[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
THE FUTURE OF DIGITAL ASSETS: PROVIDING
CLARITY FOR DIGITAL ASSET SPOT MARKETS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
JUNE 6, 2023
__________
Serial No. 118-9
__________
Part 3 (Final)
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Agriculture
agriculture.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
53-287 PDF WASHINGTON : 2023
-----------------------------------------------------------------------------------
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
(ii)
C O N T E N T S
----------
Page
Scott, Hon. David, a Representative in Congress from Georgia,
opening statement.............................................. 4
Thompson, Hon. Glenn, a Representative in Congress from
Pennsylvania, opening statement................................ 1
Prepared statement........................................... 3
Digital Asset Market Structure:
Discussion draft......................................... 109
Summary.................................................. 153
Section-by-section....................................... 155
Witnesses
Behnam, Hon. Rostin, Chairman, Commodity Futures Trading
Commission, Washington, D.C.................................... 6
Prepared statement........................................... 7
Supplementary material....................................... 160
Submitted questions.......................................... 160
Giancarlo, Hon. J. Christopher, former Chairman, Commodity
Futures Trading Commission, New York, NY....................... 49
Prepared statement........................................... 50
Grewal, J.D., Paul, Chief Legal Officer, Coinbase Global, Inc.,
Oakland, CA.................................................... 55
Prepared statement........................................... 57
Gallagher, J.D., Hon. Daniel M., Chief Legal, Compliance, and
Corporate Affairs Officer, Robinhood Markets, Inc.; former
Commissioner, U.S. Securities and Exchange Commission, Menlo
Park, CA....................................................... 63
Prepared statement........................................... 65
Berkovitz, Hon. Dan M., former Commissioner, Commodity Futures
Trading Commission; former General Counsel, U.S. Securities and
Exchange Commission, Bethesda, MD.............................. 72
Prepared statement........................................... 74
Submitted question........................................... 162
Lukken, Hon. Walter L., President and Chief Executive Officer,
Futures Industry Association; former Acting Chairman, Commodity
Futures Trading Commission, Washington, D.C.................... 81
Prepared statement........................................... 82
Submitted question........................................... 162
THE FUTURE OF DIGITAL ASSETS:.
PROVIDING CLARITY FOR DIGITAL ASSET SPOT MARKETS
----------
TUESDAY, JUNE 6, 2023
House of Representatives,
Committee on Agriculture,
Washington, D.C.
The Committee met, pursuant to call, at 10:01 a.m., in Room
1300 of the Longworth House Office Building, Hon. Glenn
Thompson [Chairman of the Committee] presiding.
Members present: Representatives Thompson, Lucas, Austin
Scott of Georgia, Crawford, LaMalfa, Rouzer, Kelly, Bacon,
Bost, Johnson, Baird, Mann, Feenstra, Miller of Illinois,
Moore, Cammack, Rose, Jackson of Texas, Molinaro, De La Cruz,
Langworthy, Duarte, Nunn, Alford, Miller of Ohio, David Scott
of Georgia, Costa, McGovern, Adams, Spanberger, Hayes, Brown,
Davids of Kansas, Slotkin, Caraveo, Salinas, Perez, Davis of
North Carolina, Budzinski, Crockett, Jackson of Illinois,
Carbajal, Soto, and Bishop.
Staff present: Paul Balzano, Caleb Crosswhite, Nick
Rockwell, Kevin Webb, John Konya, Emily German, Josh Lobert,
Clark Ogilvie, and Dana Sandman.
OPENING STATEMENT OF HON. GLENN THOMPSON, A REPRESENTATIVE IN
CONGRESS FROM PENNSYLVANIA
The Chairman. Well, good morning, everyone. Before we
officially gavel in, I recognize the gentleman from Arkansas
here, in our Agriculture Committee tradition, just to offer a
blessing over our Members here, and, quite frankly, these
proceedings, and our nation. Mr. Crawford?
Mr. Crawford. Thank you, Mr. Chairman. Heavenly Father--
thankful for every blessing of life. We are thankful for this
Nation that you have given us, Father. I just--thankful for
each Member that is represented here, and it is my prayer today
that everything that is said and done here will bring honor and
glory to your name, and it is in your name, Jesus Christ, I
pray. Amen.
The Chairman. Thank you, sir. The Committee will come to
order. Welcome, and thank you for joining today's hearing
entitled, The Future of Digital Assets: Providing Clarity for
the Digital Asset Spot Markets. After brief opening remarks,
Members will receive testimony from our witnesses today, and
then the hearing will be open to questions. And so I will lead
with my opening statement.
Good morning, and welcome to our full Committee hearing on
the future of digital assets. Thank you to our esteemed panel
of witnesses for making the time to be with us today. Indeed,
this is a rare opportunity to have so many established current
and former regulators in one room. Chairman Behnam, we
appreciate you for your, and your colleagues on the second
panel for, providing us with your expertise, your knowledge,
and thoughtful feedback on how Congress should develop a viable
regulatory framework for digital assets.
It is no secret blockchain technology and digital assets
hold real promise. From improving our banking and financial
services to providing data privacy and improving supply chain
logistics, these technologies have the potential to transform
everyday lives for Americans. As we look to put up clear
guardrails for digital assets, it is important consumers and
market participants benefit from the same longstanding customer
protections found in traditional financial markets.
For nearly a decade Congress has debated the treatment of
digital assets, which has led to numerous hearings, bill
introductions, and panel discussions, all trying to bring
regulatory certainty and clarity to these novel technologies.
These past activities have helped move the needle forward, but
further thoughtful coordination between committees and Members
is required. At the outset, I need to thank Chairman Patrick
McHenry with the Financial Services Committee for his
leadership and willingness to collaborate on this novel and
challenging topic.
Late last year we agreed to embark on a joint effort to
work collaboratively and craft a comprehensive digital asset
market structure framework. We set our eyes to a bold plan, but
one that was driven by logical and sensible principles for
digital asset regulations, led by fostering American
innovation, and bringing much needed customer protections to
digital asset-related activities and intermediaries. We sought
to put forward the best policies we could by developing them
together. We held numerous Member and staff education events,
including one-on-one meetings, roundtables, and hearings, to
bring folks up to speed on how current market structures for
commodities and securities operate, how digital assets fit and
do not fit into existing regulatory regimes, and why
Congressional action is needed.
Last month, Subcommittee Chairman Dusty Johnson and
Subcommittee Chairman French Hill held a joint subcommittee
hearing--the first one on digital assets that we are aware of--
to examine digital assets with both our committees working
together. From these events, it is not hard to conclude that
current Federal laws and regulations provide few rules of the
road for those who want to engage with these emerging
technologies, leading to complicated enforcement actions by
regulators and creating further confusion in the industry and
markets.
To address these concerns, Chairman McHenry and I went to
work and developed an initial discussion draft providing the
contours of a statutory framework for digital assets that was
released last week. The discussion draft * intends to provide
certainty, fill regulatory gaps, and bolster innovation. But,
and I cannot reiterate this enough, this is a draft, and we
plan to improve it through further vigorous debate, stakeholder
feedback, and technical assistance. It is our intention to work
with our Democratic colleagues on this proposal and continue
this Committee's longstanding tradition of working in a
bipartisan manner. It is our hope that we will have a
bipartisan, joint committee legislative proposal.
---------------------------------------------------------------------------
* Editor's note: the discussion draft, summary, and accompanying
section-by-section are located on p. 109.
---------------------------------------------------------------------------
The United States has always been a leader in financial and
technological innovation, and we have the most liquid and
robust markets in the world. It is incumbent on us to not miss
this opportunity, and to bring certainty to digital asset
markets. Other nations, like the European Union, Singapore,
Hong Kong, and the United Kingdom, have already put pen to
paper and have created frameworks and established themselves as
hubs for the development of the digital asset ecosystem. It is
time that we do our work here in the United States too, and
build a framework for trusted, reliable, and useful markets for
digital assets.
Before I close, I do want to address one more elephant in
the room. Earlier today, the SEC filed a complaint against one
of our witnesses, Coinbase. While I will not and cannot speak
to any of the specific allegations against the company, I do
want to note that this action is exactly why we are holding our
hearing here today. Regulation by enforcement is not an
appropriate way to govern a market, adequately protect
customers, or promote innovation. And I hope that the Members
of our Committee can work together to pull together a better
framework for digital asset regulation that promotes customer
protections, provides clear lines of authority to regulators,
and allows the regulated to clearly understand their
obligations under the law.
Again, thank you to each of our witnesses for their
willingness to partake in today's hearing, and I look forward
to our conversation.
[The prepared statement of Mr. Thompson follows:]
Prepared Statement of Hon. Glenn Thompson, a Representative in Congress
from Pennsylvania
Good morning, and welcome to our full Committee hearing on the
future of digital assets. Thank you to our esteemed panels of witnesses
for making the time to be with us today. Indeed, this is a rare
opportunity to have so many established current and former regulators
in one room.
Chairman Behnam we appreciate you, and your colleagues on the
second panel, for providing us with your expertise, knowledge, and
thoughtful feedback on how Congress should develop a viable regulatory
framework for digital assets.
It is no secret blockchain technology and digital assets hold real
promise. From improving our banking and financial services, to
providing data privacy and improving supply chain logistics, these
technologies have the potential to transform everyday lives for
Americans.
As we look to put up clear guardrails for digital assets, it is
important consumers and market participants benefit from the same
longstanding customer protections found in traditional financial
markets.
For nearly a decade, Congress has debated the treatment of digital
assets, which has led to numerous hearings, bill introductions, and
panel discussions, all trying to bring regulatory certainty and clarity
to these novel technologies.
These past activities have helped move the needle forward, but
further thoughtful coordination between committees and Members is
required.
At the outset, I need to thank Chairman McHenry for his leadership
and willingness to collaborate on this novel and challenging topic.
Late last year we agreed to embark on a joint effort to work
collaboratively and craft a comprehensive digital asset market
structure framework.
We set our eyes to a bold plan, but one that was driven by logical
and sensible principles for digital asset regulation, led by fostering
American innovation and bringing needed customer protections to digital
asset-related activities and intermediaries.
We sought to put forward the best policies we could, by developing
them together.
We held numerous Member and staff education events, including one-
on-one meetings, roundtables, and hearings, to bring folks up to speed
on how current market structures for commodities and securities
operate, how digital assets fit and do not fit into existing regulatory
regimes, and why Congressional action is needed.
Last month, Subcommittee Chairman Dusty Johnson and Subcommittee
Chairman French Hill held a joint subcommittee hearing--the first one
on digital assets that we're aware of--to examine digital assets with
both our committees working together.
From these events, it is not hard to conclude that current Federal
laws and regulations provide few rules of the road for those who want
to engage with these emerging technologies, leading to complicated
enforcement actions by regulators and creating further confusion in the
industry and market.
To address these concerns, Chairman McHenry and I went to work and
developed an initial discussion draft providing the contours of a
statutory framework for digital assets that was released last week.
The discussion draft intends to provide certainty, fill regulatory
gaps, and bolster innovation.
But--and I cannot reiterate this enough--this is a draft and we
plan to improve it through further vigorous debate, stakeholder
feedback, and technical assistance.
It is our intention to work with our Democratic colleagues on this
proposal and continue this Committee's longstanding tradition of
working in a bipartisan manner.
It is our hope that we will have a bipartisan, joint committee
legislative proposal.
The United States has always been a leader in financial and
technological innovation. We have the most liquid and robust markets in
the world.
It is incumbent on us to not miss this opportunity and bring
certainty to digital asset markets.
Other nations, like the European Union, Singapore, Hong Kong, and
the United Kingdom, have already put pen to paper and have created
frameworks and established themselves as hubs for the development of
the digital asset ecosystem.
It is time that we do our work here in the United States too, and
build a framework for trusted, reliable, and useful markets for digital
assets.
Before I close, I do want to address one more elephant in the room.
Earlier today, the SEC filed a complaint against one of our
witnesses, Coinbase.
While I will not and cannot speak to any of the specific
allegations against the company, I do want to note that this action is
exactly why we are holding our hearing today.
Regulation by enforcement is not an appropriate way to govern a
market, adequately protect customers, or promote innovation. I hope
that the Members of our Committee can work together to pull together a
better framework for digital asset regulation that promotes customer
protections, provides clear lines of authorities to regulators, and
allows the regulated to clearly understand their obligations under the
law.
Again, thank you to each of our witnesses for their willingness to
partake in today's hearing. I look forward to our conversation.
The Chairman. With that, I would now like to welcome the
distinguished Ranking Member, the gentleman from Georgia, Mr.
Scott, for any opening remarks he would like to give.
OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN
CONGRESS FROM GEORGIA
Mr. David Scott of Georgia. Thank you, Mr. Chairman, and
welcome, Chairman Behnam. It is great having you. As you know,
Chairman Behnam, I have a long history of fighting for more
resources for the CFTC, so it shouldn't surprise you when you
hear me say that the CFTC needs and deserves more funding,
particularly at this critical time.
The markets the CFTC regulates are ever evolving. The CFTC
needs the resources to get the right talent and the right
technology to continue its work. And this proposal that we are
looking at now does not respond to the wants and the needs of
the CFTC. Instead, this proposal establishes a number of
complex and untested processes raising questions as to whether
the provisions will meet the stated goals of the industry to
establish clear regulatory and registration guidelines.
One example of this is the provisional registration process
which would be in place while the CFTC and the SEC undergo a
very resource-intensive joint rulemaking process. This is very
critical. Anytime you must shift longstanding regulatory
processes and practices, there is a chance that something will
fall through the cracks. And this bill provides no additional
staffing or funding resources, and it makes this even more
likely.
As it currently stands, the digital asset industry, without
a doubt, exposes all who choose to participate to serious
potential financial risks and uncertainties. This is well
established information we have gathered over the past several
Congresses, this Committee has highlighted these risks both in
hearings and proposed legislation.
The digital commodity spot market, where many of these
assets are purchased and traded by market participants, are
operated according to an ill-suited regulatory regime that
varies substantially based on the state in which the trading
platforms are operating. That alone lets you know the depth and
the height of this critical issue that we are facing.
And over the past year alone we have observed firsthand the
fragility and the vulnerability of this industry, and it has
lost billions in customer funds due to questionable and
insufficient business practices, from the collapse and
bankruptcy of major digital assets trading platforms such as
Terra, the FTX, to ineffective cybersecurity practices, and the
inherent vulnerability of digital asset trading platforms to
hackers, who stole a record $3.8 billion from cryptocurrency
businesses in 2022. This is not sustainable and cannot go on.
I yield back the balance of my time.
The Chairman. Well, I thank the gentleman. The chair would
request that other Members submit their opening statements for
the record so the witness may begin his testimony to ensure
that there is ample time for questions. Our witness today for
our first panel is Rostin Behnam, who is the Chairman of the
Commodity Futures Trading Commission. Chairman Behnam, we are
pleased to welcome you back to the Committee. Thank you for
joining us today, and we will now proceed to your testimony.
You have 5 minutes. The timer in front of you will count down
to zero, at which point your time has expired. Chairman Behnam,
please proceed when you are ready.
STATEMENT OF HON. ROSTIN BEHNAM, CHAIRMAN,
COMMODITY FUTURES TRADING COMMISSION,
WASHINGTON, D.C.
Mr. Behnam. Chairman Thompson, Ranking Member Scott, and
Members of the Committee, thank you for the opportunity to be
here before you today. Since my confirmation as CFTC Chair, I
have consistently highlighted the need for Congressional action
to address the lack of Federal regulation over the digital
commodity market, intending to bring this volatile market out
of the shadows and into the regulatory fold.
I have not done this alone. Last year the Financial
Stability Oversight Council unanimously issued a landmark
report calling on Congress to enact legislation to fill the
clear regulatory gap over the spot mark for digital assets that
are not securities. The events over the past year bring added
urgency to these recommendations. The bankruptcy of several
large digital asset platforms erased billions of dollars in
customer funds. Multiple large market participants allegedly
engaged in manipulative and abusive trading activity, including
through opaque arrangements with affiliated trading platforms,
undermining confidence in these nascent markets.
Simply put, we know how this ends. Leaving billions of
dollars of customer funds in investments in largely unregulated
entities is a recipe for disaster. But recent history can teach
us many lessons. Following the 2008 financial crisis this
Committee, working in a bipartisan basis, responded with
reforms to the previously unregulated swaps market that were
anchored in core principles of sound market regulation:
transparency, reporting, and registration, to name a few. These
tools are necessary to prevent future crises.
Indeed, one of the only FTX entities that avoided the
broader FTX bankruptcy last year did so because of CFTC
regulation that mandated that any registered entities maintain
segregation of customer funds, sufficient financial resources,
and proper governance. I believe the broader digital commodity
market should be subject to similar time-tested regulations,
focused on protection of customer assets, surveillance of
trading activity, prohibitions on conflicts of interest, and
imposition of cybersecurity standards.
I am encouraged by the continued interest of both parties
in Congress and the Administration to address the regulatory
gap over digital commodities, and generally support legislative
efforts by this Committee to provide the CFTC with additional
authority to do just that. That said, it is critically
important that any new legislation considered by Congress does
not undermine existing laws. Most notably, where securities
laws apply, the Securities and Exchange Commission should use
its robust authorities to protect customers and address
information gaps.
I would like to highlight those areas that I think are
particularly important for Congress to address in any
legislation on this issue. For retail market participants,
Congress should ensure that the CFTC is fully empowered to
require registered entities to make necessary disclosures
regarding a variety of matters, such as investment risk,
cybersecurity risk, mining, settlement practices, and other
related activities, ensure customers are receiving the best
available prices, and segregate and safeguard assets in the
event of a failure.
We also know that these markets are often promoted as a
form of financial inclusion to populations that may be most
vulnerable to the inherent risks in these assets, as well as to
predatory financial schemes. Any legislation in this area
should recognize this dynamic and require additional work and
study to better understand how these populations interact with
this market. In the absence of Federal market regulation, the
digital asset market has been plagued by fraud and
manipulation.
The CFTC has been aggressive and proactive in policing
these markets, bringing over 85 cases, resulting in over $4
billion in penalties and restitution. But our legal authority
in the spot market for digital commodity tokens is necessarily
limited to acting only after the fraud has occurred. A key
feature of any regulatory scheme should be authority for the
CFTC to proactively establish rules to minimize fraud in the
first place. This should include authority to set stringent
standards for preventing conflicts of interest, establish rules
for maintaining fair, open, and transparent markets, and
actively monitoring trading by market participants.
Presently the CFTC is the only financial market regulator
that relies on appropriated dollars from Congress for its
funding. Other financial regulators have self-funding
mechanisms in place that provide greater assurance that their
fiscal year budget requests will be fully funded. For any
regulator taking on new authority, it is imperative that the
Congress provide the resources necessary to implement the new
authority. Regulation of the digital commodity market will
bring new responsibilities to the CFTC that cannot be managed
by simply folding this newer market into our existing
regulatory regime with existing resources.
I want to thank the Committee again for the opportunity to
testify today. I am encouraged by the Committee's efforts to
address difficult policy issues in the digital asset space, in
particular addressing the existing gaps in regulation. I stand
ready to engage with this Committee and Members of Congress on
this legislation to ensure it addresses all key considerations
in this emerging marketplace. I look forward to answering your
questions. Thank you.
[The prepared statement of Mr. Behnam follows:]
Prepared Statement of Hon. Rostin Behnam, Chairman, Commodity Futures
Trading Commission, Washington, D.C.
Chairman Thompson, Ranking Member Scott and Members of the
Committee, thank you for the opportunity to appear before you today.
The Need for Legislation to Fill the Regulatory Gap
Since my Senate confirmation hearing almost 2 years ago, I have
consistently highlighted the need for Congressional action to address
the lack of Federal regulation over the digital commodity market.\1\ I
have been clear in testimony before Congress as well as in other public
statements that bringing this volatile market out of the shadows and
into the regulatory fold would protect customers, ensure market
resilience and stability, and prevent contagion to the traditional
financial system.
---------------------------------------------------------------------------
\1\ See Rostin Behnam, Chairman, CFTC, Testimony of Chairman Rostin
Behnam Regarding ``Examining Digital Assets: Risks, Regulation, and
Innovation'' before the U.S. Senate Committee on Agriculture,
Nutrition, and Forestry (Feb. 9, 2022) (https://www.cftc.gov/PressRoom/
SpeechesTestimony/opabehnam20); Rostin Behnam, Chairman, CFTC,
Testimony of Chairman Rostin Behnam Regarding the Legislative Hearing
to Review S. 4760, the Digital Commodities Consumer Protection Act at
the U.S. Senate Committee on Agriculture, Nutrition, and Forestry
(Sept. 15, 2022) (https://www.cftc.gov/PressRoom/SpeechesTestimony/
opabehnam26); Rostin Behnam, Chairman, CFTC, Testimony of Chairman
Rostin Behnam Regarding ``Why Congress Needs to Act: Lessons Learned
from the FTX Collapse'' at the U.S. Senate Committee on Agriculture,
Nutrition, and Forestry (Dec. 1, 2022) (https://www.cftc.gov/PressRoom/
SpeechesTestimony/opabehnam29).
---------------------------------------------------------------------------
I have not done this alone. Last year, the Financial Stability
Oversight Council unanimously issued a landmark report on the financial
stability risks presented by the digital asset market.\2\ One of the
core recommendations called on Congress to enact legislation to fill
the clear regulatory gap over the spot market for digital assets that
are not securities.
---------------------------------------------------------------------------
\2\ Financial Stability Oversight Council, Report on Digital Asset
Financial Stability Risks and Regulation (Oct. 2022) (https://
home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-
2022.pdf).
---------------------------------------------------------------------------
The events over the past year bring added urgency to these
recommendations. The bankruptcy of several large digital asset
platforms erased billions of dollars in customer funds. Multiple large
market participants allegedly engaged in manipulative and abusive
trading activity, including through opaque arrangements with affiliated
trading platforms, undermining confidence in these nascent markets.
Cybersecurity vulnerabilities continue to be exploited in weekly hacks,
resulting in billions of dollars in lost funds.\3\
---------------------------------------------------------------------------
\3\ See Chainalysis, 2022 Biggest Year Ever For Crypto Hacking with
$3.8 Billion Stolen, Primarily from DeFi Protocols and by North Korea-
linked Attackers (Feb. 1, 2023), https://blog.chainalysis.com/reports/
2022-biggest-year-ever-for-crypto-hacking/; see also Web3 is Going Just
Great, Hacks and Scams by Dollar Amount (accessed on June 1, 2023),
https://web3isgoinggreat.com/charts/top.
---------------------------------------------------------------------------
Simply put, we know how this story ends. Leaving billions of
dollars of customer funds and investments in largely unregulated
entities is a recipe for disaster. But, recent history can teach us
many lessons. Following the 2008 financial crisis, this Committee--
working on a bipartisan basis--responded with reforms to the previously
unregulated swaps market that were anchored in core principles of sound
market regulation: transparency, reporting, and registration, to name
just a few.
These tools are necessary to prevent future crises. They have
served as tried and true rules of the road for the derivatives markets.
Indeed, one of the only FTX entities that avoided the broader FTX
bankruptcy proceedings did so because of CFTC regulation that mandated
any registered entities maintain segregation of customer funds,
sufficient financial resources, and proper governance. That is, the
entity was able to protect customer funds while continuing to operate.
I believe the broader digital commodity market should be subject to
similar time-tested regulations focused on protection of customer
assets, surveillance of trading activity, prohibitions on conflicts of
interest, and imposition of stringent cybersecurity standards.
Key Provisions for Regulating the Digital Commodity Market
I am encouraged by the continued interest of both parties in
Congress and the Administration to address the regulatory gap over
digital commodities and generally support legislative efforts by this
Committee to provide the CFTC with additional authority to do just
that. That said, it is critically important that any new legislation
considered by the Congress does not undermine existing laws. Most
notably, where securities laws apply, the Securities and Exchange
Commission should use its robust authorities to protect customers and
address information gaps between securities issuers and investors in
the market. I would like to highlight those areas that I think are
particularly important for Congress to address in any legislation on
this issue.
Customer Protections
For retail market participants entering a new and technically
complex digital asset market, robust customer protections are
paramount. Congress should ensure that the CFTC is fully empowered to
require registered entities to make necessary disclosures regarding a
variety of matters, such as investment risk, cybersecurity risks,
mining, settlement practices and other related activities; ensure
customers are receiving the best available prices; and segregate and
safeguard assets in a way that protects customers in the event of a
failure by the platform.
We also know that these markets are often promoted as a form of
financial inclusion to populations that may be most vulnerable to the
inherent risks in these assets as well as to predatory financial
schemes. Any legislation in this area should recognize this dynamic and
require additional work and study to better understand how these
populations interact with this market and ensure they are adequately
protected.
Market Integrity
In the absence of Federal market regulation, the digital asset
market has been plagued by fraud and manipulation. The CFTC has been
aggressive and proactive in policing these markets, bringing over 85
cases resulting in over $4 billion in penalties and restitution. But,
our legal authority in the spot market for digital commodity tokens is
necessarily limited to acting only after the fraud has occurred. A key
feature of any regulatory scheme should be authority for the CFTC to
proactively establish rules to minimize fraud in the first place. This
should include authority to set stringent standards for preventing
conflicts of interest, establish rules for maintaining fair, open, and
transparent markets, and actively monitoring trading by market
participants.
Funding
Presently, the CFTC is the only financial market regulator that
relies on appropriated dollars from Congress for its funding. Other
financial regulators have self-funding mechanisms in place that provide
greater assurance that their fiscal year budget requests will be fully
funded. For any regulator taking on new authority, it is imperative
that the Congress provide the resources necessary to implement that new
authority. Regulation of the digital commodity market will bring new
responsibilities to the CFTC that cannot be managed by simply folding
this market into our existing regulatory regime with existing
resources.
I want to thank the Committee again for the opportunity to testify
today. I am encouraged by the Committee's efforts to address difficult
policy issues in the digital asset space, in particular, addressing the
existing gaps in regulation. As always, there is more work to be done,
and I stand ready to engage with this Committee and Members of Congress
on this legislative proposal to ensure it addresses all key
considerations in this emerging marketplace.
I look forward to answering your questions.
The Chairman. Well, Mr. Chairman, thank you so much. Thanks
for your important testimony today. At this time Members will
be recognized for questions in order of seniority, alternating
between Majority and Minority Members, and in order of arrival
for those who joined us after the hearing convened. You will be
recognized for 5 minutes each in order to allow us to get to as
many questions as possible, and I now recognize myself for 5
minutes.
Chairman Behnam, you have been discussing the regulatory
gap with respect to the digital commodity cash markets for
years now. Why is it so important for Congress to proactively
work to close this gap?
Mr. Behnam. Thank you, Mr. Chairman. It is an extremely
important question, and really, I think the reason why we are
here. What we have observed over the past decade, if not more,
is an emerging transition to commodity cash markets that retail
participants can use. Traditionally markets, commodity markets
that this Committee knows well, are wholesale-oriented and used
for risk management. But because of technology, because of
smartphones, and because of emerging access to markets reducing
barriers to access, we are seeing retail participants have
greater exposure to commodity assets, as they are defined by
U.S. law.
So we are in this space where we have two market
regulators, the Securities and Exchange Commission and the
Commodity Futures Trading Commission. We regulate derivatives,
this Committee knows that well. We do not regulate cash
commodity markets. The SEC regulates security markets, both
cash markets and derivatives markets.
So in this larger Venn Diagram of market regulation, the
one area that is not covered is commodity cash markets. And as
these financial assets are defined, and I will focus most
notably on Bitcoin and Ether, these two assets make up 60
percent of the digital asset market. And at least Bitcoin,
which we know has a determination by a Federal court--I have
argued in the past that Ether is a commodity. We have a listed
Ether futures contract. If you take these two tokens alone, you
are talking about 60 percent of the digital asset market that
potentially lives inside of this regulatory vacuum.
So I have been advocating, as you have said, for a number
of years. As a market regulator, as the Chair of the CFTC,
bringing all of these enforcement cases, seeing vulnerable
communities being taken advantage of, losing money, customer
money, obviously all of the bankruptcies we saw last year,
which Congressman Scott mentioned, this is the area that I am
highlighting advocating for, hopefully that Congress can
address, so we can fill that gap, and ultimately protect
customers.
