House Republicans to
    work with the Minority to make sure that whole situation is
    investigated and that he is held accountable.
        However, we can't lose sight of why both Democrats and
    Republicans have been calling for legislation for months. There
    is nothing partisan about that. To quote Senator Gillibrand,
    ``Establishing a regulatory framework that spurs innovation,
    develops clear standards, develops appropriate jurisdictional
    boundaries, and protects consumers.'' That is why we are here
    today. No one here is claiming that crypto should be exempt
    from rules or that we should create an entirely new regime for
    it. Instead, we are trying to follow the principle of same
    risk, same regulation to amend current law to establish a
    functional regulatory environment. I think the CFTC and the SEC
    and our consumers will benefit. And I look forward to our
    discussion today, and I yield back.
        The gentleman from Massachusetts, the distinguished ranking
    member of the Subcommittee on Digital Assets, Financial
    Technology, and Inclusion, Mr. Lynch, is recognized for 4
    minutes.
        Mr. Lynch. Thank you, Mr. Chairman. I would like to also
    welcome our Agriculture Committee colleagues, and to thank this
    panel for their willingness to help the committee with this
    work, and Chair Johnson as well. I believe there are benefits
    to hosting a joint forum like this between members of our
    subcommittees to consider policy questions around digital
    assets and allow all stakeholders to have a seat at the table.
    I do understand jurisdictional questions have been raised at
    times over whether crypto tokens are securities or commodities,
    and whether the primary regulator of those tokens should be the
    SEC or the CFTC.
        I worry we might be asking the wrong questions, however,
    and we risk feeding into industry-fueled narratives about a
    turf war between these two agencies. The digital assets
    industry continues to claim that it lacks regulatory clarity,
    and that its products and technology don't fit into existing
    regulatory schemes. I believe that industry advocates make
    these claims because they know that the current prevailing
    business models for crypto are not compatible with orderly
    markets, and our investor protection laws.
        The problem is not regulatory ambiguity. It is mass
    noncompliance with existing laws. We are now exploring whether
    we need a new regulatory structure to cover digital assets,
    which would likely undermine well-established laws and
    regulations. I worry that enacting a new law could be viewed as
    a light touch and could encourage other industries to morph
    their products so that they can meet the definition of digital
    assets and thereby avoid long-standing, long-established,
    investor protection and orderly markets requirements.
        I remind my colleagues that the U.S. has a comprehensive
    and long-standing framework of securities laws and rules
    designed to protect investors, promote market integrity, and
    facilitate capital formation. It is the framework that has
    sustained massive innovation in our financial system for
    decades. The SEC has important requirements to protect
    investors and the markets. These include laws that govern
    securities, broker-dealers, security exchanges, and clearing
    and settlement agencies. It requires the companies to provide
    certain disclosures, segregate customer funds, keep records,
    protect customers, and a whole host of other requirements.
    Creating a new carveout for digital assets seems redundant and
    unnecessary.
        I encourage my colleagues to not get lost in the debate
    over whether individual tokens are securities or commodities.
    Instead, we should take a step back and examine the
    intermediaries that facilitate these tokens, such as the
    exchanges, lenders, and wallet holders. Digital assets
    companies want to serve multiple functions, but there are clear
    rules for companies that function as exchanges, broker-dealers,
    or clearing and settlement agencies. Some digital assets
    companies try to flout the rules by being all at once. Rather
    than comply with existing rules, various cryptocurrency firms
    have engaged in a legal battle against the SEC. The SEC has
    brought 130 enforcement actions and has prevailed in every
    single one. Crypto firms often argue that they lack guidance,
    or that their products aren't what they clearly are.
        In closing, I welcome the conversation that explores the
    potential of these products. But given that the majority of the
    industry has failed, I find it difficult to understand the
    benefits without proper regulatory compliance. Creating a
    separate regulatory regime through legislation is not the
    answer. However, I look forward to a continued discussion on
    this topic, and I yield back.
        Chairman Hill. I thank the gentleman. I now recognize the
    gentleman from North Carolina, the Chair of the full Committee
    on Financial Services, Chairman McHenry, for 1 minute.
        Chairman McHenry. First, it is wonderful to be on neutral
    territory before in this little Ways and Means Committee room
    between the Agriculture Committee and the Financial Services
    Committee. We want to show our friends on the Ways and Means
    Committee how two committees can work together and produce a
    legislative product. But I want to thank the Subcommittee
    Chairs for working so well together with their ranking members
    to have this joint subcommittee hearing. The purpose here is to
    make laws to give assurance to the marketplace and to
    consumers, to close regulatory gaps, and to make sure that you
    have like-kind of regulation of new things in our society and
    the potential they hold. We need to get this right for a couple
    of reasons: one, to harness innovation and enable consumer
    protection; and two, to ensure that the CFTC and the SEC will
    work together to ensure that consumers are protected, unlike
    what is currently happening.
        I look forward to the panel's testimony, and I want to
    thank the members for joining in, in this little committee
    room.
        Chairman Hill. I thank the chairman for those comments. I
    now recognize my friend from California, Ms. Waters, the
    ranking member of the full Committee on Financial Services, for
    1 minute.
        Ms. Waters. Thank you very much. Last Congress, I focused
    the efforts of this committee around addressing problems in the
    crypto markets after the Biden Administration testified before
    our committee about possible bank-like runs of stablecoins. I
    set about working on a comprehensive set of legislation,
    jointly with Mr. McHenry, the Treasury, and the Federal
    Reserve. We made solid progress but didn't quite get there.
    Treasury and our financial regulators also identified further
    gaps in oversight in the crypto markets, such as limits in the
    SEC's authority to go after frauds like FTX even when they
    operate just off the coast of Florida. These should be
    bipartisan concerns, and legislation to address them should
    have a path to the President's desk. I hope this Congress, we
    can quickly return to developing legislation together. I yield
    back.
        Chairman Hill. I thank the distinguished ranking member.
        We now welcome the testimony of our witnesses: Mr. Andrew
    Durgee, the head of Republic Crypto; Mr. Matthew Kulkin, a
    partner and the Chair of the Futures and Derivatives Practice
    of the law firm of Wilmer Cutler Pickering Hale and Dorr, and a
    previous Director of the CFTC's Division of Swap Dealer and
    Intermediary Oversight; Mr. Marco Santori, the chief legal
    officer at Kraken Digital Asset Exchange; Mr. Daniel
    Schoenberger, the chief legal officer at the Web3 Foundation;
    the Honorable Timothy Massad, a research fellow at the Harvard
    Kennedy School, the director of the M-RCBG Digital Assets
    Policy Project, and a former Chair of the CFTC, from 2014 to
    2017; and Mr. Michael Blaugrund, the chief operating officer of
    the New York Stock Exchange.
        We thank each of you for taking the time to be here with us
    today. You will each be recognized for 5 minutes to give an
    oral presentation of your testimony. And without objection,
    your written statements will be made a part of the record.
        Mr. Durgee, you are now recognized for 5 minutes.

    STATEMENT OF ANDREW DURGEE, EXECUTIVE VICE PRESIDENT, OPENDEAL,
                          INC. D/B/A REPUBLIC

        Mr. Durgee. Thank you, Committee Chairmen McHenry and
    Thompson, Committee Ranking Members Waters and Scott,
    Subcommittee Chairmen Hill and Johnson, Subcommittee Ranking
    Members Lynch and Caraveo, and esteemed members of both
    committees for the honor of testifying before you today. My
    name is Andrew Durgee, and I am executive vice president of
    Republic and co-founder of the blockchain technology business,
    Republic Crypto. In these capacities, I oversee Republic's
    strategic vision with respect to Web3, as well as sit on
    various corporate boards as a fiduciary. And for better or
    worse, I believe I am the only panelist here who does not
    happen to be an attorney.
        While I am here representing Republic, it is important to
    note, I also feel that I am here to represent the American
    people, of which nearly 83 million have or are currently
    participating within this industry, including millions of them
    who use the Republic platform. I have been in the blockchain
    industry for over a decade and have watched the industry grow
    from concepts and theories to practical deployments. To find
    this industry now the topic of congressional interest is both a
    testament to its maturity and the willingness of this committee
    to strive to continue American innovational dominance. It is
    not lost on me the amount of work and dedication it takes to
    bring this many people together to constructively discuss
    changes that could impact the financial lives of millions of
    Americans, and I thank you.
        Republic was a spinoff of a prominent investment company
    called AngelList. With a focus on the JOBS Act as well as the
    CROWDFUND Act, members of these committees are no rookies when
    it comes to efforts to drive innovation within our beautiful
    country, including Chairman McHenry, who introduced the
    Expanding Access to Capital Act. It was from these efforts that
    Republic was born, a U.S.-based company that employs over 300
    people, which serves U.S. retail investors, and U.S.-accredited
    investors and institutions alike. We are a living success case
    from those initiatives, and we are excited to help bring the
    next wave of American innovation. For those who are not
    familiar with the JOBS Act and the CROWDFUND Act, they created
    two new regulatory securities exemptions known as Reg. CF and
    Reg. A+. These allowed for a novel framework for retail,
    meaning non-accredited investors to be able to invest in
    companies prior to an IPO. This was a groundbreaking change
    from the Securities Act of 1933.
        And it finally gave regular citizens the ability to
    participate in the financial upside of early-stage companies.
    Regulators pointed to these exemptions as functional for Web3
    companies to comply, but they struggle from both a logistical
    disclosure and an SEC-approval standpoint. The disclosure
    requirements simply do not work within an industry trying to
    decentralize itself, for example, once a certain number of
    investors or token holders are reached, the issuer is then
    required to register under Section 12(g) of the Exchange Act,
    inherently limiting access and inclusion from other eager
    participants. It is nearly impossible for a company to push
    towards decentralization without triggering this requirement.
        The second issue is the SEC's approval process. Republic
    has attempted to register a Reg. A+ security token with the SEC
    for the last 3 years, and after 12 turns of that document and
    countless legal bills, we have still been unable to get
    approval. In fact, the current Administration has not qualified
    a single digital asset offering. Thus, the current system is
    not working as intended. Much of what this committee has
    discussed and will certainly discuss today is around crypto
    assets and their speculative form. But it is important to
    remember that what we are really discussing is a technological
    innovation, and one of its first use cases that has operative
    scale just happens to be digital currencies.
        We are in the early stages of this technology, and I really
    want to provide some examples of that. It generally takes about
    25 to 30 years for human beings to adopt a new data transfer
    technology. Radio was invented in 1890, but wasn't commercially
    available until the 1920s. TV was developed in the 1920s, but
    wasn't in homes until the 1950s. Email was invented in 1969,
    but most of you likely didn't have an email address until 1997.
        There is one that I really want to focus on, and that is
    Transmission Control Protocol/Internet Protocol (TCP/IP), which
    is the Internet for those who don't know, developed as a
    Defense Advanced Research Projects Agency (DARPA) project in
    1970, but it wasn't really commercially accepted until 1995,
    when it was rolled out with Windows 95. There is another
    important date, 1983, which is is when TCP/IP was accepted as
    the standard protocol for Internet development, 13 years after
    it was created.
        Well, here we are, 13 years after Bitcoin was created, and
    we are just now starting to talk about standardization. This is
    not a coincidence. Adoption at this stage is not a technology
    problem; it is a human conditioning issue. Every 13-year-old in
    the United States has only existed in a world where Bitcoin has
    existed, and 3 years from now, every 16-year-old will have only
    existed in a world where Bitcoin has existed. Sixteen-years-old
    is an important date because it is generally when someone
    becomes interested in becoming a developer; they are the
    adoption layer. We here in this room are the infrastructure
    layer. It is our responsibility to create an environment where
    every 13-year-old American has a framework upon which they can
    build the next world.
        Thank you and I look forward to your questions.
        [The prepared statement of Mr. Durgee can be found on page
    66 of the appendix.]
        Chairman Hill. Thank you. The gentleman yields back.
        Mr. Kulkin, you are now recognized for 5 minutes.

      STATEMENT OF MATTHEW KULKIN, PARTNER AND CHAIR, FUTURES AND
      DERIVATIVES PRACTICE, WILMER CUTLER PICKERING HALE AND DORR
      LLP, AND FORMER DIRECTOR, CFTC DIVISION OF SWAP DEALER AND
                         INTERMEDIARY OVERSIGHT

        Mr. Kulkin. Thank you, Subcommittee Chairs Johnson and
    Hill, Subcommittee Ranking Members Lynch and Caraveo, and
    Financial Services Chairman McHenry and Ranking Member Waters.
    My name is Matthew Kulkin. I am a partner in the Washington,
    D.C. office of Wilmer Hale, where I lead our law firm's futures
    and derivatives practice group. I previously served as the
    CFTC's Director of the Division of Swap Dealer and Intermediary
    Oversight, now known as the Market Participants Division, and I
    commend the subcommittees for working together today to explore
    potential paths forward for digital asset market regulation.
    These rules and policies cannot be successfully developed by
    any individual committee, legislative chamber or regulatory
    agency.
        The views I have shared this morning are my own; they do
    not represent those of my colleagues, my law firm, our clients,
    or any other person or organization. Thank you for inviting me
    to participate today.
        I have three points I would like to make. The first is that
    the largest digital assets that are traded by market size and
    volume are commodities, and the statutory definition of
    commodity is intentionally broad. It covers almost all goods
    and articles, as well as services, rights, and interests in
    which futures trading takes place. So, products like Bitcoin
    and Ethereum already have CFTC-registered futures contracts
    trading on CFTC-registered exchanges. In addition, the CFTC has
    successfully asserted anti-fraud and anti-manipulation
    jurisdiction, or its enforcement authority over certain
    stablecoins, again, as defined by Congress in the Commodity
    Exchange Act.
        My second point is that the current framework limits the
    CFTC's enforcement authority, solely for fraud and manipulation
    in the digital commodity swap market or cash market, and that
    authority is insufficient to adequately protect customers.
        By limiting the CFTC's oversight of commodity swap markets,
    market participants are not getting the benefit of basic
    customer protections that the CFTC could provide through
    registration, regulation, examination, and enforcement. And
    those authorities already exist in the digital commodity
    futures markets. I am also talking about things like
    segregation of customer funds, and rules governing how those
    funds are held in the event of a bankruptcy.
        That brings me to my third point today. Congress should
    expand the CFTC's role to include regulatory authority over the
    digital commodity swap markets. Doing so would introduce key
    features that are found in the futures markets, which have
    worked well to protect customers for years. In addition,
    segregation of customer funds, things like financial resource
    reporting requirements for intermediaries, exchanges conducting
    real-time surveillance over trading activity, regular
    examination for compliance with CFTC rules, and, of course,
    enforcement for noncompliance with these rules.
        From 2017 to 2019, I had the privilege of serving as a
    Division Director at the CFTC. Simply put, I have great
    confidence in the CFTC's ability to carry out its mission to
    protect customers and promote the integrity, resilience, and
    vibrancy of markets. My experience has shown me how the CFTC
    can register, regulate, examine, and enforce. In fact, I
    partnered with the National Futures Association, a self-
    regulatory organization, on the development and implementation
    of a number of customer protection measures. I saw how the
    CFTC's enforcement program holds individuals and institutions
    accountable for misconduct that interferes with market
    integrity. And importantly, I also worked closely with my
    colleagues at the SEC, and I saw how the CFTC and the SEC can
    collaborate in a productive, responsible manner.
        In 2010, Congress passed the Dodd-Frank Act. In that law,
    Congress directed the CFTC to regulate swap markets, and the
    SEC to regulate security-based swap markets. In the years that
    followed, the two Commissions adopted several important rules
    together and coordinated on the implementation of these new
    frameworks. There are similarities between the implementation
    of Dodd-Frank for over-the-counter derivatives, and today's
    discussion regarding the regulation of digital asset markets.
    In both instances, there is an important leadership role for
    Congress.
        Here, Congress should make clear that the CFTC is the
    primary regulator for digital commodities, and the SEC for
    securities. I believe that approach will provide these markets
    and market participants with a framework that respects existing
    laws, conventions, and market structures. Congress should build
    on its precedent in a manner that best protects investors, and
    at the same time attracts and retains the innovation that has
    made the U.S. capital markets the deepest, most-transparent,
    and most-competitive in the world. I thank you for your time,
    and I will be happy to answer your questions.
        [The prepared statement of Mr. Kulkin can be found on page
    78 of the appendix.]
        Chairman Hill. Thank you, sir.
        Mr. Santori, you are now recognized for 5 minutes.

    STATEMENT OF MARCO SANTORI, CHIEF LEGAL OFFICER, KRAKEN DIGITAL
                             ASSET EXCHANGE

        Mr. Santori. Chairman Hill, Chairman Johnson, Ranking
    Member Lynch, Ranking Member Caraveo, and members of the
    subcommittees, thank you for the opportunity to testify today.
    My name is Marco Santori, and I am the chief legal officer of
    the Kraken Digital Asset Exchange. I was one of the first
    lawyers practicing in the area of digital asset regulation. I
    have advised clients in this ecosystem for over a decade,
    nearly since blockchains were invented. Today, I oversee all
    legal, regulatory, and policy matters impacting our global
    business operations. I oversee 50 lawyers and professionals
    around the world with deep and diverse experience, and public
    sector and private sector backgrounds.
        Kraken was founded over 11 years ago. Since then, we have
    steadily grown into one of the world's leading global digital
    asset businesses. We are proud of our roots as a Bitcoin
    exchange, but we are equally driven by the societal and
    economic value that is developing well beyond financial
    services.
        Blockchains are transforming the way that we consume goods
    and services, secure data, and even deal in property rights.
    Our primary business is operating in-exchange to match buyers
    and sellers in digital assets. Today, we serve over 10 million
    customers around the world through a secure and transparent
    centralized platform. As we have grown, our business has
    diversified beyond our exchange. We operate the world's leading
    digital asset index provider which serves some of the largest
    futures exchanges and asset managers here in the United States.
    We offer staking and futures trading in eligible jurisdictions.
    And we have founded a first-of-its-kind, State-chartered,
    Special Purpose Depository Institution (SPDI) called Kraken
    Bank.
        Today, our global team of over 2,000 professionals is
    located in the U.S. and across more than 70 countries. We
    collaborate and advance our mission through contributions from
    many geographies, professional backgrounds, cultures,
    ethnicities, and, of course, political viewpoints. The
    diversity of our team is a competitive strength that aligns our
    business with the global nature of our markets and the dynamic
    community of customers and innovators we serve.
