[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

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