The Chairman. In your testimony you mentioned the
recommendations of the Financial Stability Oversight Council,
FSOC, regarding the regulation of non-security digital assets
in its 2022 report on digital asset financial stability risks
and regulation. Would you briefly elaborate on the
recommendations that FSOC made with respect to addressing the
regulatory gaps in non-security digital asset cash markets?
Mr. Behnam. Thanks, Mr. Chairman. It will be brief,
because, in short, the recommendation was that there is a gap
for digital tokens that are not securities. So the FSOC report,
as you noted, recognized the fact that, for commodity digital
tokens, there is no regulatory authority or regulatory
oversight. I would add the FSOC report also emphasized that all
regulators utilize all enforcement tools to the extent they
can. And as you know, and as I said in my statement, we are
doing what we can with the authority that we have, which is, at
this time, quite limited.
The Chairman. Does the discussion draft address the many
concerns that the FSOC report raised?
Mr. Behnam. Mr. Chairman, it does. It does, in the sense
that you are trying to target this gap, and essentially provide
the CFTC with regulatory authority over commodity tokens.
The Chairman. And, Chairman, while we all know that the
CFTC is a significantly smaller agency than the SEC, it has
also shown itself to be a more nimble regulator. Do you believe
that the Commission has the flexibility to expand and adapt to
a change in its remit?
Mr. Behnam. Mr. Chairman, we have done this in the past,
most recently after the 2008 financial crisis, and the
implementation of the 2010 Dodd-Frank Law. To take on the swaps
market, the previously unregulated swaps market, was a
significant lift for the CFTC at the time. But I think if you
ask anyone, both in the U.S. and globally, the CFTC was one of
the most efficient and effective regulators in implementing a
whole new regulatory scheme over a very large and very
complicated market. So I don't think this situation that we are
dealing with right now, in terms of digital asset commodities,
is much different.
As Ranking Member Scott said, and as you mentioned
yourself, with appropriate funding, given the expertise we
have, and the experience we have with digital assets, I have no
doubt that the Commission, and our staff, will be able to
implement a regulatory regime over digital asset commodities.
The Chairman. Very good. Well, thank you so much. I yield
back, and I am pleased to recognize my good friend, the Ranking
Member, for 5 minutes of question.
Mr. David Scott of Georgia. Thank you. Chairman Behnam,
what will be the effect of providing no additional funding
resources to the SEC and the CFTC to implement this proposal
according to the joint rulemaking process established in the
proposal?
Mr. Behnam. Thank you, Ranking Member Scott. I appreciate
you highlighting this point. It really would be ineffective, or
we would not be able to appropriately and impactfully implement
the law that you would ask us to do. We would need teams to
work on the rule implementation, which is very complex, as you
know. We would need resources both for IT purposes, hardware,
and software. We would need new cyber-protections. And of
course, as you point out, with the Joint Advisory Committee, we
would have--as I understand the law requires per diem
requirements for the members, all of these new financial
burdens and responsibilities.
So, given all of the market issues we are facing today, new
markets, emerging markets, and as you pointed out, a growing
futures and options and swaps market, if we were given new
authority to regulate the digital commodity markets, it would
be critically important, in order to do it right, that the CFTC
has new additional funding to match that responsibility.
Mr. David Scott of Georgia. And, Mr. Chairman, can you
estimate for me the amount of time that the joint rulemaking
process would take without additional resources?
Mr. Behnam. Well, I would say that it is always difficult
to estimate, but I have evaluated certain circumstances where
we did get additional funding, and it would take at least 1 to
2 years to implement rules. So under your scenario, where we do
not get additional funding, given all the existing
responsibilities we have in traditional derivatives markets, I
would estimate that this could take upwards of 3 to 4 years to
implement, given the pull and the stress on staff to understand
the law, and to write rules to implement over time.
Mr. David Scott of Georgia. And let me ask you, can you
share with us, are there any benefits to this provisional
framework that provide the Commission with authorities or
information to which you cannot currently assess?
Mr. Behnam. Congressman, I think the provision that
outlines a period of provisional registration--the way I view
it is it really is holding back the CFTC, and prohibiting us
from utilizing our existing authority, which, again, is very
limited, and, as you know, is very focused on anti-fraud and
manipulation.
I think I understand the goal and the intent of what this
provision is trying to accomplish, and I think there is
probably a more efficient way to do it. And I would point to,
again, after Dodd-Frank, when we had to implement Title VII of
that bill, around the swaps market, the CFTC, in a very
efficient manner, finalized rules in about 12 to 24 months for
the core rules, which included the definition of a swap, and
the framework around swap dealers, and swap execution
facilities. Once those rules were finalized, we were able to
provisionally register swap dealers and swap execution
facilities for a number of years after the rules were
finalized.
And the idea was we had finalized the rules, but we had
some work to sort of finish through before we could implement
the rule, and that is when we had this provisional period. So I
do think it is something the Committee should consider as this
draft continues to be debated and discussed, is reworking that
provisional section so that we don't handcuff the regulator
from the start.
Again, we are dealing with a market that is unregulated,
which is similar to what we were dealing with, with the swaps
market. We would work efficiently, with appropriate funding, to
get the rules done as soon as possible, and then I think it
would be best to have a provisional period as we work through
the details of the regime, and work with the registrants, who
are either registered exchanges, brokers, or affiliate
entities.
Mr. David Scott of Georgia. Well, I will tell you, it is
very important that we make sure that we provide you with
sufficient funding to do this very much needed job. Thank you.
Mr. Behnam. Thank you.
The Chairman. I thank the gentleman. I now recognize
Congressman Austin Scott from Georgia for 5 minutes.
Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
Chairman Behnam, good to see you. I have mixed feelings about
what the right thing to do here is, candidly. Crypto to me is
clearly not a security. It is closer to a currency, and should
be regulated by the CFTC, not the SEC. But my question is, we
talk about fair, open, transparent markets, whether it be
derivatives, or swaps, or contracts. There are over 20,000
different cryptocurrencies out there today. Is that number
approximately correct?
Mr. Behnam. I believe it is.
Mr. Austin Scott of Georgia. Have you done any type of
analysis on the workforce that you would need at the CFTC if we
gave you the authority to register or regulate the 20,000
crypto currencies?
Mr. Behnam. Congressman, what we have done thus far, and
this has been as a result of numerous efforts that both the
House and the Senate have put forward on bills over the past
few years, is to estimate resource needs, and I have come up
with the number, roughly, as an estimate, about $120 million
over 3 years, and that is to build teams around rulemaking, and
how we would implement something generally that we would
suspect would require registration of exchanges, brokers,
custodians, and others.
Mr. Austin Scott of Georgia. And what is your current
budget, if I could----
Mr. Behnam. Our current budget is $365 million.
Mr. Austin Scott of Georgia. Per year?
Mr. Behnam. Per year.
Mr. Austin Scott of Georgia. So you are talking about
another ten percent?
Mr. Behnam. Yes.
Mr. Austin Scott of Georgia. Approximately?
Mr. Behnam. Our current request for Fiscal Year 2024 is
$411 million. I do think, regarding your question about the
tokens, and the 20,000 tokens, our markets--what--we focus on
Bitcoin and ETH most commonly because they are listed futures
contracts. We have brought a number of enforcement cases which
mention other tokens, including Litecoin and others.
Mr. Austin Scott of Georgia. Yes.
Mr. Behnam. There are dynamics, which I am sure we will
talk about throughout the course of the hearing, about what
constitutes a security and a commodity, and I think this is
what the draft bill is trying to target, because there are, in
fact, some tokens that, from the legal precedent we have now,
resemble securities, but there are certainly many that look
like and act like commodities.
Mr. Austin Scott of Georgia. Yes. I guess one of the
questions I have is, as we identify, of the 20,000, which ones
are, for lack of better terminology, of the regulatory
framework? I mean, does it have to be a certain dollar value, a
certain number of individual owners of the different cryptos?
And how do you keep somebody from manipulating it? Obviously,
if you could buy into an unregulated one and somehow manipulate
the price that it became regulated, you would make yourself
wealthy, because once you became regulated, then you are going
to be part of the--for lack of better terminology, the chosen
ones that actually are able to engage in transactions.
Mr. Behnam. Yes. The vast majority of these 20,000 tokens
you mentioned are largely not trading. You probably see very
little to probably no trading on a daily basis. The vast
majority of the trading occurs in a small handful of tokens, in
the dozens at most, and probably smaller than that. The idea
and the concept around the regulatory regime wouldn't be any
different than what you mentioned on futures, or options, or
swaps, or equities, is that you have registered exchanges, and
in order to trade those tokens in a regulated way, you would
have to list the tokens on the exchange. If they remained off
exchange, then that would be a violation of either the
Commodity Exchange Act, as refined or amended, and then, of
course, the Securities and Exchange Act as well.
I do think a lot of these tokens, given where they are
right now, and the activity that we have seen over the past few
years, would probably, over time, disappear, both because of
the weight of regulation, and because they have largely become
obsolete.
Mr. Austin Scott of Georgia. Yes. I agree with you on that.
I do think that you have the ability of one or two or three
famous people to manipulate that. I mean, we have seen that
with some of the other coins as it is, but I appreciate you. I
have a tremendous amount of faith in your leadership and your
ability to advise us as we push forward on this, and I
appreciate you being here. With that, I yield back.
The Chairman. The gentleman yields back. I now recognize
the gentleman from California for 5 minutes, Mr. Costa.
Mr. Costa. Thank you very much, Mr. Chairman. Chairman
Behnam, you stated, I believe, in a hearing before the Senate
Agriculture, Nutrition, and Forestry Committee, that, following
the collapse of FTX, that, without any new authority, the CFTC,
there would remain gaps in the Federal regulatory framework. I
think you kind of outlined them, even if other regulators acted
in their existing authority. What do you think are the lessons
to be learned here from the collapse of FTX, and how we prevent
that from occurring again in the future?
Mr. Behnam. Congressman, thanks for the question, and, as I
stated in my opening remarks, we regulated an FTX entity,
LedgerX, and when I look at the scope of the bankruptcy, which
was very significant globally, there were over 130 entities
that had to file for bankruptcy.
Mr. Costa. Could you have anticipated beforehand of its
downfall?
Mr. Behnam. Yes, it is a good question, because the lens
with which we saw FTX was LedgerX, which was a highly
regulated, well-resourced, well-governed entity, and that was
the entity that we regulated, and we focused on. To your point,
and your question, could we have anticipated, or could we have
seen, the answer is no, and the answer is because--it is the
reason I am here today, and what I have advocated, it is
because we don't have authority over digital commodity tokens.
And a lot of that activity occurred overseas, which is a first
sort of primary barrier to our jurisdiction offshore, but the
larger barrier, of course, is the fact that we don't have
regulatory authority over entities that trade cash commodity
tokens. So it is the area that we are here for today, and
hopefully we can change so we can prevent those crises from
happening again.
Mr. Costa. Well, you talk about overseas, and I remember
when we were going through this challenge with the swaps a
number of years ago, the Committee actually went to Europe, and
we met with a number of the financial institutions in London
and Frankfurt, and were trying to get a sense of what the
Europeans were doing. And are there any lessons to be learned
that you would cite from the framework that exists there today?
Mr. Behnam. Yes, Congressman, it is another great question.
Our derivatives markets are global in nature, and that is the
way they function, because we have large institutions needing
to manage global risk.
Mr. Costa. Right. Yes. We are not an island here.
Mr. Behnam. Yes. And I think the--this is--in many respects
the nature of digital assets is global. There are no barriers
like there are in traditional markets, and I think it is
important. I am the Vice Chair of IOSCO, which is the
International Organization of Securities Commissions. I
participate in the Financial Stability Board. There are a lot
of efforts at the global level to coordinate rules of the road.
And, as was mentioned by the Chairman, Europe has moved on
crypto regulation in the UK, Singapore, Hong Kong, and I think
it is important that we gel our rules across more----
Mr. Costa. So you think there are models there that we can
follow what those----
Mr. Behnam. Every jurisdiction is unique, and certainly in
the U.S. market we are the largest, deepest, and we have a
variety and diverse set of institutions and market
participants, but, at a high level, they are certainly--looking
at the European model is a good mark, and some of the work that
the UK and Singapore is doing as well is a good mark to start
off with.
Mr. Costa. What fears do you have most, in terms of if we
continue to go as we are, without the additional authorities
that you outlined, and that the Chairman and the Ranking Member
discussed? If we just continue with the status quo, what is
your biggest fear?
Mr. Behnam. Congressman, I mean, the evidence is in our
enforcement record, and I would even point to the SEC's
enforcement record as well. We brought 82 cases over about 8
years, and this--82 cases for an agency that doesn't have
regulatory authority. These are all cases that we have been--
having--coming inbound, people have been telling us. And these
are individuals and institutions that are losing money, that
are getting hurt and getting duped, and my fear is, if we don't
address this issue from a legislative standpoint, we will
continue to bring these cases.
But, as I point out, we are bringing these cases because of
a very small authority that Congress provided. And my fear is
that this is, I have said this in the past, the tip of the
iceberg. And as this market ebbs and flows in size--which it
has largely stabilized over the past 6 to 9 months. If it
starts to peak and move into a direction of growing, you could
potentially have financial stability risks, and other concerns
for financial markets.
Mr. Costa. Well, my time has expired, but, Mr. Chairman,
and Ranking Member, I think there obviously is work for us to
do, and I think there is an opportunity here to establish a
bipartisan framework in which we can accomplish that end, to
deal with the issues that have been presented, and I look
forward to continuing to work on this effort.
The Chairman. I thank the gentleman. I now recognize the
gentleman from Arkansas, Mr. Crawford, for 5 minutes.
Mr. Crawford. Thank you, Mr. Chairman. Chairman Behnam,
thanks for being here. You may recall the last time you were
here we had a conversation about whether or not Sam Bankman-
Fried was a CFTC registrant, and, of course, he wasn't. And so
that was my concern, and it is my concern now. I am kind of
like--I share the sentiment of my colleague here, Mr. Scott,
that--I am not really sure how I feel about this. In a way I
guess I am kind of, like, standing on a platform, watching the
train leave the station, and there may be time for me to jump
on the last car, I don't know, but that is just sort of how I
feel right now.
But I am concerned about--you mentioned LedgerX, and you
had a view into what was taking place through the lens of
LedgerX. Talk about what regulatory authorities existed then,
and what would--how that would change now, as it applies to
LedgerX. Were they a CFTC registrant? Obviously, I am assuming
they were because you had authority, so talk about that a
little bit.
Mr. Behnam. Yes. LedgerX was a clearinghouse and a trading
platform that offered fully collateralized futures options and
swaps. FTX bought LedgerX in the fall of 2021, and shortly
after they purchased them--LedgerX has been licensed with the
CFTC since 2017 or 2018.
Mr. Crawford. Okay.
Mr. Behnam. Shortly after FTX bought LedgerX, they
submitted an application, which is why I was here before, at
least in part, to change their model from fully collateralized
to margined.
Mr. Crawford. Okay.
Mr. Behnam. But the unique nature of it was that it was
non-intermediated.
Mr. Crawford. So you can see how that might be a problem,
fully collateralized versus margin. I mean, I have some
concerns about that, but I want to move on. On that topic--so
as we start to see your regulatory authority expand, and we
have talked about the financial needs that would accompany
that, the resources you would need, what about the licensure? I
am talking about, are IBs going to be able to now be brokers
from digital currency, and are they going to be Series 3
license holders, what is the regulatory requirement going to
be, what is the licensure going to be, and what role does NFA
play in that?
Mr. Behnam. Right. So NFA is going to play a critical role,
assuming it is NFA. I don't want to make any assumptions, this
could change, but we have a great relationship with the
National Futures Association. They are, I often say this, the
boots on the ground, the direct intersection between retail
participants, other market participants, and markets. We would
certainly need an SRO to sort of facilitate this market
regulatory scheme.
I would say a lot of the questions you raise, we would have
to decide, both in legislation and in the rule context, would
we want a traditional FCM, or a broker type who offers futures
and options, to also be able to offer digital assets? And the
question might be yes. The answer to the question might be no.
Or would we want a registered futures exchange, under a CFTC
license, to be able to offer cash digital commodities? I think
the draft bill proposes a new entity, a digital commodity
contract market, which is parallel to what we have for futures
and options. So I think there are things that we have to work
through, and this is why it is a draft, but certainly would
welcome your steer on whether or not you would want those
responsibilities to be held jointly by a single entity.
Mr. Crawford. Well, here is where I am going. I mean, there
are at least three vape shops in my hometown that say ``Buy
crypto here.'' That is problematic. And so, on that--and on
that score, I would say that is why we have to do this
regulatory measure, because we don't need just Joe Schmoe at a
vape shop selling crypto. But this seems to be widespread, and
so to Austin Scott's point, I mean, you have 20,000+
currencies. How are you going to get your arms around this and
determine which ones are valid, which ones are going to fall
under your umbrella, and which ones are going to be sort of
operating in this sort of unregulated Wild, Wild West space?
Mr. Behnam. I don't think any of the tokens should be
operating in the unregulated space. They all needed to be--they
need to be in the regulated space. We do have to figure out
which tokens are commodities, which tokens are securities. And
then the next layer to your point, about us working with state
regulators and the NFA, is to weed out all of these local
distributors, sellers, individuals who are often scammers.
And this is not unique to our Ponzi schemes and pump-and-
dumps that we face every day in the futures space and in the
stock market. It is just a different underlying asset, and this
is what has made our 82 enforcement cases. But we need the
policing authority to proactively go after these individuals.
Mr. Crawford. And then finally, in the last seconds I have,
are you engaging with stakeholders in the banking world, and
soliciting their input? Because, so far, I can't find any
bankers that are real warm and fuzzy about this right now.
Mr. Behnam. Well, I am having conversations with the
leaders of large banks, and other brokers, and asset managers,
and I think the general consensus is a bit of skepticism, but
also a bit of: ``I am going to stay on sidelines as long as
this market remains unregulated.'' I do think a number of the
heads of these organizations and institutions view this as a
viable, or at least some of the tokens, as a viable financial
instrument, and one that their clients want exposure to, but
they certainly don't like the idea of getting involved in
markets that are unregulated. As much as they may complain
about U.S. regulation, they, in fact, like U.S. regulation
because it is clear, it is predictable, and there is law
enforcement behind it.
Mr. Crawford. Thank you, Mr. Chairman.
The Chairman. I thank the gentleman. I now recognize the
gentlelady from Ohio, Congresswoman Brown, for 5 minutes.
Ms. Brown. Thank you, Chairman Thompson and Ranking Member
Scott, and thank you, Chairman Behnam, for being here to talk
about digital assets again. Mr. Chairman, this is the third
hearing this Committee has held on digital assets this
Congress. Meanwhile, tomorrow will be the first time this
Committee talks about an issue that affects 34 million
Americans, and I am talking about food insecurity.
Chairman Thompson, I would certainly hope that in a farm
bill year this Committee would be holding hearings on topics
that we have yet to focus on, like specialty crops, Black and
Brown farmers, and USDA operations, rather than visiting
digital assets multiple times. When Chairman Thompson and
Representative Henry presented their draft legislation on
digital asset regulation late last week, written without
Democratic voices at the table, it became evident why the
Majority is so committed. So, Mr. Chairman, I know you and your
team have even less time to sift through the 162 pages of text
than we have, but I am hoping that you can speak to some of my
concerns.
So, Mr. Chairman, just a few weeks ago the House
Appropriations Subcommittee marked up a bill that would
dramatically cut funding to Commodity Futures Trading
Commission, or CFTC. How would spending cuts like this impact
the CFTC's ability to implement legislation like that we are
discussing today?
Mr. Behnam. Thank you, Congresswoman. As you noted, our
current budget is $365 million, our request for FY 2024 is $411
million, and the proposal that came out of the Appropriations
Committee a few weeks ago was $345 million. given our
responsibilities, given the growing interest from new
stakeholders, given new risks around cyber, and just the
growing nature of markets, and the diverse set of constituents
that are starting to come into our markets, if we were to go to
$345 million, coupled with elevated costs, which we are all
facing, this would be, quite frankly, devastating to the
agency.
We would have to probably furlough quite a number of our
staff, and it would really restrict our ability not only to
provide the service we do through a regulatory lens, but more
importantly, and one that I know you care about, is to properly
implement our enforcement program, which I believe is the gold
standard globally, and it is a statement--or a statistic I like
to share often, for the past 10 fiscal years we have largely
returned to the General Treasury Fund about $8 for every $1
that we are appropriated.
So I say this often, the CFTC is a good investment by the
American taxpayer, and the return on investment is even better.
So you can imagine a cut in our budget is really, in fact, a
reduction of money going to the General Treasury.
Ms. Brown. Thank you for that. And the correlation you
frequently address is the relationship between climate and
cryptocurrencies, which is not addressed in this bill. So could
you describe the kinds of climate provisions that should be
addressed in a digital assets bill that come out of this
Committee?
Mr. Behnam. Thanks, Congresswoman. Given the issue you
raised, and this really is focused on the energy usage around
mining for tokens, there have been efforts by some in the
industry to change the method of mining, which I applaud, but
it doesn't necessarily remove the issue that you raise, and it
is one that we have to be very focused on. So I do think, as
this Committee considers this draft, two thoughts come to mind,
is further studying the issue, and getting a better sense of
what the mining capacity is, and what the energy usage really
is here domestically, what types of energy sources are used to
actually mine the tokens, whether it is fossil fuels or
renewables. I know there has been a shift in that as well.
And then ultimately I think the best--or one of the best
solutions to this problem is disclosures. It is transparency.
It is giving the community of investors information about the
tokens that they are investing in. And I am hopeful that with
more information, transparent information about energy usage or
mining techniques, that will push the market towards more--I
will say less energy intensive practices around mining.
Ms. Brown. All right. Well, thank you for that. With that,
Mr. Chairman, I yield back the balance of my time.
Mr. Austin Scott of Georgia [presiding.] Thank you. The
chair now recognizes Mr. Bost for 5 minutes.
Mr. Bost. Thank you, Mr. Chairman. Chairman Behnam, futures
commissions merchants play an important role, enabling farmers
to participate in futures markets, hedge the risks, provide
them with access to exchanges and clearinghouses. I think we
can both agree that it is important to understand the risk with
futures trades. Can you talk about the obligation that the FCMs
have to disclose these risks to their clients?
Mr. Behnam. There are a number of requirements that both
the CFTC and the NFA, the National Futures Association, require
of the FCMs to provide disclosures to their customers. I would
say, generally speaking, though, Congressman, a lot of
disclosures in the derivatives, and more importantly the
commodity markets, are around risk of loss, and the actual
contract specifications themselves. And I will--I want to
very--be targeted in my response to you. This really goes to
the heart of the discussion we are having today, is, when you
have a commodity asset, and you have a regulated market
structure around it, which we set, and this Committee
implements, it is really about creating fair, transparent, and
orderly markets for the financial asset to trade on.
And then there are important disclosures around risk of
loss, and other information about the contract specifications.
This is unique, and very distinct, from what happens in the
securities market, because there is a requirement around
disclosures for securities that is far greater and deeper, in
terms of what the asset is, who is the individual, or group of
individuals, that are managing the company or the institution
that is generating those securities, and what information the
investor needs to know about that issuer, in this case.
So, getting back to your question, the FCM has serious and
significant responsibilities around disclosures, but they are
unique in the sense of what a commodity asset needs to--what
needs to be disclosed about a commodity asset.
Mr. Bost. Okay. You may have answered what I was going to
go with--the follow-up question, would it be helpful to require
brokers, dealers, and exchangers in the digital commodity to do
the same, though?
Mr. Behnam. Yes, absolutely, and there would be a number of
different areas we would need to focus on. We would certainly
look for a steer from this Committee, but this would be the
analysis that the agency does with a new law, is to think about
what types of disclosures an investor would need to know about
a digital commodity token. Certainly risk of loss, certainly
some information about the token itself, and other information
about the regulated entity that is facilitating the trading of
the token.
Mr. Bost. So the--what we are discussing in this draft that
we are providing is just--the CFTC and the National Futures
Association will have the authority to require similar
disclosures on CFTC registered digital commodities, correct?
Mr. Behnam. Correct, yes.
Mr. Bost. So my second question, and I will try to get it
in here, in 2010, when Dodd-Frank--and I think you brought this
opening--Dodd-Frank significantly--or maybe it was one of the
other questions--expanded the jurisdiction of the CFTC from the
futures and options market to the $500 trillion swap markets,
that increased jurisdiction required the agency to undertake a
significant number of rulemakings. Having the experience, and
knowing exactly what the transition process, and the time could
take if the CFTC is given authority over digital commodities
and cash market, and do you--do you believe that it would be a
complex or difficult process, and how long and how costly do
you think it would be?
Mr. Behnam. Congressman, thank you for the question. As I
said earlier, I have estimated that a similar regulatory regime
to the one in this draft bill would cost about $120 million
over 3 years. It would require standing up multiple rulemaking
teams, it would require hardware and software, from an IT
perspective, and increased cyber protections. These are just
estimates, but it gives you a sense of what we would need over
a period of time to implement the rules.
I do think the rulemaking process would take between 6 and
24 months, roughly. We have the experience, you noted this. We
did this in 2010. I stand by what I said earlier. We were one
of the most efficient, quick, and effective regulators across
the globe to implement over-the-counter derivatives regulation.
It was difficult, it was complicated. But I think, with a
mandate, and appropriate funding, the agency is well-suited,
has the expertise, and the competency to do it in a very
efficient manner.
Mr. Bost. Yes. I just want to say thank you for being here
today. I want to thank the Chairman for putting this together,
because I know some others were saying that we have hit on this
pretty hard. This kind of explains why we have to hit on this,
why we have to have the oversight. And believe me, I am not a
big regulation person, and believe me, I am also an old guy
that just kind of watches from the side on Bitcoin, and all of
the others, but this is a real concern, and I think we have to
be ready for it, so thank you for being here. I yield back.
Mr. Austin Scott of Georgia. The chair recognizes Ms.
Caraveo, for 5 minutes.
Ms. Caraveo. Thank you, Mr. Chairman, and thank you to
Chairman Thompson and Ranking Member Scott for today's hearing,
and to you, Chairman, for being here this morning. Recently,
this industry has seen the collapse and bankruptcy, as we have
talked about, of large market players, and enforcement actions
taken by the CFTC, and other Federal financial regulators to go
after abusive and manipulative trading practices. The framework
envisioned in this discussion draft is incredibly complex, but
the harms posed to customers by this industry are very real.
This framework is also a departure from the current
regulatory approach, and would require an extensive joint
rulemaking process, and establishing a new provisional
registration framework while the rulemaking is underway. So I
want to reiterate, just as the Ranking Member did, and as I
have in previous hearings, that funding would be needed to
support this process, which this proposal lacks, as has been
pointed out.
In addition to the provisions included in this proposal, I
would like to discuss what has been left out. The CFTC has been
engaged in digital asset conversations going back to as early
as 2014. Over that time, the Commission has developed
significant expertise, participating in interagency
discussions, and reports concerning the appropriate regulatory
framework of these assets, and you have been active in
enforcement as well. So, given the CFTC's expertise, Chairman
Behnam, and work in this area, are there any considerations
missing from this proposal?
Mr. Behnam. Thanks, Congresswoman. Yes, I would say that I
agree with you. I have concerns around the provisional
registration scheme. I do think there is probably a path
forward, and one that we can look to the past on to sort of
dictate what would be an effective way to have provisional
registration without handcuffing the agency. Funding, you raise
that. I mean, I--that is certainly the number one--if we
wanted--if we want to get--be successful in this endeavor, the
agency is going to need more resources, given our core
responsibility in the futures, options, and swaps market, and
our enforcement actions in the digital asset market.
I would also point out that there are a number of things,
and I mention this around disclosures to make sure that we are
providing appropriate disclosures, both on the energy usage
side, there is a huge debate about digital assets and financial
inclusion which can be a very positive thing, but we have to do
it, again, in the right way because with opportunity comes
risk, and the risk in this space is fraud. And there is no
doubt in my mind that there are fraudsters out there taking
advantage of financially illiterate people, and often that
happens in lower-income communities. So we would need to be
very focused on making sure we have the resources to get
information out to the investment community.