        Security and customer asset protection has been central to
    our culture and our business model from our inception. We hold
    regulatory licenses here in the United States and around the
    world, including the United Kingdom, the European Union,
    Canada, and other developed and emerging markets. My team and I
    are thrilled to operate with a global perspective because many
    countries are advancing effective, practical, fit-for-purpose
    rules governing digital asset participants.
        Europe and the United Kingdom, for example, have focused on
    assessing the specific real-world characteristics of digital
    assets and advancing risk-based rules to regulate them.
    Although approaches differ by jurisdiction, there is a common
    thread to these efforts. Instead of forcing new products into
    old regulatory schemes, they craft more-effective rules from
    tested principles.
        In the United States, however, we face significant
    regulatory gaps. Those gaps are so stark that they have spawned
    a seemingly-unending docket of both private and public
    litigation. This litigation has not protected consumers. This
    litigation will not protect consumers either.
        Congress can fill these gaps with clear mandates: first, a
    functional standard and process for drawing clear
    jurisdictional lines for SEC and CFTC oversight; second, a
    workable registration path for exchanges at each Agency; third,
    clarification of the role of the CFTC over swap markets;
    fourth, clear direction for ongoing regulatory cooperation; and
    finally, workable transitional arrangements to avoid market
    disruption until then.
        Congress, led by these subcommittees, can fill these gaps
    to improve markets, empower consumers, and ensure the United
    States participates in the world's next wave of technological
    innovation. As you have heard from other witnesses today, there
    is clear precedent for Congress here. Following the 2008
    financial crisis, Congress passed Dodd-Frank, which set up
    lines of demarcation and joint supervision of swaps markets for
    both the CFTC and the SEC. Today's collaboration across
    committee members and staff and across party lines demonstrates
    both the willingness and the ability for Congress to get this
    right. I look forward to your questions and our discussion.
    Thank you.
        [The prepared statement of Mr. Santori can be found on page
    105 of the appendix.]
        Chairman Hill. Thank you.
        Mr. Schoenberger, you are recognized for 5 minutes.

      STATEMENT OF DANIEL SCHOENBERGER, CHIEF LEGAL OFFICER, WEB3
                               FOUNDATION

        Mr. Schoenberger. Chairman McHenry, Chairman Thompson,
    Chairman Hill, Chairman Johnson, Ranking Member Waters, Ranking
    Member Scott, Ranking Member Lynch, Ranking Member Caraveo, and
    other members of the committees, on behalf of the Web3
    Foundation and the Polkadot ecosystem, I would like to thank
    you for the opportunity to testify today regarding blockchain
    technology and the benefits of Web3.
        I am Daniel Schoenberger, the chief legal officer at the
    Web3 Foundation. I have worked at the intersection of emerging
    technologies, law, ethics, and public policy for more than 20
    years. The Web3 Foundation was formed with the goal of
    establishing Web3, a new and better Internet infrastructure. It
    wasn't about building a currency like Bitcoin, or a smart
    contract platform like Ethereum. It was about giving siloed
    blockchains the ability to communicate with each other. And to
    realize this vision, the Polkadot network was built.
        Think of Polkadot as the Simple Mail Transfer Protocol
    (SMTP) of the Internet used to send and receive email, and
    think of layer one blockchain such as Bitcoin or Ethereum as
    email providers like Yahoo or Google. Polkadot allows these
    distinct programs to communicate with a seamless connection and
    interoperability. Without this infrastructure, this would not
    be possible. The native token of the Polkadot network is a
    blockchain-based token known as DOT,--D-O-T--which should be
    thought of as the orchestrating tool used to secure and govern
    Polkadot. To facilitate the creation of this ecosystem, future
    DOT token was sold in private sales from 2017 to 2019. The
    foundation treated DOT as a security in accordance with
    regulation SNT, and the foundation confirmed the identity of
    the original buyers through Know Your Customer/Anti-Money
    Laundering (KYC/AML) checks.
        After 3 years of engagement with SEC staff, the foundation
    believes DOT is no longer a security, based on the Howey Test,
    but it also satisfies the factors indicating the token is less
    likely to be a security as set out in the Framework for
    Investment Contract Analysis of Digital Assets, as it was
    issued by the SEC's Strategic Hub for Innovation and Financial
    Technology, FinHub. Given those functionalities and properties,
    the foundation thinks of DOT as merely a coordinating software.
    The foundation suggests putting DOT in a separate category, for
    example, the class of utility tokens. The most important
    regulatory concern for the foundation is the classification of
    tokens. Both Switzerland and the European Union have created a
    clear framework distinguishing between payment tokens, security
    tokens, and utility tokens.
        Under the current U.S. regulatory approach, a token is
    forced to fit into limited categories. However, it is not
    always clear in which category a token should be placed. As a
    simple example, the chair I am sitting in could be tokenized.
    Also, there will be some tokens that will have the
    characteristics of a particular asset class, and at a time in
    the future will cease to have those characteristics. This is
    part of the nature and innovation of blockchain technology.
    Clearly, a legislative process to reevaluate a token is
    necessary. The SEC staff has already outlined a path to
    evaluate the status of a digital token. The foundation suggests
    that Congress establish a procedure through legislation to
    authorize regulators to reevaluate the status of tokens.
        Let me be very clear: If a token is used for fundraising
    purposes, it should be subject to all applicable laws and
    regulations. However, that same token may serve a functional
    purpose devoid of speculative investment in the future. We
    fully support putting into place a legally-binding process of
    token reclassification. We applaud the subcommittees for
    undertaking the hard work and deliberation necessary to develop
    a legislative framework. We would ask you to do so with an
    understanding and approach that recognizes new technologies. To
    simply apply existing regulation would be inadequate to truly
    address this emerging technology.
        We look forward to helping the committees develop a
    comprehensive framework for all token classification in the
    U.S., and we are confident that with clear statutory
    guidelines, the U.S. will continue to lead the world in
    innovation. I look forward to answering your questions. Thank
    you very much.
        [The prepared statement of Mr. Schoenberger can be found on
    page 113 of the appendix.]
        Chairman Hill. Thank you.
        Mr. Massad, you are recognized for 5 minutes.

    STATEMENT OF THE HONORABLE TIMOTHY MASSAD, RESEARCH FELLOW AND
    DIRECTOR, DIGITAL ASSETS POLICY PROJECT, HARVARD KENNEDY SCHOOL
          MOSSAVAR-RAHMANI CENTER FOR BUSINESS AND GOVERNMENT

        Mr. Massad. Thank you. Chairmen McHenry and Thompson,
    Subcommittee Chairmen Hill and Johnson, Ranking Members Lynch
    and Caraveo, and members of the committees and staff, I am
    honored to be testifying before you today.
        Since 2014, when I became Chairman of the CFTC, I have
    talked about the gap in crypto regulation. And you have heard a
    lot about it today. Obviously, we don't have a Federal
    regulator of the swap market in tokens that are not securities,
    and we have this classification debate, which makes that gap
    worse. So the question is, how do we fix it? And there are now
    lots of calls for maybe tinkering with securities laws and
    definitions, coming up with a new category, and coupling that
    with giving jurisdiction to the CFTC.
        The part that concerns me is the rewriting of the
    securities laws and creating that new definition, because I
    think it is likely to generate its own questions of
    interpretation that may lead to lots of litigation and
    confusion. I think it may also create unintended loopholes. And
    frankly, we don't have the information today to know how to
    classify tokens, to apply the Howey Test.
        I think there is another approach, which is that we would
    pass a law that requires that any trading platform or lending
    platform that uses or trades Bitcoin or Ethereum has to comply
    with a set of principles for everything it does for all the
    tokens on the platform, for all of its activity. And those
    principles would be the ones with which we are all familiar:
    protecting customer assets; preventing fraud and manipulation;
    requiring risk management; requiring reporting; requiring trade
    transparency; and preventing conflicts of interest, and so
    forth.
        Congress would direct the SEC and the CFTC to develop joint
    rules implementing those standards, or create a self-regulatory
    organization (SRO) that would develop those rules and implement
    and enforce them. I think there are several advantages to this.
    First, it is simple. The law would give us jurisdiction over
    all of those platforms that are important, because no platform
    can exist without trading Bitcoin or Ethereum, without having
    to rewrite the securities laws. And the principles would, as I
    say, apply to all activity on those platforms.
        Second, it focuses on the core of the problem, which is
    that over 90 percent of the swap market trading occurs on
    centralized intermediaries. Simply eliminating wash trading on
    those platforms would be a big improvement.
        Third, it is practical, It would not require bifurcation of
    the existing market into one platform for trading commodity
    tokens and one platform for trading security tokens, and it is
    helpful not to do that, because crypto trading actually occurs
    in pairs today.
        In addition, by using an SRO, we would be able to require
    the industry to pay a lot of the cost and thereby reduce the
    Federal budget impact. As I say, the approach would not involve
    rewriting the securities or commodities laws, and the SEC and
    the CFTC would retain their existing authority. And the SEC
    could still bring a case, claiming that a particular token is a
    security. But if it prevails, the platform would simply have to
    stop trading that token or move it to a registered platform.
    The SEC would not be able to shut down the platform as long as
    it was operating in compliance with these core principles,
    which ensures that the platforms can continue on a more-
    responsible basis while these classification issues are
    resolved. It would also, as I say, provide for some disclosure,
    which is important for investor protection and to enable us to
    decide how to classify things. It is an incremental approach,
    and I think we can build on it. It is also a solution that I
    think can be bipartisan.
        Former SEC Chair Jay Clayton--appointed by President
    Trump--and I have kind of formulated this. I know he supports
    it. We also think it is a proposal that people can support
    regardless of how you value the importance of crypto, whether
    you are a crypto-enthusiast or a crypto-skeptic. We don't have
    to debate that, let's just put in place a framework that
    provides investor protection. Let us move forward and we can
    always come back and do more.
        Finally, let me say there are other gaps in the law, such
    as in stablecoin regulation. I appreciate the efforts of these
    committees on that and I am happy to talk about that as well.
    Thank you.
        [The prepared statement of Mr. Massad can be found on page
    89 of the appendix.]
        Chairman Hill. Thank you very much.
        Mr. Blaugrund, you are now recognized for 5 minutes.

     STATEMENT OF MICHAEL BLAUGRUND, CHIEF OPERATING OFFICER, NEW
                          YORK STOCK EXCHANGE

        Mr. Blaugrund. Subcommittee Chairs Hill and Johnson,
    Subcommittee Ranking Members Lynch and Caraveo, Full Committee
    Chairs McHenry and Thompson, Full Committee Ranking Members
    Waters and Scott, and distinguished members of the
    subcommittees, thank you for the opportunity to testify today
    on the regulatory future of digital asset markets. My name is
    Michael Blaugrund, and I am the chief operating officer of the
    New York Stock Exchange (NYSE).
        National securities exchanges, such as the NYSE, serve a
    fundamental role in the capital markets ecosystem by providing
    a forum for companies to raise money, as well as a venue for
    investors to buy and sell the securities of public companies at
    transparent prices in a fair and orderly manner.
        Next week, the NYSE will celebrate the 231st anniversary of
    the signing of the Buttonwood Agreement, the foundational
    document that established our exchange. For more than 2
    centuries since, we have worked to establish and maintain the
    United States' position as the envy of the global capital
    markets. In advancing this position, we focus on utilizing
    innovative technology to ensure that our nation's vibrant
    markets remain competitive around the world. I am here today to
    share some perspective from our experience.
        Although technology evolves over time, the obligation to
    protect investors does not. Whether their trading occurs via
    open outcry, over telegraph, through pneumatic tubes, or
    pursuant to complex algorithms, the public rightfully expects
    that their assets will be protected from fraud, theft, and
    manipulation. The regulatory framework governing national
    securities exchanges brings transparency and a trusted
    environment for issuers and investors.
        As investors increasingly seek exposure to digital assets,
    it has never been more important to develop a regulatory
    framework around them that protects the public. This is not
    unlike the problem that Congress faced nearly 100 years ago
    that led to the establishment of the Securities Exchange Act to
    address these same policy objectives. So, how best to protect
    public investors who seek to engage in the digital assets
    market? The lesson to be drawn from the more-established
    markets is clear. Segregation of key functions within the
    financial markets ecosystem, brokerage, exchange, clearing and
    custody mitigates inherent conflicts of interest, promotes
    transparency, and facilitates competition among service
    providers. This, in turn, benefits investors and results in a
    more fair, efficient, and safe environment.
        When investors trade on the New York Stock Exchange, they
    are represented by registered broker-dealers whose trades are
    cleared and settled by registered clearing houses, whose assets
    are held by registered bankruptcy remote custodians. Investors
    have recourse if they are harmed by any of their service
    providers, and multilateral clearing reduces counterparty risk.
        By comparison, some current-day digital asset trading
    models, as witnessed with the collapse of FTX, commingled
    assumptions in a way that raises serious questions of risk
    management, financial resources, and investor protection. We
    believe that if investors could trade digital assets in a
    similarly-regulated exchange environment, many of the problems
    we have seen in the last year would not have occurred.
        Competition among securities and commodities exchanges is
    fierce, and new entrants are a regular occurrence. It is a
    well-established process to launch a registered exchange,
    whether one with a unique listing concept, a unique trading
    protocol, unique operational features, or a unique market
    segment. To date, however, we have not seen a digital asset
    trading platform follow this well-worn path. There is a
    dissonance between much of the current digital asset industry's
    practice and the standards of investor protection established
    under the law and regulation for traditional markets. Some have
    argued that the rules and regulations should be relaxed to
    accommodate current crypto practice, while others have asserted
    that the market for digital assets must adapt to existing
    standards. Congress can determine its preferred course of
    action. It is our belief, however, that the exchange regulatory
    framework represents an established and well-known foundation
    that can be adjusted to accommodate the marketplace for digital
    assets.
        In this regard, there are several steps that can be taken
    by government agencies that would facilitate practical
    oversight for digital assets. First, provide a tailored
    registration process for investment contract tokens. Second,
    replace the temporary SEC conditions for Special Purpose
    Broker-Dealers (SPBDs) to custody digital assets with a more-
    permanent solution. Third, permit adjustments to applicable
    rules of national securities exchanges and clearing houses
    support securities or other digital assets that are not
    considered national market system securities. And fourth,
    evaluate the potential for dual registration or substituted
    compliance between SEC and CFTC regimes. Coordination between
    the two agencies would work to mitigate the costs, burdens, and
    uncertainty that can arise when more than one regulatory regime
    is implicated.
        American capital markets have long benefited from evolving
    within the parameters of well-established rules. Our experience
    over the past 231 years is a testament to the ability of market
    participants to promote investor protections while adapting to
    technological innovation. Thank you, and I look forward to your
    questions.
        [The prepared statement of Mr. Blaugrund can be found on
    page 62 of the appendix.]
        Chairman Hill. We appreciate our panel's testimony. We will
    now turn to our Member questions. And I recognize the Chair of
    the Subcommittee on Commodity Markets, Digital Assets, and
    Rural Development, Mr. Johnson, for 5 minutes.
        Chairman Johnson. I know this town loves kicking the can
    down the path. But there are times where it is just clear even
    to Congress that action is appropriate and needed. Mr. Durgee,
    I was so grateful for you to point out that a 13-year-old has
    only grown up in the Bitcoin era. We have learned a lot during
    that time.
        And, in fact, every single witness that we have today, and
    every single witness we have had before our Subcommittee on
    Digital Assets have all said that there is a lack of clarity
    within existing law that is holding back innovation in the
    marketplace. It is holding back America's ability to be
    competitive in this development space. And it is not properly
    protecting consumers and the broader marketplace. And so, we
    get to a point where we know that action is appropriate, I
    think the contours of what that looks like are beginning to
    come into focus, thank goodness.
        But I want to hone in on one of these central questions.
    And I will come to you, Mr. Kulkin. We know that one of the
    legs of the Howey Test is about whether or not a centralized
    group of decision-makers has a substantial impact on the value
    of that thing. If they do, it is highly likely to be a
    security.
        In Mr. Schoenberger's testimony, he talked about the multi-
    year process that Polkadot went through to be more
    decentralized. Why is that an important characteristic of when
    something can go from being a security to becoming a commodity?
        Mr. Kulkin. Chairman Johnson, thank you for the question.
    The Howey Test really looks at the issue or sale of a security,
    so you are thinking about it at the moment that the product is
    put out for investors. I would distinguish that from trading
    down the road after it has been put out, where you don't
    necessarily have the expectation of profits based on the
    efforts of others. And it becomes more fungible or I might even
    say more commoditized. And then, the trading in that market, in
    the secondary market looks a lot more like a commodity as
    defined by Congress.
        Chairman Johnson. And we are looking to try to help guide
    the SEC and the CFTC as they try to determine how to apply
    something like the Howey Test to this question of
    decentralization, are there particular factors we should look
    toward? Are there particular triggers?
        Mr. Kulkin. We know that it is substantial, that it is
    sufficiently commoditized. For starters, we can look at where
    derivatives markets already exist. If there are futures
    contracts that have been certified by exchanges at the CFTC,
    and we have people hedging risk on the commodity, that is a
    pretty good indicator that something has been commoditized.
        The other way to look at it is to look at the action of the
    Commission as a body, as opposed to any individual Chair or
    Commissioner or speech or staff statement. In this case, we
    have seen the CFTC as a body take action against certain
    stablecoins in the swap market where they have identified fraud
    or manipulation that has impacted others. So, I sort of look at
    those sources first to determine whether or not something is a
    commodity.
        Chairman Johnson. Yes, looking to the regulators for an
    environment that seemingly everybody acknowledges doesn't have
    proper clarity for the regulators or the marketplace, it seems
    like we could help them better ascertain, when does that
    trigger hit? We are not providing a lot of guidance. Is there
    anything else you could say to help us find a way forward?
        Mr. Kulkin. No, I think that inflection point is a
    challenging one. I will admit that. And it is sort of easy to
    draw out the two ends of the spectrum in terms of a token being
    offered to raise capital versus something that is highly-
    commoditized and hedged to the derivatives markets, but that
    point in between is a challenging one to draw a very bright
    line.
