[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]