I think, from a larger perspective, the bill does include
many of the core responsibilities and requirements that you
would want of a market regulator around registration,
surveillance, monitoring trading practices, having requirements
around conflicts of interest, and governance, and financial
resources. I say all that with caution because--like, you were
just looking at the bill right now, so I do think there is a
lot of work to be done, but I think structurally, and from a
foundational level, many of the core elements that I have been
asking for, and that you would want in a market regulatory
structure, exist in the bill. It is just a matter of doing a
deep dive analysis, and making sure it jives with our existing
laws, and we can get it right, given the nature of these
digital assets.
Ms. Caraveo. Yes. I really appreciate that. I think it is
important to have these conversations continue, especially on a
bipartisan basis, and to know if there are any gaps there. This
proposal also changes how commodities and securities are
defined, focusing on how a digital asset is traded, rather than
the characteristics of the asset being traded. Do you think
that there are any implications to this definition, and do you
have any thoughts and concerns on this approach, which
prioritizes the technology, and not the classification,
necessarily?
Mr. Behnam. Congresswoman, thanks for the question. As I
said in my statement, and I will just repeat it, we need to
make sure that this does not compromise any existing law, both
the CEA or the Securities Exchange Act of 1933, 1934, or other
laws from our Prudential Regulators. I think, from a
definitional standpoint, it is critical to--when we think about
this question about a commodity versus a security, what the
bill does well is focuses on decentralization as a key
characteristic of what would constitute a commodity or a
security. I have said this for years. This really goes to the
heart of any definitional discrepancy between the two financial
assets, whether it is wheat, crude oil, or copper, or in this
case, a digital asset. So that really should be the nucleus of
how we define and how we start the conversation.
I also think it is really important to think about where
the investor is getting the asset from, and is he or she
getting the asset from an issuer, which, given the securities
laws, that would most notably represent or reflect a security,
or is the investor purchasing the token from a registered CFTC
exchange? In that case, you have that more decentralized
connection between the investor and the issuer. And I am not
suggesting you can't have a token on an exchange that is not a
security. It just is in this complex arc of tokens, which can
transition from securities to commodities. We have to think
about these very difficult questions.
So, improvements, for short, I think need to be made. I
think you are asking the right questions. We certainly look
forward to working with you and helping you with this. But I do
think, at its core, some of the key questions are included. We
just need to make sure that we are getting all of them wrapped
around our head.
Ms. Caraveo. I appreciate that, and look forward to
continuing to work with you.
Mr. Behnam. Thank you.
Mr. Austin Scott of Georgia. The chair now recognizes Mr.
Johnson, for 5 minutes.
Mr. Johnson. Thanks for being here, Mr. Chairman. We have
had a number of subcommittee hearings on these topics over the
last few months, and seemingly everybody, whether it is a
Majority witness or a Minority witness, indicates that the lack
of regulatory clarity is pushing market activity and pushing
innovation overseas. Despite that fact, there are some who
argue that the SEC's got this. We don't need to muddy the
waters with new legislation, SEC has got the authority they
need, they will take care of it, you don't worry your pretty
little heads. I find myself pretty skeptical of that argument,
that inaction is what the day calls for. Give us your sense.
Mr. Behnam. Congressman, thanks for the question. And, I
think shared sense of facing headwinds, because there is a lot
of criticism out there, and that is fine. That comes with the
job. But ultimately, as I said to the Chairman, and I have
repeated many times in the past, this is not a zero-sum game.
For anything that the CFTC might get in legislative authority
or legal authority, I am not taking it from someone else. There
is a regulatory vacuum. There is a gap in regulation over
digital commodity assets. And as much as I agree that the SEC
has authority over security assets, the fact of the matter is
the largest token, Bitcoin, is a commodity, and that has been
determined by a Federal court, and that, under U.S. law, is
unregulated.
Mr. Johnson. Yes.
Mr. Behnam. And there are at least a number, I know one
of--exchanges that list very few tokens where there has been
legal clarity, around whether or not they are commodities or
securities, so you can imagine an exchange just veering towards
a few tokens, and that living in a regulatory vacuum. So that
is why we are here. We have to fill this gap.
Mr. Johnson. So the discussion draft envisions that it
would be the SEC that would ultimately deal with this
rebuttable presumption of decentralization, but you are an
expert market regulator, so as you reviewed the discussion
draft, and I know you haven't had weeks to do it, but--did the
meat on the bone around the Howey Test regarding some of these
factors that would be considered for decentralization, did that
make sense to you?
Mr. Behnam. Congressman, as I said earlier, the general
framework, I think, is right, and can be built on with some
tweaks and technical assistance. Certainly we would want to dig
into the bill a bit more before we give our clear opinion on
where to go. But as I have articulated over the past few years,
and as the Howey Test has articulated for the better part of 70
years or so, maybe even 80, we have to think about
decentralization as the core question when we are asking is an
asset a commodity or a security?
The other thing that I do like about the bill as a--again,
on a foundational level, is the question around where is the
investor getting the asset from, which I think is also a
critical question.
Mr. Johnson. Yes.
Mr. Behnam. Is the investor getting the asset from an
issuer, which obviously makes it much more like a security, or
is the investor getting the asset from a third party exchange
or trading venue, which doesn't eliminate the chance of it
being a security, but certainly puts it in a much clearer lens
around the commodity space.
Mr. Johnson. Yes, and that is why I like there are a couple
of different provisions in that decentralization test that
calls that are specifically. So what about--you talked about
wanting to make sure that the--some of these new concepts that
we have in the bill, some of this intermediary registration
jives with existing--your existing statutory authority. We very
purposely didn't want to just try to make these folks brokers
and dealers as already defined. We created new definitions,
digital commodity broker, digital commodity dealer, and so on.
Do you feel like we struck the right balance there, with making
it similar to, but not exactly the same as the existing
intermediary regime?
Mr. Behnam. Congressman, I have a lot of faith in our
existing regulatory framework for futures, options, and swaps.
I think it is--as I said in my statement, it is time-tested, it
has worked well. We are constantly amending it, to the extent
markets evolve and change. But ultimately, when we think about
transparent, fair, orderly markets, where investors have access
to information, and they know who they are dealing with,
whether it is at the broker level, the exchange level, the
custodian level, or, on the back side of a trade, a
clearinghouse or a settlement agency, these are the core
components of market structure that have worked for many, many
decades. And I think that is where the bill focuses on, and
that is a great starting point.
Mr. Johnson. So, Mr. Chairman, we tried not to just grab
all these digital asset folks and fit them into your existing
buckets. We created new buckets. Is that an approach that you
are comfortable with?
Mr. Behnam. Yes. I think they are--I think over time we
will probably learn how you can--the two--or traditional assets
can intersect with digital assets. But at this point, I do
think the approach in sort of siloing them, and having unique
classifications for both the entities that would facilitate
trading or brokering is the right approach at this point.
Mr. Johnson. Very good. Mr. Chairman, I yield back.
Mr. Austin Scott of Georgia. The chair now recognize Ms.
Salinas, for 5 minutes.
Ms. Salinas. Thank you, Mr. Chairman, and thank you to
Chairman Thompson and Ranking Member Scott, and thank you,
Chairman Behnam, for being before us today. So I am going to
take it back to the people who have really been harmed by a lot
of this. So fraud, scams, and manipulation in cryptocurrency
markets are growing increasingly rampant around the nation, and
particularly in my home State of Oregon. That false promise of
easy money, combined with folks' limited knowledge and
experience with cryptocurrency sets up that perfect storm for
scammers to take advantage of people.
In the first 10 months of 2022, the FBI reported that
Oregonians were swindled out of about $13.6 million in
cryptocurrency scams. And in February a Federal grand jury in
Oregon indicted four Russian nationals, founders of a
purportedly decentralized cryptocurrency investment platform,
for their roles in a global Ponzi and pyramid scheme that
raised approximately $340 million from victim investors. The
impact of all this malicious activity on everyday Americans is
heartbreaking to hear, and I have a local Fox 12 news story
that showed a Portland man in his 60s fell into depression and
anxiety after losing over $200,000 of his hard-earned life
savings in a crypto scam.
So in your most simplest terms, again, trying to take this
back to my constituents, Chairman Behnam, can you identify what
the CFTC and other Federal Government agencies are doing right
now to protect Americans from fraud and manipulation in the
digital asset arena, and what should the complimentary roles
for those agencies look like moving forward?
Mr. Behnam. Thanks, Congresswoman, and I am going to start
with the very--we have multiple regulatory agencies in the U.S.
government, and there are benefits to that. There are some
flaws as well, one could argue, but the fact of the matter is,
from a market regulatory standpoint, we have two types of
financial assets, securities and commodities, just speaking
generally, and many of these tokens fall within the securities
bucket, but I will focus on the commodities side, which at
least one has been determined, as I said to Congressman
Johnson, as a commodity. I believe others are commodities as
well, and this creates this gap.
The authority that we have right now, which is extremely
limited, allows us to police cash markets. We are a derivatives
market regulator, but we can police cash markets if there is
fraud or manipulation. The biggest Achilles heel to this
authority is we have to wait for individuals to come to us and
tell us, ``You should check out this individual, or this scam,
or this fraud.'' So of these 82 cases we have brought for the
better part of 8 years, nearly all, if not all of them, have
been because people have come to us.
And I can tell you unequivocally, that is not how we want
to run a regulatory scheme. We need proactive regulation, we
need registration, we need surveillance, we need monitoring of
markets, of individuals, of institutions who are offering these
assets to vulnerable citizens in Oregon, and across the
country. So we are doing what we can with what we have. I am
very proud of what we have accomplished under many Chairs and
Commissions, and we will continue to do that, but ultimately,
as I have said this earlier today and in the past, we are
probably dealing with the tip of the iceberg, and we need to
address that larger problem here. And, regardless of what some
may say, this technology is here, the markets exist, they
trade, and every day they trade, someone is likely getting
taken advantage of.
Ms. Salinas. Yes. Thank you. Thank you, Mr. Chairman. I
yield back.
Mr. Austin Scott of Georgia. The chair now recognizes Mr.
Baird, for 5 minutes.
Mr. Baird. Thank you, Mr. Chairman, and I appreciate this
opportunity to have this discussion, so, Mr. Chairman, Ranking
Member ----
Mr. Austin Scott of Georgia. Pull that microphone closer.
Mr. Baird. I appreciate the opportunity to have this
discussion, and, Mr. Chairman, I really appreciate you being
here and sharing your observations and experience with us so
that we can make good decisions on this Committee. My first
question deals with the fact that segregation of customer funds
has really been the bedrock of security and so on and
protecting customers in the derivatives market. So can you
explain to us how these funds might be separated and
segregated, and explain what is appropriate, in your opinion,
for protecting customers?
Mr. Behnam. Thanks, Congressman. You use the word bedrock,
and I think I am going to repeat that, because, when I think
about the CFTC, and I know when others who are in the CFTC
markets, either in a regulatory perspective or a registrant
perspective, customer funds are sacrosanct, and it is because
the rules that the Commodity Exchange Act--that--the law the
Commodity Exchange Act has and the rules behind it have set
that focus, as the highest priority, segregating, as you point
out, customer funds. And really the idea is to ensure that
customer funds are completely separate and siloed from an
intermediary or a broker that is facilitating the trading of
futures options or swaps.
And ultimately, what we are trying to also protect is that,
if there is a bankruptcy or a failure of an intermediary or a
broker, or in this case an FCM, which does happen periodically,
thankfully not often, we need to make sure that any claims
against that broker are walled off to the customer, right? So
that the customer funds are completely walled off and protected
from any third party claims against the broker that the
customer uses. And I think what the draft bill does well is
largely mimics, or at least uses the customer segregation
regime that the CFTC has right now to use, and to think about,
as a baseline or a foundation for this digital asset market.
One of the biggest issues and concerns we are facing in
this new nascent, but growing, marketplace is the segregation
of customer funds. And we saw that last year with FTX, we have
seen that more recently with cases against Binance, both from
the SEC and the CFTC, all allegations at this point. but bottom
line is this customer segregation and commingling of customer
funds is one of the most important issues that needs to be
addressed. And I am encouraged by the effort of the draft bill
to do this, and certainly look forward to working with the
Committee to make sure that we get it right.
Mr. Baird. Thank you. My other question deals with the
CFTC's relationship with the National Futures Association. Can
you describe that, and see how that partnership benefits this
situation?
Mr. Behnam. Yes. Thank you, Congressman. The NFA is a
partner, and they have been a close partner as long as both the
agency and the NFA have been around about 45 and 40 years,
respectively. And we are--well, I view them, as I said earlier,
as our boots on the ground partner, right? They are the entity,
the SRO, the self-regulatory organization, that has the closest
intersection and relationship with our registrants and our
stakeholders. They provide invaluable disclosures, protections,
education and literacy around our markets for all users down to
retail farmers and ranchers, to swap dealers, and other
institutions, like FCMs.
We are--thinking about the depth and breadth of the markets
we oversee, both here in the U.S. and overseas, an SRO like the
NFA is an absolute necessity. So I am also encouraged by the
fact that the draft bill considers a relationship with a self-
regulatory organization and building off of some of the
principles and foundations that have worked quite well for the
CFTC in our traditional markets to use in this digital asset
market.
Mr. Baird. So I determine from that that you think that
there is--this working relationship between the NFA and the
CFTC is a good one, and it will provide additional customer
protections?
Mr. Behnam. Absolutely.
Mr. Baird. Thank you very much. I appreciate that.
Mr. Behnam. Thank you.
Mr. Baird. And with that, I yield back.
Mr. Austin Scott of Georgia. The chair now recognizes Ms.
Budzinski, for 5 minutes.
Ms. Budzinski. Thank you, Mr. Chairman, thank you, Ranking
Member, and thank you, Chairman Behnam, for being here today. I
appreciate it. The digital asset industry has framed these
products as a tool to support increased financial inclusion.
Though we have yet to see the effect come to fruition, we have
observed in recent years that persons of color are, in fact,
more likely to own these types of assets. Despite the
industries touting these assets as paths toward a more
inclusive financial system, and the Administration's proposal
to study in more detail the effect of the digital asset
industry on financial inclusion, there is no mention of this in
the proposal. Could you speak to the utility of these assets to
support financial inclusion? Should effects on financial
inclusion of particular digital assets be considered by the
CFTC and the SEC in their registration and approval process?
Mr. Behnam. Congresswoman, thank you. It is an extremely
important issue that I think we at the CFTC level have thought
about, and we are doing everything we can, through our Customer
Education Office, to get as much information out, mostly
through the internet, to users of digital assets.
Unfortunately, that probably doesn't really hit as many people
as we would like. But you are right to sort of articulate this
friction between the opportunities that are highlighted, in
terms of providing under-banked individuals with more banking
services, and those in low-income communities with access to
financial services, versus really what are the use-cases, and
what are we seeking in terms of the actual development of this
technology, and is it actually benefitting these communities?
And I think in principle, given some of the challenges and
issues around banking services to lower-income communities, you
can certainly see how being able to download an app on your
phone to essentially swap cash for a stable coin, or some other
digital asset, and instantly transfer that asset across the
globe--and what I mean--when I say instant, I mean instant. So
we can think about a lot of individuals and families who have
relatives overseas, or in different parts of the world, where
this technology can actually facilitate opportunities that
currently don't exist.
All that said, it comes with risks, right? Because--risks
of information about these assets, volatility of these assets,
and whether or not there is fraud occurring behind the
institutions that are facilitating some of these tokens and
some of these services. And that is where I think a disclosure
regime is critical, customer education regime is critical, and
ultimately, to your point, more examination by the agency in
partnership with other agencies to see what are, in fact, the
use-cases. Are we seeing a development in this space that is
helping and supporting financial inclusion, or is it, in fact,
just a mirage, and are we not seeing it?
And I think we shouldn't dismiss it, but we also shouldn't
embrace it as a success story quite yet. So we can do things at
the agency level, and certainly would like your support to do
more work so we can really figure out what is behind all this,
and make the best of it.
Ms. Budzinski. Yes, thank you. And maybe I could take a
little bit of a deeper dive on this topic. And I appreciate in
your testimony you allude to this, we need to be doing more
studying around this to really learn more of the facts, the
hard facts around this, and what the real results have been.
But could you explain a little bit more in detail about who
these populations are, and how any legislation in this space
should address this dynamic to ensure that these populations
are protected?
Mr. Behnam. Thanks, Congressman--Congresswoman. I would say
that what we are seeing--and there are statistics, you pointed
to some of them. There have been some studies, and it is low-
income communities, it is racially diverse communities that are
living in traditionally under-banked areas, and, as I said,
find these tools that are being facilitated by technology much
easier to have access to.
So much of the discussion that we are having today is about
barriers to access, and really a reduction in access to
financial markets and banking services, because it really is
just a phone, as opposed to having to go to a bank, which may
or may not exist in your community, and then to provide a
credit score, and information, and an address, and financial
history. All of these requirements that we have in our
traditional system can act as barriers for individuals who
don't have credit history to have a banking account. This
eliminates many, if not all, of those barriers.
So, again, there is an optimistic way to view this, but I
think with high caution, because with all of these
opportunities comes risks, and we have to focus on these
vulnerable communities, which tend to be the ones using these
banking services or these technologies for these types of
services.
Ms. Budzinski. Thank you, I really appreciate that, and I
will yield back my time. Thank you.
Mr. Austin Scott of Georgia. The chair recognizes Mr.
LaMalfa, for 5 minutes.
Mr. LaMalfa. Thank you, Mr. Chairman. Thanks, Mr. Behnam,
for being here. Currently, what we see under the National
Futures Association, is a set of requirements and regulations
that are already in play, that they are used to, but in the
discussion we are having here, that the CFTC would become
subject to new requirements for all digital commodities, et
cetera, registered with CFTC. So this--it would risk
disclosures to customers, and conflict of interest
requirements. So these would be new to the digital asset
industry coming from CFTC, as--but they are not--they are
current with the--with futures. So how does it actually work
these days? How well is it working with CFTC, working with the
Futures Association, as a parallel towards what it would look
like for digital commodities?
Mr. Behnam. Thanks, Congressman. In principle, we want to
replicate--and I think the draft bill does a good job in this,
in replicating what we do now in our traditional markets. And
to your point, we work closely with the National Futures
Association, which is our self-regulatory organization, and a
body that, as I have said before, acts as a more direct
intersection with investors, and with market participants,
whether retail or institutional.
And it is all of these attributes that you mention, which
it is disclosures about assets and risks of loss, conflicts of
interests, AML or KYC, and it is--anti-money laundering and
Know Your Customer, these are core components of markets and
information that an investor should, and needs, to know, and
has been built over decades because of experience, and often
because of fraud, and learning from fraudulent activities. So
it is these core principles--or it is this, like--this base
layer that we know works, we know protects markets, creates
resilient markets, and creates information flow to investors
that allows them to make informed decisions. And what we want
to do, in essence, is cut and paste that same layer into the
digital asset market. Now----
Mr. LaMalfa. Do you see any issues with it applying towards
a completely different style of market? Is it--do you see it
readily adaptable?
Mr. Behnam. Well, I feel like it is adaptable, but we will
certainly have to take a look, and make sure that we make
appropriate tweaks and adjustments to reflect the unique nature
of digital assets.
Mr. LaMalfa. And you think the relationship with CFTC and
NFA would work well together to meld those?
Mr. Behnam. We work hand in glove. We have a great
relationship from the top down, and I have no doubt that we
would be able to accomplish this.
Mr. LaMalfa. Okay. You mentioned early on the importance of
fair, open, and transparent markets, so what are your--how do
you strive with CFTC to maintain these fair, open, and
transparent derivatives markets at this time?
Mr. Behnam. So mostly we work through the registration
regime we have to register the exchanges, to register the FCMs
that--introducing brokers, the associated persons, the
commodity pool operators, trading advisors. And through the
registration scheme we get information about key personnel,
about governance, about compliance, about conflicts of
interest. We surveil markets on a regular basis. We collect
data. We work closely with the exchanges, and also the self-
regulatory organization, to ensure that we are monitoring
markets. We have a very strong and robust whistleblower program
which incentivizes individuals to come and tell us about bad
actors. And ultimately we use the civil enforcement authority
we have, through our enforcement division, to create, of
course, disincentives, and, hopefully, an incentive to act
within the bounds of the law.
So, comprehensively, the regime focuses on registration,
surveillance, and enforcement, among other things, which
focuses on a number of things around cyber, compliance,
governance, as I mentioned. And I think, in sum, this has
worked well for our markets, and can be replicated in the
digital asset market.
Mr. LaMalfa. If CFTC had full regulatory authority over the
spot market for digital, how would that have helped with
consumer protections, when we go back to this FTX issue? For
segregation of assets that would have been important.
Mr. Behnam. Yes. And, Congressman, it is a great question,
because, as I have articulated, I look at what happened to
LedgerX, which was an FTX entity, or affiliate entity: 132
bankruptcy--bankrupt entities in the FTX entity, and John Ray,
who is the CEO of FTX now, has said that LedgerX has
responsible management, valuable franchise, and was recently
optioned for $50 million. And that, I think speaks louder than
words. That is CFTC regulation. That is regulation working.
That is what we need in order to prevent future crises.
Mr. LaMalfa. I appreciate it. Thank you. I will yield back,
Mr. Chairman.
Mr. Austin Scott of Georgia. Before I recognize Mr.
Jackson, I want to just--I am showing Mann, Moore, De La Cruz,
Duarte, and Rouzer, in the order, on the other side. Mr.
Jackson, you are recognized for 5 minutes.
Mr. Jackson of Illinois. Thank you, Chairman Thompson, in
your absence. Thank you, Ranking Member Scott. Thank you,
Chairman Behnam. In my earlier career, I ran on the Chicago
Board of Trade, I ran on the New York Stock Exchange, other
financial institutions. I appreciate the work that you do, and
all--what the CFTC has to do. This conversation repeats itself
on is this a commodity, is this a security, how do we get it--I
have some basic questions. How are the deposits assured?
Mr. Behnam. Deposits insured?
Mr. Jackson of Illinois. Assured. Like, when someone opens
an account how do we know the money is on account?
Mr. Behnam. Yes. Well, we have a number of regulations and
requirements when we deal with mostly the FCMs, the futures
commissions merchants, that they have relationships with either
banking entities, or they have relationships with custodians.
And we do get daily reports about customer funds, and customer
balances, sent to the CFTC to ensure that customer funds are
where they are supposed to be, available, and available to be
withdrawn or used for trading activities.
Mr. Jackson of Illinois. Second part to the question is
what transparency is there in bidders and bids?
Mr. Behnam. Sorry, I didn't hear the last part?
Mr. Jackson of Illinois. What transparency is there in
bidders and bids? When the bid is in and they are asked----
Mr. Behnam. Sorry. Yes, sure. So we have an order book,
which is really what you are articulating, and we have rules
around transparent markets and settlement, and ensuring that
bids are real, and that they are going to be offered, they are
going to be filled. And this is--really goes to some of the
disruptive trading practices that we prohibit, whether it is
spoofing or wash sales, which we see often, and is really,
unfortunately, systemic in this unregulated digital asset
market.
But to your point, in the regulated market, when we have a
central limit order book, we have bids and offers, and we are--
we have rules at the agency level, and then, more importantly,
at the exchange level to ensure that every bid and every offer
is valid, and will be executed if it is on the order book.
Mr. Jackson of Illinois. Because this is at the heart of
what the problem is. They pride themselves on being opaque, and
it is somewhere out there in the ether that this happens, but
then, when there is a cash draw, people are trying to chase the
funds, and where are they? So how would you say the bids get
processed? Because I have a concern on what happened with some
of the other beats--places--it is Coinbase, tomorrow is
Bitcoin, and Coinbase is not coinable, there is nothing
tangible, and then, poof, billions of dollars seem to go away.
How is this processed for the bids, so that way we can make
sure people aren't setting up--faking an account raising a bid
against themselves, and washing a trade?
Mr. Behnam. Congressman, I mean, this--you are raising
the--really the most fundamental and important question, and I
hope the reason we are here today is--we can set up a side by
side of regulated markets and unregulated markets, and all
these concerns you raise about bids, and offers, and customer
funds being secure, and siloed from other customers and other
brokers, versus an unregulated market, where you don't have
those legal and regulatory requirements, and you have that
incentive, or that ability, for some market participants to
conduct themselves in a way that is essentially contradictory
to what we have traditionally done, and know that works in U.S.
financial markets.
So, yes, a lot of the cases we brought over the past 8
years, 82, 84, I think I have mentioned multiple times, are
talking about wash sales, and spoofing, and commingling funds,
and conflicts of interest, and all these things that go to the
heart of your concerns. And my request to you and the Committee
is we have this space that is unregulated in the commodity
digital area that is a huge part of the larger market cap of
the entire digital asset space, and absent are all of these
core requirements that have made U.S. financial markets the
best, most liquid, and deepest in the world.
Mr. Jackson of Illinois. Now, my time is limited, but
ultimately, who has the custody of the asset?
Mr. Behnam. In the unregulated digital asset space?
Mr. Jackson of Illinois. Correct.
Mr. Behnam. Well, that would depend on the entity, and who
is facilitating the trading. But, I do know that some of the
larger entities that facilitate trading and digital assets have
custodians, and comply with state regulations around custody.
They require--or they comply with some requirements from
Treasury around AML and KYC. So I don't want to suggest that
the entire industry is void of regulation. There are quite
robust state regulatory requirements, and some OFAC
requirements around AML and KYC, but really what we are focused
on at the CFTC are markets, and market regulation.
And some have used existing structures to impose on their
businesses, but ultimately, that doesn't give me comfort at
night. There are too many bad actors, and too many individuals
and institutions who are willing to cut corners because it cuts
costs, and potentially gives them more resources and money, and
that is when we have implosions, bankruptcies, and lost
customer funds.
Mr. Jackson of Illinois. I yield back my time. Thank you
very much for your service and your work.
Mr. Austin Scott of Georgia. The chair now recognizes the
former Chairman of the Committee, Mr. Lucas from Oklahoma.
Mr. Lucas. Thank you, Mr. Chairman, and thank you, Mr.
Chairman, for agreeing to testify today. I always appreciate
that. When we discuss a digital asset market structure
framework, consumer protection is, of course, front and center.
I am confident you agree that any proposal should not undermine
existing laws that provide for robust consumer protections. So,
to this end, could you discuss why it is important that any
legislative framework be consistent with both our securities
laws and the Commodity Exchange Act, that balancing act?
Mr. Behnam. Thank you, Congressman Lucas. We have an
existing framework around securities and commodities markets
that are time-tested and have proven to be quite efficient and
effective in capital formation and risk management. And I think
that the clearest reflection of that success is the fact that,
when I work with my colleagues globally, there is no question
that U.S. financial markets are the strongest and most
desirable in the world. And I do think in part it is because of
the entrepreneurial spirit of our fellow citizens, but really
it is about the markets that provide clarity, certainty, and a
legal framework behind the market so that market participants
can be assured, if there is a bad actor, that individual or
institution will be held accountable.
So I feel like, as we think about, and as you think about,
a new regulatory regime, we have a playbook that has worked,
and we have to think about it in the context of a new financial
asset. This is not a new concept or a new exercise. We have
done this in the past. You can largely say we did it with the
swaps market, which you were very much a part of. We used the
traditional futures and options market, and the structures
around those markets, and essentially superimposed them on the
swaps market, with some tweaks, understanding that swaps are
very unique and different than futures and option. I don't
think it needs to be any different with this asset.
Mr. Lucas. Did you know the proposed market structure draft
attached to this hearing is the result of a collaborative
effort between Chairman Thompson and Financial Services
Chairman McHenry to bring a much-needed regulatory framework to
digital assets? Just as the Agriculture Committee and Financial
Service Committee must work together, so too must CFTC and SEC.
There are notable cases of disagreement between the SEC and
CFTC regarding which digital assets are considered securities
and which are considered commodities. could you discuss the
current collaboration between the two agencies regarding the
treatment of digital assets and their intermediaries? And while
you are thinking about the--and how the legislation would help
in this process?
Mr. Behnam. Thanks, Congressman. From top to bottom,
including myself and Chair Gensler, we talk frequently, we
discuss these issues, among other issues. Staff are constantly
discussing these issues, and how we are seeing markets evolve
and change, and new participants. Our intersection with digital
assets has gone back for the better part of 8 years now. We
have had listed futures contracts on Bitcoin since 2017, on
Ether since 2020. And as you point out, there is a bit of
difference, which is fine, it is healthy, on what might
constitute a security or commodity.