        Chairman Johnson. As you noted in your testimony, 71
    percent of the market capitalization in this area are products
    for which it seems like there is broad agreement that they are
    commodities. So, the CFTC is generally the cop on this beat,
    but for swap market, you noted in your testimony that you are
    not suggesting the CFTC should have broad swap market
    enforcement authority everywhere, but just looking at digital
    assets because they are different. How are they different?
        Mr. Kulkin. They are different in a couple of ways. And if
    I could, Ranking Member Caraveo pointed this out at the last
    subcommittee hearing that many of these digital commodities
    have a very strong retail component. That is different than
    soybeans or oil or interest rates. We have a very strong retail
    market here that needs the benefits of customer protection. The
    other reason is that it is new. And the other commodities that
    I just used as an example have years or decades or generations
    of existing swap market regulation, whereas digital commodities
    do not.
        Chairman Hill. Thank you very much. The gentleman yields
    back. I now recognize the ranking member of the Subcommittee on
    Commodity Markets, Digital Assets, and Rural Development, Ms.
    Caraveo, for 5 minutes.
        Ms. Caraveo. Thank you, Mr. Chairman. And thank you again
    to our panel for being here this morning and for your
    testimony. A common argument, which I touched upon in my
    testimony, is a concern about the CFTC's relative size,
    compared to other Federal financial regulators, and the impact
    that may have on the ability of the Commission to engage in
    robust enforcement.
        Mr. Massad, you were the Chair of the CFTC at a time when
    the Agency was implementing Dodd-Frank, which provided the
    Commission with additional regulatory authority over the swap
    markets. Were there similar concerns at that time for the
    CFTC's ability to oversee those swap markets?
        Mr. Massad. Absolutely. It is not possible for the CFTC, or
    frankly, any agency, to suddenly take on a whole new area of
    jurisdiction without additional resources. In the case of the
    swap market, we did the best we could. But we were cutting a
    lot of other activities that we should have been, I think,
    spending more on, oversight of a lot of the existing market,
    the existing infrastructure. It is as if you all decided, you
    know what? Let's have the Capitol Police not just do the
    Capitol, but all of the airports around Washington, but let's
    not give them any more resources. It just doesn't work.
        Ms. Caraveo. Thank you. I think that is an important issue
    to point out, especially as we are facing potential cuts
    across-the-board to many agencies. To follow up, I also just
    briefly wanted to touch on the theme of today's hearing, which
    is cross-jurisdictional cooperation and collaboration. Sir, for
    you again, what are some measures that can be taken to ensure
    that the CFTC, the SEC, Treasury, and other financial
    regulators work cooperatively to further industry compliance?
        Mr. Massad. Excellent question, Congresswoman. Again, I
    think the approach I have suggested would require Congress to
    effectively say that the CFTC and the SEC have to come up with
    some joint rules or create the SRO to do it, give them a
    deadline, and that would basically force the agencies to do it.
    I think, again, that is a better approach than trying to
    rewrite the securities laws to create this new definition.
        And I would take issue with a lot of the comments that have
    been made about the indicators. There was a comment earlier
    about the fact that if something is commoditized, that means it
    is not a security. No, it doesn't. You can have a futures
    contract, something that is therefore a commodity, but it is
    still a security. We have futures contracts on Tether; that
    makes it a commodity.
        Now, most of us may not think Tether is a security because
    it doesn't pay interest, and we would like to see it regulated
    as a banking product. If it suddenly paid interest, it would be
    a security. There is a group of people running Tether and
    profiting from Tether. But the fact that those futures
    contracts are traded on Tether doesn't remove it from being a
    security.
        Ms. Caraveo. Thank you. I appreciate those comments.
        And I yield back, Mr. Chairman.
        Chairman Hill. I thank the gentlewoman from Colorado.
        I now recognize myself for 5 minutes for questions.
        Again, I appreciate the panel. And I really appreciate Mr.
    Durgee commenting about the progression of technology and its
    adaptation by the American people. I thought that was a good
    perspective, because sometimes we are lost in this debate here
    about the blockchain and distributed ledger technology, and we
    forget that it is a technology, and we are off chasing the
    rabbit of a particular digital asset or commodity. I think you
    make a good point. And I will remind my colleagues that in
    1996, Congress passed a resolution that said, we are not going
    to tax the Internet, we are not going to overregulate the
    Internet, we are going to let this technology progress and we
    are going to tax and regulate and consider things on what
    people do with the Internet as a technology, and I think that
    has created 25 years of amazing economic growth as a result of
    that forward-thinking consideration. So, I think that is the
    spirit in which we work today.
        The SEC disclosure regime is designed to provide reasonable
    investors with information needed to make informed investment
    decisions. Thus, if the existing disclosure regime for digital
    assets isn't producing that kind of result, then the ultimate
    purpose of the U.S. securities laws is, in fact, not being met
    from an investor protection/capital formation point of view.
    Current disclosure requirements, however, do not cover a number
    of the features unique to digital assets that would undoubtedly
    be considered important to any potential purchaser.
        Mr. Santori, what are some of the features of digital
    assets that are not contemplated in the existing securities
    disclosure regime?
        Mr. Santori. Thank you for the question, Mr. Chairman.
    First of all, we agree that the existing disclosure regime does
    not contemplate most of the characteristics of digital assets
    that make them rewarding for users. But it also doesn't account
    for the characteristics of digital assets that can make them
    risky for users, and that is where the primary gaps exist
    today. Some of the elements of digital assets that users want
    to know about, and indeed the people in this room are likely to
    ask about if they were to ever use digital assets, include the
    number of nodes operating on the network, how many developers
    are actually developing on this network, whether these
    developers are associated or whether they are operating
    independently, and where those nodes operate from? These are
    highly-technical igital assets-specific characteristics that,
    frankly, I could probably list for well in excess of my time or
    your time, Chairman Hill.
        Chairman Hill. I think it would be useful if you expanded
    on that in writing, and just talked now about those specific
    disclosure gaps. I think that would be helpful to me.
        Mr. Kulkin, to the extent a digital asset project is
    sufficiently decentralized, and there is not an issuer who
    disclosed this info, such as Bitcoin or Ether, how could an
    intermediary provide disclosure to investors?
        Mr. Kulkin. Chairman Hill, there are a couple of pieces to
    that answer. First, for the intermediary, there can be
    disclosure to the customer about how the intermediary conducts
    its business. And on the product side, and I look at the CFTC's
    model for futures and swaps right now where an exchange needs
    to certify the product to the CFTC, provide commercial specs,
    details about the product, explain how it is not readily
    susceptible to manipulation, and how the financial integrity of
    the product is protected. There is a model there that can be
    used, but maybe at its core, disclosure is only as good as it
    is accurate. So, it has to be policed for fraud.
        Chairman Hill. In this regard, SEC Commissioner Peirce
    proposed a disclosure framework in her safe harbor proposal
    that would have accounted for some of these differences. The
    framework would include disclosures related to source code,
    token supply, governance mechanisms, and other aspects unique
    to digital assets.
        Mr. Santori, do you think Commissioner Peirce's approach
    would be a workable one, based on our conversation?
        Mr. Santori. Thank you for the question, Chairman Hill. I
    do. I think Commissioner Peirce's approach is thoughtful, and
    it is well-tailored to the risks and the rewards. I think
    Congress has tremendous discretion in this regard. But
    Commissioner Peirce's proposal would be light-years ahead of
    what we have today in terms of protecting consumers and
    allowing us as a global business to continue to plan to invest
    here in the United States.
        Chairman Hill. Thank you. I think an important concept, Mr.
    Schoenberger, that you raised was token reclassification, and I
    think that is at the heart of this issue no matter whether you
    are taking Tim's approach or somebody else's approach. And I
    think if each of you would submit for the record your ideas on
    how one thinks about that idea of token reclassification, that
    would be helpful.
        With that, I yield back. And I now recognize the ranking
    member of the Digital Assets, Financial Technology, and
    Inclusion Subcommittee, Mr. Lynch, for 5 minutes.
        Mr. Lynch. Thank you, Mr. Chairman. And Mr. Massad and Mr.
    Blaugrund, I was heartened by your testimony. And I offer my
    cooperation, Mr. Massad, with some of the ideas you have talked
    about with former Chair Clayton, and I would love to be part of
    that conversation.
        The U.S. financial system is indeed, as a number of you
    have said, the envy of the world and a source of strength, not
    only economically, but in international relations, and in the
    geopolitical sphere. But it is built on trust, right? It is
    built on trust at its very core. And every time a crypto firm
    explodes, whether that is FTX or Terra or Voyager Digital or
    Genesis or Silvergate Bank, as a result of those explosions,
    investors get locked out. And now, we have millions and
    millions of investors who are trying to get their money back,
    unsuccessfully so far. We lose trust. We lose trust in that
    system. And we also know full well that criminal enterprises is
    a favorite tool of some of these hacking episodes where we see
    criminal entities, foreign and domestic, actually capitalizing
    on the anonymity there and using that to further their criminal
    enterprise. So, you have all that going on. And now, we have an
    effort by some to import all of that instability, all of that
    risk, and all of that volatility into the previously-stable
    financial system.
        And as my colleague, Ms. Caraveo, has pointed out, there is
    a suggestion that, well, we will move this over to the CFTC,
    which has about 600 employees, and take it away from the SEC,
    which has about 4,500 employees and has a hard time keeping up.
        Mr. Massad, you talked about this a little bit in your
    opening statement, but what are some of the measures that would
    be necessary if we were going to try to share jurisdiction here
    or shift those responsibilities over to the CFTC? And just as a
    heads-up, Mr. Blaugrund, I want to ask you the same question
    with respect to the SEC and what that would involve, and what
    gaps you see in that exercise. But Mr. Massad, go ahead?
        Mr. Massad. Thank you, Congressman. First, obviously, you
    cannot expect either Agency to really tackle this market in a
    more-substantial way, in the way that we need, given the lack
    of investor protection, without significant resources; it would
    be very, very significant in the case of the CFTC. I often said
    to Chair Behnam, when he was suggesting they get swap market
    authority, ``Be careful what you wish for.''
        But second, I think it still goes to this question of what
    exactly would they be getting jurisdiction over? And that is
    where, again, I would rather see a system where we force the
    two agencies to work together, to work through an SRO, and that
    way, the industry would basically have to pay for it.
        Mr. Lynch. Can I ask you on that, on a self-regulatory
    organization, are there other examples out there that you think
    would offer instruction?
        Mr. Massad. Sure. First of all, a self-regulatory
    organization is something that is closely supervised by the
    Agencies and doesn't simply go off on its own.
        Mr. Lynch. Right.
        Mr. Massad. Like FINRA, like the NFBPA, we do have a
    precedent for jointly recognizing those SROs. And what I am
    suggesting is sort of going the next step where we say, okay,
    we are going to have a joint one that is mandated to do this
    common task, if you will, and develop rules that will then have
    to be approved by both agencies. But again, I think it is a
    good interim step forward. It would allow us to bring the
    sector within regulation, which I think is better than pushing
    it out.
        Mr. Lynch. I want to let Mr. Blaugrund get in on this a
    little bit from the SEC perspective.
        Mr. Blaugrund. Thank you. I would agree that finding a path
    forward that in some respect renders moot the question of
    whether a token belongs on one side of a perimeter or the other
    seems like a sensible path. With respect to the process of
    doing that, we think potentially dual registration of exchanges
    or broker-dealers would allow for, for example, the National
    Securities Exchange that decides to trade digital assets, to
    also trade Bitcoin and Ether, if those are determined not to be
    securities. That would be essential, as those are, as was
    noted, the lion's share of the market activity today.
        Mr. Lynch. Thank you, Mr. Chairman. I appreciate your
    courtesy, and I yield back.
        Chairman Hill. The gentleman yields back. I now recognize
    the Chair of the full Committee on Agriculture, Mr. Thompson,
    for 5 minutes.
        Chairman Thompson. Mr. Chairman, thank you so much, and
    thank you to each of the witnesses for being here for this
    joint hearing. I want to echo my fellow colleagues' comments
    and thank our members and witnesses for being here today. When
    Chairman McHenry and I first met to discuss the digital assets
    framework, we set our eyes to a bold plan. We sought to put
    forward the best policies we could by developing them together.
        While both of our committees have been considering digital
    assets for several years, for the past few months, members of
    both committees have engaged in robust and collaborative debate
    and education on the current securities and commodities laws
    and regulations. This joint hearing is a culmination of those
    events which have shed light on a couple of key points,
    including that the current process to determine if a digital
    asset is a security or not is unclear, unworkable, and
    impractical.
        The CFTC lacks the essential regulatory authority over
    retail-serving intermediaries and the digital commodity swap
    markets, and the treatment of customer assets held by
    intermediaries needs to be strengthened. And I am proud of the
    thoughtful approach that members of the Agriculture Committee
    have taken in considering these questions thus far, and I look
    forward to the work ahead with our Financial Services Committee
    partners.
        It is that thoughtful curiosity that makes for the best
    regulation in the end, and I hope we are able to work together
    in a bipartisan manner on substantive legislation to address
    the issues that are being discussed today. Our committees have
    an historic opportunity to work together to create a
    comprehensive digital assets market framework that will provide
    a pathway for developers and users to engage with digital
    assets in a safe, compliant, and, quite frankly, productive
    manner.
        The first question I have is for Mr. Kulkin. Mr. Kulkin,
    Mr. Massad suggests that the CFTC and SEC should establish a
    joint SRO to regulate pursuant to core principles established
    by Congress. Do you think the CFTC/SEC joint SRO construct is
    an efficient, effective, and practical solution?
        Mr. Kulkin. Thank you for the question, Mr. Chairman. And I
    agree with a lot of the diagnosis that Mr. Massad has offered.
    But I worry that creating a new SRO from scratch would take
    time, so I don't know. I think about this in terms of
    incremental progress, and I don't know that we need to recreate
    the wheel here. I noted in my opening statement that more than
    70 percent of digital commodities currently being traded are
    commodities, so by expanding the CFTC's authority beyond just
    enforcement authority, which is reactionary to regulatory
    authority, and requiring those exchanges, those intermediaries,
    to be registered, regulated, examined, and then subject to
    enforcement, is probably a quicker path to providing the
    investor protections that are currently lacking in these
    markets.
        Chairman Thompson. Could you please tell me about past
    instances where the CFTC and the SEC had shared jurisdiction,
    and whether there were any lessons learned from those
    experiences?
        Mr. Kulkin. Sure. I think the biggest success case is post-
    Dodd-Frank, when the SEC was given jurisdiction or asserted
    jurisdiction over security-based swaps, and the CFTC over
    swaps. And through that, the SEC and the CFTC adopted joint
    rules together that really set the fundamental baseline for
    swap market regulation. I think that succeeded because Congress
    led and gave direction. And I would contrast that with the work
    that has been done on security futures contracts and securities
    future regulation, where the agencies work together but not
    with the same direct clarity from Congress, and it hasn't been
    as successful.
        Chairman Thompson. Mr. Massad, besides the National Futures
    Association's (NFA's) precedent for this structure, are you
    firm with NFA's role as a joint CFTC/SEC SRO? Let me start with
    Mr. Kulkin, if you could?
        Mr. Kulkin. Yes, Mr. Chairman. When I was at the CFTC, part
    of my portfolio included working with the NFA. I think it is
    important to note that the NFA has 500 employees, and post-
    Dodd-Frank, they built out from scratch a complete registration
    and examination program for swap dealers. We're a decade out
    now, and it is fully operational. So when I think about an SRO
    model we have seen in recent years, the NFA does exactly what
    we are talking about today.
        Chairman Thompson. Very good. In my few remaining seconds.
    I want to thank our two Subcommittee Chairs for doing such a
    great job in this space for future leadership. I yield back.
        Chairman Hill. Thank you.
        And now, I have the pleasure of recognizing my friend from
    Georgia, the ranking member of the Committee on Agriculture,
    Mr. Scott, for 5 minutes.
        Mr. David Scott  of Georgia. Thank you very much. And I
    want to thank all of the witnesses for joining us and being
    here. This is a very important and timely hearing. As some of
    you may know, I have long been concerned about the risks and
    the pitfalls of cryptocurrencies and what they pose for our
    retail investors.
        And also, as some of you may know, as Chair of the House
    Agriculture Committee, I provided leadership on this issue. One
    year ago, on May 13, 2022, we held a hearing, examining FTX and
    its proposal to trade margin products through a non-
    intermediary model. And in that historic and monumental hearing
    in our House Agriculture Committee, I raised my serious
    concerns about this proposal because I believed it made an
    already-risky market even riskier for investors. I was
    concerned that FTX was playing fast and loose with our markets,
    to the detriment of the customer. And I have been proven right.
    And I continue to be concerned. As of now, many other Members
    of Congress have followed my leadership on this issue about the
    vulnerability and the volatility of cryptocurrency, which we
    have seen time and time again.
        And now, FTX, this stunning collapse has revealed
    extraordinary mismanagement, misappropriation of customer
    funds, a complete failure to adhere to basic measures of
    corporate control, and, quite honestly, an arrogant example of
    corporate deceit. And FTX, while certainly the most-prominent
    example, is not alone. VenEx Holdings is currently under
    investigation for violations of our sanctions laws, and we have
    seen countless other examples of this type of misuse and abuse.
        So, ladies and gentlemen, as we have seen time and time
    again, these sketchy types of offerings provide little to
    nothing in the way of disclosures to investors, who, quite
    honestly, are being used. And now, ladies and gentlemen, our
    cryptocurrency markets are rife with fraud, misuse, and
    volatility that seems to pose all risks and no rewards for our
    everyday investors. Here is my real point. The supposed
    benefits of digital assets that we have all heard about, have
    yet to be seen in real life. It doesn't work as a currency. And
    I ask you, do everyday Americans pay for goods and services
    using cryptocurrency? The answer is absolutely not.
        And importantly, it does not advance economic inclusion as
    so many platforms claim they do. Ladies and gentlemen, I have
    spent 20 years as a Member of the United States Congress,
    fighting for true financial inclusion. And that means ensuring
    that consumers are protected from fraud, are protected from
    scams, and are not subject to hefty fees for their
    transactions.
        Also, it means improving the overall financial health of
    all consumers, especially low-income consumers who are
    unfortunately regularly left out of our financial system. So
    let me ask you, how does pushing these same consumers into
    opaque, risky, volatile markets advance these goals?
        Chairman Hill. Would you please----
        Mr. David Scott of Georgia. There is no way they do, Mr.