But, from my standpoint as Chairman of the CFTC, when I
think about these particular two assets, Bitcoin and Ether, I
have to think about what is listed on exchanges that I
regulate. And as you know well, whether it is corn or soybeans,
or crude or natural gas, if there is a commodity listed with
the CFTC, I care about the underlying physical market. Because
any manipulation, or fraud, or disruptive trading that might
occur in that cash market is most likely going to be reflected
in the markets we oversee.
So I have been very vocal in my belief that Bitcoin and ETH
are commodities, and that is in part because they are listed on
my exchanges, but in part because we did the legal analysis. We
will continue to do that, if that is the case. Thus far no
other participant has come and tried to list a contract, a
different token, on our exchange. But as we think about this
bill, and what it provides, and what is suggests, and proposes,
in terms of more cooperation, I certainly welcome that. I know
there is an advisory committee that is proposed, and these are
the types of things that I have embraced as long as I have been
at the Commission, since 2017, and I think can certainly
benefit the agencies as we think through these issues.
Mr. Lucas. And I thank you those answers, and I yield back,
Mr. Chairman.
Mr. Austin Scott of Georgia. Thank you. The chair now
recognizes Mrs. Hayes, for 5 minutes.
Mrs. Hayes. Thank you. And thank you, Chairman Behnam, for
your testimony today. I apologize for bouncing back and forth.
I have another hearing that is going on at the same time. But,
I am happy to talk to you, and to hear your opening remarks
today.
Following many years of uncertainty in the digital asset
space, it is promising to see draft legislation circulated to
Members of this Committee. As trading in cryptocurrencies
continues to grow, it is critical that Congress provide
regulatory authority and clarity that protects consumers and
fosters a safe, reliable marketplace. Last month it was
revealed that Bitcoin of America had failed to obtain proper
licensing for Bitcoin ATM kiosks in my State of Connecticut.
Several customers lost tens of thousands of dollars in a scam
involving these kiosks. These scams have cost Connecticut
residents millions of dollars, most of those people being
senior citizens. Chairman Behnam, how does the CFTC hold
scammers and other bad actors accountable in the digital assets
marketplace?
Mr. Behnam. Congresswoman, thank you for the question, and
it really raises a lot of the issues that we have discussed
today, and I--and the reason I think why we are here today is
so much of this market remains unregulated, and particularly,
we have heard examples about kiosks and local vendors trying to
sell Bitcoin to some of our most vulnerable citizens. And, in a
continually unregulated space, we are going to have to
anticipate that these types of activities will continue.
The enforcement or legal authority we currently have is
very limited. It really--it is a--not a new authority, but it
is reflective of the fact, as I said to Congressman Lucas, that
if a contract or a commodity is listed on a CFTC exchange, the
agency has a very clear and vested interest in the health of
the underlying commodity. Again, whether that is wheat, crude,
natural gas, or palladium, but it also includes Bitcoin or
Ether. So when citizens or individuals are offering Bitcoin to
folks in Connecticut at kiosks, we have an interest in what
manipulation or fraud might be occurring in these underlying
cash markets.
And we have used this limited enforcement authority to
police cash markets, and in the end I think we have been very
successful, bringing over 80 cases, $4 billion in penalties and
restitution, with essentially no authority. And when I say
essentially no authority, it is because, unfortunately, we
can't use traditional market regulatory tools, like
registration, surveillance, and oversight. We have to wait for
individuals to come to us and report wrongdoing.
And that is what concerns me the most, is we have been very
successful in bringing enforcement actions, but nearly every
single one of those enforcement actions has been because
someone has come to the CFTC. And I don't think anyone in this
room agrees that is how to conduct an effective regulatory
scheme or regime. So I am hopeful that, as this bill moves
forward, we can get to a place to fill this gap around
commodity tokens, and in that case, or scenario, we can prevent
or eliminate some of these less than savory offerings to
vulnerable citizens.
Mrs. Hayes. That actually leads me to my next question, and
ranking Member Scott mentioned this in his opening. Does the
lack of a funding mechanism in this discussion draft limit the
CFTC's ability to enforce the law and assure accountability? My
concern is that, by having legislation that gives the
impression that we are now beginning to regulate this with no
funding mechanism for enforcement, I don't see how we would
improve outcomes in anyway. Thoughts on that?
Mr. Behnam. Yes. I could not agree with you more, and I
fully support any effort to fill this gap, but it must be met
with appropriate resources and funding. We simply will not have
the personnel, the technology, both hardware and software, to
fulfill the responsibility that this Committee is
contemplating. We have a huge responsibility as it is in our
traditional markets. We have received generous funding
increasement--increases over the past 3 or 4 fiscal years,
which we appreciate, and it has put us on a much leveler
playing field than we were in the past.
But I am unsure and always wary of the budget sort of
ebbing and flowing over time because our markets are growing,
the number of our constituency, our registrants, is growing,
and we are starting to see new products and new individuals
because of technology want to be registered by the CFTC. So, if
we were to layer on top of that new legislation with new
authority, as you point out, unless there was funding backing
and supporting that authority, it would be a little bit of
smoke and mirrors.
Mrs. Hayes. Well, thank you. My time has expired, but I
would love to hear more from you on what you could do with
funding to actually support this legislation.
[The information referred to is located on p. 160.]
Mr. Behnam. Thank you.
Mrs. Hayes. With that, I yield back.
Mr. Austin Scott of Georgia. The chair now, 25 minutes
later, recognizes Mr. Mann.
Mr. Mann. Thank you. And Chairman Behnam, thank you for
being here, thank you for your testimony. This Committee this
morning a few times have referenced Dodd-Frank, and how that
expanded CFTC's jurisdiction. Clearly the discussion draft
would do the same thing. Big picture, what do you think the
CFTC learned from overcoming the challenges posed by the
expansion of your authority under Dodd-Frank?
Mr. Behnam. Thanks, Congressman. One, I would say that
the--this was--I think some in this Committee faced--and even
the CFTC faced at the time, when we had these inflection
moments in financial markets, whether it is as a result of a
crisis or technology, and we have to think about, from a policy
perspective, what is our infrastructure, regulatory
infrastructure, right, to market regulators and Prudential
Regulators? Where do we put these new markets, or these
previously unregulated markets? The swaps market had a long
history, certainly in financial markets, going back to the
1980s. There were debates in the 1990s about whether or not to
regulate them, and ultimately we came upon 2008, and the swaps
market played a role in the financial crisis. And with that
came Dodd-Frank.
And I think, legitimately, the question is can the CFTC
manage it? But ultimately, to answer your question more
directly, not only did we manage it, we were very successful.
We did it quickly, efficiently. The swaps market now is
transparent--more transparent, is orderly, and continues to
serve its purpose of risk management and price discovery for
institutional investors.
Mr. Mann. Thank you for that. And, from a regulator's point
of view, knowing what we now know about the implementation of
Dodd-Frank, and as you look at the discussion draft that is
before you today, are there are any pitfalls that you would
recommend that Congress avoid as this Committee continues the
conversation about expanding CFTC's authority?
Mr. Behnam. Congressman, one, as I was just mentioning,
funding is key, and I know that is always difficult in an
environment where we are all tightening our belts here. But, as
I said earlier, the CFTC has been a return on investment for
U.S. taxpayers. We are returning $8 for every $1 invested in us
over the past 10 fiscal years. I do think that in, if you are--
and I am not suggesting--I am--I know a lot think about this
market from an innovative, and a technological, and a
perspective of what it could lead to from a U.S. growth
perspective and competition perspective. This is an investment
in markets, and I think anything that comes with this
legislative authority or legal authority should be paired with
funding.
And also, as I said before, using some of the same
fundamental principles that have worked in the past. We don't
need to rewrite the playbook. It has worked, we can do it
again. We are going to have to adjust for unique technology,
and we will make those adjustments, but the foundation should
be similar, and it has worked.
Mr. Mann. Great. And last--and I think I know the answer to
this, but I just want to make sure I give you a chance to
respond. Do you believe that granting the CFTC regulatory
jurisdiction over the cash or spot--commodity markets is just
the natural extension of the enforcement authority that you
have been doing already?
Mr. Behnam. Yes. I mean, we have been dealing in this
market, as I said, for the better part of 8 years. We have a
level of experience, and more notably expertise at the staff
level, which impresses me every day, mostly driven through the
Enforcement Division, but that naturally sort of permeates
itself through our other policy divisions. We have listed
futures contracts, we deal with entities that are more
traditional, or native digital asset firms. So I would say,
arguably, more so than any other regulator on the globe, we
have been one step ahead, in terms of our intersection with the
digital asset market.
So when it comes to commodity digital assets, as you point
out, I do think this is a natural next step, and as we continue
to see this market at least stabilize and maintain its current
price level--and it will change over time--this is actually a
good time to be having this policy discussion, so we can get
ahead of a next move, or a next growth in the market, and not
be caught on our back feet here.
Mr. Mann. Yes. No, I agree. Thank you. With that, I yield
back.
Mr. Austin Scott of Georgia. The chair now recognizes Mr.
Moore, for 5 minutes.
Mr. Moore. Thank you, Mr. Chairman. Thank you, Mr. Behnam,
for being here today. I think you have done a fine job, as far
as answering questions. Been very informative for me. One of
the questions I want to ask is--it is our job, obviously, on
this Committee and Financial Services, to make sure we kind of
build a good structure for you to work with and within. It is
sometimes difficult, however, for us to strike a balance
between what is sufficient oversight and over-regulation. And--
so how do we strike a balance between overly prescriptive and
too broad while defining what an asset is, and how do we
regulate this space to ensure consumer protections without
hindering growth in the industry?
Mr. Behnam. Congressman, thanks for the question. One of
the hallmarks of CFTC regulation is the fact that it is driven
by--it is a principles-based regulatory scheme. And that
actually invites some criticism, but ultimately, I think if
people took a deeper dive and understood the complexity of our
ruleset, they would appreciate that the principles-based
regime, which is about 23 years old now, is a base layer.
I have used that term a couple times, but if you look at
our statute, we have the law, and then our regulations. And the
statute is fairly thin, and it is these core principles, but
the rules are quite thick, and the rules are where the rubber
hits the road, and where we get, at the agency level, a bit
more prescriptive in terms of how we regulate brokers, and
exchanges, and custodians, individuals who are offering
services, or individuals who are managing money.
And I think that that regulatory system has worked quite
well. It has allowed the market to innovate, it has allowed the
market to grow, but it has empowered the CFTC over the better
part of 2 decades to be flexible, and to adapt to essentially
an ever-changing marketplace. I think, as you approach this
draft bill using that foundation and that history, these core
principles, is a good place to start, where it creates
essentially guard rails, and a bit of a steer for us at the
agency to say: ``This is what we expect you to do, in terms of
custody, in terms of registration, in terms of surveillance,
cyber, conflicts of interest, governance,'' and then let us
fill in the details. I think that serves both the Committee and
the agency well, and ultimately allows us, at the agency level,
to adapt to a marketplace that will likely evolve and change,
potentially in the near-term, but certainly in the long-term.
Mr. Moore. So you--I--the top three things--I know silos
for assets, it sounds like, is one of them. More funding,
obviously, that is always an ask, especially with inflation,
and the things you have to tackle. But--so what are the top
two--I was going to ask for the top three. Is--silos of assets,
is that one of the top--if you had said: ``This is my wish
list, this is my Christmas list, this is the structure, here
are my top three asks,'' what would they be?
Mr. Behnam. Yes. So I think the--fundamentally, it has
legal authority to police the commodity digital token market,
right? But with that, yes, customer segregation, which is
essentially what you said, being able to silo customer money
from house money. Really, it is--that is what it is. Conflicts
of interest, we have seen this become a pervasive issue in this
space, in the unregulated space, where there isn't a
recognition among many different entities about what potential
conflicts might exist, and this is something that is core to
our traditional markets, that, if you are offering a service
that is a broker/dealer function, but you are also a bank, but
you are also a custodian, these things have to be very
separate, and there needs to be clear, defined conflicts of
interest rules so that there is no intermingling, is what we
want.
Mr. Moore. Not too much vertical integration in the
process?
Mr. Behnam. And, it is a great point, Congressman, because
we continue to see the market moving towards vertical
integration, and I think mostly because of technology.
Traditionally, you would have to call up your broker at the
local level, who would make a phone call to Chicago to run an
exchange, or to run an order, and you would have to go to the
floor broker. All of that is being compressed now because of
technology, and it is just raising new questions about market
structure, which I have shared with this Committee in the past,
and we continue to see, at the CFTC, new developments, and new
requests for more vertically integrated structures.
And I don't want to pre-judge, say it is right, it is
wrong, but what it does do, it deserves thought and a debate
among lawmakers and regulators. So that is another thing we
have to focus on, is the conflicts, the governance, and I will
say the third thing is financial resources. This has proven to
be a key component to make sure these entities have financial
resources to operate for some time in the period--in the
future.
Mr. Moore. You said earlier, based--it might take you 48
months to stand this thing up if you lacked funding. If you had
the funding in place, how long before we could have a
framework? I know we would have to send something for you to
work with; but, do you think, as far as staffing and getting
relevant?
Mr. Behnam. I am going to use 2010 as a little bit of a
barometer, and knowing what this Committee is----
Mr. Austin Scott of Georgia. Be quick, Mr. Chairman,
please.
Mr. Behnam.--contemplating draft bill, I would say 12 to 24
months.
Mr. Moore. Thank you. I appreciate it, Mr. Chairman.
Mr. Austin Scott of Georgia. All right. The chair now
recognize Mr. Rose. Let us try to keep it to 5 minutes, if we
can. I know we are running over.
Mr. Rose. Thank you, to Chairman Scott, and thanks to
Chairman Thompson, and Ranking Member Scott for calling this
hearing, and thanks to our witness for being here with us
today. Chairman Behnam, I am sure you saw the news this morning
that the SEC has filed a lawsuit against Coinbase for listing
unregistered securities. Similarly, earlier this week,
yesterday, the SEC also filed a lawsuit against Binance. In
each of the two filings the SEC argues that Solano, Cardano,
Matic, Filecoin, Sand, and AXS are all securities. Do you agree
with Chair Gensler's assessment that these tokens should all be
classified as securities?
Mr. Behnam. Congressman, I am going to ask you--the--I am
not going to answer that question, and I do it out of due
respect just because it is active litigation, and I want to be
mindful of ongoing litigation. Certainly there are components
of interpretation about what constitutes a commodity and
security, and without getting into details about the specific
tokens you raise, I will just say this, this is the reason we
are here. There is confusion, there is uncertainty, and there
are a number of active cases that are going on, and hopefully
we can resolve some of these differences in the future.
Mr. Rose. Thank you. And, Mr. Chairman, do you think the
timing of Chair Gensler filing these lawsuits is at all
coincidental.
Mr. Behnam. I don't know. Knowing enforcement cases, we
deal with this all the time. You are building a case, and--when
the time is right, because you are--for whatever reason, you
have to file the case, you have to file the case. So I----
Mr. Rose. So does the CFTC take into account political or
media considerations in filing lawsuits, like the SEC seems to
be doing?
Mr. Behnam. We do not.
Mr. Rose. Thank you. That is good to hear. Chairman Behnam,
at our joint hearing with the Financial Services Committee,
Ranking Member Waters stated that both the SEC and the CFTC are
aligned on the fact that the SEC is the regulator to determine
if crypto assets are securities, and the SEC has made clear
that nearly all crypto assets, in their view, are securities.
Chair Gensler has declined to say, however, whether Ethereum is
a security of a commodity, and that: ``everything other than
Bitcoin'' falls under securities laws. Chairman, is Ethereum a
commodity or a security?
Mr. Behnam. Congressman, I have said this many times
before, I believe, Ether is a commodity. We have it listed on
our exchange, multiple exchanges, CFTC exchanges, for a number
of years. There are certainly situations--I think--as I have
said before, the situation that led us to this point--and Ether
was listed as a futures contract in 2020--there was robust
legal analysis that occurred at the time.
And I was not Chair, I was a Commissioner then, but I know
what the process is. I know the deliberation and the
cooperation between the two agencies. and, given the legal
precedent, and the law that we follow currently, and how we are
driven by certain characteristics around what is a security and
a commodity, I have faith and confidence that the decision back
in 2020 was correct, and we continue to have Ether futures
contracts listed on our exchange without any question.
Mr. Rose. Thank you. Mr. Chairman, do you believe requiring
registered entities to disclose greenhouse gas emissions may
fall under CFTC statutory authority under the Commodity
Exchange Act?
Mr. Behnam. No.
Mr. Rose. Thank you. Good answer. Chairman Behnam, at the
SEC Chair Gensler has insisted that digital assets' legal
status depends on individual facts and circumstances, and that
projects should come in and talk to the SEC to identify a path
towards compliance. Only about four crypto projects have been
able to come into compliance as defined by the SEC. Chairman
Behnam, is there a path towards compliance at the CFTC for
registration, specifically for exchanges, and what does that
look like?
Mr. Behnam. Well, there is a path for exchanges as it
relates to derivatives, so futures options and swaps. And we
historically and--continue to do our best to facilitate either
incumbent exchanges from listing digital asset derivatives, or
even newer exchanges from registering an exchange, and being
able to list these contracts. I stand by what we have done
historically in the past, and I think we have created a system
where we engage, we are transparent, and to the extent that we
can, we facilitate a path forward for registrants.
Mr. Austin Scott of Georgia. The gentleman's time has
expired.
Mr. Rose. Thank you. Mr. Chairman, I----
Mr. Austin Scott of Georgia. The chair now recognize Ms.
Crockett, 5 minutes.
Ms. Crockett. Thank you, Mr. Chairman. And thank you, to
the witness, for your time. First, I just want to express my
concern for the process that produced the discussion draft of
this cryptocurrency regulation bill. For months last year House
Democrats held hearings to build understanding and establish a
consensus around the regulatory gaps with this emerging
technology. Then House Republicans continued this work in a
bipartisan fashion, capping off months of work with a fact-
finding subcommittee hearing on the issue. So far, so good.
Unfortunately, now we are holding a full hearing to discuss
a highly technical bill almost half the Committee saw for the
first time at the end of last week. This is not how the
Agriculture Committee is supposed to work. I sincerely hope
that this Committee can return to its bipartisan traditions,
and that we engage in meaningful hearings that address the
concerns many of us have. It is essential that a bill
addressing these regulatory gaps is passed this Congress. Just
today the SEC sued Binance, demonstrating the urgent need for
this regulation. In addition, blockchain technology in general,
and it is Syntech specifically, hold so much promise that we
are missing out on.
There is a bipartisan consensus that government regulation
is what is needed to create jobs, build wealth, and protect our
constituents. Sadly enough, one hand doesn't seem to know what
the other is doing. I am referring to the fact that while
everybody in here agrees on the need for this regulation, and
we have heard from the testimony that this requires more
funding, that is precisely the opposite of what our colleagues
on the Approps Committee did. As we are putting more on their
plate, the Appropriations Committee has cut their budget by
almost $9 billion, down to the lowest level since Fiscal Year
2006.
To be clear, we are asking the CFTC to take on a whole new
regulatory process while simultaneously cutting their budget by
33 percent. So my first question is what the impact would be if
the current budget were passed, and the agency was asked to
take on these tasks with equal or lesser funding, particularly
the impacts on consumers and the industry?
Mr. Behnam. Thanks, Congresswoman. Focusing just even on
our traditional markets, if our funding levels were to drop
from $365 million to $345 million, given increased costs, given
increased level of, I would say, participation of new
registrants, and new entrants into our markets, it would be
extremely difficult, and, quite frankly, and I have used this
word before, devastating to the agency. Given all that we are
all facing in terms of, as I said, increased costs, we would
probably have to furlough quite a number of our staff. We have
about 680 full time equivalents right now, and if we were to
drop down about $20 million, that would be a huge challenge.
And I say this often, I said it earlier, and I will repeat
this for the Committee, the CFTC is a good return on investment
for the U.S. taxpayer. We return nearly $8 for every $1
invested in us over the past 10 fiscal years, and this is
through enforcement, this is through protecting customers, this
is through information to financial illiterate individuals who
are being taken advantage of. So I would hope that we can at
least hit our full funding and get our request so that we can
continue to do our job, especially if this new authority is
provided to us.
Ms. Crockett. Thank you so much. Mr. Behnam, you mentioned
in your testimony, and it was also brought up in the
Subcommittee, the potential of creating an independent funding
source for administrating these regulations. Could you expound
upon how such a model could fit into this bill?
Mr. Behnam. Thanks, Congresswoman. We are the only
financial regulator to not have a user be--a user fee-based
system--sort of mixed up those letters there--and it has proven
to be a huge challenge for the agency, quite frankly, for quite
some time, a number of decades. And I think since 2010, after
the financial crisis, as our responsibilities significantly
increased, we faced quite a bit of strain, from a budget
perspective, because of flat funding over a number of years.
So I think, with respect to this new authority, it would be
very important for this Committee and the Congress to consider
a user fee based system, where it would essentially be a fee
for services system. So those who are registered with us would
have to pay a proportional fee over the course of a year to
fund the services that we provide.
Ms. Crockett. Thank you so much. And with that, I will
yield back.
Mr. Austin Scott of Georgia. Thank you. The chair now
recognizes Mr. Feenstra, for 5 minutes.
Mr. Feenstra. Thank you, Chairman Scott, and Ranking Member
Scott. And I want to thank Mr. Behnam for being here today.
Thank you. I find this conversation so fascinating. I was a
professor teaching business courses at a university several
years ago----
Mr. Austin Scott of Georgia. I am on. The chair now
recognizes Mr. Feenstra, for 5 minutes.
Mr. Feenstra. Thank you again, Chairman Scott, Ranking
Member Scott, and obviously thanks to our--thank you very much
for being here, Mr. Behnam. I greatly appreciated your
testimony. As I was noting, I taught at a university, teaching
business classes, and what I would do in the morning is I would
talk about the events of the day. And at one point I know we
were talking about cryptocurrency, and it was valued at $2.5
trillion or $3 trillion. Obviously the value today is
probably--as of March I think it was $1.1 trillion. And I have
always thought back to all these kids. These kids were so
fascinated and so intrigued by cryptocurrency. I know a lot of
them were using or buying it. And there is just something
that--I worry about how that all went.
In 2009, obviously, when crypto started, and through today,
we have over 23,000 different cryptocurrencies. Imagine that,
all right? Just in that amount of time, to have 23,000
different cryptocurrencies. And since then, as I think through
my--all these kids that have moved on, that--at the same time,
some of these largest crypto exchanges that trade these
currencies have collapsed and have been sued by various
security--or have been sued by--for security violations.
Obviously, CFTC and SEC has filed active lawsuits, but I really
don't want to get into that. But instead I want to talk about
what has happened, and uncertainty of these exchanges in acting
as the middleman for these commodities.
So I look at this discussion draft that we have, and my
question would be, what would the oversight impact be in this
draft legislation if this would become law? How would this
affect the intermediaries and exchanges as we move forward? And
I look at these students that were so excited, that were
probably blinded by the hope of making money, and how this all
plays out. So if you could just answer that, I would greatly
appreciate it.
Mr. Behnam. Sure. Thanks, Congressman. We have had some
experience in the retail foreign exchange market over the past
15 years, where--and this was a law that this Committee and
Congress passed in 2008 to provide authority for the CFTC to
regulate retail forex, which you wouldn't normally think of.
But, my point being is, prior to that legislation, you had a
market that was totally opaque, a lot of fraud, a lot of
manipulation, and a lot of retail investors losing money. This
is, like, late night commercial forex, right?
Mr. Feenstra. Yes, exactly right.
Mr. Behnam. And I don't want to say we are in exactly same
position, but it is similar, and there was a lot of skepticism
back then about why would you even want to regulate it, why
would you validate this? Like, retail people should not be
buying and selling forex, right? That is an institutional
market. But ultimately, as a market regulator, you have to
think about what is out there, and what people, like, your
students, or others are investing in, and how they are
allocating their money.
And ultimately I think it is incumbent on all of us to
think about that stark reality. And not about whether we
believe in it, or we don't believe in it, or what the future
might hold, or can hold, but the fact of the matter is
technology has enabled commodity assets to be traded on their--
on phones and other easy sort of portals, and we have a
responsibility to provide disclosures and transparency to
market.
So you ask what is going to happen? We are going to
register and regulate brokers, we are going to register and
regulate asset managers, we are going to regulate and register
exchanges. All the things that we do that are core components
in our traditional markets. And there will be a cost associated
with that, there is no doubt. But with that cost comes
transparency, fairness, and hopefully, and I believe history
has proven this, less abuse, fraud, and manipulation.
Mr. Feenstra. Well, I appreciate that, and that is very
important. I mean, when I was a professor I could talk about a
stock, and the costs, and what it would look like. I could do
that with commodities. And they always ask me, how do you
evaluate a cryptocurrency? That was always very baffling to me.
But where do you see--as this is implemented, and you just
noted this, but five to--if you could picture out, 5 to 10
years from now, what do you see this arena look like?
Mr. Behnam. Well, I don't want to get into the prediction
game here; but, as I said before, and I said earlier, I feel
like I have the responsibility right now, as Chair of the CFTC,
to inform everyone on this Committee about what I see and what
the agency sees on a regular basis, and how that intersects
with existing law and what authorities we have now, and where I
feel like we could use new authority.
Mr. Feenstra. Right.
Mr. Behnam. So, as I have said this earlier, I believe U.S.
markets, financial markets, are the strongest, deepest, and
most sought after in the world because of our regulatory
structure and the certainty, and the legal authority--the
enforcement authority behind those regulatory structures.----
Mr. Feenstra. I agree.
Mr. Austin Scott of Georgia. The gentleman's time has----
Mr. Behnam. So it is unforeseen to think that, with this
market relatively stable over the past few months, particularly
after 2022, if you had a regulatory structure over the markets,
hopefully we would eliminate, the fraud, the manipulation----
Mr. Feenstra. Okay.
Mr. Behnam.--and more of a stabilization in the markets in
the future.
Mr. Feenstra. Thank you. I----
Mr. Austin Scott of Georgia. The gentleman's time has
expired.
Mr. Feenstra. I yield back. Thank you.
Mr. Austin Scott of Georgia. The chair now recognizes Ms.
De La Cruz, for 5 minutes.
Ms. De La Cruz. Thank you, Mr. Chairman. Thank you,
Chairman, and thank you, Chairman Behnam, for joining us today.
I have some, there are some of the opinion that all digital
assets are securities, and that they should be regulated solely
by the SEC, and therefore there is no need for the CFTC to play
a role in overseeing digital asset markets. Do you agree with
that statement?
Mr. Behnam. I don't.
Ms. De La Cruz. And, notwithstanding any arguments that all
digital assets are securities, almost everyone seems to agree
that Bitcoin is not a security, but instead a commodity.
Because Bitcoin is a commodity, and entities which offer
trading in Bitcoin are not subject to the SEC's regulation of
securities. Additionally, SEC regulated entities are not
permitted to offer trading in Bitcoin because it is not a
security. Despite that, Bitcoin trading accounts for around 70
percent of digital asset trading activity. If we don't
legislate, would it be sufficient, or even possible, for
regulators like the CFTC and SEC to simply use its existing
authorities to cover the gap?
Mr. Behnam. Congresswoman, no. I mean, the fact of the
matter is this gap is so significant, as you point out, on a
sort of statistical basis how Bitcoin relates to the larger
market capitalization of the digital asset market. And we would
use, as I have said earlier, the tools that we have, from an
enforcement perspective, at the CFTC, but these tools are so
limited. They are powerful, but limited, and I know that sounds
like a little bit of a contradictory statement. But the fact of
the matter is we have to wait for individuals to come to us and
to raise alarm bells or flags about wrongdoing or violations of
the law. And I don't think any of us believe that that is how a
sound, effective, impactful regulatory scheme should function.
I think we are just leaving a lot out on the table when it
comes to fraud and manipulation, and legal authority to police
commodity tokens, as you point out, is the right decision to
ensure safety and soundness in these markets and protecting
customers.