    Massad.
        Chairman Hill. Mr. Scott?
        Mr. David Scott of Georgia. Yes.
        Chairman Hill. I would like to ask you to direct that
    question to somebody to respond in writing because your time
    has expired.
        Mr. David Scott  of Georgia. Please, Mr. Massad, respond to
    it in writing.
        Chairman Hill. The gentleman yields back. I now recognize
    the gentleman from Ohio, Mr. Davidson, who is also the Chair of
    our Housing and Insurance Subcommittee, for 5 minutes.
        Mr. Davidson. I thank the chairman, and I thank our
    witnesses. And I think in spite of all the narratives up here,
    the market is really clear. I think of any number of companies
    that have experienced Gary Gensler's, ``Hotel California,''
    approach to crypto regulation where there is no path to leave,
    you come in, and you ask for the clarity that he says is there,
    and there is just no path to escape.
        Several of the companies who have witnesses here today have
    experienced that, oh, if I only knew to click the link to file,
    I think the Kraken CEO said we could have saved millions of
    dollars. So, the reality is not shaped by what the Members of
    Congress are saying up here. The market is very clearly
    speaking and we do need to react to that.
        Mr. Santori, in a POLITICO interview you gave last month,
    you were asked what you believe is an underrated idea in this
    space. You said that it was the power of exit and explained how
    we don't have such an ability to exit from intermediaries in
    traditional finance. This would be the ability to have self-
    custody. And in your testimony, you also explain how your
    exchange complies with Know Your Customer (KYC) and Anti-Money
    Laundering (AML) laws. Can you explain for some of the members
    of the two committees how it is possible to reconcile the idea
    of self-custody while simultaneously adhering to Know Your
    Customer rules?
        Mr. Santori. Thank you for the question, Congressman. I do
    think the two are compatible. I think that we as an ecosystem
    can both walk and chew gum at the same time. I think that KYC
    is not incompatible with self-custody. I think that the
    important factor is, who is best-placed to collect that
    information? Kraken is a centralized service, we are a
    custodian, we are an intermediary. We are here today to
    reinforce that we are indeed well-placed to collect that
    information. We KYC every single customer who uses our platform
    in the United States.
        From South China to South America to the South Bronx, we
    KYC everybody, because we are well-placed to do that. Part of
    the promise of digital assets is the ability to self-custody.
    We don't offer self-custody products, but other participants in
    the market do offer self-custody products. Those are pure
    software that is pure speech. They are publishers of software,
    they are not in a position to collect KYC information, and they
    shouldn't be required to. We don't require KYC for every single
    transaction in the U.S. economy. It doesn't make sense to
    require every participant in the U.S. economy to KYC. We as a
    centralized exchange are happy to do that. And we would expect
    that that would be included in any action that Congress takes
    as a result of these hearings.
        Mr. Davidson. Yes, thank you for the clarification. And I
    think custody is just so important. Of course, self-custody is
    just the ability to own private property. And I think it is
    also important that we recognize when capital gains, if any,
    are triggered, and it shouldn't trigger whether you move from
    one custodian to another, including self-custody.
        Mr. Schoenberger, in your testimony you mentioned that
    Polkadot is ranked as a top industry participant when it comes
    to your protocol's level of decentralization. In my bill, the
    Token Taxonomy Act, one of the bright-line elements I proposed
    for defining whether a digital asset is a security or not, is
    the degree of control that an issuer would have over the
    digital assets. So when this body writes laws that will help
    distinguish between what is and is not a security, do you
    believe that we should factor in the level of decentralization
    that protocol has, like proof of stake?
        Mr. Schoenberger. I think that this is a crucial point
    because community consensus, which goes back to
    decentralization, is at the core of the idea of Web3. And if we
    look at the DOT token, what it does, it is essentially a piece
    of orchestrating software. It is technology. It is a piece that
    helps access and participate in the broader network bit. I
    think we should look at what these tokens do if we want to
    regulate them as opposed to what they are called. And the
    foundation launched the network and gradually gave up control
    like it was a launch process that lasted a year-and-a-half, but
    ultimately ceased central control, be it at a technical or a
    governance level.
        Mr. Davidson. Yes, I think that is an important
    distinction. And how do we measure when that point occurs? I
    think of Protocol Labs and Filecoin in a similar path where
    they very overtly used our existing framework to launch the
    project. But at some point, this is the, ``Hotel California,''
    from which they can't escape. When is Filecoin actually a
    digital asset and no longer part of the entity, Protocol Labs?
    I hope we resolve that here today. And I yield back.
        Chairman Hill. I thank the gentleman for yielding back, and
    I now recognize my friend from Illinois, Dr. Foster, for 5
    minutes. Thank you.
        Mr. Foster. Thank you, Mr. Chairman, and thanks to our
    witnesses as well. Estimates that were referenced in the
    testimony indicate that anywhere between 50 percent and 95
    percent of Bitcoin transactions are fakes, that it is wash
    trades and similar products on the market. So for the first
    question, does anyone on the panel believe that it is possible
    to conduct a well-regulated futures and derivatives market when
    the underlying asset is subject to this level of market
    manipulation? Let the record show that no one believed it was
    possible.
        Mr. Santori. Sir, you have two people with their lights on.
        Mr. Foster. Oh, is that right? Okay. Yes. So, describe how
    you can have a well-regulated derivatives market when the
    underlying asset is subject to massive market manipulation?
        Mr. Kulkin. I think that question supports why the CFTC,
    which is limited right now to simply monitor----
        Mr. Foster. It is the swap market, yes.
        Mr. Kulkin. That is right, and----
        Mr. Foster. And I agree completely. That is the point. You
    agree with the point that we have to do a better job. We have
    to eliminate manipulation in the swap market to have well-
    regulated derivatives.
        Mr. Kulkin. Yes.
        Mr. Foster. Okay. Everyone concurs with that. Great. Now,
    if we wish to prevent wash trades, insider trading, front
    running, money laundering, ransomware, and everything else, is
    there any alternative to having both sides of every crypto
    transaction associated with a traceable digital identity? And
    have that digital identity issued by a government with which we
    have extradition treaties and a common concept of financial
    fraud, is there any alternative to that? Okay. Let the record
    show that no one came forth with an alternative.
        Mr. Santori. Sir, are you asking whether there is an
    alternative to----
        Mr. Foster. Yes, how do you prevent wash trades without
    associating both participants in any crypto transaction with a
    trusted, traceable digital identity?
        Mr. Santori. I do believe there are alternatives to, I
    believe----
        Mr. Foster. Describe one example of something that can
    prevent wash trades, that does not have traceability of digital
    identity to both participants?
        Mr. Santori. Kraken, for example, monitors our exchange for
    abuse on----
        Mr. Foster. On your exchange, but you accept Bitcoin, which
    gets traded anonymously on the dark web without that. So, you
    are basically a portal to that. You are not preventing----
        Mr. Santori. I wouldn't say that at all. I think we play an
    important role as gatekeepers in this industry.
        Mr. Foster. But there are wash trades happening with self-
    custody that you cannot control, for example.
        Mr. Santori. I would be surprised if wash trades happened
    in any meaningful sense. Trades cost, they are expensive to do
    on-chain, and particularly, MAS wash trading on-chain is
    regularly detected by forensics platforms. There are----
        Mr. Foster. Or some crypto assets. There are crypto assets
    where the identity is much more difficult to trace. And I
    believe this is not possible. And the market will no doubt move
    to those if it is driven by the desire to do anonymous and
    fraudulent trading. I think that really, in my mind, is the
    place that we have to go.
        Actually, Mr. Kulkin, you mentioned on page 9 of your
    testimony that various industry participants have suggested
    various KYC solutions, including even at the wallet level. And
    so, this strikes me as where we're going to have to end up
    here. Now, if you just look at the automobile industry, and how
    essential it has been to the development of the automobile
    industry to have license plates be mandatory on every car and
    to have the license plate issued to a registered driver--it
    would be completely unacceptable to have unlicensed cars with
    unlicensed drivers cruising through your neighborhood or coming
    across your international borders.
        And for the same reason, I believe we will have to issue a
    trusted digital identity at the wallet level. For every crypto
    wallet, you will have to say, I want a wallet. Go to a
    government that we trust and have that license plate issued for
    that wallet. Could you describe some of the proposals, concrete
    proposals for wallet-level identity?
        Mr. Kulkin. Congressman, I will defer to others. I think
    someone else on the panel made the point about KYC-ing wallets.
    But I would build on Mr. Santori's point, and note that if the
    CFTC had regulatory authority over the spot market, it would be
    able to impose on registrants through core principles in the
    same way that it does for futures and swaps markets, that the
    exchanges conduct surveillance, and that the KYC participants,
    as part of their onboarding, submit to the rules and
    jurisdiction of the exchange. And those exchanges essentially
    act as an SRO, in addition to the CFTC and the NFA.
        Mr. Foster. Okay. Mr. Schoenberger, in your testimony you
    made the comparison with Web3 and SMTP mail transfer protocol,
    with the idea that people would somehow be interacting with the
    blockchain. Excuse me. I am out of time. If you could respond
    in writing to the Moxie Marlinspike article that you are no
    doubt familiar with, ``My first look at Web3,'' I would
    appreciate it.
        Chairman Hill. The gentleman yields back. Thank you. You
    can respond to his question in writing.
        I now turn to the gentleman from Tennessee, Mr. Rose, for 5
    minutes.
        Mr. Rose. Thank you to our distinguished chairmen and our
    ranking members for holding this hearing. And thanks to the
    witnesses for sharing your time today. Mr. Chairman, I kind of
    feel like a NASCAR driver but I am not sure which cap to wear,
    my Agriculture cap or my Financial Services cap today, but I am
    honored to get to be a part of this hearing and hear from these
    august witnesses.
        I would like to begin today with Mr. Kulkin and Mr. Massad,
    who suggested exchanges that don't list Bitcoin or Ether would
    be excluded from regulation. Mr. Massad testified that U.S.
    exchanges collectively list around 400 digital assets. The SEC
    has indicated that there are nearly 10,000 digital assets being
    traded on hundreds of platforms. Do you think it is problematic
    if we don't regulate the trading of digital assets and
    exchanges that don't list Bitcoin or Ether for trading?
        Mr. Kulkin. Congressman, thank you for the question. There
    are a number of digital commodities in addition to just Bitcoin
    and Ethereum. And I think to Mr. Durgee's point earlier, that
    trend will continue, so creating an artificial restriction to
    only include those digital commodities--I suspect we will be
    back here speaking with you again in the future.
        Mr. Rose. Again, Mr. Kulkin, I have heard some of my
    Democratic colleagues, particularly on the Financial Services
    Committee, claim that because Gary Gensler has declared that
    nearly all digital assets are securities, that we should just
    treat them all as such. Do you think this is the right
    approach, to do nothing and let Mr. Gensler just have full
    control of the space?
        Mr. Kulkin. Congressman, I don't. But I don't think that is
    the best approach, because nearly 70 percent of digital
    commodities traded today have already been deemed commodities
    by the CFTC, as a body, as opposed to any Chair, Commissioner,
    or staff. And so, I think we need to be thoughtful about which
    products are commodities and should be treated as commodities,
    just like oil or soybeans or interest rates.
        Mr. Rose. I personally would liken Chair Gensler's approach
    to my son, Sam's, approach. He is 2-years-old, and when it
    comes to toys, he wants to hold all of the toys, but he doesn't
    want anyone else to be able to play with the toys at the same
    time. And so, I thank you for your answer.
        Mr. Santori, Mr. Massad testified that Congress should not
    pursue legislation creating new asset classes under the
    jurisdiction of the CFTC or the SEC because it would generate
    confusion and lead to disputes. Do you agree?
        Mr. Santori. Thank you for the question, Congressman. I
    don't agree. I think that what we have today is abundant
    confusion and complexity. We have two of our financial
    regulators here in the United States, alleging contradictory
    positions over the same asset. They have alleged that the same
    asset is one under oath, sworn. And, again, a complaint that it
    is both a security and a commodity, but it doesn't fit into the
    narrow classifications of assets that can be both as a future.
    What we have today is an untenable position. What we have today
    is unending complexity and litigation that is leaving consumers
    unprotected and leaving us as a global organization unable to
    plan and unable to invest here in the United States.
        Mr. Rose. Mr. Kulkin, would you like to respond to that as
    well?
        Mr. Kulkin. No. I agree with Mr. Santori.
        Mr. Rose. Thank you. Mr. Santori, it is essential for any
    market structure legislation to set rules for the custody of
    digital assets so the customers can have confidence that their
    digital assets actually are where an intermediary says they
    are. Digital assets raise, of course, several novel issues when
    it comes to custody that must be addressed.
        Mr. Santori, as we think about how to apply these
    protections to digital assets, do you have any recommendations
    for how we should address issues related to custody?
        Mr. Santori. Thank you for the question, Congressman.
    Custody is something we believe that is critical to consumer
    protection. We believe it is critical to our ethos. It is part
    of Kraken's ethos. The failings that we have seen over the last
    year have had quite a bit to do with a lack of corporate
    governance controls, among them being custody. Kraken does
    offer custody for its users.
        We segregate our users' funds and their assets. But I will
    say that there is no such thing as physical segregation on a
    blockchain because these assets are digital, they are not
    physical. Custody is an important thing to get right for this
    Congress. I would say that the most important element of this
    is prescribing uniform standards for custody across market
    participants, so the consumers know how their assets are being
    held in custody and they can have confidence in it.
        Mr. Rose. Thank you. And I yield back, Mr. Chairman.
        Chairman Hill. I thank the gentleman. Ms. Budzinski, what
    State are you from?
        Ms. Budzinski. Illinois.
        Chairman Hill. Illinois. You are recognized for 5 minutes.
        Ms. Budzinski. Thank you, Mr. Chairman, and thank you to
    the ranking members, and thank you to the panelists today. I
    appreciate your testimony. As we participate in these important
    hearings on the future of digital assets, it is very clear that
    there is a pressing need to develop a regulatory framework for
    this industry to protect consumers while also allowing room for
    growth.
        I was really happy to participate in the subcommittee
    hearing we had on the House Agriculture Committee not too long
    ago. But maybe zooming out a bit on this topic, at the same
    time, I hosted a town hall, my first town hall as a freshman in
    my district last week, and we talked about a whole host of
    issues from the farm bill to the debt ceiling. And yet, I just
    don't hear a lot about these issues from my constituents. I
    represent a very rural part of our State, central and southern
    Illinois.
        So, I am asking all of you as panelists, how do we frame
    this conversation for folks back home, when we are talking to
    constituents, as it relates to the vision for DeFi to be a
    supplement to those who have been underrepresented in the
    traditional finance markets, in particular? I would be
    interested in your thoughts. Thank you.
        Mr. Massad. If I may address that? I agree with you,
    Congresswoman. These issues obviously aren't central to most
    Americans, who are worried about whether they will have a job,
    whether their incomes will rise, the price of goods, education
    of their families. What concerns me, though, is what we saw
    when crypto prices really rose quickly, were a lot of people
    who thought, Oh, I am going to invest in this and I can quickly
    make some money.
        And maybe, they even understood that there was volatility
    to the assets, although I think a lot of them didn't understand
    that. But there is also a huge amount of risk in these
    platforms, and so it is maybe not that important an issue for
    most Americans. But I think we have a responsibility to create
    an investor protection regime so that they are not taken unfair
    advantage of, they are not risking their hard-earned savings on
    things where there is so much fraud and scam and risk.
        Mr. Kulkin. Congresswoman, if I could just add, when I
    tried to explain to friends and family that the CFTC has
    enforcement authority, which is really reactionary, but that
    they do not have regulatory authority in the commodity spot
    market, frankly, they were surprised. It is confusing. It is
    complicated. And so, in my mind, the best incremental step
    forward here is to expand the CFTC's authority so that
    participants, particularly retail participants, have the
    protections that a lot of them think they already have, but
    that don't exist.
        Mr. Durgee. Additionally, up until recently, unaccredited
    investors could really only participate in post-IPO offerings.
    Most of the larger gains take place pre-IPO. So when we look at
    access and inclusion in particular districts like yours, those
    individuals don't have the ability to even participate. So, due
    to U.S. accreditation laws, it creates an even greater wealth
    disparity.
        So when the crypto markets became activated, particularly
    in the U.S., you started to see U.S. retail investors
    participating, and it was almost their first glimpse at
    participating in what would be considered an early-stage
    startup that they could never have touched otherwise. Now, if
    we had clear regulatory frameworks in consumer protections,
    where they had the ability to participate within those markets
    and there was some level of oversight, then they would be
    sitting in a much better position than they are now and still
    be able to participate in something that is early, that
    otherwise they never would have been able to touch.
        Ms. Budzinski. Great points. Thank you. I had just one
    other follow-up question with my remaining time for Mr. Massad.
    Your testimony touched on the resources that would be necessary
    to equip the CFTC, should they be given additional regulatory
    authorities? Could you walk us through resources the Agency
    identified or invested in during your time at the CFTC in
    relation to digital assets and any additional resources we
    should be looking at now?
        Mr. Massad. Thank you, Congresswoman. It was still a fairly
    small market when I was in office. I left in early 2017. And we
    did not, under my tenure, approve any futures products. There
    were only swaps trading on platforms with eligible contract
    participants.
        In terms of our regulatory authority, it was fairly small
    at that time obviously, with the overall growth of the market
    and the fact that we now have several platforms trading
    derivatives on crypto, it is a much bigger challenge. And if
    you then go and give the CFTC spot market authority, and I
    think they are very competent, they could do that, but only if
    they get adequate resources because it is just a big policing
    job.
        Ms. Budzinski. Thank you, Mr. Chairman. I yield back. Thank
    you.
        Chairman Hill. The gentlewoman from Illinois yields back.
    The gentleman from Oklahoma, the former Chair of the House
    Agriculture Committee, and a great American, Mr. Lucas, is
    recognized for 5 minutes.
        Mr. Lucas. Thank you, Mr. Chairman. I very much appreciate
    that. The EU recently approved its markets in crypto assets
    regulation and the U.K. is currently crafting its own
    framework.
        Mr. Santori, as other jurisdictions craft their own
    frameworks, and more time passes without a digital asset market
    structure framework in the U.S., how does this make our job
    more difficult as we write the rules of the road here at home?