Ms. De La Cruz. So, that being said, just a moment ago we
talked--I asked you the question about--if there was no need
for the CFTC to play an oversight role, and you said you did
not agree with that comment. So let me ask you, in your
opinion, at what point do you see our digital assets moving
from a commodity to a security, or vice versa?
Mr. Behnam. Well, I don't want to get too down in the weeds
on the technical side of things. I will be the first to tell
you, I am not a technologist, and I don't fully embrace or
understand some of the processes that might take place, but you
could imagine just sort of mixing it with the legal frameworks
we understand, and how you define a security or a commodity.
That you could have a promoter or a group of individuals
offering tokens in exchange for cash, trying to build or
establish some protocol, or a ledger, or some sort of
blockchain. And then at some point you would see the value of
those tokens increase. That is, and sort of resembles, a
security.
Under your hypothetical, it is not unforeseen, and we have
seen this happen, where there would be a--sort of break in the
linkage between that issuer, the individual or institution that
is collecting the cash and issuing the tokens, and when you had
that break, there wouldn't be that centralized body conducting
business or operations that would impact the value of the
token. And it is really, at that point, where you have that
decentralization over some period of time, and that interaction
between a purchaser of a token and a trading market or an
exchange, as opposed to an issuer that the asset would most
likely become or be a commodity and not a security.
And this is, in many respects, very unique to this digital
asset space, but, as I said earlier, what I am encouraged by,
in terms of the draft bill, is focusing on centralization and
decentralization, because that is really the core arguments
around what is a security and what is a commodity. And then the
other component is where is the investor getting the token
from? Is it a direct issuance by--or an issuance by an issuer
of the token, or is it, in fact, the investor is going to an
exchange, a third party, to purchase the token. But details
should certainly be worked out. I look forward to working with
you. Imperfect system, but one that sort of uses the foundation
of what a security is.
Ms. De La Cruz. Thank you. I yield back.
Mr. Feenstra [presiding.] I now recognize the gentleman
from Ohio, Mr. Miller, to be recognized for 5 minutes.
Mr. Miller of Ohio. Thank you. And thank you for holding
this hearing as we seek to develop a digital asset market
structure framework to ensure the next generation of financial
innovation develops in the United States. Any functional
legislative strategy should provide digital asset firms with
regulatory certainty, and prevent the regulatory turbulence
created by jurisdictional uncertainty.
In the absence of the United States' leadership, other
countries are rushing to build frameworks and become
developmental hubs for the digital asset ecosystem. Currently
the largest trading platform issuers are based outside the
United States. Many entrepreneurs are advocating for digital
asset companies to move offshore. The ability of other
countries to successfully build digital asset frameworks and
technology into their market infrastructure further
demonstrates the need for action.
Currently there is no comprehensive Federal regulatory
regime for the spot trading of commodities. I appreciate the
efforts of this Committee, working with the House Committee on
Financial Services, to address these shortcomings by
establishing a functional framework that works for both market
participants and consumers. This guidepost is meant to provide
digital asset firms with regulatory certainty and fill the gap
that exists between the authorities of the Commodity Futures
Trading Commission and the Securities and Exchange Commission.
Chairman, please share how the current lack of regulatory
certainty for digital assets may hinder innovation and not
provide adequate consumer protection.
Mr. Behnam. Thanks, Congressman. I would certainly focus on
the commodity side of things, but--understanding that, without
further guidance from Congress, and a sense of where the two
market regulators and the financial regulators should go, how
we are going to define these assets as they relate to existing
law. And in many respects, as I said earlier to the
Congresswoman, we use decades-old precedent to decide how these
financial assets should be bucketed and defined, but there are
enough unique characteristics that I think we have to think
about things differently.
And certainly we can make those decisions, we try to, but
given the way technology is advancing, and markets are
evolving, it is not necessarily the best idea to lean on a
decades-old legal decision about what is a security and then de
facto what is a commodity if it is not a security. So I think
the draft bill takes steps, as I said earlier, focusing on some
key elements around decentralization, and where a customer and
investor gets the asset from.
And then further we are--and I don't want to dismiss the
legal precedent that we have leaned on over many years, because
fundamentally what we are trying to accomplish is, on the
securities side, bridging information gaps between someone who
promotes and issues a security, and on the commodities side,
making sure that we are establishing and operating fair,
orderly markets.
And I use--as you know, in Ohio, many of the agricultural
analogies. I am not sure what type of information you would
share with an investor in a corn or a soybean contract, because
you don't have central entities controlling the price of corn
or soybeans, right? Global markets decentralize numerous
factors impacting the price. This is very distinguishable from
a centralized security, where you have a group of individuals
with financial statements, a headquarters, et cetera, that
impact the price of the security. So, we lean on those
fundamentals, I think we can get this right.
Mr. Miller of Ohio. I don't disagree. In your view, how
would the functional framework, as outlined in today's
discussion draft, provide digital asset firms with regulatory
certainty and fill the gap that exists between the authorities
of the Commodity Futures Trading Commission and the Securities
and Exchange Commission?
Mr. Behnam. Congressman, thanks for the question. I think
for us, fundamentally giving us authority to fill this gap is
my primary concern, and this is because we want to root out
this fraud and manipulation that is occurring. The draft does a
very good job in essentially replicating some of the core
fundamental market requirements around registration and
surveillance, cybersecurity, conflicts of interest, governance,
many of these things that you have heard me say today. If we
can replicate those requirements, I think we can create a very
transparent and orderly digital asset market. We will certainly
have to make some adjustments to reflect the unique nature of
the asset itself.
On the definitional side, I do think the bill does a good
job. Certainly will require a bit more look--sort of--technical
assistance and examination around how do we decide what is a
security, what is a commodity, and if, in fact, there is a
transition between a security and a commodity, what that
transition looks like, who makes those decisions, and what are
the core characteristics of that transition to say, you know
what, now this asset is a commodity, as opposed to what it was
originally in a security.
Mr. Miller of Ohio. Thank you. Thank you, Mr. Chairman.
And, Mr. Chairman, I yield back. Thank you.
Mr. Feenstra. Thank you. I now recognize the gentleman from
Iowa, Congressman Zach Nunn, for 5 minutes.
Mr. Nunn. Thank you, Mr. Chairman, also from Iowa.
Privileged to get to sit with you on this. And, Chairman
Behnam, thank you so much for joining us. I know testifying in
Congress, is never the highlight of anybody's week, but we are
learning a lot from you on this front, so very much appreciate
it.
I want to begin the, I get to serve in two roles, both here
on the Agriculture Committee with digital assets, as well as on
the Financial Services Committee, looking at what the SEC is
doing in this space as well. From a national security
perspective that I grew up in, Europe, the United Kingdom,
Singapore, have already laid out frameworks for digital asset
corporations, and how to operate proficiently within their
areas of jurisdiction, something we are still trying to get our
arms wrapped around here in the United States.
In fact, MiCA, the European version--VC investment in
European crypto projects are up ten percent--or tenfold in one
year. To my Iowans back home, these are American jobs, American
corporations, American innovation that are fleeing offshore
because, in my opinion, a rogue SEC Chair is trying to expand
his overreach, arguably, for maybe a specific role in the SEC
ahead of this legislative body, and I find that concerning.
To make this point crystal clear, I met with a founder
earlier this week who was contemplating moving his workforce to
Europe because the U.S. is too unpredictable as a result of
what Chair Gensler has done. Additionally, we saw, just in the
last quarter alone, nearly 25 percent of capital in this market
flow outside the United States. This should be concerning for
every American, and it clearly means that there is a lack of
understanding what the regulatory environment looks like today
and could look like in the weeks ahead.
So as we move forward, I would like to just begin with some
of the challenges that we have seen here. We highlight that
there is a lack of clarity in this area, but ultimately we
should be able to pinpoint pretty directly--I have asked two of
your colleagues this, and I have gotten different answers, so I
would like to begin with kind of the easy question here at the
beginning, Mr. Chairman, Ethereum. Commodity or security?
Mr. Behnam. Congressman, I have said repeatedly I believe
Ether is a commodity.
Mr. Nunn. Very good. And what is the analysis that you had
in leading you to that decision?
Mr. Behnam. Well, we look at some of the core fundamentals
that have driven this analysis over many decades, as I have
said, including the Howey Test, and it is the characteristics
that are driven mainly by decentralization, and the fact that
you don't have a single individual, or a group of individuals,
taking action that dictates the value of the underlying asset,
right?
Mr. Nunn. Yes.
Mr. Behnam. And this is where I am going to probably get
into an area that I am not necessarily an expert, but you have
a large group of individuals who are on--or who are validating
the network itself, and when you have that dispersion among
individuals, you don't have those traditional--what is, at
least how we define a security, central group of individuals--
--
Mr. Nunn. I would very much agree with you on that, Mr.
Chairman. In fact you mentioned some other ones today, Litecoin
among them, Stablecoin as a highlight of this, as digital asset
commodities. My concern here is that by having this non-defined
regulatory space, the SEC is, in effect, picking winners and
losers in this attempt to innovate in this space. Wouldn't you
agree with that assessment?
Mr. Behnam. Well, it--Congressman, the issues are
difficult, and I--you could say that even--with any of these
tokens, and given the way the market is evolving, you could
package them, and utilize them, and offer them in many
different ways. So----
Mr. Nunn. I would offer that everybody in this space
ultimately ends up being a loser, at least in the U.S. market,
because there is no regulatory regime, and they are forced to
find other places where there is clear definition for them to
be winners in this space. So I want to change to some of the
legislation that we are working on here. Do you believe it is
possible for a digital asset to start as a security initially,
and then transition to a commodity?
Mr. Behnam. I do.
Mr. Nunn. All right. Very good. Do you believe that
Congress should be the driving force enacting clarity in this
space or the SEC?
Mr. Behnam. Given the nature of the markets that are
evolving, and changing, and growing, I think this Congress
should have a hand in sort of dictating the future of policy in
this country.
Mr. Nunn. I would agree. Do you believe it is necessary to
save digital asset innovation and let it prosper here at home
instead of going overseas?
Mr. Behnam. Of course.
Mr. Nunn. Absolutely. And do you believe that regulatory
coordination between your agency, both in the CFTC and the SEC,
is possible?
Mr. Behnam. Of course.
Mr. Nunn. Do you have a good history of doing this?
Mr. Behnam. We have a long history of working closely with
the SEC, and I have no doubt we will continue to do that----
Mr. Nunn. And I think, working together on this, you guys
have proven a pathway to be successful. What I do not want to
see is one agency taking the lead for its own intent before the
actual legislation comes to the floor. So, with that, Mr.
Chairman, I really appreciated the opportunity today. Thank you
very much, Mr. Chairman.
Mr. Behnam. Thank you.
Mr. Nunn. I yield my time.
Mr. Feenstra. I now recognize the gentlewoman from Florida,
Kat Cammack, for 5 minutes.
Mrs. Cammack. Well, thank you, Mr. Chairman. Thank you to
our witness for being here today. Yes, we will have to do this
head game real fast. Zach, duck. We will jump right into it,
and I actually would like to do a follow-up, talking about the
jurisdiction issues that we have between the SEC and CFTC.
So, in your testimony, you had discussed the importance of
not undermining existing laws, most notably the security flaw
in the jurisdiction of the SEC. I think you have already
outlined why you think this is important, but the discussion
draft does not amend the definition of securities, but it set
up a process to help market participants work with the SEC to
determine when an asset is no longer part of an investment
contract. Does that modification disrupt the SEC's authority to
protect customers and address information gaps between digital
asset issuers and investors?
Mr. Behnam. Congresswoman, thanks for the question, and
just a little bit of context before I answer the question more
directly, and I said this earlier. We are not here because we
are trying to, this is not a zero sum game. And what I mean by
that is, if this Committee and the Congress were to provide the
CFTC with more authority over the cash commodity markets, we
are not pulling that authority from another agency, the SEC or
otherwise. It doesn't exist. There is a vacuum. No one
regulates cash commodity markets, and I think this is the most
important thing this Committee should think about, and has
thought about, as it drafts, or continues to work on, this
draft bill.
As it relates to the SEC, I was very intentional,
obviously, in including that statement--or that sentence in the
statement. We have a very robust, very effective, very
impactful set of laws around markets in the United States, both
on the commodity side and then on the security side, and what I
would not want to see is this bill, or any bill, addressing
digital assets undermine existing law. And I am not suggesting
the bill does.
And to now turn to a more direct answer to your question
is--I do think, we haven't had too much time with the bill, but
more importantly, I would just encourage you and your
colleagues to work closely with the SEC to ensure that the bill
does not undermine the securities laws. And I know that is not
your intention, but with legislation comes unintended
consequences, and I think we should always be very mindful of
what we do, what we are intending, and what the outcomes are.
Mrs. Cammack. Thank you. And I know that FTX has been
touched on quite a bit here today, but I wanted to make sure
that I just did a quick follow-up on that. If there is no
Federal oversight of digital commodity intermediaries and
exchanges, if Congress doesn't act, is the CFTC's anti-fraud
and anti-manipulation authority sufficient currently to prevent
an FTX-like debacle, like what we saw in the U.S. cash or spot
digital commodity markets?
Mr. Behnam. Short answer, Congresswoman, is no. And, I have
said this many times, but it might not happen next month, it
might not happen next year, but if we continue to keep status
quo, these markets will rise and fall in value, and these
implosions, bankruptcies, will occur again.
Mrs. Cammack. It is an interesting perspective, me being
someone who is very much against the heavy hand of government
bureaucrats and regulators. It tends to have one extreme to the
other, so--there has been criticisms that CFTC is a bit of a
light touch, right? How do you strike that balance?
Mr. Behnam. Well, I obviously don't agree with that
statement at all, and my thought is folks who want to----
Mrs. Cammack. You could take it as a compliment.
Mr. Behnam. No, I don't. But I would say that I have
thought about this, and this is just a product of individuals
who, they are pundits, they want to be critics. This is what
they do. But also just not willing to take time, and--to really
examine the agency and the impact that we have on financial
markets. And I will briefly give you two examples, one on
enforcement. I have said this multiple times, last Fiscal Year
2022, $320 million budget, $2.5 billion in penalties and
restitution. Eight times return, roughly. Over the past 10
years, consistent factor, eight times return on our
appropriated dollar. So every dollar you appropriate, we are
returning $8 to the General Treasury.
Second thing I will say, and I mentioned this earlier, we
are a principles-based regulator, so I think it is easy for
critics, which there are always critics, to say they are a
``light touch'' regulator because they are a principles-based
regulator. That couldn't be farther from the truth, and as I
said earlier, we, in fact, through the law, the Commodity
Exchange Act, are a principles-based regulator. But if you look
at our statute, and to your point earlier, the rules that we
draft, driven from the law, are quite extensive, are more
prescriptive, and are very specific to protecting customers and
protecting markets. So we are the farthest thing from a light
touch regulator, and I think if you ask any of our registrants
what they would say, I think they would agree with that.
Mrs. Cammack. Well--and I had a couple follow-ups to that
administrative and enforcement actions, but I will submit those
for the record. My time has expired, Mr. Chairman. I yield
back. Thank you.
Mr. Feenstra. At this time we have completed all our
questions for our first panel witness, Chairman Behnam. The
Committee thanks you for your testimony today. Thank you for
spending the time with us. The witness is excused.
The Committee will take a brief recess to allow Chairman
Behnam to depart and allow our second panel of witnesses to
take their seats. The Committee stands in recess at this point,
subject to the call of the chair.
[Recess.]
Mr. Feenstra.--Legal Officer of Coinbase. Our third witness
today is Dan Gallagher, who is the Chief Legal Compliance and
Corporate Affairs Officer for Robinhood Markets, Incorporated.
He is also a former Commissioner of the Securities and Exchange
Commission. Our fourth witness today will be Mr. Dan
Berkovitz--sorry I abused that name there--who is a former
Commissioner of the Commodity Futures Trading Commission. Our
fifth and final witness today is Walt Lukken, who is the
President and Chief Executive Officer of the Futures Industry
Association. He is also the former Acting Chairman of the
Commodity Futures Trading Commission. I thank you all for
joining us today.
We will now proceed to our testimony. You each will have 5
minutes. The timer in front of you will count down to zero, at
which point your time has expired. Mr. Giancarlo, please begin
when you are ready. You have 5 minutes.
STATEMENT OF HON. J. CHRISTOPHER GIANCARLO, FORMER CHAIRMAN,
COMMODITY FUTURES TRADING COMMISSION, NEW YORK, NY
Mr. Giancarlo. Thank you, Mr. Chairman, Ranking Member, and
Committee Members. It is an honor to speak to this great
Committee once again. I am Chris Giancarlo, former Chairman of
the CFTC. I appear today in my individual role, and not on
behalf of any entity. Five years ago I sat on the other side of
the Capitol and testified to the Senate Banking Committee. The
topic was a rather obscure one at the time, cryptocurrency.
Well, that hearing turned out to be one of the more noticed
Congressional hearings to--in certain corners of the Twitter-
sphere, because in the prior year the price of Bitcoin had
risen almost 20 times. Our U.S. derivatives exchanges knew
there was commercial demand for Bitcoin price hedging, and they
wanted to launch exchange trading of Bitcoin futures.
In response, my administration at the CFTC drew on existing
authority, and innovated a unique process of heightened review
for crypto derivatives to facilitate, rather than hamper, their
market debut. In the 5 years since, the U.S. crypto derivative
markets, and the CFTC's oversight of them, have been quite
successful. Today Bitcoin continues to grow in transactional
volume, adoption, network strength, and code execution, despite
increasing politicization and hostility.
Now, some may recall that the original decision to
greenlight Bitcoin futures sparked controversy. There were
calls to stop their launch. Yet my team knew that blocking
these new futures products would not stop the rise of Bitcoin
or other virtual currencies. It would only deprive Americans of
smart regulation. Doing nothing would have been irresponsible.
At that February 2018 Senate hearing I spoke about a new
generation's interest in crypto. I explained that the energy
and momentum behind digital assets was not just driven by
technological efficiencies and benefits. There was something
else going on, something generational, and cultural, and
social, and human. And I told the Senate that we owe it to this
new generation to respect their enthusiasm about digital assets
with a thoughtful and balanced response, not a dismissive one.
And here we are today, 5 years later, still seeking that
thoughtful and balanced response from Congress.
Americans, especially innovators, investors, and younger
Americans, await Congressional action to create a sound legal
framework for this innovation. And so I commend this Committee
and this Congress for undertaking this unique joint effort at
lawmaking. The bill before us addresses an important public
interest in closing gaps in CFTC oversight. And Chairman Behnam
is right that there are elements of cash markets for digital
commodities suitable for direct CFTC oversight.
Weeks before that 2018 Senate testimony I went to
Switzerland and spoke to the Financial Stability Board, the
chief standard-setting body of the global financial system. The
assembled global regulators were skeptical of the CFTC's
decision to greenlight Bitcoin futures. I said to them, crypto
is not going away. Digital assets and other network technology
is like a roaring wind. You can take shelter from it, get blown
away by it, or hitch a sail and ride it. And I added that we
Americans prefer to ride the wind.
Well, in the 5 years since, many of the countries
represented in that Swiss conference room are now trying to
hitch their sails to crypto innovation. They are hoping to
benefit from America's early lead. And yet we know the American
Dream was created by innovators riding winds of innovation. And
as it did 3 decades ago, Congress needs to support innovation
today. Thank you for the thoughtful legislation before us,
thank you for your leadership, and I look forward to your
questions.
[The prepared statement of Mr. Giancarlo follows:]
Prepared Statement of Hon. J. Christopher Giancarlo, Former Chairman,
Commodity Futures Trading Commission, New York, NY
Thank you, Chairman Thompson, Ranking Member Scott, and Committee
Members. It is an honor to appear before this Committee once again.
I am Chris Giancarlo, former Chairman of the U.S. Commodity Futures
Trading Commission (CFTC). I appear before you today in my individual
capacity as an industry professional and former member of the
Commission.\1\ The views I express are mine and mine alone.\2\
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\1\ My professional affiliations are listed in Schedule A attached
hereto.
\2\ This testimony contains my professional thoughts on the issues
discussed herein; it neither contains legal advice nor establishes an
attorney-client relationship in any form. The opinions expressed herein
are attributable to me alone, and they do not reflect the views,
positions or opinions of any commercial, professional or nonprofit
organization with which I am affiliated, including Willkie Farr &
Gallagher LLP or other attorneys at the firm.
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Five Years Perspective
A little over 5 years ago, I sat on the other side of the Capitol
and gave testimony to the Senate Banking Committee. The topic was a
rather obscure one at the time: the oversight roles of the SEC and CFTC
over crypto.\3\ That hearing turned out to be one of the more noticed
Congressional hearings on digital assets, at least in certain corners
of the Twitter-sphere.
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\3\ U.S. Senate Committee on Banking, Housing and Urban Affairs,
Hearing: ``Virtual Currencies: The Oversight Role of the U.S.
Securities and Exchange Commission and the U.S. Commodity Futures
Trading Commission,'' (February 6, 2018), (hereafter: Virtual Currency
Hearing), available at https://www.banking.senate.gov/hearings/virtual-
currencies-the-oversight-role-of-the-us-securities-and-exchange-
commission-and-the-us-commodity-futures-trading-commission.
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In the year just prior to that hearing, the price of Bitcoin had
risen almost twenty fold. Respected U.S. derivatives exchanges, CBOE
and CME, sensed commercial demand for Bitcoin price hedging and sought
to launch exchange trading of Bitcoin futures. In response, my
administration drew upon existing authority and innovated a unique
process of heightened review for new crypto derivatives products to
facilitate rather than hamper their market debut.\4\ Our approach was a
balanced one. In the 5 years since, these crypto derivatives markets
and the CFTC's oversight of them have been quite successful.
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\4\ Remarks of CFTC Chairman J. Christopher Giancarlo to the ABA
Derivatives and Futures Section Conference, Naples, Florida (January
19, 2018), at: https://www.cftc.gov/PressRoom/SpeechesTestimony/
opagiancarlo34.
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Some may recall that our original decision to greenlight these
products sparked some controversy.\5\ There were calls to prevent their
launch.\6\ Yet, my team felt that attempting to block new futures
products would not stop the rise of Bitcoin or other virtual
currencies, but just push them offshore. Doing nothing would have been
irresponsible.
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\5\ See generally, ``CryptoDad--The Fight for the Future of
Money,'' (Wiley) 2022, (Chapts., 8-10).
\6\ Id.
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At that February 2018 Senate hearing, I talked about a new
generation's interest in crypto. I explained that the energy and
momentum behind digital assets was not just driven by technological
efficiencies and benefits. There was something else going on--something
generational and cultural, social, and human.
I told the Senate that,
``. . . we owe it to this new generation to respect their
enthusiasm about digital assets with a thoughtful and balanced
response, not a dismissive one.'' \7\
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\7\ Written testimony of J. Christopher Giancarlo, Chairman,
Commodity Futures Trading Commission Before the Senate Banking
Committee, Washington, D.C. (February 6, 2018) (hereafter: Senate
Banking Testimony), at: https://www.banking.senate.gov/imo/media/doc/
Giancarlo%20
Testimony%202-6-18b.pdf.
And here we are today--over 5 years later, still seeking that
thoughtful and balanced response. Americans--especially innovators,
investors and younger Americans--await Congressional action to create a
legal framework for this innovation.
I commend this Committee and this Congress for undertaking this
unprecedented joint effort at law making. I support the goal of
``finding workable solutions that provide much-needed regulatory
clarity and certainty, while still adhering to time-tested principles
that protect market participants.'' \8\ Addressing the complex aspects
confronting this innovation, including the concept of decentralization
is no simple feat, but one that deserves the attention of this
Committee. For this, American investors and innovators should be
grateful.
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\8\ Thompson, McHenry, Johnson, Hill Issue Joint Statement on
Digital Assets Partnership (April 27, 2023) at: https://
agriculture.house.gov/news/documentsingle.aspx?DocumentID=7613.
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I applaud the leadership of Chairman Thompson of the House
Agricultur[e] Committee and Chairman McHenry of the House Financial
Services Committee to work together on this landmark bill. The
coordination between these important Committees has produced a robust
piece of legislation that advances consideration of an appropriate
regulatory framework for crypto. The scope of regulation of financial
services in the United States is unmatched by the rest of the world,
thus making the coordination between these Committees necessary. This
coordination has produced an impressive piece of legislation that could
not have been achieved by either Committee on its own. Such
coordination is difficult and time-consuming and deserves recognition
and appreciation.
The CFTC Was Built for Innovation
As Congress contemplates an appropriate legal and regulatory
framework for digital assets it is appropriate that attention is
directed to the CFTC. In fact, the CFTC was reformulated over forty
years ago into an independent body specifically to safeguard a
breakthrough in financial innovation--financial futures--that enabled
the global economy to hedge the risk of moving interest and exchange
rates ensuring the U.S. Dollar's primacy as the world's reserve
currency.\9\ As you well know, the CFTC has been at the forefront of
U.S. financial market innovation since its inception. During the past
decades, the CFTC has deftly overseen more new financial product
innovation than almost any other market regulator.\10\ And yet, amidst
such innovation, CFTC regulated markets have safely mitigated financial
risk in an orderly manner without faltering or failing even during the
great financial crisis.
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\9\ Leo Melamed, ``Man of the Futures: The Story of Leo Melamed &
the Birth of Modern Finance'' (Harriman House 2021).
\10\ See generally, Senate Banking Testimony.
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The CFTC engaged early with digital assets, finding in 2015 that
Bitcoin was properly defined as a commodity under its authority.\11\ In
the spring of 2017, the agency unanimously launched LabCFTC, a
dedicated office to serve the Commission, Congress and innovators in
furthering promising fintech and digital asset technology.\12\ The
CFTC's greenlighting of the self-certification of bitcoin futures later
that year initiated the world's first significant, fully regulated
market for digital assets. Since then, other commodity-based, digital
asset products including ether futures have come under CFTC oversight.
Today, derivatives on digital asset commodities (the largest digital
asset category by volume) \13\ trade in orderly and transparent markets
under close CFTC supervision, fostering Dollar-based pricing, with
healthy liquidity and high levels of open interest despite volatile
current economic conditions.\14\ These markets provide the CFTC with
regulatory visibility supporting robust enforcement that is second to
no other market regulator in prosecuting perpetrators of digital asset
fraud, abuse, and market manipulation. Yet, perhaps most importantly,
the CFTC's early and unhesitant engagement with digital assets has
reduced regulatory risk and uncertainty for responsible financial
market innovation paving the way for an important new ecosystem of
retail and institutional digital asset investment generating economic
activity here in the United States.
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\11\ ``CFTC Orders Bitcoin Exchange Bitfinex to Pay $75,000 for
Offering Illegal Off-Exchange Finance Retail Commodity Transactions and
Failing to Register as a Futures Commission Merchant,'' CFTC press
release, (June 2, 2016), available at https://www.cftc.gov/PressRoom/
PressReleases/7380-16.
\12\ ``CFTC Launches LabCFTC as Major Fintech Initiative'' (May 17,
2017), at: https://www.cftc.gov/PressRoom/PressReleases/7558-17.
\13\ Testimony of Daniel J. Davis Before the U.S. House Agriculture
Committee, Subcommittee of Commodity Markets, Digital Assets, and Rural
Development, ``The Future of Digital Assets: Identifying the Regulatory
Gaps in Spot Market Regulation,'' at: https://docs.house.gov/meetings/
AG/AG22/20230427/115803/HHRG-118-AG22-Wstate-DavisD-20230427.pdf.
\14\ CME Bitcoin Liquidity Report (May 26, 2023), at: https://
www.cmegroup.com/reports/bitcoin-futures-liquidity-report.pdf.
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The bill under consideration by this Committee addresses the
important public interest in closing a gap in CFTC oversight. As you
know, spot markets facilitate immediate physical delivery of tradable
goods in contrast to markets for futures, forwards and options
deliverable in the future. In spot markets, the CFTC has only limited
authority over trading of digital asset commodities. As a result, there
are no platform registration, operator supervision or standard investor
protection measures in the spot markets that are common in U.S.
derivatives markets to police against fraud, manipulation, and abuse.