        Mr. Santori. Thank you for the question, Congressman. Other
    jurisdictions are indeed pushing ahead. They have been pushing
    ahead. These are G20 jurisdictions with sophisticated financial
    services markets, with sophisticated technology industries. The
    U.S. is significantly behind in that respect. It is important
    that we get it right, not necessarily get it first. But I can
    tell you firsthand, as a global business with a global
    footprint, we have made plans to invest in Europe.
        We are making plans to invest in the United Kingdom. Our
    plans to invest in the United States by hiring people, by
    expanding our boots-on-the-ground operations, well, we are
    limited in that regard. We find it quite difficult to figure
    out just how much we should deploy in terms of resources here
    without a comprehensive Federal plan.
        Mr. Lucas. As we continue this discussion and work towards
    legislation, we should keep in mind that the United States, of
    course, has the most-efficient, most-liquid, and the deepest
    capital markets in the world. This is a result of our
    willingness to embrace innovative technologies, not stop
    innovation abstracts.
        Mr. Blaugrund, could you touch on this? You touched on this
    in your testimony, but from the perspective of the world's
    largest stock exchange, could you elaborate generally on both
    the difficulty and the importance of balancing financial
    innovation with investor protection?
        Mr. Blaugrund. Certainly. Thank you. I think you have
    placed it very well, balancing investor access and investor
    protection is a crucial exercise. And certainly, the framework
    that we see in the National Securities Exchanges is one model
    which may lend itself well to this more-nascent space. In
    particular, the segregation of roles between an exchange and a
    broker, between the exchange and the clearinghouse and a
    custodian, that is really basic risk management and can give
    the public consumer, the public investor confidence that they
    are not going to use a crypto term of art.
        Mr. Lucas. Following up on that, you discussed how the
    regulators could choose to provide relief for exchanges that
    want to list digital assets. From your perspective, what SEC,
    and for that matter CFTC rules should be altered to address
    this?
        Mr. Blaugrund. I think the first issue that needs to be
    addressed is really a chicken-and-egg problem. Right now, there
    are prospective issuers who are reluctant to pursue
    registration because there aren't exchanges, sort of capitally
    National Securities Exchanges on which they could trade. And
    National Securities Exchanges are reluctant to enter the space
    because there are no listings that have been effective under
    the SEC. So, I think the SEC needs to consider some sort of on-
    ramp to allow for existing tokens to come into the regulatory
    fold and find a way that we can sort of end this chicken-and-
    egg situation.
        Mr. Lucas. Mr. Santori, you said that a major barrier for
    digital asset trading platforms to register with the SEC is the
    direct interaction with retail investors rather than through
    broker-dealers. In your view, what revisions are needed to
    current law as it relates to broker-dealers in order to have a
    digital asset trading platform be successful? What are the
    characteristics of digital assets that you believe make this
    necessary, in my remaining time?
        Mr. Santori. Thank you for the question, Congressman. We
    believe that the broker-dealer construct is a flexible enough
    construct to accommodate a great deal of trading and digital
    assets. Broker-dealers can interact directly with consumers and
    investors. They can elect under Reg. ATS to operate essentially
    as an exchange. This flexibility is, I think, critical to the
    task in front of Congress today. And you can contrast that
    flexibility with the rigid regime that exists for National
    Securities Exchanges that require intermediation, require that
    assets not trade after-hours because of the price pressure that
    occurs on that trading after-hours, require transfer agents,
    which are one of the extractive intermediaries that are
    obviated by digital assets and blockchains. We think that the
    SEC still has a role over the future of digital asset trading
    and the broker-dealers specifically; the ATS regime is an
    excellent fit.
        Chairman Hill. Thanks, Mr. Santori. The gentleman's time
    has expired. And the committee is very pleased that the witness
    from the New York Stock Exchange used an agriculture analogy of
    chicken and egg. We are grateful for that today.
        And now, I turn to the distinguished ranking member of the
    full Financial Services Committee, Ms. Waters, for 5 minutes.
        Ms. Waters. Thank you very much. I am going to address this
    question to Mr. Blaugrund. As I mentioned in my opening
    statement, this committee has heard from a wide range of market
    participants about the nature-addressed discrete risk posed by
    stablecoins, which will be subject to bank-like runs similar to
    what we saw with SVB, and previously with money market funds.
        We have also heard about the need to enhance the SEC's
    authority because it is currently limited when going after
    firms overseas, and the need to enhance the CFTC's authority
    because it currently lacks authority over so-called spot
    markets. However, there is a broader effort underfoot to
    establish an entirely new market structure for cryptocurrencies
    and their issuers.
        I think that we should first pause and consider whether our
    securities and commodity market structure is sufficient to
    address these issues. For 90 years, the New York Stock Exchange
    and other market participants have been highly-regulated to
    enable American companies seeking capital to gain the trust of
    investors, and we have it. We often talk about how our capital
    markets are the envy of the world, and it is our securities
    laws that make that so.
        Your exchange must abide by strict rules about what it can
    and cannot do. This is a result of regulation designed to
    protect investor assets by providing the markets with material
    information, eliminating conflicts of interest, and risk to our
    financial system, and promoting fair competition.
        In your view, are crypto exchanges meaningfully different
    from traditional exchanges such that they should warrant an
    entirely new legislative and regulatory framework? What would
    be the effect of crafting a new and separate legal framework
    for crypto exchanges?
        Mr. Blaugrund. Thank you very much for your question. I
    think it is a general principle that like functions should be
    regulated in like fashion. And while it is true that the
    digital asset trading platforms have commingled many of the
    functions, which in the traditional markets are discreetly
    highly-regulated, like brokerage, exchange, and clearing and
    custody, the fact that they have commingled them doesn't
    decrease risk; it increases risk. So in our mind, bringing
    those activities up to the standard that has been established
    for National Securities Exchanges is an appropriate posture.
        To your second question, we are certainly concerned that
    should there be an alternative lighter-touch treatment that is
    developed for digital assets, there is a risk of regulatory
    arbitrage that is established, and that would somehow diminish
    or degrade the investor confidence, the resiliency, the
    transparency, and the leadership of our more traditional
    markets as well. There are certainly adaptations that the
    regulatory agencies should consider with respect to digital
    assets and refining the way that they are supportive. But we
    believe that they have the authority they need today to do so.
        Ms. Waters. Thank you very much. And I yield back the
    balance of my time.
        Chairman Hill. The gentlewoman yields back. Mr. Steil from
    Wisconsin is recognized for 5 minutes.
        Mr. Steil. I thank both of our chairmen and both of our
    ranking members for calling today's hearing. It is great to see
    Agriculture and Financial Services come together to address a
    really big challenge. Why? Because I think it is time for
    Congress to get to work on digital asset rules because the
    current regulation-by-enforcement practice is not working.
        Last month, the Financial Services Committee asked SEC
    Chairman Gensler for his view on the future of digital assets
    regulations, and candidly, we didn't learn a lot. We didn't
    hear a path forward for digital asset regulation. Maybe, one of
    the only things we learned was that Chairman Gensler has never
    traded a digital asset himself.
        We don't know what Chairman Gensler's plans are, and there
    are not clear rules in front of us. And regulation by
    enforcement doesn't work. They come in and register Black Box
    served. The registered by Black Box is serving to chill the
    digital assets innovation. I don't think we can afford as a
    country to cede regulation to other countries. I am concerned
    that it is going to move innovation outside the United States,
    move it overseas, costing Americans jobs and putting U.S.
    retail investors ultimately at a disadvantage. And I think this
    hearing demonstrates that Congress is ready to do the job.
        Let me dive in and ask a question if I can of you, Mr.
    Schoenberger. In particular, when we think about the global
    construct, if we fail to do this here in the United States and
    we see innovation move abroad, I want to look at what other
    countries, what other regions are doing, and in particular, how
    do regulators in Europe view blockchain technology, and how
    does this attitude differ from that of U.S. regulators?
        Mr. Schoenberger. Thank you, Congressman, for the question.
    I can speak for the Web3 Foundation, that made a very
    deliberate decision at the time to be headquartered in
    Switzerland. Switzerland provided very early on for a very
    clear regulatory framework, distinguishing between payment
    tokens, security tokens, and utility tokens, and also the Swiss
    regulator, FINMA, issued a no-action letter to the Web3
    Foundation back in 2019.
        Mr. Steil. Would it be fair to say that they took a much
    more forward-thinking approach in Switzerland and in Europe?
        Mr. Schoenberger. I would say so. This framework that they
    provided certainly provided the legal certainty to be
    headquartered there and have legal clarity around the
    classification instantly.
        Mr. Steil. Thank you very much.
        Mr. Durgee, if I can shift over to you, the European Union
    recently approved its Markets in Crypto-Assets Regulation
    (MiCA). What lessons can we take away from the EU's experiences
    as we craft our own market structure laws here in the United
    States?
        Mr. Durgee. Yes, thank you for the question. As we look at
    the rollout of MiCA, which won't take place actually until
    2024, it really is the first large-scale jurisdictional
    regulatory framework that we have seen from our major market.
    It is very focused on retail investors, particularly,
    protecting them in the earlier stages of these projects and the
    project development. But I would say it would be a misstep to
    only look there.
        If we look at other jurisdictions like the Virtual Assets
    Regulatory Authority (VARA) out of Dubai, MAS out of Singapore,
    and we look at what South Korea is doing, particularly around
    security tokens and gaming, you start to get a much more
    holistic view of how the world is approaching the asset class,
    as the United States starts to wait in the wings.
        Mr. Steil. And as those countries have more stability, more
    clarity, not driving forward through a regulatory approach with
    putting forward rules and regulations of the road, do you see
    more investment in innovation occurring in those jurisdictions?
        Mr. Durgee. Extensively so. And the real example is--I
    think I am the only one here who actually runs early-stage
    venture funds; we have multiple ones out of Republic that we
    run--in the last 3 years, there has been a huge shift to
    offshore investments. I would say we are doing over 3 times
    more investments offshore than in the United States.
        Mr. Steil. Thank you very much.
        One final question to you, Mr. Santori. We have talked
    about the Howey Test, and how it is used. And in particular, do
    you think these efforts of other requirements is triggered when
    you have a digital asset project where holders contribute to
    the development and success of a functional or decentralized
    network?
        Mr. Santori. Thank you for the question, Congressman. No, I
    don't. I think that is actually quite rare. I think that the
    attraction of blockchain networks is, among other things, the
    ability to coordinate between large, otherwise disorganized
    groups whose efforts contribute to the code, but who don't act
    together as issuers, who don't exercise managerial expertise
    over profits and losses. This is a very different environment
    than what was contemplated and how we ended storage growth.
        Mr. Steil. Thank you very much, because one of the
    requirements of the Howey Test is that the profits be primarily
    derived from the efforts of others. I think your comment there
    is helpful. Mr. Chairman, I yield back.
        Chairman Hill. The gentleman yields back. The gentleman
    from North Carolina, Mr. Davis, is recognized for 5 minutes.
        Mr. Davis of North Carolina. Thank you so much, Mr.
    Chairman, and I will say good morning to all of the witnesses
    today. Thank you so much for joining us, and especially to my
    colleagues, too, on the Financial Services Committee, as well
    as those on our House Agriculture Committee. I'm looking at Pew
    report research that was done and this particular data point is
    showing as high as 66 percent minority communities using--and
    this is self-reported, by the way, U.S. adults that are self-
    reporting having traded or use cryptocurrency.
        And my question here is, I have looked at different
    research that has been out there just trying to get an
    understanding of what is taking place. And I just want to
    understand, as we are here trying to wriggle out, discuss
    regulation, how do we best understand right now, in terms of
    the data, what is actually taking place before us?
        Mr. Massad. If I may answer that, Congressman, I am very
    concerned by this statistic you cited, I think it does suggest
    that a lot of people might be jumping into this space, not
    being fully aware of all the risks. I think we certainly saw
    that as prices started to go up dramatically in crypto. And I
    think it just speaks to the need to create a much better
    investor protection framework. We do not have that today in
    this industry.
        Mr. Santori. If I could add, Congressman, this discussion
    is not just about people using tokens or people using digital
    assets. This discussion is about people using the product of
    those digital assets, the functional use cases that exist
    today, and this Congress has heard from witnesses who have laid
    bare some of those uses.
        I can add a couple to that pile, but maybe one in
    particular that I think illustrates that distinction between
    the use case and the coin. Today, when you watch a video on
    your phone, and we all probably watch videos on our phone from
    time to time, those videos are recorded in far-off places using
    different standards, resolutions, color schemes, et cetera.
    Transforming that into a version that fits on your phone takes
    computing and processing power. It takes time and effort. And
    it is expensive. There are blockchain-based networks now that
    coordinate and incentivize that process, it is called
    transcoding, so that end-users can see that video that is being
    recorded in a different resolution on their phone, on their
    screen, on a big screen, on IMAX, right?
        People are using that technology today to view videos of
    all kinds, mundane use cases that have nothing to do with
    blockchain technology. But those use cases are being
    provisioned and delivered because of functional networks in
    digital assets. Kraken doesn't provide that. We would be the
    subject of regulation; we only provide liquidity services. But
    we are a part of that ecosystem. And that is part of this
    conversation today.
        Mr. Davis of North Carolina. When I think broadly speaking,
    and we look at the recent market, what has happened with the
    market in terms of crisis, and come back to just trying to
    piecemeal and understand the dynamics of what is taking place,
    it would be concerning at how we are able to identify certain
    trends in the data.
        And what would be important to me when we obviously are
    talking about safeguarding consumers from fraud scams that are
    taking place, at how we are proactively looking at any trend
    lines to further protect consumers.
        And I would love, with the time remaining, if anyone would
    like to just add another comment on what that looks like,
    identifying any trend lines that would be of concern when we
    are talking about putting safeguards in place for consumer
    protection.
        Mr. Kulkin. Yes. Congressman, if I could, I will maybe
    offer that I think right now, market participants see press
    releases where regulatory agencies like the CFTC are bringing
    cases in the spot market for trading of things like Bitcoin,
    Ethereum, and certain stablecoins for fraud and manipulation.
    And they assume or they think that the CFTC has full regulatory
    authority for those markets, but they don't. And they later
    find out that customer funds aren't being segregated, the
    markets aren't being subject to surveillance, and they are not
    getting specific treatment under bankruptcy. And so, there is
    an effort that could be made to expand the authority, which
    would then go to further education of the market.
        Mr. Davis of North Carolina. Thank you. I yield back, Mr.
    Chairman.
        Chairman Hill. Thank you, Mr. Davis. Mr. Timmons of South
    Carolina is recognized for 5 minutes.
        Mr. Timmons. Thank you, Mr. Chairman. The question, is a
    digital asset a security, really is a question of, should
    existing securities regulations apply to digital assets? It
    seems to me that the answer is no. Blockchain technology
    enables digital assets to be created, stored, transferred, and
    transacted. The use of digital assets is essential to our
    discussion here. Some are cryptocurrencies intended to be used
    as a means of payment to buy goods and services. Some are
    digital assets intended to represent traditional assets such as
    equities, bonds, or derivatives. Some are digital tokens
    intended to provide access to and operate blockchain-based
    infrastructures.
        Further still, digital assets have different funding
    structures at their inception, different governance structures,
    different operational rules, and different marketed economic
    realities. Existing securities regulations simply do not have
    the appropriate flexibility to foster innovation and support
    the adoption of blockchain technology in all of its use cases,
    while also providing the necessary investor protections. Here
    in Congress, we face a daunting task in navigating these
    regulatory waters.
        I believe Congress must act to clarify the regulatory
    uncertainty. Digital assets will be a huge part of the global
    economy in the future. The strength of our markets and the rule
    of law in the United States gives us the ability to lead in the
    future of digital assets. That ability to lead is also often a
    burden, but it is a burden that we are obligated to rise to the
    occasion and meet.
        The purpose of this hearing is to identify what future
    framework will best meet the needs of the digital assets
    industry while protecting our citizens from foreseeable harm.
    Along those lines, I have a few questions around whether
    existing securities regulations should apply to digital assets.
    One of the hallmarks of digital asset that has reached its full
    potential is being functional and decentralized.
        Mr. Schoenberger, would you discuss what it means for
    digital assets to be functional and decentralized, and why
    these features have become the end goal for so many digital
    asset projects.
        Mr. Schoenberger. Thank you, Congressman, for the question.
    I would say this is certainly true for DOT, and some other
    projects probably not far at all. For those, wherever it
    applies, we need to go back to the Web3 version that is based
    on community consensus, and this necessarily requires that
    there is no central entity controlling the network. The Web3
    Foundation, during the launch of the Polkadot network, gave up
    control over the network and handed that over to the community
    very early in the game. So, that is the decentralization part.
        Being functional simply means a token needs to be more than
    simply a means of payments or a vehicle for investment. In the
    case of DOT again, this gives you access to the network. It is
    used for securing the networks, used for participating in the
    governance, and also if you want to lease blockchain on top of
    that network.
        Mr. Timmons. Thank you for that. One follow-up, in your
    testimony you said that when the foundation removed the pseudo
    key, it was a pivotal point in decentralizing the Polkadot
    network. Would you explain more about that process and how it
    ensured that the foundation could not control the network
    anymore?
        Mr. Schoenberger. Sure. The pseudo key gives super-use of
    capacity, which gives you the abilities of a super-admin. This
    key, together with abilities, was given up, and since the code
    is all open source, this can be looked up by literally
    everyone. And once this was handed over to the community to
    hold control over the network, to reinstate this will take a
    majority vote of the community.
        Mr. Timmons. Thank you for that. We discussed today that
    either legislation or adaptations are needed. I want to discuss
    that some more. Bitcoin is the most popular digital asset
    ecosystem. It is also the only digital asset that both the SEC
    and the CFTC can agree is a commodity.
        Mr. Santori, under the current securities laws, would it be
    possible for National Securities Exchanges to list Bitcoin and
    securities alongside each other?
        Mr. Santori. Thank you for the question, Mr. Timmons. No,
    no, no, it wouldn't. National Securities Exchanges are limited
    in the assets that they can list. And it is not just a question
    of amending the list of assets they can list; it is a matter of
    ripping the heart out of the rules that are in place that make
    that listing possible. The limitations on trading times, the
    requirement of intermediaries that can be expensive, and the
    requirement that they don't list additional assets, are
    fundamental to the structure of a National Securities Exchange
    that exists in the United States. It is not a flexible one.
        Mr. Timmons. Thank you for that. Mr. Chairman, I yield
    back.
        Chairman Hill. The gentleman yields back. The gentleman
    from Illinois, Mr. Casten, is recognized for 5 minutes.
        Mr. Casten. Thank you, Mr. Chairman, and thank you to all
    of our witnesses here today. I have just a general request, and
    I feel like I make some version of this at all of our hearings.
    If a carpenter asked you, why do I need a screwdriver, and you
    said, let me tell you why all carpenters need to use toolboxes,
    we would say you are not answering the question.
        We are not here today to talk about whether or not Web3 or
    blockchain should be regulated at some entity. We are not here
    to talk about whether or not you can pay for things with a
    digital dollar through invoices. We are here to talk about
    cryptocurrency. And so, I would ask you all to limit your
    conversations to that, because the questions are about the
    token, not the ecosystem in which the token lives.
        I want to start with you, Mr. Durgee. I want to make sure I
    didn't misunderstand you. If I understand your testimony, is it
    your view that the cryptocurrencies will help close the wealth
    inequality gap?
        Mr. Durgee. Indeed, it is.
        Mr. Casten. Okay. If you had invested in the S&P Index over
    the last 5 years, from 2017 to 2022, do you know what the
    return is you would have earned?
        Mr. Durgee. It would not have been terrible.
        Mr. Casten. Yes, that is almost 61 percent. There have been
    12 cryptocurrencies that have existed during that same 5-year
    period. Do you know what the median return is if I had invested
    in that basket of currencies over the same period?
        Mr. Durgee. I assume I know the basket you are talking
    about, and it would be less than that.
        Mr. Casten. It is a lot less, in fact, I would have lost 46
    percent of my money. It is a negative yield. Now, that is the
    median cryptocurrency, and we could talk about where the other
    ones are, but according to a recent report from the Bank for
    International Settlements, 73 percent to 81 percent of all of
    the Bitcoin traders during that period lost money. Do you want
    to revisit your statement about this being a great way to close
    the wealth inequality gap?
        Mr. Durgee. I think when we look at the wealth inequality
    gap, we come back to the aspect of accredited versus
    unaccredited access.
        Mr. Casten. That is a different question. The historical
    data is that this is not actually a way to grow wealth. I am
    really concerned if we are telling people who do not have the
    sophistication, that this thing where they would have lost 46
    percent of their money over the last 5 years is something
    other, than I don't know, a way to transfer wealth?
        Mr. Durgee. Yes. I think when we go back away and we look
    at that, we are all here to talk about consumer protections,
    right? That is the goal of this conversation.
        Mr. Casten. But I asked the question because there is a
    myth about wealth inequality. I am happy to debate facts, but I
    am not happy to debate lies. And I think we need to be honest
    about those facts.
        Mr. Blaugrund, I want to move to you. In your comments, you
    mentioned that investor protections such as segregation of
    rules between trading venues, market makers, and asset
    custodians are a hallmark of regulated exchanges. I totally
    agree. Thank you for making that point.
        I would remind us all that your comments, which I think are
    valid coming from your mouth, are virtually identical to
    comments that Sam Bankman-Fried made in his characterization of
    FTX in his prepared testimony here last June.
        Because many of those same statements have been made by
    other crypto exchanges, do you have any way to verify that
    those other exchanges' statements are any more accurate than
    the statements made by Mr. Bankman-Fried last June, as it
    relates to their exchanges?
        Mr. Blaugrund. With respect to digital asset trading
    platforms that assert that they have controls in place to
    enforce consumer protections, I don't know that there is any
    sort of third-party verification that is available.
        Mr. Casten. Okay. So, as you know, because you live under
    these SEC regulations, the current SEC regulations do require
    exchanges and brokers to issue and provide investors and market
    participants with fair, timely, and accurate information. If
    the crypto exchanges were subject to those regulations, would
    you be able to answer the prior question in the affirmative?
        Mr. Blaugrund. If they were complying with the regulations,
    then we would be able to answer it correctly.
        Mr. Casten. For both the exchanges and the brokers,
    everybody in that ecosystem?
        Mr. Blaugrund. Yes, sir.
        Mr. Casten. For my last question, I just want to build on
    the comment that Ms. Caraveo and others have made. I think we
    have established the CFTC as the smallest of all of our
    financial regulators, by staff, and by resources. And look, it
    is great that we say, let's increase the funding of these
    organizations, but just to state the obvious, it is never easy
    to raise the amount of resources that go to fund organizations.
    If this industry is such a big deal, if it is such a great way
    to grow wealth, if it is going to be so huge in the future,
    would you care to speculate why this industry would like to be
    regulated by the smallest, least well-resourced organization?
        Mr. Blaugrund. I don't care to speculate, sir.
        Mr. Casten. I yield back.
        Chairman Hill. The gentleman yields back. The gentleman
    from New York, Mr. Molinaro, is recognized for 5 minutes.
        Mr. Molinaro. Thank you, Mr. Chairman. And I, too, want to
    acknowledge the fact that the two committees are meeting here
    today. When I came to Congress, I was one of the few folks who
    actually wanted to have this conversation. And I just listened
    when my colleague suggested that this hearing is not about
    regulations. In fact, it is.
        This is an industry that has certainly been pushing the
    expanses of innovation, creating opportunity to access capital
    and wealth, and doing so in a way that yes, has enormous risks,
    we recognize that. But at the same time, it's an enormous
    opportunity, particularly for those who don't understand or
    want to or can participate in the traditional banking
    infrastructure. That is all critically important. I represent a
    rural community in upstate New York, and we might as well be
    some banking island in any other place of the world.
        And so yes, this hearing is about regulation, in fact,
    regulation of an industry that is asking us to do something.
    And I appreciate the testimony we have heard already and the
    progress that we are making.
        My colleague, Mr. Timmons started down the road of talking
    about distinguishing, I want to get through that, whether or
    not it is possible for National Securities Exchanges to list
    Bitcoin and a security alongside each other. Mr. Santori, you
    started down that road, and I wanted to add to that as a
    follow-up, is the SEC working with trading platforms to account
    for those differences?
        Mr. Santori. I can't speak for other participants in the
    digital asset industry or ecosystem. We did in fact try to work
    with the SEC. We had what I thought was good engagement with
    the staff. I won't go into the details of that, as I think
    building trust between the industry and its regulators is
    important. But at a point in those conversations, they were cut
    off, and I don't believe that had anything to do with the
    staff.
        So, I can tell you that we tried. I can tell you as an
    attorney who has represented clients in the industry that other
    participants have tried, but I don't believe that anybody has
    really gotten anywhere.
        Mr. Molinaro. Mr. Kulkin, how would allowing an entity
    registered at the SEC to list a commodity for trading impact
    the CFTC's existing enforcement authority?
        Mr. Kulkin. Congressman, that is a good question. It would
    be challenging. Right now, commodities are not traded on stock
    exchanges. They are not traded on alternative trading systems.
    So, it would create a lot of confusion because currently, the
    CFTC can only look at the digital commodity spot market for
    fraud and manipulation. They are limited to enforcement
    authority only. And if the trading were to take place on an
    SEC-regulated exchange, it would probably further restrict
    their ability to conduct that oversight.
        Mr. Molinaro. It was suggested a few months ago that some
    of this should be addressed through simple adaptation. Is it
    your opinion that this is just an adaptation?
        Mr. Kulkin. I think it is an adaptation in the sense that
    the CFTC is already monitoring spot commodity markets for fraud
    and manipulation. But they don't have their full regulatory
    authority that they have in the futures markets. So, when you
    think about it that way, it is an extension of the CFTC's
    jurisdiction to require a registration regulation, examination,
    and enforcement in a way that is not meaningfully available
    right now.
        Mr. Molinaro. Mr. Santori, same question. Would you like to
    add to that?
        Mr. Santori. No, sir, I think Mr. Kulkin covered it well.
        Mr. Molinaro. Fair enough. For all of you, I want to end
    where I began. It was suggested that this hearing is not about
    regulation, but it seems to me that it is. Is it necessary for
    Congress to move down the path of adequate guidelines and
    regulation, yes or no?
        Mr. Durgee. Yes.
        Mr. Kulkin. Yes.
        Mr. Santori. Yes.
        Mr. Schoenberger. Yes.
        Mr. Massad. Yes.
        Mr. Blaugrund. I don't think so.
        Mr. Molinaro. Thank you very much. And I yield back, Mr.
    Chairman.
        Chairman Hill. The gentleman yields back. The gentleman
    from Texas, Mr. Casar, is recognized for 5 minutes.
        Mr. Casar. Thank you, Mr. Chairman, and thank you to the
    leadership of the committees and the subcommittees for bringing
    us together. I want to pick up my line of questioning where my
    colleague, Mr. Casten, left off on the current state of play
    and the current rules that we are discussing.
        Several courts have determined that many crypto assets
    indeed meet the Howey Test in our securities. There are some,
    as we have discussed today, including Bitcoin, that seem to
    fall under CFTC jurisdiction. My first question is for you, Mr.
    Santori. Your platform is a cryptocurrency exchange. How many
    crypto assets are currently on your platform?
        Mr. Santori. We support roughly 200 assets globally.
        Mr. Casar. Thank you. And of those roughly 200 assets, to
    your knowledge, how many of them are registered with the CFTC
    as commodities or with the SEC as securities?
        Mr. Santori. To my knowledge, none of them are.
        Mr. Casar. Why are none of them registered?
        Mr. Santori. I can speculate on the basis of the projects.
        Mr. Casar. Sure.
        Mr. Santori. My belief is that there is no workable
    registration regime for those projects. Any registration regime
    laid out in front of them would require the intermediation of
    things, like a transfer agent that would add nothing to
    consumer protection and would make the working of those digital
    asset blockchains untenable. And in your view, does current law
    allow you to list unregistered securities on the exchange?
        Mr. Santori. So the question is, does current law allow for
    us to list unregistered securities on the exchange?
        Mr. Casar. Correct.
        Mr. Santori. I don't think so.
        Mr. Casar. So, if some of these indeed are securities or
    indeed are commodities, you wouldn't be allowed to list them if
    they were unregistered?
        Mr. Santori. I have to tell you, you are getting into
    interpretations of existing law, as opposed to testimony that I
    can give on fact. I would say that Kraken takes great strides
    in not listing securities. And we do not list securities. We
    have robust processes in place to vet the assets that we do
    support. We review every asset for, of course, its business use
    case and its functional use case. We review assets for
    cybersecurity vulnerabilities, and, of course, we have a
    process in place to evaluate these assets as to whether they
    could potentially fall into either the world of regulated
    securities or regulated commodity derivatives.
        Mr. Casar. Thank you. I want to ask a similar question now
    to Mr. Blaugrund. Can the New York Stock Exchange have
    unregistered securities on its platform?
        Mr. Blaugrund. We do not.
        Mr. Casar. And what would happen if it did?
        Mr. Blaugrund. It would be subject to enforcement action, I
    presume by the SEC.
        Mr. Casar. Right. So, part of what I am trying to
    understand here as far as the current state of play is that if
    an exchange wants to be in compliance with the law, it would
    have to delist any unregistered securities or commodities. And
    our current laws, as I understand them from several judicial
    opinions and decisions that I have looked over, are that crypto
    assets are either securities or commodities, many of them being
    determined to be securities, and some of them that we talked
    about today, folks agree are commodities, but very few, and in
    some cases, none of them are registered with the appropriate
    agency.
        I don't think you have to be a crypto-skeptic or a crypto-
    enthusiast to come to the conclusion that I am feeling now,
    which is some level of concern that even under existing rules,
    there are real concerns about, do we have folks that should be
    registered, where we should have protections for investors not
    registering? And it is hard to think about the path forward. If
    right now, I could be having this concern.
        Mr. Massad, I would love to hear what you think about that?
        Mr. Massad. I think you are absolutely right, Congressman.
    If you look at even what the 4 largest platforms today list in
    the U.S., there are about 400 tokens in total on all of those
    platforms, and only 60 of them are commonly listed. They are
    all making different decisions about what is a security or what
    is not. Now, maybe they are applying other filters on top of
    what is the security, and maybe they could all get together and
    say, oh, yes, yes, yes, we believe all 400 are not securities.
    But I doubt it.
        Mr. Casar. Thank you. I appreciate it. To me, the SEC came
    out of the Great Depression and that enormous crash, and I
    think it is so important for us to learn from those mistakes.
    And as FTX and others have collapsed, we need those kinds of
    protections to make sure we don't have the intermingling of
    funds, and to make sure people have recourse against fraud and
    abuse. We want to make sure we are protecting investors and the
    fact that right now, I am concerned that the laws aren't even
    being followed makes this really challenging. Thank you.
        Chairman Hill. The gentleman yields back. The gentleman
    from Nebraska, Mr. Flood, is recognized for 5 minutes.
        Mr. Flood. Thank you, Mr. Chairman. Mr. Durgee, I want to
    just state for the record that I was very impressed by your
    opening statement regarding the standardization and the
    acceptance of emerging technologies. And I think it is
    important to remember that we need to look down the road. We
    need to understand where we are at, and how these things work.
    We have been discussing the need for regulatory clarity and
    digital asset regulation for the past few months.
        There is no question that in the aftermath of FTX, a
    company that cheated American investors from the Bahamas, and
    as some American firms begin to move offshore, an American
    regulatory regime for digital assets is needed. As it relates
    to digital assets, I firmly believe that we don't need more
    regulators. We need a way of clarifying when and where our
    current regulators should have jurisdiction over the existing
    market.
        In other words, we need to establish, and this is easier
    said than done, the CFTC lane and the SEC lane within the
    digital assets space, which is easier said than done. I want to
    go on the record today, Mr. Santori, regarding Kraken. Does
    Kraken maintain accurate books and records?
        Mr. Santori. Yes, we do, Congressman.
        Mr. Flood. Does Kraken make those documents available to
    regulators?
        Mr. Santori. We do on occasion. Yes.
        Mr. Flood. Does Kraken make appropriate disclosures to
    customers and ensure that its customer assets are protected?
        Mr. Santori. We do.
        Mr. Flood. Okay. Given your answers to those simple
    questions, what is the best means, in your opinion, by which we
    can ensure that those steps are all being taken?
        Mr. Santori. Thank you for the question, Congressman.
        I think that the best means is to ensure that digital asset
    participants are keeping records, and that they are sharing
    those records when requested by regulators and law enforcement,
    and to ensure that digital asset participants are being good
    stewards of their customers with regards to disclosures. We
    need harmonization across those digital asset providers, a set
    of clear rules for the road, so that we don't have to guess as
    to what are those standards and best practices.
        One of the reasons why, as you noted, FTX was such a
    debacle was because it wasn't some small niche exchange that
    wasn't servicing Americans. It was an exchange that Americans
    almost had to use because of the environment here in the United
    States. Americans were driven to FTX because of the lack of
    standards, here because of the lack of uniform disclosure
    rules, because we are forced to guess as to what those rules
    are, instead of building compelling products.
        Mr. Flood. Thank you, Mr. Santori.
        Mr. Kulkin, does the CFTC regularly examine its registrants
    to ensure that they are keeping adequate books and records,
    making appropriate disclosures, and ensuring that customer
    funds are protected?
        Mr. Kulkin. Yes.
        Mr. Flood. A follow-up to that, did any customers of
    LedgerX, the CFTC-registered clearinghouse owned by FTX, lose
    any funds because of the FTX implosion?
        Mr. Kulkin. Not to my knowledge, no.
        Mr. Flood. Okay. I think it is important we get a number of
    these questions on the record. We are trying to solve a
    problem. We are trying to make it possible for Americans to
    participate in an economy and in an exchange of framework that
    is going to be worldwide. And today, I think we got some good
    answers. I would like to ask one more question to Mr. Kulkin
    regarding the self-certification process and how it could be
    applied in digital assets.
        Mr. Kulkin, if a commodities exchange attempts to self-
    certify the trade of a product under current CFTC rules, what
    does that process look like for the applicant filing the self-
    certification?
        Mr. Kulkin. Currently, if a futures exchange wants to list
    a product, they have to file the product with the CFTC. They
    have to include basic commercial components of the contract.
    And then, they have to provide a pretty lengthy explanation for
    how that product is not susceptible to manipulation, how the
    financial resources are in place to facilitate that trading.
    And for digital assets specifically, the CFTC staff have put in
    place a heightened scrutiny review that has been in place now
    for 5 years. And those questions have to be satisfied as well.
        Mr. Flood. I don't know if I have enough time for the
    second question on the self-certification, but if the CFTC
    finds that an applicant's self-certification violates the
    Commodity Exchange Act (CEA), what recourse does the CFTC have?
        Mr. Kulkin. If a submission fails to comply with the CEA
    and its rules, then the product would be rejected, and it would
    not be able to be listed for trading.
        Mr. Flood. Thank you, Mr. Kulkin. I yield back.
        Chairman Hill. I thank the gentleman. Ms. Salinas is now
    recognized for 5 minutes.
        Ms. Salinas. Thank you, Mr. Chairman, and thank you to our
    Ranking Members and Chairs for bringing us all together to hold
    this joint hearing. And thank you to our panelists for taking
    the time to be here today.
        Over the course of the conversation, even over the last few
    months, one area that hasn't really been discussed in the
    deliberation of how to fill regulatory gaps is the very real
    and very large impact on climate that the industry is also
    having. In my home State of Oregon, this has spurred State
    legislative action to require cutting carbon output.
        My question for any of the panelists is, as we grapple with
    how to regulate the digital asset industry, if, as with other
    fiduciaries, should we incentivize climate responsibility and
    penalize carbon emissions from high-energy-use facilities? And
    if so, do you have any recommendations for implementing a
    climate-friendly regulatory framework for the digital asset
    industry?
        Mr. Massad. Congresswoman, I think the energy usage of
    certain aspects of the crypto industry is a real cause of
    concern. It is not something that we would typically address
    through financial regulation. But that doesn't mean it doesn't
    need to be addressed. You are right that your State and other
    States, like New York, have tried to take this on and that may
    be the path. Certainly, though, beginning with some sort of
    framework, where we have financial regulation that includes
    investor protection and that includes disclosure about a lot of
    these things would be a step forward. And then, one can decide
    who is the proper regulator to address the energy aspect.
        Ms. Salinas. Thank you. I appreciate that. Does anybody
    else care to answer? I can move on.