In testimony to this Committee's Subcommittee on Commodity Markets,
Digital Assets and Rural Development, the CFTC's former General Counsel
and my former colleague, Dan Davis, calculated that \2/3\ and \3/4\ of
crypto currencies traded in spot markets are digital commodities, not
digital securities.\15\ This bill would bring the CFTC's practical and
seasoned oversight to spot trading in these most popular
cryptocurrencies.
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\15\ Id., Dan Davis Testimony.
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CFTC Chairman Rostin Behnam has stated that there are elements of
the digital commodity cash markets suitable for direct CFTC oversight
that are distinguishable from traditional cash commodity markets. I
agree with Chairman Behnam and I support the provisions in the bill
that extend the CFTC's oversight to cover spot digital commodity
markets.
Observations on Proposed Legislation
I would like to offer some observations on the draft bill being
considered by this Committee.
First, the bill takes the appropriate step of enshrining LabCFTC
into the Commodity Exchange Act. LabCFTC was a bipartisan initiative of
the Commission created with the active support of then Democratic
Commissioner Sharon Bowen.\16\ Its purpose was to promote responsible
financial innovation by serving as a non-partisan resource for all
stakeholders including Congress, a purpose that is all the more
critical today. To serve as such a resource, it is important that
LabCFTC be a resource to each Commissioner, not just the Chair. I was
delighted to see that the bill codifies the independent and non-
partisan nature of LabCFTC. This independence should promote one of the
foundations of LabCFTC--to promote education within the Commission and
externally with other stakeholders allowing the agency to have its
finger fully of the pulse of innovation and its appropriate oversight.
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\16\ In public remarks acknowledging the active support of former
CFTC Commissioner Sharon Bowen in the creation of LabCFTC, I noted
that, ``Our work together is an example of how Federal officials can
serve the American people productively and without destructive
partisanship.'' ``LabCFTC: Engaging Innovators in Digital Financial
Markets,'' Address of CFTC Acting Chairman J. Christopher Giancarlo
Before the New York Fintech Innovation Lab (May 17, 2017), at: https://
www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-23.
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Second, the coordination between the House Agriculture and
Financial Services Committees affords an opportunity for this bill to
address an issue that has challenged regulators and the digital asset
industry: the distinction between a security and a commodity. I commend
the Chairs of each Committee for pushing toward a level of clarity in
what often has been an difficult distinction, especially in the area of
digital assets. More clear rules of the road help provide a map to
compliance, and in my view, the purpose of regulation is to promote
compliance. Reviewing and modernizing the existing rules applicable to
securities markets in order to facilitate compliance for the digital
assets industry, as this bill seeks to do, is important and overdue.
While admittedly not easy to achieve, the desired outcome should be a
business knowing what rules apply, and in turn, fostering a culture of
compliance around those rules. By contrast, we should work to avoid a
system that leaves responsible market participants guessing as to the
appropriate rule set, only to face enforcement if, after rigorous
analysis, they reached a different conclusion than regulators.
Last, and notwithstanding that this bill reflects extensive effort
and thoughtful deliberation to create a regulatory framework for
crypto, I would suggest a limited number of enhancements to the bill.
Native to all starting points is an opportunity to digest potential
areas for improvement. I would welcome an opportunity to discuss each
of these suggestions, and any other contemplated changes as Congress
and the greater public contemplate the bill.
The bill should impose a deadline for the CFTC and SEC to
complete the joint definitional rulemakings. Section 104(a) of
the bill requires that the CFTC and the SEC engage in joint
rulemakings to further define numerous definitions contained in
the bill. Given that these definitions impact both agencies, I
support the prospect of joint rulemakings to further define the
terms that would become part of the Commodity Exchange Act and
Federal Securities Laws. In my view, these definitional
rulemakings would benefit from a deadline to complete the
further definitions within a specified amount of time after the
passage of the bill. A deadline directs the agencies on the
urgency for action, and helps deliver on the promise of
clarity. The length of the deadline should take into
consideration the number of definitions and the resources of
the respective agencies to dedicate staff to the necessary
rulemakings.
The list of joint rulemakings should include a joint CFTC-
SEC rulemaking on the process to certify that a blockchain
network is decentralized. Under Section 204 of the bill, any
person may certify to the SEC that a blockchain network to
which a digital asset relates is a ``decentralized network.''
The certification carries with it a presumption that the
network is decentralized that the SEC can rebut upon making a
determination that the network is not decentralized. One
consequence of the SEC approving a certification that a
blockchain network is decentralized is that a digital asset
related to the decentralized network is treated as a digital
commodity subject to the regulatory oversight of the CFTC.
Given that any certification might involve the transition of
regulation from the SEC to the CFTC, both agencies should
inform the process that governs the certification. This process
includes the materials necessary for the SEC to consider a
filing complete, the relevant factors for the SEC to consider
in evaluating a blockchain network, and how the SEC determines
that a particular blockchain network raises novel and complex
issues that warrant lengthier consideration. The definition of
a decentralized network also references various time periods
(e.g., 12 months and 3 months) where certain facts cannot exist
for the network to be considered decentralized. For example, a
digital asset issuer or an affiliated person cannot market the
blockchain network ``during the previous 3 month period.'' \17\
A joint rulemaking could further clarify how to interpret these
time period, in particular, how these time periods apply once a
blockchain networks has been certified as decentralized. Last,
Section 204(g) establishes a process for the SEC to reconsider
a prior determination that a blockchain network is
decentralized. If the SEC were to determine that a network was
no longer decentralized, a digital asset might transition from
being a digital commodity back to a security. A joint CFTC-SEC
rulemaking surrounding the process for reconsideration would
help promote a clear and transparent methodology for a
reconsideration, which would shed light on the impact that a
change to a blockchain network might have on its regulatory
classification.
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\17\ See Section 101 (definition of ``decentralized network'').
Both the CFTC and SEC should determine that a blockchain
network is no longer decentralized. As noted above, Section
204(g) establishes a process for the SEC to reconsider whether
a blockchain network is no longer decentralized, and the impact
of any change in classification would mean the transition of
regulation from the CFTC back to the SEC. Given that any
reclassification necessarily involves digital assets currently
regulated by the CFTC, a reconsideration determination should
require a joint determination with each agency approving the
reclassification. To be clear, if both agencies did not agree
to a reclassification, the network should remain certified as
decentralized. A joint determination should help foster clear
rules regarding whether a blockchain network is decentralized.
Conclusion--The Time to Act is Now
The world is once again experiencing a fundamental new innovation
in finance. The same digital network technology--the internet--is doing
to banking, finance and money itself what it has already done to
information gathering, personal communications, social networking,
entertainment and retail shopping. That is: increase efficiency, lower
costs, increase inclusion and challenge a whole lot of existing market
structures.
Today, despite growing U.S. politicization and Administration
hostility,\18\ Bitcoin continues to grow in transaction count,\19\
adoption,\20\ network strength,\21\ and code execution.\22\ Ignoring or
attacking digital assets does not make them go away. Nor is it prudent
public policy.
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\18\ Michael J. Casey, ``Biden Administration is Politicizing
Crypto,'' (March 31, 2023), at: at: https://www.nasdaq.com/articles/
biden-administration-is-politicizing-crypto.
\19\ Will Clemente, ``Bitcoin Transactions are Increasing at Fast
Pace,'' referring to Reflexivity Research, The Pomp Letter (paid
subscription) (May 4, 2023).
\20\ Anthony Pompliano, ``Bitcoin Fundamentals Keep Getting
Stronger,'' The Pomp Letter (paid subscription) (February 7, 2023).
\21\ Id.
\22\ Id.
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We need not be naive. The cryptocurrency universe contains its
share of get-rich-quick fraudsters, shady entrepreneurs, and outright
criminals. Yet, crypto is also supported by a growing contingent of
professional and institutional users and real everyday believers,
including advocates for the poor and the unbanked, libertarians,
pacifists, earnest tech geeks, mathematicians, sound-money aficionados,
long-term investors, and many idealistic Americans. Whatever their
interests, they deserve to be taken seriously, not dismissed or
disparaged as fools or idiots. They deserve well-conceived, crypto-
native legal and regulatory frameworks.
Financial market regulators also need digitally-native legal
frameworks to prosecute bad guys, while giving certainty to everyone
else who desire to follow clear rules, well-tailored for digital
innovation. Prudential regulators need to accept that financial
stability is not sustained by shoring up legacy financial technology
and staunchly defending the status quo. Responsible innovators need to
believe that digital asset technology is as welcome here in America as
it increasingly is abroad.
Weeks before my 2018 Senate testimony, I went to Switzerland and
spoke to the Financial Stability Board--the chief international
standard setting body of the global financial system. Many in the
assembled group of global regulators were skeptical about the CFTC's
decision to greenlight bitcoin futures. I told them that, ``crypto is
not going away.'' Technology including digital assets ``is like a
roaring wind.'' I said, ``you can take shelter from technological
change, get blown away by it, or hitch a sail and ride it.'' Adding,
``We Americans prefer to ride the wind.'' \23\
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\23\ Id., CryptoDad, pp. 164-68.
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In the 5 years since, many of the countries represented in that
Swiss conference room are now trying to hitch their sails to crypto
innovation.\24\ They are hoping to benefit from the United States'
early lead.
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\24\ The Atlantic Council has assembled a global database of
cryptocurrency regulation. See ``Cryptocurrency Regulation Tracker,''
Atlantic Council at: https://www.atlanticcouncil.org/programs/
geoeconomics-center/cryptoregulationtracker/. Of 45 national regulatory
systems considered, many have or are developing regulatory frameworks
conducive to cryptocurrency innovation, including such U.S. economic
allies and competitors as: Australia, Brazil, Canada, the EU (including
France, Germany and Italy), Japan, Mexico, Singapore, South Korea and
the UK.
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This Committee knows that the American dream was created by
innovators riding the wind of innovation. As it did 3 decades ago
during the first wave of the internet,\25\ Congress needs to support
American innovation today.
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\25\ In February 1996, Congress recognized that ``the Internet . .
. ha[d] flourished, to the benefit of all Americans.'' The
Telecommunications Act of 1996 together with the ensuing Clinton
Administration's ``Framework for Global Electronic Commerce'' are well
recognized as the enlightened regulatory underpinning of America's
early leadership in the Internet of Information.
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Thoughtful, clear-eyed and unbiased leadership is needed. American
crypto consumers, investors and financial innovators alike deserve the
benefit of the market supervision, expert analysis and oversight of the
world's most experienced and farsighted financial regulators: the CFTC
and the SEC.
Thank you.
Appendix A
J. Christopher Giancarlo, Professional Affiliations
Willkie Farr & Gallagher, Senior Counsel, New York, NY--Jan. 2020-
Present
Nomura Holdings, Inc., Independent Director, Tokyo, Japan--Jun. 2021-
Present
Digital Asset Holdings LLC, Independent Director, New York, NY--Jan.
2022-Present
Digital Dollar Project, Co-Founder & Exec. Chairman, New York, NY--
Jan. 2020-Present
Chamber of Digital Commerce, Member, Board of Advisors, Washington,
D.C.--Oct. 2019-Present
Mr. Feenstra. Thank you, Mr. Giancarlo, for your testimony.
Mr. Grewal, please begin when you are ready, and you have 5
minutes.
STATEMENT OF PAUL GREWAL, J.D., CHIEF LEGAL OFFICER, COINBASE
GLOBAL, INC., OAKLAND, CA
Mr. Grewal. Thank you, sir. Good afternoon. I want to thank
Chairman Thompson, Ranking Member Scott, and Members of the
Committee for inviting me to testify about the future of
digital assets, and the need for a clear rulebook in the United
States. My name is Paul Grewal, and I am the Chief Legal
Officer at Coinbase. Coinbase was founded in 2012 with the goal
to be the world's most trusted, secure, and compliant on-ramp
for the crypto economy. We went public in 2021 and are
currently the largest crypto platform in the United States. Our
mission is to increase economic freedom in the world, and our
products and services do just that. We enable millions of
consumers, institutions, and developers around the world to
buy, sell, and use crypto in a meaningful way.
Since our founding over a decade ago, we have embraced
regulation. We take seriously our obligations to our customers,
our investors, and our regulators, and we are proud of the
robust consumer protection controls, prudent risk management,
and industry-leading security practices implemented over the
years. I am pleased to speak with you today about our views on
regulation and legislation, but before I proceed with my
scheduled remarks, I would like to address the litigation filed
this morning by the Securities and Exchange Commission as
mentioned earlier.
It is disappointing, but not surprising, that the SEC has
decided to bring legal action against Coinbase today, the day
of our testimony before this Committee's critical hearing on
creating a workable framework for digital asset regulation. The
SEC's reliance on an enforcement-only approach in the absence
of clear rules for the digital asset industry is hurting
America's economic competitiveness and the companies most
committed to compliance. The solution is legislation. It allows
fair rules for the road to be developed transparently and
applied equally, not litigation. Despite today's complaint, we
will continue to operate our business as usual.
For today, there are three main points I would like to
highlight. First, the United States is falling behind.
Distributed ledger and digital asset technology is, as the
White House has stated, critical and foundational to the future
of the United States. Yet the United States is pushing the
technology and innovators overseas due to lack of regulatory
clarity. The rest of the world is taking advantage of our
absence. The EU, UK, Australia, Singapore, and Hong Kong, just
to name a few, are writing rules that are making room for
innovation while also protecting consumers. We shouldn't want
any country to leapfrog the United States in a foundational
area of technology. It is not just bad for our economic future,
but bad for our national security.
Second, crypto is solving real world problems, and we need
a clear path forward to protect responsible innovation. Digital
assets are creating new ways to store and transfer value. They
are making existing systems, like the financial system, better.
Today's crypto use-cases range from cheaper, faster, and more
reliable international payments, to digital IDs, to healthcare
records on the blockchain. But digital assets don't fit into
any single existing regulatory box. Some are commodities, some
are securities, and some simply don't map onto existing
categories. With more than 20 percent of Americans owning and
using crypto, we need a regulatory framework that will protect
American consumers and enable innovation.
Third, the digital asset market structure discussion draft
is a strong step forward in providing overdue regulatory
clarity. Congress alone has the power to draw clear,
comprehensive lines for digital assets, specifically when
digital assets are regulated as commodities or securities, or
when the regulatory structure simply makes no sense. We are
excited about the discussion draft because it builds on
existing and workable regulatory precedent, while also
recognizing the unique properties and opportunities of digital
assets. The discussion draft also thoughtfully draws from many
of the key findings of President Biden's Executive Order and
the agency reports that came out of the EO, most notably that
we need a Federal regulator for the spot trading of crypto
commodities.
Specific to the CFTC and the jurisdiction of this
Committee, the bill would create a regulatory framework that is
rooted in the existing CFTC structures for commodity markets
and market participants. The bill recognizes that centralized
intermediaries, like Coinbase, should be regulated, and it
creates transparency through mandatory registration, disclosure
requirements, and inspection and examination authority.
Importantly, this is a fit for purpose registration regime that
doesn't attempt to shoehorn market participants into pre-
existing but ill-suited requirements that are not mapped to
actual risks and consumer needs. And critically, the bill
provides a framework for those registration pathways to work in
practice, not just in theory.
The bill also allows for side by side trading, and creates
clear consumer protections, like conflicts of interest
disclosures and limitations, requirements to segregate client
funds, and bankruptcy priority. With respect to the SEC, it
provides necessary adaptations to existing rules, like
Regulation A, Rule 144, and the regulations related to
alternative trading systems, in order to create a regime for
all crypto market participants. Similar to the proposed CFTC
regime, the discussion draft would establish a fit for purpose
framework for the regulation of restricted digital assets, or
more specifically, digital assets regulated as securities. This
framework does not exist today. The bill articulates guardrails
and requirements to protect investors, and ensure transparency
and consistency for all market participants.
In closing, Coinbase strongly supports creating a robust,
comprehensive regime for the regulation of digital asset
commodities and digital asset securities. Only Congress can do
this. Although legislation can always be improved around the
edges, the discussion draft would create a workable foundation
for consumers, investors, and market participants alike. We
urge Congress to act as soon as possible. We welcome the
opportunity to continue participating in this dialogue, and I
look forward to your questions.
[The prepared statement of Mr. Grewal follows:]
Prepared Statement of Paul Grewal, J.D., Chief Legal Officer, Coinbase
Global, Inc., Oakland, CA
Good afternoon. Thank you, Chairman Thompson, Ranking Member Scott,
and Members of the Committee for inviting me to testify today about why
we need a clear rulebook for crypto in the United States and also about
the bill you recently released with Financial Services Chairman
McHenry, and Subcommittee Chairmen Johnson and Hill.
My name is Paul Grewal and I am the Chief Legal Officer at
Coinbase. I joined Coinbase in August 2020 following 4 years as Vice
President and Deputy General Counsel at Facebook, Inc. Prior to
Facebook, I served for 6 years as a U.S. Magistrate Judge for the U.S.
District Court of the Northern District of California, a partner at
Howrey LLP, and a Judicial Law Clerk for the U.S. Court of Appeals for
the Federal Circuit and the U.S. District Court for the Northern
District of Ohio. As Coinbase's Chief Legal Officer, I am responsible
for assessing, mitigating, and addressing American and international
regulatory risks associated with operating the largest U.S. crypto
platform.
I am pleased to speak with you today about Coinbase and our views
on regulation, as well as our thoughts regarding the Digital Asset
Market Structure Discussion Draft, as released on Friday. There are
three main points I would like to share with you today in my testimony.
At a high level:
1. First, the U.S. is falling behind. Distributed ledger and digital
asset technology is--as the White House has stated--
critical and foundational.\1\ Despite being identified as
potentially critical to U.S. economic and national
security, the U.S. is pushing the technology and the
innovators overseas due to lack of clear rules and
regulations for crypto. The rest of the world is not
waiting for us, and they are taking advantage of our
absence. The European Union, the UK, Australia, Singapore
and China--through Hong Kong--just to name a few, are
putting in place regulatory frameworks that are creating
room for innovation while also protecting consumers.
Allowing others to leapfrog the United States in a
foundational area of technology is not just bad for our
economic future, but also our national security as a broad
range of use cases emerge in the years ahead.
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\1\ https://www.whitehouse.gov/wp-content/uploads/2022/02/02-2022-
Critical-and-Emerging-Technologies-List-Update.pdf
2. Second, crypto is solving real-world problems and we need a clear
path forward to protect responsible innovation. Digital
assets are unique and diverse. They are creating new ways
to store and transfer value, while also making existing
systems--like the financial system--better. Today's digital
asset use cases range from cheaper, faster, and more
reliable international payments to digital IDs to
healthcare records on the blockchain. But digital assets do
not collectively fit into any single existing regulatory
box: some are commodities, some are securities, some are
neither, and some simply don't map onto existing
categories. With more than 20 percent of Americans owning
and using crypto, we need a regulatory framework that will
protect consumers and enable the critical uses of this new
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technology to continue and grow.
3. Third, the Digital Asset Market Structure Discussion Draft is a
strong step forward in providing overdue regulatory
clarity. Congress needs to draw the lines between when
digital assets and the technology that underpins them
should be regulated as commodities, when they should be
regulated as securities, and when financial regulations
should not apply or simply would make no sense. As the
legislative process unfolds this bill will no doubt evolve,
but we believe it already offers a strong foundation on
which to build a workable and balanced regulatory framework
for crypto innovation within the U.S. In addressing both
CFTC and SEC authority, the Discussion Draft builds on
existing regulatory frameworks, while also recognizing the
unique properties and opportunities of digital assets. It
would also provide much-needed Congressional authority and
guidance to allow our financial system to evolve. With
respect to the CFTC, the bill draws from portions of the
existing framework of the Commodity Exchange Act, and also
builds on 5 years of deliberations in the House Agriculture
Committee on the Digital Commodities Exchange Act and a
similar Senate bill, the Digital Commodities Consumer
Protection Act. With respect to the SEC, it provides
necessary adaptations to the existing frameworks of
Regulation A, Rule 144, and the regulations related to
Alternative Trading Systems to create a regime that could
be used broadly by crypto market participants. The
Discussion Draft also thoughtfully draws from many of the
key findings of President Joe Biden's Executive Order and
the agency reports that came out of the EO, most notably by
ensuring that we will have a Federal regulatory framework
over the spot trading of crypto commodities. Overall, it is
a thoughtful effort and represents a major step forward. We
urge Congress to move swiftly to consider and pass digital
asset legislation.
I'd like to share more background on why I am here, and Coinbase's
approach to our customers, our regulators, and compliance overall.
Coinbase Introduction
Coinbase has embraced regulation since we were founded over a
decade ago, and we have extensive experience building and implementing
robust consumer protection controls, prudent risk management, and
industry-leading security practices. The SEC allowed us to become a
public company in April 2021, which makes us unique in the crypto
industry. We believe we are uniquely qualified to discuss the
Discussion Draft and why we need a clear Federal framework of crypto
regulation in the U.S.
Coinbase was founded in 2012, with the goal of being the world's
most trusted, secure, and compliant onramp to the crypto-economy. Our
mission is to increase economic freedom in the world, and our products
enable tens of millions of consumers, institutions, and developers
around the world to discover, transact, and engage with crypto assets
and web3 applications. We enable our customers to trade and custody
assets, but we list assets only after they have been through a rigorous
legal, compliance, and information security review.
Coinbase is currently regulated by more than 50 regulators in the
U.S. alone: we are a money services business registered with the U.S.
Treasury Department and subject to FinCEN rules, we have 45 state money
transmission licenses, and a BitLicense and state trust charter from
the New York Department of Financial Services (``NYDFS''). Somewhat
less known is that Coinbase also has two broker-dealer licenses (both
of which are dormant at this time) and that Coinbase Asset Management
is a registered investment advisor under the SEC. We are a licensed
designated contract market (``DCM'') regulated by the CFTC and our
Coinbase Financial Markets, Inc. subsidiary has applied for
registration as a futures commission merchant (``FCM'') with the
National Futures Association.
Coinbase also strives to be the market leader when it comes to
consumer protection. We hold our customer assets 1:1 at all times,
which means we do not lend or rehypothecate customer assets without
being directed by them to do so. We safeguard customers' assets--both
crypto and fiat--using bank-level security standards. Our security
technology is designed to prevent, detect, and mitigate inappropriate
access to our systems by internal or external threats. We have
developed and maintain administrative, technical, and physical
safeguards designed to comply with applicable legal requirements and
industry standards. At all times, we also appropriately ledger,
properly segregate, and diligently maintain separate accounts for our
corporate crypto assets and customers' crypto assets.
In addition to safeguarding customer assets on the platform,
Coinbase is focused intently on the prevention and detection of illicit
activity and keeping Coinbase customers and the U.S. financial system
safe from bad actors. We have implemented a comprehensive Financial
Crimes Compliance program that adheres to U.S. BSA/AML and sanctions
requirements as is required under our existing licenses. It is also
consistent with the standards required of traditional financial
institutions.
Coinbase also rigorously assesses each and every crypto asset
before listing it on our platform to ensure it meets our legal,
information security, and compliance requirements. Our legal review is
particularly relevant to this Committee's work because our process
includes an analysis of whether the asset could be considered to be an
SEC-regulated security or a commodity. Coinbase does not list
securities on our platform and our processes are so rigorous that we
reject the vast majority of assets considered for listing. But we are
eager to work with this Committee, the House Financial Services
Committee, the CFTC, the SEC, other industry participants, and the
public to help advance legislation and regulations that help develop a
market for the offering of digital asset securities in the future.
The U.S. is Falling Behind
Thirty years ago, the U.S. made a historic and strategic decision
to not only embrace, but become a leader, in the development and
deployment of a new technology, collectively known as the World Wide
Web. The World Wide Web is not just one technology--it's the
amalgamation of numerous software programs working together to give
users a seamless experience today. Thirty years ago the terms ``Uniform
Resource Locator (URL)'', ``HyperText Transfer Protocol (HTTP)'', and
``Hyper Text Markup Language (HTML)'' were new to the American public.
Today, these protocols fit seamlessly into our everyday lives.
At the time, the approach of President Clinton's Administration to
the internet--as an issue of U.S. national interest--was not intuitive
given that its economic and social applications were only beginning to
emerge. The decision needed in 2023 on crypto is no different; digital
asset technology represents the next critical evolution of the
internet. Crypto is a revolutionary technology that allows ownership
interest and value to be recorded on a distributed ledger that anyone
can hold or transmit simply and cheaply, and without needing to use an
intermediary. This simple innovation is profound in its implications,
particularly as we increasingly manage our lives in ways enabled by the
internet.
Crypto technology can both modernize our financial system and
transform other systems like livestock management, pharmaceutical
distribution, car titles, and healthcare. Crypto enables low cost and
rapid transfers of value and enables capital market trades to settle
instantaneously, rather than the 2-3 days common today.
Major economies and financial centers like the UK, European Union,
Canada, Japan, Singapore and Hong Kong have taken significant steps to
embrace crypto through adoption of both the technology and new rules
and regulations specifically tailored to the unique characteristics of
crypto. The EU, for example, is working to implement the Market in
Crypto-Assets (``MiCA'') regulation, which created a comprehensive
regulatory framework intended to close the gaps in existing financial
services legislation and establish a harmonized set of rules designed
for crypto asset issuers, intermediaries, and others who participate in
the crypto ecosystem.
While the rest of the world is moving ahead, the U.S. has struggled
to keep pace in terms of a clear and workable Federal regulatory
framework.
I want to share a few statistics that inform and drive the work we
do at Coinbase, and also underscore the importance of the bill now
being considered:
According to research from Morning Consult, 80% of Americans
think the current financial system is unfair, and 61% believe
providing access to cryptocurrency helps democratize finance;
52% think it makes the financial system more fair.\2\
---------------------------------------------------------------------------
\2\ Morning Consult. Crypto Currency Perception Study. Commissioned
by Coinbase. 24 Feb 2023. https://assets.ctfassets.net/c5bd0wqjc7v0/
WvuOkBwNXZsqhd6EWtkEL/7f94f8b6fbb222f3
faf4d0346e473012/
Morning_Consult_Cryptocurrency_Perception_Study_Feb2023_Memo__1_.pdf.
Crypto is also responsible for thousands of jobs in the U.S.
and overseas. According to recent reports, crypto will produce
more than a million jobs by 2030. Those jobs will inevitably
develop in regions and countries where clear regulatory
frameworks exist.\3\
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\3\ Developer Report. Electric Capital. https://
www.developerreport.com/.
But we are behind in the race to build the kind of regulatory
infrastructure that will foster innovation here at home and serve the
growing number of Americans who are part of the crypto-economy. We know
the risks associated with sending innovation offshore: while we once
dominated the semiconductor industry, the shifts that pushed
development offshore in the 1980s and 1990s still haunt us today. For
the past few years, chip shortages have negatively impacted industries
across our economy. We should keep these lessons in mind as we consider
the modern rules and regulations that will define breakthrough
technologies like crypto and the blockchain, and we should ensure the
power to shape them stays here in America.
We believe the U.S. still has the opportunity to take the reins to
ensure we lead from the front on crypto and reap the geopolitical and
economic benefits the leadership provides. But we are on the clock. If
Congress fails to act, other countries will continue to quickly step in
to attract new legitimate builders and innovators, while certain
overseas actors in the crypto industry will continue to dodge American
values and our commitment to the rule of law.
Crypto is Solving Real-World Problems and We Need a Clear Path Forward
to Protect Responsible Innovation
Congress alone can address this urgent need for the U.S. to create
a comprehensive regulatory framework for digital assets. The Discussion
Draft is a significant and commendable step toward doing just that. The
Discussion Draft begins by establishing definitions for digital
commodities, and delineating between the types of assets that will be
regulated by the CFTC (``digital asset commodities'') and those that
will be regulated by the SEC (``restricted digital assets'').
Starting with definitions is critical because digital assets are
diverse and fuel diverse use cases. Although many existing use-cases
today are related to improving our financial system, such as smoothing
international transfers and allowing real-time settlement of
transactions, we are seeing developers leverage digital assets and the
blockchain to create new projects every day related to agriculture,
rural WiFi access, energy management, climate and conservation, social
media, privacy, and many more. That is why being clear as to how and
when digital assets are subject to certain regulatory requirements is
critical. Many of the digital assets available today are designed to
enable simple functions that provide economic gates to commercial
applications and services. They are not securities. They are
commodities and their value is determined by adoption and use. And
adoption of these assets will grow as the crypto-economy grows.
For example, decentralized identification or DiD is a use case that
will provide countless benefits to American consumers. DiD technology
is growing rapidly, with public and private innovations poised to
integrate DiD tokens into our everyday lives. There are companies and
blockchains today that use naming services and token attestation to
provide the convenience of cloud-based, internet login services while
also letting users retain control over the information they share with
other websites. This means centralized Web2 sites can verify a user's
identity and other relevant information without needing to store
sensitive personal or financial information on their own servers. In a
world where information is regularly stolen from centralized servers as
a result of cyber attacks and data breaches, storing that information
on fewer servers provides tangible value.
Governments are also starting to embrace DiD. A project sponsored
by the European Commission is developing interoperable DiD solutions
[1] that would facilitate faster and more reliable security
checks for EU citizens.\4\ And as part of its national blockchain
strategy, India is building a decentralized, digital platform
[2] that will host IDs and documents related to education,
healthcare, and agriculture.\5\ Cities like Buenos Aires are also
spearheading efforts to construct DiD platforms in order to give
residents access to city services [3] and financial service
providers.
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\[1]\ https://essif-lab.github.io/framework/docs/essifLab-project.
\4\ See The European Self-Sovereign Identity Framework Lab (https:/
/essif-lab.github.io/framework/docs/essifLab-project). The selective
sharing capability of DiD is especially useful for federated
governments like the United States, EU, and others, where personal
information is often stored by multiple countries or states with
varying security infrastructures.
\[2]\ https://www.biometricupdate.com/202110/india-reportedly-
moving-toward-decentralized-digital-id-platform.
\5\ See National Strategy on Blockchain, Ministry of Electronics &
Information Technology (https://www.meity.gov.in/writereaddata/files/
National_BCT_Strategy.pdf), Government of India (Dec. 2021).
\[3]\ https://www.biometricupdate.com/202205/buenos-aires-planning-
ambitious-decentralized-digital-identity-system-with-biometrics.
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All of these projects run on blockchains, and all blockchains need
digital assets or tokens to operate. These digital assets are used to
govern, manage, and reward participation in a blockchain protocol or
project--in other words, these digital assets have utility. They often
function like oil or gold. For example, bitcoin is a store of value
just like gold. It fluctuates based on market forces and its value is
rooted in the belief that it can be used globally as a payment
mechanism, a way to hedge against inflation, and a protective layer
between fiat and value in a volatile country.
ETH works much like Bitcoin as a way of sending, receiving, or
storing value. But it also has a special role on the Ethereum network.
Because users pay fees in ETH to execute smart contracts, it is the
fuel that keeps the entire network running. It is also why those fees
are called ``gas''. If Bitcoin is ``digital gold,'' then ETH can be
seen as ``digital oil.'' They are commodities and should be regulated
as such at the Federal level. It's the power of innovation and market
forces combining to create new ways to store and move value.
As discussed above, the Digital Asset Market Structure Discussion
Draft would help create a regulatory line between digital commodities
and securities. In the absence of this kind of legislative clarity,
regulators have disagreed with one another and at times themselves
about how to categorize specific digital assets under existing
standards. The bill is thorough and detailed, and aims to help resolve
this uncertainty plaguing the industry and consumers.
The Digital Asset Market Structure Discussion Draft is a Strong Step
Forward in Developing Regulatory Clarity
The Discussion Draft as introduced builds on existing regulatory
frameworks, while recognizing the unique properties and opportunities
for digital assets that are not and cannot be addressed without
Congress. Given the jurisdiction of this Committee, I will first focus
on the role of the CFTC and the regulatory framework established for
digital asset commodities.
The bill, as drafted, would amend the Commodity Exchange Act to
create a much-needed and robust Federal regulatory framework for the
CFTC to oversee the spot markets for digital asset commodities. This
framework would fill an existing gap in Federal oversight and would
lead to more consistent consumer protection requirements across the
country and enable more vigorous enforcement authority for bad actors.
The bill builds upon the CFTC's existing authority under the Commodity
Exchange Act to regulate futures and derivatives referencing digital
asset commodities, and its anti-fraud and anti-manipulation authority
over commodity spot markets, including digital asset commodity spot
markets.
The CFTC is equipped to regulate spot markets for digital
commodities. It has experience utilizing disclosures to equip customers
with the information they need to understand the risks of trading a
particular asset. For example, when a DCM licensee submits a new
product to the CFTC for self-certification, it does so in a public
filing that describes the contract and how it complies with the
Commodity Exchange Act, including why the contract is not readily
susceptible to manipulation. The self-certification requires rigorous
analysis that focuses on the characteristics and features of the asset
and the underlying cash market, to ensure the financial integrity of
the futures contract and the market, while deterring fraud and
manipulation. By contrast, disclosures required by the SEC focus on
disclosure about companies, their management and their financial
results--topics that are largely irrelevant to the decentralized and
open-source nature of blockchain-based digital assets. It is
appropriate that the bill borrows from the existing DCM self-
certification process and requires different and tailored disclosure
requirements for digital commodities.
The CFTC has shown it is qualified to regulate new markets
effectively, either by working within its existing authority or by
implementing new regulatory frameworks that achieve participant and
consumer protection. When DCMs started to list digital asset futures,
the CFTC took several steps to address and better understand the
nascent risks presented by this asset class.
The agency applied a heightened review process to DCM self-
certifications of digital asset futures, including implementing
mechanisms to ensure that DCMs and the CFTC are able to monitor
settlement and other prices in digital asset cash markets to identify
anomalies. The CFTC also worked with the National Futures Association
to require FCMs that offer virtual currency futures to provide
additional disclosure to customers specific to the risks of trading in
that asset class.
The CFTC has been diligent in policing the digital commodity cash
markets for fraud and manipulation and has pursued enforcement actions
against actors in the digital commodities derivatives markets for
failure to comply with existing derivatives regulations. It has brought
over 70 enforcement actions involving digital commodities. As Chair
Behnam testified in March, more than 20 percent of the CFTC's
enforcement actions in the last fiscal year related to digital
commodities.
Finally, the CFTC's global leadership and speed in implementing
swaps regulation after the 2008 financial crisis demonstrate its
capacity to undertake the important and exacting task of drafting a
regulatory framework to address the risks in digital asset commodity
cash markets. As noted by former CFTC Chairman Gary Gensler in 2013,
``when the President was formulating his financial reform proposals, he
placed tremendous confidence in this small agency, which for 8 decades
had overseen the futures market. This confidence in the CFTC was well
placed.'' \6\
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\6\ https://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-
155.
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Given the CFTC's experience in effectively regulating existing
markets, taking enforcement action that carries out the mandates given
to it by Congress, and protecting customers and market participants, we
believe the CFTC is well qualified to regulate the spot market for
digital asset commodities and support the new framework laid out in the
Discussion Draft that allows crypto companies to operate and innovate
within reasonable, understandable parameters. I'd like to highlight a
few specific aspects of the Discussion Draft that are particularly
important to delivering a workable regulatory framework for crypto:
Defines Digital Commodities: As I have shared, drawing clear
and workable jurisdictional lines is critical to ensuring that
customers are appropriately protected, and understand the
regulatory framework that applies to their activities.
Creates a Comprehensive Regulatory Structure: The bill
creates a regulatory framework that is rooted in the existing
structures at the CFTC for market participants and the market
as a whole. It applies to entities that act as an exchange,
broker, or dealer for digital commodities. The CFTC's existing
regulatory model established pursuant to the Commodity Exchange
Act for futures contracts and swaps works. It serves as a good
model for regulating digital commodity spot markets, and is
appropriately the foundation for the Discussion Draft. The
current model also demonstrates that joint rulemaking between
two primary regulators--the SEC and CFTC--can and does work
when Congress provides a proper mechanism for it.
Workable Registration Pathways: The bill recognizes that
centralized intermediaries should be regulated, and it creates
transparency through registration, disclosure requirements, and
inspection and examination authority. The bill includes
mandatory registration as a digital commodity exchange
(``DCE''), digital commodity broker (``DCB''), or digital
commodity dealer (``DCD'') for entities engaged in the
activities listed above. Importantly, this is a fit-for-purpose
registration framework that doesn't attempt to shoehorn market
participants into preexisting but ill suited frameworks that
are not mapped to actual risks and consumer needs. And
critically, the bill provides a framework for those
registration pathways to work in practice, not just in theory.
It also appropriately preempts money transmission licensing
registration regimes to resolve what could be competing or
duplicative state regulatory requirements that could lead to
confusion for both consumers and market participants.
Multiple Registrations Permitted: The bill allows certain
entities that are already registered with the CFTC for their
futures and swaps activities to register as a DCE, DCD, or DCB.
It also allows for entities to register in multiple capacities
for the digital commodity activities. In each case, multiple
registrations are subject to important safeguards, including
conflicts of interest requirements that will ensure customers
and the markets are protected. These rules apply to all market
participants--and not based on targeted settled enforcement
actions or bespoke exemptive relief--which creates a level
playing field, consistent application of consumer protections.
Side by Side Trading: Entities registered with the CFTC are
also permitted to register in parallel with the Securities
[and] Exchange Commission. This would be a new path created by
Congress to enable companies to offer side-by-side trading of
digital commodities and digital securities.
Segregation Requirements for Entities that hold Customer
Assets: The bill requires the CFTC to designate certain
entities subject to supervision by the CFTC, SEC, a Federal
banking agency or a state banking supervisor as qualified
digital commodity custodians. DCEs, DCBs and DCDs must hold
customer digital commodities at a qualified digital commodity
custodian and segregated from the DCE, DCB, or DCD's own
assets. The segregation requirement in the bill mirrors the
segregation requirements for FCMs that protect futures customer
funds today.
Application of Commodity-Broker Insolvency Regime: The bill
applies the tested commodity broker insolvency regime to
entities registered with the CFTC as DCEs, DCBs and DCDs. We
know this regime works because it has effectively protected
customer assets in insolvencies of FCMs.
Product Listings, Rules, and Rule Amendments for Trading
Facilities: The bill reflects a long-standing practice at the
CFTC for DCMs to self-certify new futures products. The
specific requirements of the digital commodity self-
certification regime are tailored to digital commodities and
cover areas such as the digital commodity's purpose and use,
consensus mechanism, and governance structure, among others.
I would also like to take the opportunity to briefly discuss the
important role of the SEC, and our support for creating a comprehensive
approach that spans both the CFTC and the SEC. Similar to the CFTC
regime, the Discussion Draft would establish a fit-for-purpose
regulatory framework for restricted digital assets--those that may be
determined to be securities--under the jurisdiction of the SEC, which
does not exist today. The bill articulates guardrails and requirements
to protect investors, and ensure transparency and consistency for all
market participants.
The Securities Act of 1933 and the Securities Exchange Act of 1934
grant the SEC authority to regulate securities in the U.S. If an asset
is a security, the SEC generally has Federal authority over its
offering and sale, and over many functions that support these
transactions. If the asset is not a security, the SEC does not have
that authority. Notably, the Federal securities regime is a disclosure-
based regime. The SEC is not a merit regulator, so it does not decide
what is a ``good'' investment or a ``bad'' investment. Rather, it
ensures fair, orderly, and efficient markets with appropriate investor
protections, while facilitating capital formation.
The Discussion Draft is grounded in this authority, directing the
SEC to create new market structure rules that would work for digital
asset securities more broadly based on the principles that have been
the foundation of our unmatched capital markets for 90 years. Coinbase
has long supported a regulatory framework for digital asset securities,
as we do not currently list securities but would like to do so in the
future when a workable regulatory framework becomes available. Last
July, we filed a formal petition with the SEC asking for rulemaking for
digital asset securities.
The Discussion Draft addresses many of the questions we raised in
the petition. Specifically, Coinbase supports the aspects of the
Discussion Draft that:
Provide the needed Congressional authorization for side-by-
side trading of digital commodities and securities, and
establish a dual registration structure once CFTC has spot
authority.
Allow registration for digital asset securities trading
platforms as an Alternative Trading System, which better aligns
with the technical realities and consumer benefits of how
crypto transactions work, including real-time settlement on the
blockchain.
Create a principles-based approach to disclosure obligations
for digital asset securities that accommodates the practical
realities of the industry. For example, many asset issuers have
no intention of growing into large companies, nor should they.
Disclosure obligations should reflect that. There also should
be a path for exiting those disclosure obligations when a
project decentralizes and disclosures no longer serve any
purpose for consumers.
Acknowledge that tokens themselves are and should continue
to be used for non-securities functions and transactions, even
if initially offered through a securities offering.
Closing
In closing, Coinbase strongly supports creating a fit-for-purpose,
comprehensive regulatory regime for digital asset commodities,
securities, and market participants with strong consumer protections.
Only Congress can do this. Although legislation can always be improved
around the edges, the Discussion Draft would create a workable
foundation for consumers, investors, and market participants alike. We
urge Congress to act on it as soon as possible. We also welcome the
opportunity to continue participating in this dialogue and serving a
resource to you as you move forward.
Mr. Feenstra. Thank you, Mr. Grewal, for your testimony.
Mr. Gallagher, please begin when you are ready. You have 5
minutes.
STATEMENT OF HON. DANIEL M. GALLAGHER, J.D., CHIEF LEGAL,
COMPLIANCE, AND CORPORATE AFFAIRS OFFICER, ROBINHOOD MARKETS,
INC.; FORMER COMMISSIONER, U.S. SECURITIES AND EXCHANGE
COMMISSION, MENLO PARK, CA
Mr. Gallagher. Thank you. Chairman Thompson, Ranking Member
Scott, Chairman Johnson, Ranking Member Caraveo, and Members of
the Committee, thank you for inviting me to testify today on
the important topic of digital asset regulation. My name is Dan
Gallagher, and I am the Chief Legal Compliance and Corporate
Affairs Officer at Robinhood Markets. I have worked in the
financial services industry for over 25 years, and served as a
Commissioner of the United States Securities and Exchange
Commission, and as Deputy Director of the SEC's Division of
Trading and Markets.
Robinhood was formed in 2013 with a single mission, to
democratize finance for all, regardless of a customer's
background, income, or wealth. Robinhood is an American
company, with over 2,000 employees in the United States,
serving millions of American customers. At Robinhood we
pioneered a commission-free, no account minimums investing
model that has helped open the stock market to tens of millions
of new retail investors and saved them billions of dollars.
We have also worked to democratize access to other corners
of the financial markets. Since 2018 Robinhood Crypto, which is
proud to operate in the United States, has offered customers
the ability to buy, sell, store, and transfer certain
cryptocurrencies at low cost, with no trading commissions, and
no account minimums. Innovation is at Robinhood's core. We are
committed to working with policymakers to foster the
development of blockchain technology and digital asset markets
through tailored, responsible regulation. But the reality is
that, in the United States, market participants face a
patchwork of inconsistent state frameworks, and a lack of
regulatory clarity at the Federal level. This unpredictable
landscape stifles innovation and hampers responsible firms like
Robinhood.
To be clear, we believe Robinhood Crypto has a
qualitatively different model than other digital asset
platforms. We are not an exchange that matches customer orders.
We offer 18 digital assets, compared to hundreds on other
platforms. We don't offer yield-generating products, like
staking or lending. And Robinhood Markets is a publicly traded
company, subject to SEC disclosure rules, and we operate to
highly regulated registered subsidiary broker/dealers that are
our primary business.
Some in senior regulatory positions maintain that the law
is clear, and no further guidance for digital assets is
necessary. We disagree. In fact, it often feels like we are
facing what Lewis Carroll called a Humpty-Dumpty view of the
world, a world where Federal regulators believe words, like the
word security, ``mean just what one chooses them to mean,
nothing more, nor less.'' For example, regulators look to a
1946 Supreme Court case concerning orange groves to define
whether a digital asset is an investment contract subject to
the securities laws. There are legitimate questions about
whether certain digital asset transactions involve investment
contracts, and the application of a decades-old case addressing
orange groves is hardly clear when applied to today's digital
asset ecosystem.
The lack of Federal regulatory clarity is bad for American
consumers who want access to digital assets, bad for
innovation, and bad for the competitive position of the United
States, which is already losing out to Europe and other foreign
jurisdictions. Regulatory clarity would allow market
participants to provide products and services their customers
want, without the constant threat of crippling enforcement
actions, and would help ensure that the U.S. remains a global
leader in this space. Today's discussion draft provides that
much-needed regulatory clarity.
I would also like to thank Financial Services Committee
Chairman McHenry, Ranking Member Waters, Chairman Hill, and
Ranking Member Lynch for their work on this important matter.
It is important to get the details right, and I have provided
additional thoughts and recommendations in my written
testimony. For too long the digital asset economy, and millions
of Americans who wish to participate in it, have had to contend
with stifling regulatory uncertainty. The discussion draft is a
positive step forward and will finally bring clarity to the
market. I look forward to working with Members and staff to
further enhance this important legislation. Thank you, and I
look forward to your questions.
[The prepared statement of Mr. Gallagher follows:]
Prepared Statement of Hon. Daniel M. Gallagher, J.D., Chief Legal,
Compliance, and Corporate Affairs Officer, Robinhood Markets, Inc.;
Former Commissioner, U.S. Securities and Exchange Commission, Menlo
Park, CA
I. Introduction
Thank you, Chairman Thompson, Ranking Member Scott, Chairman
Johnson, Ranking Member Caraveo, and Members of the Committee for
inviting me to testify today on the important topic of digital asset
regulation. I'd also like to thank Financial Services Committee
Chairman McHenry, Ranking Member Waters, Chairman Hill, and Ranking
Member Lynch for their attention to this topic.
My name is Dan Gallagher. I am Chief Legal, Compliance and
Corporate Affairs Officer of Robinhood Markets, Inc. (``Robinhood''). I
was formerly a Commissioner of the U.S. Securities and Exchange
Commission (``SEC'' or ``Commission'') from 2011 to 2015, and Deputy
Director of the SEC's Division of Trading and Markets from 2008 to
2010. I have been an active legal practitioner in the financial
services industry for twenty-five years.
Robinhood is a NASDAQ-listed company formed in 2013 by Vlad Tenev
and Baiju Bhatt with a single mission--to democratize finance for all,
regardless of a customer's background, income, or wealth. Robinhood
employs over two thousand individuals working remotely and in offices
across six states--California, Colorado, Florida, Illinois, New York,
and Texas--and the District of Columbia. Robinhood pioneered the
commission-free, no-account-minimums investing model that has helped
open the stock market to tens of millions of new retail investors and
saved them billions of dollars in the process.\1\ Robinhood has two
wholly-owned subsidiary broker-dealers, Robinhood Financial LLC and
Robinhood Securities, LLC. Our brokerage customers can invest in and
trade thousands of publicly-listed stocks and exchange-traded funds
using fractional or whole shares, as well as options.\2\ Established in
2018, Robinhood's wholly-owned subsidiary Robinhood Crypto offers
customers in 48 states and the District of Columbia the ability to buy,
sell, store, and transfer (depending on the jurisdiction) up to 18
cryptocurrencies--in contrast to hundreds of listed tokens at other
firms--at low cost with no trading commissions and no account
minimums.\3\ As described below, Robinhood Crypto employs a rigorous
review process designed to ensure that it does not list digital asset
securities.
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\1\ A 2021 study by Professors Kothari, Johnson, and So
commissioned by Robinhood found: ``Since the industry adopted
Robinhood's zero commission model in late 2019, retail investors have
saved tens of billions in [equities] trading commissions, with
Robinhood customers alone saving $11.9 billion during 2020-2021.'' The
same study also found: ``During 2020-2021, Robinhood customers
benefited from more than $8 billion in price improvement compared to
the national best bid and offer prices.'' Kothari, S.P., Travis L.
Johnson, and Eric C. So, Commission Savings and Execution Quality for
Retail Trades (Dec. 2, 2021), at 1, available at https://ssrn.com/
abstract=3976300 or http://dx.doi.org/10.2139/ssrn.3976300.
\2\ Options are for eligible customers only. Robinhood Financial
does not offer over-the-counter (``OTC'') stock trading, with the
exception of select American Depositary Receipts (``ADRs''). Robinhood
Financial does not allow naked options trading or short-selling.
\3\ Aave (AAVE), Avalanche (AVAX)*, Bitcoin (BTC), Bitcoin Cash
(BCH), Cardano (ADA)*, Chainlink (LINK), Compound (COMP)*, Dogecoin
(DOGE), Ethereum (ETH), Ethereum Classic (ETC), Litecoin (LTC), Polygon
(MATIC)*, Shiba Inu (SHIB)*, Solana (SOL)*, Stellar Lumens (XLM)*,
Tezos (XTZ)*, Uniswap (UNI)*, and USD Coin (USDC)**. Note: ``*'' means
it is not available for trading in New York, and ``**'' means it is not
available for trading in New York or Texas.
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Robinhood shares the goal of policymakers who seek to foster the
development of blockchain technology and digital asset markets in the
U.S. through tailored, responsible regulation. Unfortunately, Robinhood
and other digital asset market participants in the U.S. face a
patchwork of state regulatory frameworks, not all of which are
consistent, as well as a lack of regulatory clarity at the Federal
level. In many ways, the regulatory landscape for digital assets is
like it was for the equities markets in 1932.
The lack of Federal regulatory clarity in particular has created an
unlevel playing field for market participants and hindered the broader
adoption of digital asset products and services in the U.S. While some
view existing regulations as sufficient to regulate digital asset
markets, we disagree. The Federal securities laws have been remarkably
flexible in response to many forms of technological innovation in the
financial services space, but they were enacted in the 1930s at a time
when the idea of blockchain technology and cryptocurrencies was
unimaginable. And likewise, the Federal commodities laws are inherently
principles-based and flexible, but they arose decades ago and were
geared towards markets very unlike today's digital asset markets. As a
result, serious gaps in existing statutes and regulations exist when it
comes to digital assets.
The most fundamental problem in digital asset markets is that there
is no clear guidance on which digital assets the SEC and Commodity
Futures Trading Commission (``CFTC'') deem to be securities and
commodities, respectively, and how cryptocurrency platforms and digital
asset securities can be appropriately registered under Federal law.\4\
For example, without the provision of additional regulatory relief
addressing, among other things, exchange listing requirements; SEC
custody requirements, including capital and accounting requirements for
custodians; the trading of non-security digital assets and digital
asset securities on the same platform; the application of SEC trading
rules, such as those under Regulation NMS and Regulation SHO; the
application of SEC disclosure rules; and SEC clearing agency and
transfer agent requirements, exchanges, market intermediaries, and
other market participants are unable to register with the SEC.
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\4\ See ``Regulating cryptocurrencies is a national concern, not a
political issue, says former SEC Chair Harvey Pitt,'' CNBC (Dec. 13,
2022) (``It's reminiscent of the old recipe for rabbit stew--first you
have to start with a rabbit and it's not clear to me that these are
securities. And in any event FTX wasn't registered with the SEC and
there is a need here for a concise and considered national policy that
lays out the rules of the road.''), available at https://www.cnbc.com/
video/2022/12/13/regulating-cryptocurrencies-is-a-national-concern-not-
a-political-issue-says-former-sec-chair.html.
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The SEC bases its analysis of whether a digital asset is a security
on decades-old Supreme Court cases. The primary case, SEC v. W.J. Howey
Co., 328 U.S. 293 (1946), which was decided in 1946, establishes a
four-part test to define an ``investment contract.'' As a threshold
matter, there are legitimate questions around whether certain digital
asset transactions involve contracts and therefore should be governed
by the Howey test. Moreover, Howey involves interests in orange groves,
a markedly different context compared to today's digital asset markets.
Yet some in senior Federal regulatory positions maintain that the law
is clear and no further Federal guidance is necessary. Again, we
disagree. As my dear friend and mentor, the late Harvey Pitt, SEC
Chairman from 2001 to 2003, said in a 2022 television interview,
``there is a need here for a concise and considered national policy
that lays out the rules of the road.'' \5\
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\5\ Id.
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Given this lack of Federal regulatory clarity for digital assets,
it is no wonder that SEC Chairman Jay Clayton and CFTC Chairman Chris
Giancarlo called for coordination with Congress in regulating digital
assets, and why CFTC Chairman Rostin [Behnam] has called for Congress
to provide additional authority to regulate digital asset markets.\6\
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\6\ SEC Chairman Clayton's testimony entitled ``Virtual Currencies:
The Roles of the SEC and CFTC'' before the U.S. Senate Committee on
Banking, Housing, and Urban Affairs (Feb. 6, 2018), available at
https://www.sec.gov/news/testimony/testimony-virtual-currencies-
oversight-role-us-securities-and-exchange-commission; CFTC Chairman
Giancarlo's testimony before the U.S. Senate Committee on Banking,
Housing, and Urban Affairs (Feb. 6, 2018), available at https://
www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo37#P21_6885; CFTC
Chairman Behnam's testimony entitled ``Why Congress Needs to Act:
Lessons Learned from the FTX Collapse'' before the U.S. Senate
Committee on Agriculture, Nutrition, and Forestry (Dec. 1, 2022),
available at https://www.cftc.gov/PressRoom/SpeechesTestimony/
opabehnam29.
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The current environment is bad for American consumers who want
greater access to digital assets, bad for innovation in the blockchain
and digital asset industries, and bad for the already-eroding
competitive position of the U.S. with regard to digital asset
markets.\7\ Regulatory clarity for digital assets is, therefore,
critical: it would allow token issuers, exchanges, intermediaries, and
other market participants to provide products and services their
customers want without the constant threat of crippling enforcement
actions, and would help ensure that the U.S. remains the global leader
in responsible blockchain and digital asset innovation, as well as
vibrant, appropriately regulated digital asset markets.
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\7\ Browne, Ryan, ``EU lawmakers approve world's first
comprehensive framework for crypto regulation,'' CNBC (Apr. 20, 2023),
available at https://www.cnbc.com/2023/04/20/eu-lawmakers-approve-
worlds-first-comprehensive-crypto-regulation.html.
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The Digital Asset Market Structure Discussion Draft (the
``Discussion Draft'') is an important step in providing the necessary
regulatory clarity with regard to the market structure for digital
asset commodities and digital asset securities. I commend the
coordination and diligence of the Agriculture and Financial Services
Committees under the strong leadership of Chairmen Thompson and McHenry
in acting quickly to introduce this important Discussion Draft. In
particular, as I describe below, the intent of the Discussion Draft to
establish regulatory regimes to register digital asset securities
offerings and to register intermediaries under both the Securities
Exchange Act of 1934 (the ``Exchange Act'') and the Commodity Exchange
Act is critical to establishing a rational Federal system that will
protect customers, allow responsible market participants to innovate
and serve their customers' needs, and ensure fair, efficient, and
globally competitive digital asset markets in the U.S.
II. Robinhood's Customers
For decades, economic and non-economic barriers to entry kept
millions of hardworking Americans from participating in the stock
market, which has been one of history's primary drivers of wealth
creation. Robinhood changed that. Our innovative model helped spur a
retail investor revolution. By eliminating costly trading commissions
and account minimums, by providing innovative products like fractional
shares and recurring investments, and by offering an easy-to-use mobile
platform, the ``have nots''--blue-collar workers, younger Americans
with smaller amounts to invest, women and people of color, first-time
investors, people from rural communities and inner cities alike, gig-
economy workers and freelancers--now have access to markets
historically reserved for the wealthy few. Similar to its equities
business, Robinhood has provided broad access to digital asset markets
through a low-cost, intuitive platform that forgoes many of the fees
charged by other cryptocurrency companies.
Today, Robinhood has over 23 million net funded accounts, about
half of which report being first-time investors, and $78 billion in
assets under custody. Our customers hail from every state in the
country and are a representative cross-section of America. With a
median age of 33, Robinhood's customers are younger, have smaller
account balances, and are more diverse than customers at incumbent
firms.\8\ We believe the trend of rising retail investor participation,
particularly by younger people and historically underserved
demographics, is good both for individual Americans looking to generate
long-term financial security and the continued strength of U.S. capital
markets and our economy.
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\8\ Median age as of February 2023. Demographic Data comes from a
monthly Robinhood survey, powered by Dynata. Sample is representative
of the U.S. population with brokerage accounts across age, gender,
income, race/ethnicity, and regional residence. Incumbent firms include
Charles Schwab, E*Trade, Fidelity, TD Ameritrade, Vanguard.