        Mr. Durgee. I will just make a comment that the industry is
    very aware of that problem and is aggressively moving towards
    green energy solutions. I think there has actually been, and
    there continues to be, an extensive amount of innovation in
    that area, mainly because it is business-ready, right, we are
    seeing it save money along the lines.
        I will give you a real-world example. Flare gas out of oil
    mines now is being used in order to run Bitcoin mines. It is a
    company called Crusoe that is particularly indebted, and it
    otherwise would have been pollution that is being converted
    into energy to run these facilities. So, I think the need for
    that is driving innovation.
        Ms. Salinas. Thank you.
        Mr. Schoenberger. Congresswoman, I would also like to add
    that not all are the same. According to a neutral study,
    Polkadot actually has the least carbon footprint in the
    industry, and the whole consumption in a year equates to only
    seven households in Switzerland. So, that makes a difference.
        Ms. Salinas. Thank you. So for many of you, there does seem
    to be some degree of consensus around needing to regulate based
    on utility. But what concerns me is that the use cases of
    crypto assets are still pretty murky. That also seems to be
    evidenced by the lack of registered securities. Are issuers not
    able to describe the uses of their own products or is it that
    the potential product uses are substantially broad and vague?
        Mr. Massad. Congresswoman, I think it is some degree of
    both, but in particular, it is the lack of any kind of
    regulatory framework that requires disclosure effectively. If
    you have basically a lot of industry participants claiming what
    they are issuing is not a security, then we don't have a
    framework for disclosure. I think the SEC did a great job of
    going after internet coin offerings (ICOs), where people were
    just issuing tokens that were securities on the basis of very
    little disclosure.
        There is also the element of exactly what is the use case,
    sometimes you can't have a token, which it has both the
    utility, but it is still a security. The SEC recently won a
    case to that effect, that even though it had a utility
    component, the token was still a security.
        So again, it comes back to needing a framework. What I have
    suggested is to create a framework where we don't have to
    rewrite securities laws, but we get at the issues you are
    talking about.
        Ms. Salinas. Thank you.
        Mr. Durgee. I would love to just add to that very quickly
    as well that a lot of the disclosure requirements, in
    particular, into the capital raising components, whether that
    is Reg. CF or Reg. A+, are quite counterintuitive. If the goal
    is to find that these assets are decentralized, most of the
    disclosure requirements are very centralized disclosures. Who
    is the operating team, and what are the audited financials and
    business plans?
        If these things are run by a community of developers, they
    don't have that information to disclose. It is just not a
    viable framework. So, we really need to look at potentially
    shifting that. That will also bring digital assets into the
    forefront.
        Ms. Salinas. Thank you. I yield back.
        Chairman Hill. The gentlewoman yields back. Mr. Nunn is
    recognized for 5 minutes.
        Mr. Nunn. Thank you, Mr. Chairman. And I appreciate the
    incredible panelists. This has been a good discussion we have
    been listening to all day.
        The work of both the Agriculture Committee, and the
    Financial Services Committee, where I have the privilege of
    serving, is kind of in this nexus space between where we have
    digital assets floating between what guys in Iowa know very
    well in commodities trading and guys in Downtown Des Moines
    know in securities trading.
        So, as a simple Iowa guy here, we have a digital asset that
    falls under the CFTC for all things commodities. But if it is a
    security, it is going to fall under the SEC.
        We just had SEC Chairman Gensler in here, who claims that
    every token other than Bitcoin is under the SEC's jurisdiction,
    including a number of the ones that we have talked about today.
        In contrast, CFTC Chairman Behnam states that a commodity
    like, what he called Ethereum, would be under the Agriculture
    Committee's jurisdiction.
        So, Mr. Kulkin, I am going to talk with you first based on
    your background at the CFTC. One of the simple questions that
    we asked before is, is Ethereum a commodity or is it a
    security?
        Mr. Kulkin. I think it is a commodity and I say that
    because there are futures contracts trading on Ethereum just
    like soybeans or different gas or energy products.
        Mr. Nunn. Okay. That is good to hear, because I think we
    have had a lot of people who have talked about it in both ways.
        My point here is that it is not clear under the current
    structure to be able to truly know where Ethereum should be
    traded, or other entities like it.
        I am going to ask you, given your experience at the CFTC,
    would you pose the same question on, let's see here, does the
    CFTC or any other Federal regulator registere commodity
    listings? Let's go back to this question on commodity listings.
    Does any Federal regulator register commodity listings?
        Mr. Kulkin. No, I don't believe so.
        Mr. Nunn. And let's talk about specifically--there was some
    conversation earlier about spot commodities listings.
        Why or why not do we list that?
        Mr. Kulkin. There is no Federal regulator tasked with
    overseeing the digital commodity spot market right now.
        Mr. Nunn. Right. So, we are in this open space.
        Let me ask Mr. Santori, you highlighted a great
    conversation here. In my opinion, the unique elements of crypto
    being a bipartisan issue, collaborating on tough subjects, not
    only is it bicameral, but you are seeing in here that it is
    across multiple committees of jurisdiction in the United
    States.
        One of the issues that is most important to me is ensuring
    that bad actors don't attempt to utilize this crypto to evade
    enforcement. And that is why I partnered with Representative
    Himes in introducing the Financial Technology Protection Act,
    which would bring regulators and industry leaders together to
    ensure that we have standards and regulations that were just
    highlighted in some places as currently lacking.
        In your view, how would such a collaboration be helpful,
    not only to regulators, but to the industry writ large?
        Mr. Santori. Thank you for the question, Congressman.
        We applaud that effort. I should say right out the gate
    that I think what we are here today asking for is clear rules
    of the road that would allow us, as a global organization, to
    be able to prepare to make additional reporting to the CFTC and
    the SEC.
        We would have clear guidelines on what information to
    record about our customers and about the transactions that
    occur on our platform. We would have guidelines on how long to
    keep it. We would have guidelines on how to share it. It is
    often lost in the shuffle, but the mundane details around
    actually sharing this much information with multiple regulators
    is probably the bulk of the discussions that we have today,
    when we work with law enforcement.
        Kraken makes literally thousands of reports to regulators
    in the United States and around the world. This can be a
    daunting task without clarity.
        Mr. Nunn. We have seen other entities work on this. The
    E.U. and the U.K. are developing this area, but in the United
    States, we are still talking through a very complex
    conversation.
        But to your point specifically, recently, the CFTC
    enforcement action against the foreign exchange, the CFTC
    alleged in that case that the foreign exchange's compliance
    efforts are a sham and that the company deliberately chose over
    and over to place profits over the law.
        Mr. Santori, how does your firm differ in the compliance
    perspective compared to foreign exchanges with a bad record of
    compliance?
        Mr. Santori. Thank you for the question, Congressman.
        We do differ, and we differ dramatically. Unlike foreign
    exchanges, as you heard me say earlier, we make abundant
    reporting to law enforcement. We KYC every single user, unlike
    some other exchanges, where----
        Mr. Nunn. Mr. Santori, thank you. I want to be able to
    highlight here that you are doing it the right way.
        My concern is that, if we don't have clarity in this space,
    we are going to allow bad actors to continue to operate
    outside.
        With that, I yield my time back to the Chair. Thank you.
        Chairman Hill. The gentleman yields back. The gentleman
    from New York, Mr. Torres, is recognized for 5 minutes.
        Mr. Torres. Thank you, Mr. Chairman. Here in Congress, we
    have what I would describe as an anti-crypto derangement
    syndrome that clouds clear thinking about crypto regulation,
    and although there are too many myths to dispel, I will take
    this occasion to address a few of them.
        Myth: A statutory framework for crypto would undermine 9
    decades of securities law. Fact: The New York State Department
    of Financial Services (DFS) has an alternate framework for
    regulating virtual assets. And far from undermining securities
    regulation, DFS has shown itself to be the most-rigorous
    regulator of crypto in the world.
        Myth: There is no need at all for the SEC to provide
    regulatory clarity and guidance, and calls for clarity and
    guidance are nothing more than a pretext for evading lawful
    compliance. Fact: Even the Investor Advisory Committee, which
    favors Gary Gensler's approach to enforcement, concedes that
    there is, in fact, a need for regulatory clarity, ``The SEC
    should consider issuing a request for comment regarding areas
    where additional guidance is needed related to the application
    of Federal securities laws to crypto assets.''
        Myth: It does not matter at all if crypto is driven
    offshore. Fact: Offshore, deregulated, over-leveraged
    companies, like FTX, carry the greatest risk of losing customer
    funds, a point that Gary Gensler himself did not dispute when
    pressed under questioning.
        Myth: Registration with the SEC is just a form on a
    website. Fact: The notion of registration as just a form on a
    website is patently false. So false, in fact, that it would
    come as a shock to all of the securities lawyers and companies
    spending millions of dollars on SEC registration and
    compliance.
        Myth: The SEC has the right to crack down on crypto because
    the technology has no utility, and it does more harm than good.
    Fact: The SEC is statutorily designed to be a merit-neutral
    regulator. Even if the SEC Chair were as omniscient as God
    himself, they nonetheless have no statutory authority to impose
    their personal judgement about the merits of crypto and
    blockchain on those of us who disagree with them. The SEC's
    only role is to correct information asymmetries and mandate
    disclosures to protect investors.
        One can imagine a digital asset that begins as a security,
    but then over time morphs into something else as it becomes
    decentralized. Ether, for example, was arguably a security at
    the time of the ICO, but then arguably became a commodity as it
    became decentralized.
        If a digital asset no longer has a central team from whose
    efforts investors expect to derive the profit, should there be
    a process by which that digital asset transitions from
    securities regulation to commodities regulation? Mr. Kulkin, do
    you want to take a shot at that?
        Mr. Kulkin. Congressman, first, thank you for your remarks.
    I agree with your sentiment. I think about these issues, being
    a former markets regulator. And it is really not so much
    whether I think that there is merit to the product, but that
    more participants need to be able to come in and know that the
    market has integrity, that there is no fraud, there is no
    manipulation, and activity is being surveilled. In terms of
    transitioning from a security to a commodity, I mentioned this
    earlier, there is sort of the obvious two endpoints, a token
    being issued for capital raise and something that is a good or
    an article that is relatively fungible.
        The point at which something transitions--it really is
    challenging to identify that specific inflection point. We can
    look at the different characteristics of the security----
        Mr. Torres. You would agree that whatever regulatory
    framework we develop, would have to delineate that process?
        Mr. Kulkin. Absolutely. Yes, sir.
        Mr. Torres. But you have no clear sense of how that process
    should unfold?
        Mr. Kulkin. It really depends on the facts and
    circumstances. We have talked today about how these products
    and these markets are different than traditional debt or
    securities or equities. And so, I am reluctant to point out a
    clear, bright line here.
        Mr. Torres. We typically, maybe with the exception of
    stablecoins, which we think of as a currency in the strictest
    sense of the word, think of digital assets as a binary, either
    a commodity or a security.
        Are those two categories exhaustive or are there other
    categories that we should keep in mind? I see you waving your
    hand, so let's----
        Mr. Massad. Congressman, first of all, something can be a
    commodity under our laws, such as Ether, by virtue of the fact
    that there is a futures contract traded on it, but that doesn't
    necessarily mean it is not a security. You can have something
    that is both.
        And the question for a lot of these tokens is, is there
    still that enterprise behind it that is affecting its value? I
    am not saying Ether is still a security. But I am saying those
    questions still exist. And yes, we need a transition. It is
    really a transition from when should all the securities laws
    that go to capital-raising stop applying, because you really
    don't have an entity behind it and an enterprise behind it. We
    should have a process that addresses that.
        Chairman Hill. The gentleman yields back. Mrs. Houchin is
    recognized for 5 minutes.
        Mrs. Houchin. Thank you, Mr. Chairman. And thank you to the
    panel.
        Establishing a clear and thoughtful regulatory framework
    isn't just important for the digital assets and technologies
    that already exist. By creating much-needed clarity, we would
    be facilitating the development of blockchain, expanding the
    potential uses of all sorts of tokens, and creating safeguards
    for new technologies created by innovators here in the United
    States.
        I have said before in the Financial Services Committee that
    I view the digital assets as the new space race. Like the
    challenges of the last century, there is no reason why the
    United States should not lead the way.
        Mr. Schoenberger, I would like to ask about distributed
    ledger technology. Distributed ledger technology has been
    described as a foundational technology, like the internet or
    electricity, in which the adoption of the technology is
    gradual, incremental, and steady, but utterly transformative to
    society and the economy.
        What does this idea tell us about the future of distributed
    ledger technology and the digital assets that power them?
        Mr. Schoenberger. Thank you very much for the question,
    Congresswoman.
        I think the comparison with the internet is the best one
    here, because if we look back, what made the internet really
    take off were the open standards and protocols that were
    enabled by a framework of regulation that allowed this. That
    framework tries to understand the potential of these
    technologies and cater to them.
        We think that Web3 technologies offer the same potential
    benefits. And we also think if we are evolved there where, like
    the internet was 25 years ago. So, no one knows what will come
    from this, but the potential is huge. And what we need is
    certainly legal certainty around these questions.
        I would very quickly like to comment on what Congressman
    Torres mentioned, because that was exactly our journey here. We
    tried to go to a process, together with SEC staff, from a
    security that DOT once was when we sold that for fundraising
    purposes, to a non-security.
        And while that process sort of worked, it took 3 years, and
    still after putting in all that effort, the Web3 Foundation, in
    the end, was left without any tangible validation in its hands.
    So, this very clearly shows that we need a wise legal statute.
        Mrs. Houchin. Thank you. And switching to our securities
    laws, the ultimate purpose of U.S. securities laws is to solve
    for the problem of information asymmetry. Thus, if an existing
    disclosure regime is not producing information that is valuable
    to digital asset purchasers, the ultimate purpose of U.S.
    securities laws is in fact, not being met.
        Mr. Durgee, and then Mr. Santori, do you agree with this
    characterization?
        Mr. Durgee. Very much so, yes.
        Mr. Santori. Yes, Congresswoman, I do.
        Mrs. Houchin. And for you both, how can we create a
    disclosure regime that will actually solve the problem of
    information asymmetry?
        Mr. Durgee. I will go ahead and start?
        Mr. Santori. Sure.
        Mr. Durgee. I think you are hitting the nail right on the
    head that we are in a situation that is extremely problematic.
    The disclosure regime is contradictory. And it makes it
    incredibly difficult to build a business in the United States
    with that level of contradictory regulatory frameworks.
        So until those disclosures are made clear, we are going to
    continue to have a lot of ambiguous frameworks that companies
    are trying to build on, which is ultimately why they are
    leaving the United States and moving offshore.
        Mr. Santori. I would add that, in fact, there is precedent
    here. the Markets in Crypto-Assets Regulation (MiCA) that is
    developing in Europe lays out clear disclosure rules. And they
    put those disclosure rules on the people who are best-suited to
    make those disclosures, the projects themselves. They require
    exchanges like us to make those disclosures available to our
    users, and it is a sensible approach. It is tailored to the
    actual risks of digital assets. We are encouraged by it.
        Mrs. Houchin. And finally, in 2020, the Federal Reserve
    Bank of San Francisco determined that one in eight Americans
    purchased these digital assets. The study also found that
    Americans would strongly prefer to engage with digital assets
    through regulated institutions. These statistics make it clear
    that digital assets are here to stay and that Americans want to
    engage with the digital asset ecosystem in a safe manner.
        Mr. Kulkin, Mr. Durgee, Mr. Santori, given these
    statistics, how important is it that Congress act to establish
    a well-regulated digital asset marketplace?
        Mr. Durgee. Every day that we don't act, we continue to
    fall behind all of the other jurisdictions that are not only
    moving past us, but accelerating.
        Mr. Kulkin. I think it is very important. And I think we
    can draw from the experience of the Dodd-Frank Act, where
    jurisdiction was shared between the SEC and the CFTC in a
    successful way.
        Mr. Santori. I agree. And moving forward now allows us here
    in the United States, Kraken, to plan for the future, which is
    coming quickly.
        Mrs. Houchin. Thank you. I yield back.
        Chairman Hill. The gentlewoman yields back. Mr. Nickel is
    recognized for 5 minutes.
        Mr. Nickel. Thank you, Chairman Hill. Also, thanks to
    Chairman Johnson, Ranking Member Lynch, and Ranking Member
    Caraveo for holding this hearing, and thanks to our witnesses
    for joining us today. I know you have been here for quite a
    long time.
        Maybe this is too soon, but I am glad to see a member of
    the House Financial Services Committee with the gavel today,
    and I'm very glad to be in this committee room, which is very
    convenient for me because my office is literally across the
    hall.
        We need to work together in a bipartisan way to develop a
    framework for regulating digital assets, so that we can protect
    our constituents and harness the benefits of this technology.
    Burying our heads in the sand is not an option, as inaction
    will only serve to exacerbate the risks associated with this
    rapidly-evolving asset class. You can't expect a law written
    almost 100 years ago to seamlessly work with this new
    technology.
        Mr. Durgee, my first question is to you. I have to say, I
    am also an attorney, so you are surrounded by us. But Mr.
    Durgee, could you please talk more about the rules and
    requirements for securities exchanges that are incompatible
    with blockchain technology and how you would improve them?
        Mr. Durgee. Yes, security exchanges are evaluating
    blockchain now. In fact, they are implementing it in a number
    of cases.
        The problem that we are just going to continue to run into
    is there is a risk factor that they are going to deal with in
    determining how much they want to expose their business to it.
    Until there is a clear regulatory framework for those exchanges
    to build on, particularly within the United States, they are
    going to be limited in their capacity to innovate and roll out
    more holistic products.
        Mr. Nickel. Thank you.
        Mr. Santori, SEC Chair Gensler has consistently said that
    crypto companies need to, ``come in and register.'' I would
    like to learn more about what that process actually looks like.
    In your role as chief legal officer at a crypto exchange, have
    you tried registering at the SEC, and what has that experience
    been like for you and other exchanges?
        Mr. Santori. Thank you for the question, Congressman. It
    has been repeatedly stated that cryptocurrency and digital
    asset companies should just come and register, but it is just a
    form on the website. It is not. It is unclear to us, and I
    believe it is unclear to the regulators as well, just what
    registration means for a digital asset exchange and for, I
    would say, every meaningful provider in the digital asset
    ecosystem.
        Registration is typically the filing of an S-1 statement,
    which is the form by which companies spend millions of dollars
    and many years to go public and become a public company.
    Frankly, there are a number of securities practitioners in the
    room, and I think we would all be lying if we said we had any
    idea how that could possibly work for the products that digital
    asset companies offer today. There is no realistic path to
    registration under the existing regime.
        This is why we are here today to say that Congress ought to
    act to clarify that path, to give regulators the tools that
    they need to foster this ecosystem to create fair and efficient
    markets.
        This is not 2015. This is not 2012, when I first got into
    this industry. This is not a question of education. The
    regulators are just as smart. They are just as educated. They
    are just as up-to-the-moment as the rest of the ecosystem
    lawyers. This is a question of tools.
        Mr. Nickel. And when SEC Chair Gensler was here last month,
    he couldn't say whether or not Ether, one of the most-traded
    cryptocurrencies, is a security . We spent a lot of time
    talking about that.
        When you are evaluating whether digital assets are
    securities before listing them on your platform, what's your
    process and would clarity from the SEC help?
        Mr. Santori. Thank you for the question, Congressman.
        We do have a robust vetting process for all assets that we
    support on our exchange. It includes an assessment of the
    business use case for these assets. I talked about one of them
    earlier today. It involves a cybersecurity audit. Many of these
    assets exist as smart contracts on publicly-auditable
    blockchains. It is one of their benefits. And of course, we
    evaluate these assets for whether or not they would fall under
    any particular regulatory regime in the United States. But the
    reality is that exchanges do not come out on the same side of
    that analysis 100 percent of the time. They should be able to.
        Mr. Nickel. Thank you so much. And I yield back the
    remainder of my time.
        Chairman Hill. The gentleman yields back. The gentleman
    from Illinois, Mr. Jackson, is next. You are recognized for 5
    minutes.
        Mr. Jackson of Illinois. Thank you, Chairman Hill, thank
    you to the ranking members, and thank you to the panelists for
    coming out today.
        I have a concern, being from Chicago, the Illinois first
    district, where we have the Chicago Mercantile Exchange, the
    Chicago Board of Trade, and the Chicago Options Exchange Board.
    I would like to see this technology continue to stay housed in
    the United States of America to make sure that we have a
    competitive edge. And I am concerned about MiCA and the
    platform of regulatory framework that has been negotiated out
    across the European Union. It seems like we are lagging behind.
        What is it that we can do to make sure, with all alacrity
    and due speed, that we can keep this where the world looks at
    this as the safest, deepest, best marketplace to continue to
    invest in crypto and innovate this technology?
        Anyone is certainly welcome to answer.
        Mr. Durgee. Yes, I can start. If you are scared of what is
    happening in Europe with MiCA, you are going to be terrified
    when you see the U.K. regulations come out next, which are
    going to have substantially more weight and be far more robust.
        So as we start to look at all of the different
    jurisdictions, whether it is the U.K. or the European Union, as
    far as MiCA, and I had mentioned VARA, Singapore MAS, Tokyo, et
    cetera, collectively, they are looking at what each one of them
    is rolling out and figuring out how they are going to be able
    to work together to ultimately move this industry forward.
        This might be the first time that we see an emerging
    technology that ends up finding its way outside of the United
    States predominantly, and a technology that is still very
    nascent. As I mentioned, it has only been around now for 13
    years, but is growing and accelerating at a pace that we really
    haven't seen before.
        So, I caution everyone here that if we don't move forward,
    and we don't do something, and if MiCA is something that you
    are worried about, the next book to drop is going to be pretty
    severe.
        Mr. Massad. If I may add, I think there are a lot of
    reasons why we have the strongest capital markets in the world
    and the strongest financial system regulation as part of that,
    but there are a lot of other factors that contribute to it. So,
    I think it is important not to exaggerate the risk here. We
    clearly do want to put in place a regulatory framework. But I
    am not that worried yet about the U.S. losing its leadership
    ability in a lot of these areas.
        On the regulatory framework, there is going to be
    interpretive issues under MiCA as well. Frankly, when you look
    at MiCA, it applies to crypto assets and it excludes anything
    that is a financial instrument. Their definition of a financial
    instrument includes sort of what we define as a security, so
    they are going to have some interpretive questions there, too.
    I think we need to move forward with a sensible regulatory
    framework, but let's not get too worried about losing our edge
    yet.
        Mr. Jackson  of Illinois. My concern following up on that,
    if you would, is that we look at the weakened collapsed of SVB,
    or look at Republic, these assist the bank run of of someone
    who is standing outside around the corner. These are people who
    are picking up their phones and pulling out $100 billion in a
    day, or in 2 days. So, I do think that there is a certain
    heightened sense of urgency. I'm sorry, Mr. Durgee?
        Mr. Durgee. I was just going to comment that we are talking
    about the U.S. as a financial superpower, and I don't think
    that is going to change. What we really need to be talking
    about is from the innovation perspective, the technology
    components that are going to be leaving the U.S. and developing
    other technologies outside of potential financial frameworks
    that the U.S. will not own. That is the area that we are
    certainly the most concerned about. In my opening testimony, I
    discussed that we are going to talk about the speculative
    nature of the industry, and that is all well and good. But the
    technological innovation component is the area that we really
    can't forget.
        Mr. Jackson  of Illinois. I yield back my time. Thank you,
    Mr. Chairman.
        Chairman Hill. Thank you, Mr. Jackson. Mr. Green of Texas
    is now recognized for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
    for appearing as well. And I will apologize if I should say
    something or ask a question that offends anyone, but I tend to
    deal with the sensitive issues. And today, having been a
    litigator, I find it necessary to utilize a technique that we
    employ when selecting a petit jury, a process called voir dire
    or voir dire depending on where you are from. In Texas, we say
    voir dire. It is a French term that we should speak the truth.
    So, let's proceed with this process of raising hands.
        Let's start with this, and I regret that we have lost a
    member of the panel, to be quite candid. He is back. Very good.
    We talk a lot about diversity and inclusion and how this will
    be a part of this new era of technology that will make
    millionaires and billionaires. And I would like to ask you a
    few questions about diversity and inclusion.
        Does it include both males and females, diversity and
    inclusion? If you think so, raise a hand so that I don't have
    to ask each one of you. Do you think it includes males and
    females?
        [Hands raised.]
        Mr. Green. Okay. Let the record reflect that all hands were
    raised, that would be two, four, six hands up. Do you define
    yourself as a female, and if so, kindly extend a hand into the
    air?
        [No response.]
        Mr. Green. Let the record reflect that none of the
    witnesses would be defined as a female. Do you know any females
    who would be capable, competent, and qualified to sit on this
    panel?
        [Hands raised.]
        Mr. Green. One hand is up already. There, there. They all
    know females who would be capable, competent, and qualified to
    sit on this panel. Would they bring something to this debate
    that would be not only of interest, but that would be
    beneficial to what we are trying to accomplish?
        [Hands raised.]
        Mr. Green. Hands up. All agree. Now, does diversity and
    inclusion include people of color? Raise your hand if you think
    so.
        [Hands raised.]
        Mr.  Green. Let the record reflect that they all think so.
    And do you know any people of color who would be capable,
    competent, and qualified to sit on this panel? Hands up,
    please. Nodding of heads won't do.
        [Hands raised.]
        Mr. Green. Let the record reflect that all hands have been
    raised. I am asking these questions because unfortunately, we
    tend to see diversity and inclusion at the end of a process. I
    think it starts right here today with you. But I don't have
    time to go on with this. Let's go to another area that is
    exceedingly important. It has been said that whether the SEC or
    the CFTC is empowered to do this, there will be a need for
    additional tools. That is what has been said by Mr. Santori.
    Let's talk about additional funding. I think Mr. Massad, you
    have said as much, additional funding.
        It appears to me that my colleagues would propose cuts to
    align 2024 with the 2022 Fiscal Year levels. And in so doing,
    this would impose a $91-million cut of about 22 percent. Mr.
    Massad, would such a cut hurt the CFTC and its functionality?
        Mr. Massad. Absolutely.
        Mr. Green. Would it hurt the SEC if it is cut?
        Mr. Massad. Absolutely.
        Mr. Green. Do you think that there will have to be an
    increase regardless of how this is done, that there will have
    to be some increase in funding?
        Mr. Massad. Yes. If you are going to increase an Agency's
    duties and responsibilities, you need to give it additional
    resources to do that.
        Mr. Green. Okay. I have 18 seconds left. If you agree with
    Mr. Massad, would you raise your hand please?
        [Hands raised.]
        Mr. Green. So, Mr. Santori, you don't think that there
    would have to be any additional funding?
        Mr. Santori. No, that is not what I am saying.
        Mr. Green. But that is my question. Do you think that there
    would have to be additional funding?
        Mr. Santori. I think it would depend on the jurisdiction
    that ultimately was granted to the SEC and the CFTC. There
    could very well be areas where that jurisdiction ought to be
    changed.
        Mr. Green. I'm sorry that I can't pursue this more, but
    thank you, Mr. Chairman, and I yield back.
        Chairman Hill. The gentleman yields back. Mr. Sherman of
    California is recognized for 5 minutes.
        Mr. Sherman. I want to thank Mr. Green for pointing out the
    need for diversity in gender, ethnicity, and race. We also need
    diversity in viewpoint. We have a whole panel here, none of
    whom have said, the basic question is, should we allow
    cryptocurrencies to go forward in the United States?
        The purpose of our capital markets for working American
    families is to finance factories and businesses where they can
    work at blue- and white-collar jobs and create products that
    help them in their daily lives.
        The purpose of our capital markets is to harness the animal
    spirit, the willingness to invest and get into funding housing
    and factories and jobs. What this does is it diverts that to a
    new, hidden money system. It says so right in the name:
    ``Cryptocurrency,'' literally means, ``hidden money.'' And to
    create a tool that is and has its announced purpose by its
    most-prominent supporters to defeat our sanctions laws, to
    defeat our tax laws. And it is not that all of you who are in
    this industry are unwilling to abide by our sanctions laws and
    our tax laws. It is simply that you think you can make billions
    of dollars by building a valuable tool for those who do want to
    cheat on their taxes and do want to evade our sanctions laws
    and our money laundering laws.
        We are told, oh, we are afraid of missing out, other
    countries could get 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 innovative tax haven fraud. I
    do not see the need to catch up. We speak as if this whole idea
    of creating tools that will turn the income tax into just a tax
    on wage earners and make it voluntary for the very rich as
    something new because this industry uses the internet. It is
    nothing new.
        We had tax-evasion tools last century, and we blocked them.
    The most-valuable tool was the multibillion-dollar bearer bond.
    One piece of paper earns interest, totally untraceable. And we
    prohibited people from issuing them. We, of course, have a $100
    bill, and it is worth $10 from what it was 100 years ago. The
    $100 bill, the bearer bond are no longer good tools for tax
    evasion. We need a new one, and you can make billions of
    dollars if you can create it.
        All of the money and power in this town is on the side of
    the crypto billionaire bros. There is no lobbyist in this town.
    There is no executive. Nobody is making a million dollars to
    advocate for tax enforcement. Nobody is being paid to make sure
    that we enforce our sanctions laws and our money laundering
    laws, at least not to be lobbyists and not to make millions.
    And I think it was Mr. Casten who reminded us of Sam Bankman-
    Fried. He still haunts these halls. His purpose was to give a
    patina of regulation to this industry by defeating the SEC's
    efforts. I don't want to say that I am against blockchain. It
    is an accounting system. I am against multimillion-dollar
    bearer bonds. I am not against paper, and I am not against ink.
        Mr. Massad, if many of these crypto tokens are securities,
    many of those sold on exchanges are securities, if in any other
    field of our capital markets, you had an unregistered exchange
    where you could buy and sell unregistered securities, wouldn't
    that be a violation of just about every securities law we have?
        Mr. Massad. Yes, sir. That would be a problem.
        Mr. Sherman. So why is it that the SEC that would
    immediately shut down a stock exchange where you had
    unregistered stock being publicly sold, seems unwilling to
    enforce the law in this area, whereas certainly, if it was
    stocks and bonds, they would enforce it immediately? Can you
    explain why they are not enforcing it?
        Mr. Massad. I think the SEC has brought a number of
    enforcement cases. I think it is important to remember----
        Mr. Sherman. But they haven't shut down the businesses that
    are represented here. And if these businesses were doing
    unregistered equity securities, they shut them down.
        Mr. Massad. I can't comment on----
        Mr. Sherman. It just shows the power of the billionaire
    bros. And I yield back.
        Chairman Hill. The gentleman yields back. I now recognize
    the Chair of the full Financial Services Committee, Mr. McHenry
    from North Carolina, for 5 minutes.
        Chairman McHenry. I want to thank the panel. And I want to
    thank the Agriculture Committee members, and the Financial
    Services Committee members for a vibrant discussion today.
        I think one thing that was talked about was the efforts of
    other countries. And Mr. Schoenberger, what does it mean for
    the U.S. and Americans that the U.K. and the European Union are
    ahead of us on regulatory structure for crypto? What does that
    mean?
        Mr. Schoenberger. Thank you, Chairman McHenry. I would add
    Switzerland to this, because that is simply where the Web3
    Foundation is at home. I said this before here, it was a very
    deliberate decision of the foundation to be headquartered there
    because of the----
        Chairman McHenry. What does it mean for the United States
    and Americans that we are behind in a regulatory structure
    here?
        Mr. Schoenberger. I can only speculate what others would
    do. But if the foundation perceives it that it might be better
    to be somewhere else, others might think that, too.
        Chairman McHenry. So the innovation happens somewhere else,
    the value accrual and the jobs accrue somewhere else. Mr.
    Kulkin, and Mr. Santori, based on discussions today, what are
    the most important next steps that Congress can take and is
    there any urgency?
        Mr. Kulkin. Chairman McHenry, I think in terms of
    incremental next steps, clarity from Congress that the CFTC has
    oversight over digital commodity spot markets would bring a
    number of protections to those markets and participants, things
    like segregation of customer funds, clarity on treatment of
    customer property in the event of a bankruptcy, and
    surveillance of the market activity. Those, in my mind, are the
    next logical steps here.
        Chairman McHenry. Okay. Consumer protection, fostering
    innovation, the tandem?
        Mr. Kulkin. Yes.
        Chairman McHenry. Okay.
        Mr. Santori. I agree with those themes. I would say
    specifically a functional standard and a process for drawing
    clear lines between the SEC and the CFTC, a workable
    registration path for exchanges, like Kraken, clarification
    that the CFTC does have oversight over spot markets, and, of
    course, putting in place workable transition arrangements for
    exchanges like ours and other participants.
        Chairman McHenry. Is there urgency, in your view?
        Mr. Santori. I view this as urgent.
        Chairman McHenry. Why?
        Mr. Santori. We cannot plan. We cannot plan how to put in
    place the tools, processes, and procedures that we use to
    protect consumers, and make reporting to law enforcement. Mr.
    Chairman, we cannot plan to hire new personnel to expand our
    physical presence to develop software tools.
        Planning is key for us. We have been around for 11 years.
    We plan to be around for a lot longer than 11 more.
        Chairman McHenry. On that lack of planning, what does that
    actually mean, because you are talking about your problems.
    Tell me about the American people's problems if this is the
    case. What are we missing out on? Consumer protection is what
    we are missing out on, number one. There is no clarity of this
    stuff. There are no clear rules of the road on whose rights
    there are for these assets. There is a lack of clarity.
        Mr. Santori. That is right.
        Chairman McHenry. The lack of clarity doesn't mean better
    things for the consumer. Is that fair?
        Mr. Santori. That is right. It means a worse environment
    for consumers. We cannot build the tools that we need to
    protect them. We cannot invest to----
        Chairman McHenry. So if my colleagues think that there is
    nothing to the digital assets, there is nothing to be valued
    from there, that there is nothing from an open permission-less
    exchange, it is visible to all, and law enforcement can track,
    there is no value of that.
        You would still want to have consumer protections, you
    would still want to have the rule of law here to make sure
    there is enforceability of rights and protections of consumer's
    property, even if you hated it. And if you love it, then you
    are missing out on the innovation, the job creation, the
    technical transmission of new value.
        Okay. So, what are the takeaways today? I think to recap on
    today, a couple of things are clear. The current Securities and
    Exchange Commission approach to disclosures doesn't work for
    digital assets. It doesn't conform with the nature and
    properties of digital assets.
        The CFTC needs additional authority over non-security
    digital assets. The Securities and Exchange Commission needs to
    modify its rules for broker-dealers and securities exchanges.
    Those things have to happen because the CFTC and the SEC alone
    can't do this. Congress must act. And it is imperative that we
    do act.
        And this committee will act. I want to thank Chairman Hill
    for his leadership, and the bipartisan cooperation we have had
    on these subcommittees and these committees of jurisdiction.
        With that, Mr. Chairman, I yield back.
        Chairman Hill. I thank the chairman for yielding back.
        I would like to ask for unanimous consent to submit for the
    record an investigation summary of what this committee has done
    thus far as it relates to investigating the collapse of FTX.
        Without objection, it is so ordered.
        And I would like to say that a couple of takeaways I have
    from listening today is that I have heard from the panel that
    we are not tying the hands of the SEC or the CFTC. In fact,
    just the inverse, we are trying to provide clarity and
    direction and statutory authority for those agencies to do
    their job and do it more effectively. And that, in turn, clears
    up the confusion.
        For example, the Binance case has that there is confusing
    statutory jurisdiction between those two Agencies. And what a
    great way to summarize it by the fact that we have had a
    collaborative joint hearing of the House Agriculture Committee
    and the House Financial Services Committee to illuminate
    exactly those points and the need for a framework to be put in
    place.
        I want to thank my colleagues for their participation today
    on both sides of the aisle and in both committees. And I thank
    the Ways and Means Committee for allowing us to slum here in
    their beautiful facility.
        Without objection----
        Mr. Sherman. Mr. Chairman, will you yield for----
        Chairman Hill. I will yield to my friend from California.
        Mr. Sherman. I will just point out, if we want clarity,
    let's just make it clear, and the industry should lobby for
    this, that the SEC has full jurisdiction. If the CFTC wants to
    have full jurisdiction, that is fine. I can't think of an
    industry more in need of double regulation rather than zero----
        Chairman Hill. I thank the gentleman. I am reclaiming my
    time.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        This hearing is adjourned.
        [Whereupon, at 12:47 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                  May 10, 2023

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                                    [all]