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We believe allegations from some policymakers and commentators that
digital assets are too complex and risky for individual Americans are
overly paternalistic and unproductive. These critics often ignore the
fact that millions of Americans--including millions of Robinhood
customers--want to participate and are participating responsibly in the
digital asset economy, and they will continue to do so whether in the
U.S. or through foreign platforms. We believe policymakers should
support policy solutions that encourage Americans to engage in digital
asset markets through responsible, appropriately-regulated U.S. firms,
rather than incentivizing people to participate through often
unregulated or lightly regulated foreign platforms.\9\ At Robinhood, we
stand behind our customers' ability to access digital asset markets and
transact in tokens that meet our robust listing criteria--which
require, among other things, significant liquidity, valid use cases,
and strong developer networks--and we accompany this access with a
well-developed compliance infrastructure, strong cybersecurity
controls, digestible educational content, and multiple channels for
customer support.
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\9\ This appears to be happening in greater numbers as a result of
recent U.S. Government actions targeting the cryptocurrency industry.
See Chipolina, Scott, ``US crypto clampdown pushes exchanges to go
offshore,'' Fin. Times (May 16, 2023), available at https://www.ft.com/
content/10979399-ba25-45b9-b85d-776c1b75bfea; Osipovich, Alexander,
``U.S. Crypto Traders Evade Offshore Exchange Bans,'' Wall Street
Journal (July 30, 2021), available at https://www.wsj.com/articles/u-s-
crypto-traders-evade-offshore-exchange-bans-11627637401.
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III. Robinhood Crypto's Business
Unlike many platforms in the digital asset industry, Robinhood
Crypto is proud to be headquartered in the United States. As noted
above, Robinhood Crypto allows customers in 48 states and the District
of Columbia to buy, sell, store, and transfer (depending on the
jurisdiction) a select number of cryptocurrencies--currently up to 18
tokens--at low cost without trading commissions, account minimums, and
many other fees charged by our competitors.\10\ Robinhood Crypto is
federally-registered as a money services business with FinCEN, licensed
as a money transmitter in 27 states, and holds a ``BitLicense'' from
the New York Department of Financial Services. Robinhood Crypto was the
first in the industry to provide customers 24/7 voice support, with
chat support also available as of October 2022.
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\10\ Unlike other digital asset platforms, Robinhood Crypto does
not charge any extra fees to send or receive digital assets, and in
fact Robinhood Crypto covers users' gas fees for network trading (but
not for withdrawals).
---------------------------------------------------------------------------
Robinhood Crypto is a marketplace, not an exchange. It does not
match customer buy-and-sell orders directly--rather, it sends customer
orders to liquidity providers who compete for the opportunity to
execute these orders. Robinhood routes customer orders to its liquidity
providers based on the best price and has established an execution
quality committee that monitors the quality of cryptocurrency order
execution on behalf of its customers. This generally results in highly
competitive, low-cost executions without the fees charged by some
competitors. In fact, some competitors charge both a commission/fee and
a markup for providing trade executions to customers.
Robinhood Crypto also enables customers to deposit and withdraw
cryptocurrencies to and from our custodial platform (``Crypto
Transfers'').\11\ With Crypto Transfers, customers have full access to
their digital assets and can use this service to participate in the
cryptocurrency ecosystem--by tipping on social media, paying for non-
fungible tokens (``NFTs''), and more.\12\ Unlike some other digital
asset platforms, Robinhood Crypto does not charge an extra fee to
withdraw cryptocurrency from the Robinhood Crypto platform. With Crypto
Transfers, we aim to offer a seamless and intuitive way for customers
to use their digital assets by scanning QR codes to easily send digital
assets to a wallet address. Robinhood Crypto has enhanced security and
fraud protection mechanisms, including mandatory two-factor
authentication to help protect customers' cryptocurrency and validate
most wallet addresses so customers can make sure they are sending
assets to a valid wallet address.
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\11\ Due to local regulations, Crypto Transfers are not yet
available in New York. We will inform customers in New York when this
changes.
\12\ Robinhood Crypto does not offer NFTs on its platform.
---------------------------------------------------------------------------
Robinhood Crypto is committed to providing access to digital assets
for users across all demographics. Robinhood Learn (``Learn'') \13\ is
at the center of our efforts to make trading digital assets more
accessible and provide financial education both to our customers and to
those who have not yet started their digital asset ownership journey.
Learn is available to everyone (not just our customers) on the
Robinhood website. Through Learn, Robinhood provides an extensive hub
of educational articles for customers of every experience level in an
easy-to-read format. We regularly collect feedback from readers to
understand whether the content is helpful, and this feedback helps
guide updates to our Learn articles. Educational articles on Learn
received around four million page views throughout 2022. We even offer
educational content specific to digital assets on Learn.\14\ We have
also partnered with the U.S. Hispanic Chamber of Commerce to continue
Robinhood's Opportunity Crypto program that brings crypto education
workshops to local communities across the country.\15\
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\13\ Robinhood Learn, available at https://learn.robinhood.com/.
\14\ Robinhood Learn: What is a Cryptocurrency?, available at
https://learn.robinhood.com/articles/1thUPqVffWfMYJvxthNrHn/what-is-a-
cryptocurrency/.
\15\ Robinhood Blog: Taking a Safety First Approach to Crypto,
available at Education https://blog.robinhood.com/news/2022/10/11/
taking-a-safety-first-approach-to-crypto-education-through-opportunity-
crypto.
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Additionally, we offer Crypto Learn and Earn, an exclusive in-app
educational module available to all Robinhood Crypto customers via
Robinhood Learn to teach customers the basics about cryptocurrency.\16\
Customers who complete the free learning modules related to either
Avalanche or USDC are eligible to receive rewards, paid out in the
applicable cryptocurrency (either AVAX, if customers have completed the
Avalanche module, or USDC, if customers have completed the USDC
module). Among the topics included are content discussing how
cryptocurrency works, how cryptocurrency is different from traditional
currency, and ``what are stablecoins.'' Robinhood also has a site
within our Help Center dedicated to cryptocurrency education.\17\ Some
examples of the cryptocurrency-focused educational content vary from
explanatory information about cryptocurrencies and the blockchain to
``what is a hashrate.'' We warn our customers that trading in
cryptocurrencies comes with significant risks, including volatile
market price swings or flash crashes, market manipulation, and
cybersecurity risks. We also make available a Robinhood Crypto Risk
Disclosure.\18\ We recognize and highlight for our customers that
cryptocurrencies are a risky asset class, which should be carefully
researched and evaluated by anyone thinking about purchasing a
particular cryptocurrency.
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\16\ Robinhood Crypto Learn and Earn, available at https://
robinhood.com/us/en/support/articles/crypto-learn-and-earn/. Robinhood
does not earn direct revenues from Learn and Earn.
\17\ Robinhood Help Center: Cryptocurrency Education, available at
https://robinhood.com/us/en/support/articles/cryptocurrency-education/.
\18\ Robinhood Cryptocurrency Risk Disclosure, available at https:/
/cdn.robinhood.com/assets/robinhood/legal/
Robinhood%20Crypto%20Risk%20Disclosures.pdf.
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Finally, the Snacks newsletter, produced by Sherwood Media, LLC, is
yet another avenue for educating our customers and the general public
about investing and buying digital assets in a very approachable and
accessible format. Snacks is a curated digest of business news stories,
including stories related to digital assets, delivered both daily and
weekly via a newsletter that allows subscribers to start their days
with the top business news of the day in an accessible, digestible
medium. The Snacks newsletter has around 40 million subscribers as of
December 2022, reinforcing our belief that Snacks is one of the most
widely consumed newsletters in the U.S.
IV. Robinhood Crypto's Safety-First Approach
In contrast to many cryptocurrency platforms, Robinhood has
extensive experience operating in highly-regulated industries with two
broker-dealer subsidiaries registered with the SEC and FINRA. We apply
this experience operating highly-regulated entities, as well as
industry best practices, to Robinhood Crypto's business. Indeed,
Robinhood Crypto has taken a thoughtful, incremental approach to
building its cryptocurrency business--an approach we call ``Safety-
First.''
For example, despite consistent customer demand, Robinhood Crypto
does not offer yield-generating products, such as lending and staking.
Robinhood does not and has never facilitated ICOs or issued its own
native tokens, nor does it engage in proprietary trading. And, unlike
some of our competitors that have grown quickly and now list hundreds
of digital assets on their platforms, Robinhood Crypto has taken a more
conservative approach to supporting digital assets.
Prior to 2022, Robinhood Crypto supported seven cryptocurrencies,
including Bitcoin, Ether, and certain forks of these tokens. Robinhood
Crypto has since incrementally added 12 additional assets and de-listed
one asset for a total of 18 available to customers today (depending on
the jurisdiction). Robinhood Crypto employs a robust process for
reviewing digital assets designed to ensure that it does not make
digital asset securities available to customers, which includes
conducting thorough due diligence and receiving listing guidance from
Robinhood stakeholders across, among other areas: (1) technology; (2)
security; (3) legal; (4) compliance; (5) finance; (6) operations; and
(7) anti-money laundering.\19\ This process is overseen by Robinhood
Crypto's Listing Committee, which includes the entirety of Robinhood
Crypto's Board of Managers, including its General Manager and
President, COO, CFO, and CISO. Other compliance, legal, and technical
subject-matter experts contribute to the Committee's decision making
process. The Committee also seeks the advice of outside counsel both on
its listing process and methodology, as well as on each individual
digital asset under consideration.
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\19\ Robinhood does not accept payments from third parties in
connection with any decision to support digital assets on its platform.
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In addition to engaging in a thorough review before deciding
whether to support a digital asset, the Committee also conducts
periodic reviews of the assets available on the Robinhood Crypto
platform to ensure the assets continue to meet the listing
requirements. As noted above, the Committee determined to cease support
for one asset in 2022 as a result of this periodic review.
As a Safety-First company, Robinhood Crypto has robust risk
controls and monitoring in place to protect customer assets. Robinhood
Crypto holds all settled cryptocurrencies in custody on behalf of
customers, and closely monitors its wallet balances to ensure that the
majority of customer assets are held in cold storage. Robinhood Crypto
also has strict controls around any wallet movements.
Since Robinhood Crypto's inception in 2018, it has pursued
appropriate licenses required to be fully operational in the states in
which it operates. Moreover, although Robinhood Crypto is confident
that it does not list digital asset securities among the select group
of 18 assets supported on the platform, it has nevertheless proactively
pursued registration as a digital asset special purpose broker-dealer
at the Federal level.
In 2021, SEC Chair Gensler called on market participants in digital
asset markets to ``come in and register.'' \20\ In testimony before the
Senate Banking Committee in September 2021, Chair Gensler stated,
``I've suggested that platforms and projects come in and talk to us. .
. . I believe that the SEC, working with the CFTC and others, can stand
up more robust oversight and investor protection around the field of
crypto finance.'' \21\ Robinhood Crypto heeded the Chair's call,
notwithstanding its current business model and its robust policies to
ensure that it does not support digital asset securities on its
platform.
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\20\ Wieczner, Jen, ``Gary Gensler on Crypto, SPACs, and Robinhood
Wall Street's top cop wants to police new finance with old rules,'' New
York Magazine (Sept. 13, 2021), available at https://nymag.com/
intelligencer/2021/09/gary-gensler-sec-chair-crypto-spacs-
robinhood.html.
\21\ Testimony of Gary Gensler Before the U.S. Senate Committee on
Banking, Housing, and Urban Affairs(Sept. 14, 2021), at 6, available at
https://www.banking.senate.gov/imo/media/doc/Gensler%20Testimony%209-
14-21.pdf.
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In fact, in December 2021, I announced on CNBC that Robinhood
Crypto would attempt in good faith to register with the SEC, or what we
at Robinhood call ``crypto the hard way.'' \22\ Over the next year and
a half, we had over a dozen meetings and calls with the SEC to discuss
our cryptocurrency business, including our listing process, as well as
our targeted, written request for relief for a registered special
purpose broker-dealer that would be able to support both digital asset
commodities and digital asset securities in compliance with Federal
law. While these discussions with the SEC staff have always been
cordial and often deeply substantive, we have unfortunately not been
able to make any progress with the Commission on our request for relief
to register. While we are disappointed with this lack of progress, we
continue to attempt to engage with SEC staff regarding our efforts to
register and remain open to further dialogue if given the opportunity.
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\22\ See ``Crypto legislation likely won't come anytime soon:
Robinhood's chief legal officer,'' CNBC (Dec. 8, 2021), available at
https://www.cnbc.com/video/2021/12/08/crypto-legislation-likely-wont-
come-anytime-soon-robinhoods-chief-legal-officer.html.
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V. The Discussion Draft Provides Much-Needed Regulatory Clarity
Following the SEC's crackdown on fraudulent ICOs, the SEC under
Chairman Clayton engaged in a commendable (though ultimately limited)
effort to provide tailored relief to the digital asset industry without
sacrificing important investor protections. Three actions by the SEC
during this period are worth highlighting:
First, on October 28, 2019, the SEC's Division of Trading
and Markets provided ``no-action'' relief for Paxos' blockchain
settlement platform to process transactions for a limited
number of broker-dealers in certain listed U.S. equity
securities.\23\
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\23\ See Paxos Trust Company, LLC No-Action Letter, available at
https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-
company-102819-17a.pdf. As a former SEC Commissioner and practitioner,
I cannot emphasize enough the importance of the Paxos no-action letter.
At a policy level, it demonstrates the proper role of government--
allowing for innovation in a controlled manner without sacrificing
investor protections. From a practitioner level, it plainly lays out
the broad need for regulatory relief if we are to allow SEC-regulated
digital asset securities trading in the U.S.
Next, on December 3, 2020, Chairman Clayton converted the
SEC's Strategic Hub for Financial Innovation and Technology
into a standalone office to formally spearhead the agency's
efforts to ``encourage responsible innovation in the financial
sector, including in evolving areas such as distributed ledger
technology and digital assets.'' \24\
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\24\ See SEC Release No. 2020-303, ``SEC Announces Office Focused
on Innovation and Financial Technology,'' available at https://
www.sec.gov/news/press-release/2020-303.
Finally, on December 23, 2020, the SEC released its policy
statement on the ``Custody of Digital Asset Securities by
Special Purpose Broker-Dealers'' (the ``Commission
Statement''), which articulated the SEC's position that, for a
period of 5 years, a broker-dealer that satisfies the
conditions set forth in the Commission Statement would not be
subject to a Commission enforcement action on the basis that
the broker-dealer deems itself to have obtained and maintained
physical possession or control of customer--fully-paid and
excess margin digital asset securities for the purposes of the
Customer Protection Rule.\25\
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\25\ SEC Release No. 2020-340, ``SEC Issues Statement and Requests
Comment Regarding the Custody of Digital Asset Securities by Special
Purpose Broker-Dealers,'' available at https://www.sec.gov/news/press-
release/2020-340; see SEC Proposed Rule, ``Custody of Digital Asset
Securities by Special Purpose Broker-Dealers,'' 86 Fed. Reg. 11627
(Feb. 26, 2021).
This short-lived period of innovation at the Commission ended with
Chairman Clayton's term. Rather than work with Congress to pass
comprehensive legislation governing digital assets or issue a generally
applicable proposed rule, the SEC's current approach to addressing
digital asset regulatory issues is now largely through enforcement
actions and by attempting to shoehorn cryptocurrency into proposed
rules primarily addressing other discrete areas of traditional finance,
such as communications protocols for trading government securities
(definition of an exchange), investment advisor custody requirements
(qualified custodians), and equity market structure (best
execution).\26\
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\26\ SEC Proposed Rule, ``Amendments Regarding the Definition of
`Exchange' and Alternative Trading Systems (ATSs) That Trade U.S.
Treasury and Agency Securities, National Market System (NMS) Stocks,
and Other Securities,'' 87 Fed. Reg. 15496 (Mar. 18, 2022); SEC
Proposed Rule, ``Safeguarding Advisory Client Assets,'' 88 Fed. Reg.
14672 (Mar. 9, 2023); SEC Proposed Rule, ``Regulation Best Execution,''
88 Fed Reg. 5440 (Jan. 27, 2023).
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Robinhood Crypto remains committed to engaging with the SEC (if
possible) and operating in a fully compliant manner to provide our
customers with low-cost access to the cryptocurrency products and
services they want. At the same time, however, the persistent lack of
Federal regulatory clarity and recent enforcement actions against
individual cryptocurrency platforms have created an environment in
which a firm that is truly committed to regulatory compliance and
investor protection, such as Robinhood Crypto, is working at a
competitive disadvantage. Regulatory uncertainty has at times rendered
Robinhood Crypto unable to meet the demands of our customers for
additional digital asset products and services (e.g., certain
additional cryptocurrency tokens or yield products, including lending
and staking). As a result, the Discussion Draft comes at a critical
time for Robinhood Crypto and other responsible digital asset market
participants seeking to grow their businesses and serve customers in a
manner fully compliant with applicable Federal commodities and
securities laws.
The Discussion Draft is a significant step toward providing
regulatory clarity to market participants and authority to regulators
in key areas where neither exist today. As described below, Robinhood
Crypto generally supports the intent of the Discussion Draft and
recommends additional matters to consider as the legislative process
continues.
A. Title II--Digital Asset Exemptions
While Robinhood Crypto does not issue tokens, we generally support
the intent of Title II of the Discussion Draft to provide a path for
issuers of digital asset securities to offer such assets to the public
in a compliant manner, including with appropriate disclosures to
investors that take into account the unique issues presented by digital
asset issuers and the assets themselves. Importantly, the Discussion
Draft recognizes that traditional securities-offering rules should not
apply to decentralized digital assets and that the secondary trading of
these assets is more appropriately regulated under the Federal
commodities laws.
B. Titles I & III--Digital Asset Intermediaries
Robinhood Crypto generally supports the Discussion Draft's
provisions allowing broker-dealers to register with the SEC as digital
asset intermediaries. As described above, Robinhood Crypto and other
digital asset intermediaries have no viable path to register with the
SEC as broker-dealers and thus cannot offer digital asset securities to
customers. Importantly, the Discussion Draft provides both provisional
and full registration categories for broker-dealers offering digital
asset securities, as well as dual CFTC registration for platforms that
also offer or seek to offer digital asset commodities. Robinhood Crypto
respectfully suggests that the Committees clarify that dual registrants
are able to offer both digital asset securities and digital asset
commodities to customers on the same platform.
The Discussion Draft also grants provisionally registered digital
asset intermediaries with limited relief from enforcement action.
Robinhood Crypto believes this relief is an essential component of any
viable path to registration for digital asset intermediaries,
particularly where the classification of a digital asset as a security
versus a commodity is unclear.\27\ We respectfully request that the
Committees consider expanding the scope of the proposed relief to
include other alleged violations, including alleged violations of the
``specified regulations'' identified in Section 306.
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\27\ See, e.g., Press Release, ``Hagerty Introduces Legislation to
Provide Crucial Regulatory Clarity for Digital Assets'' (Sept. 29,
2022), available at https://www.hagerty.senate.gov/press-releases/2022/
09/29/hagerty-introduces-legislation-to-provide-crucial-regulatory-
clarity-for-digital-assets/.
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Robinhood Crypto also respectfully encourages the Committees to
address the predicament created for broker-dealer custodians of digital
assets by SEC Staff Accounting Bulletin (``SAB'') 121. Issued by
Commission staff without public notice and comment, SAB 121 requires
that customer digital assets custodied by a broker-dealer--and
potentially even customer digital assets custodied by an affiliate of
the broker-dealer--be recorded as a liability on the broker-dealer's
balance sheet. We believe this requirement would result in few, if any,
broker-dealers being sufficiently capitalized to operate as digital
asset intermediaries under existing SEC rules. Robinhood Crypto
respectfully requests that the Committees consider clarifying that (1)
a broker-dealer affiliated with a non-broker-dealer digital asset
custodian, in the ordinary course, is not obligated to record the
custodied digital assets on the broker-dealer's balance sheet and (2) a
broker-dealer digital asset custodian is permitted to consider the
custodied digital assets to be allowable assets that offset the
liabilities that result from recording the custodied digital assets on
the broker-dealer's balance sheet.
C. Title III--Alternative Trading Systems for Digital Asset Securities
Robinhood Crypto generally supports the provisions of Title III of
the Discussion Draft allowing platforms to register with the SEC as
alternative trading systems for digital asset securities. The
Discussion Draft provides a practical path for digital asset securities
to trade on SEC-registered platforms that match customer orders without
the complications of certain requirements prescribed for national
securities exchanges that do not easily apply to digital asset
platforms.
D. Title IV--Commodity Exchange Act Amendments
Robinhood Crypto generally supports the Discussion Draft's
amendments to the Commodity Exchange Act, including spot market
authority for the CFTC, as well as provisions in Section 406
establishing a system for registering and regulating digital commodity
brokers and dealers. In particular, we support the efficiencies created
by allowing intermediaries to satisfy the registration requirements of
digital commodity brokers by registering either as a futures commission
merchant or an introducing broker.
E. Title V--SEC Modernization
Robinhood Crypto supports Section 504's amendments to the
Securities Act of 1933 and the Investment Advisers Act of 1940
requiring the Commission to consider whether its rulemaking promotes
innovation. The proper role of the SEC should be to encourage
innovation in our financial markets, and this can and should be done in
harmony with the SEC's statutory mission to protect investors; ensure
fair, orderly, and efficient markets; and facilitate capital formation.
There are additional matters that we believe the Committees should
consider addressing with regard to digital asset securities (including,
for example, clarifying whether digital asset securities are covered by
the Securities Investor Protection Act and provisions governing
clearing firms and transfer agents), and we look forward to working
with Members and staff to further enhance this productive Discussion
Draft.
VI. Conclusion
Robinhood Crypto commends the Agriculture and Financial Services
Committees for their work on this important legislation. For too long,
the digital asset economy and millions of Americans who wish to
participate in it have had to contend with stifling regulatory
uncertainty. The Discussion Draft is a positive step forward in finally
bringing more clarity to the regulations governing U.S. digital asset
markets.
Mr. Feenstra. Thank you for your testimony, Mr. Gallagher.
Mr. Berkovitz, you now have 5 minutes. Begin when you are
ready.
STATEMENT OF HON. DAN M. BERKOVITZ, FORMER
COMMISSIONER, COMMODITY FUTURES TRADING
COMMISSION; FORMER GENERAL COUNSEL, U.S.
SECURITIES AND EXCHANGE COMMISSION, BETHESDA, MD
Mr. Berkovitz. Thank you, Mr. Chairman, Ranking Member
Scott, Members of the Committee, for the invitation to appear
here to discuss gaps in the regulation of the digital asset
markets. My appearance today is in my own personal capacity. I
am not representing or speaking on behalf of any other person,
governmental agency, or private-sector entity.
This Committee's hearing today is timely. Digital assets
and the associated blockchain technologies have the potential
to transform the availability, scope, and efficiency of
financial services to American consumers and businesses. As the
events of the past year have demonstrated, however, certain of
these unregulated markets are operating in a manner that
presents significant risks to customers and investors in these
markets, including risks from information asymmetries, abusive
trading practices, manipulation, and conflicts of interest.
The SEC regulates the trading of digital assets that are
securities. The CFTC regulates the trading of derivatives on
digital assets. Neither the CFTC nor the SEC has regulatory
authority over the cash or spot markets for non-security
digital assets. This gap needs to be closed. The CFTC presently
regulates the futures markets for digital assets, conducts
surveillance of the underlying spot markets as part of its
oversight of the futures markets, and can bring enforcement
actions for fraud or manipulation in the spot market. Providing
the CFTC with regulatory authority over these non-security spot
markets would leverage its current enforcement authority and
surveillance program.
Legislation to provide the CFTC with regulatory authority
over these markets should require that trading facilities for
non-security spot digital assets be licensed by the CFTC. The
legislation also should provide for the regulation of
intermediaries in these markets. The legislation should
establish core principles for the operation of a non-security
digital asset trading facility.
The legislation should establish a dual track for the
review of applications to trade specific digital assets on the
facility. On one track, the SEC would review the asset proposed
to be traded to determine whether the digital asset is a
security. Digital assets determined to be securities would
continue to be regulated under the securities laws, and not be
eligible for trading on a CFTC licensed facility. On the other
track, the CFTC would review the proposed listing to determine
whether the digital asset will be traded in accordance with the
CFTC's core principles, including disclosure requirements.
The CFTC should be provided with a dedicated source of
funding for the regulation and oversight of the non-security
digital asset spot market. Current CFTC resources are not
sufficient to undertake this new responsibility without
undermining the CFTC's ability to oversee the traditional
commodity markets, including agricultural commodity markets.
The legislation otherwise should maintain existing agency
jurisdictions and authorities. The CFTC and SEC have the
necessary and appropriate authorities to regulate the
derivative and security markets.
Amendments to the SEC's authorities over one particular
asset class, such as digital assets, would be unnecessary and
counterproductive. Carving out of the SEC's authority a
particular type of asset based upon its particular technology
of creation or distribution, or degree of centralization in the
market for its distribution, would disrupt decades of settled
securities law, create uncertainty about the meaning and
interpretation of new and existing statutory terms, delay
compliance with security and commodities laws for years while
agencies are conducting numerous rulemakings to define new
terms and establish new requirements, hinder current
enforcement of securities laws to protect investors, and
generate opportunities for regulatory arbitrage in the capital
markets based upon the technology for which the asset is
created or distributed, rather than the functional nature of
the instrument or asset to raise capital from investors.
Legislation, as outlined in my testimony, would close the
regulatory gap in a straightforward manner. It would provide
critically needed protections to investors. The dual track
process for the review of digital assets would provide
regulatory certainty as to the legal status of a digital asset
prior to the trading of the asset on any facility. Together,
these reforms would enable the U.S. to maintain its global
leadership in financial technology and markets. Thank you, I am
happy to answer questions.
[The prepared statement of Mr. Berkovitz follows:]
Prepared Statement of Hon. Dan M. Berkovitz, Former Commissioner,
Commodity Futures Trading Commission; Former General Counsel, U.S.
Securities and Exchange Commission, Bethesda, MD
Chairman Thompson, Ranking Member Scott, and Members of the
Committee, thank you for the invitation to appear before you today to
discuss gaps in the regulation of the digital asset markets. I offer
you my perspective on the regulation of digital asset markets after
having spent the past 20+ years in various regulatory, oversight, and
private-sector advisory capacities related to the commodity and
financial asset markets. My appearance before you today is in my own
personal capacity. I am not representing or speaking on behalf of any
other person, governmental agency or private sector entity.
This Committee's series of hearings on the gaps in the regulation
of digital assets is timely. Digital assets and the associated
blockchain technologies have the potential to transform the
availability, scope, and efficiency of financial services to American
consumers and businesses and across the globe. As the events of the
past year have demonstrated, however, as currently structured certain
digital asset markets present significant risks to American consumers
and business and even to the stability of banks and the overall
financial system. It is critical that these markets operate in a manner
that does not present undue risks to market participants and the
financial system.
In this testimony I will describe the gaps in the regulation of the
digital asset markets in the U.S. and offer a blueprint for how to
close these gaps. Closing the gaps in the regulation of these markets
would improve the protections for investors in the digital asset
markets, bolster the integrity of these markets, reduce potential
systemic risks to the financial system, provide greater clarity and
certainty regarding the legal status of digital assets traded in these
markets, and thereby foster our nation's leadership in financial
markets and technologies.
Summary
There is a significant gap in the regulation of the digital asset
markets. No Federal agency has regulatory authority over the trading of
non-security, non-derivative commodities. The U.S. Securities and
Exchange Commission (SEC) regulates the trading of digital assets that
are securities. The U.S. Commodity Futures Trading Commission (CFTC)
regulates the trading of derivatives on digital assets. Neither the
CFTC nor the SEC has regulatory authority over the cash or ``spot''
market for non-security digital assets.
There is an urgent need to close this gap. These unregulated
markets are operating in a manner that present significant risks to
customers and investors in these markets, including risks from
information asymmetries, abusive trading practices, manipulation, and
conflicts of interest in the operation of trading infrastructures.
These unregulated markets also present broader risks to the financial
system.
Although both the SEC and the CFTC have the expertise to regulate
the non-security spot digital asset markets, the CFTC already regulates
the futures markets for digital assets and conducts surveillance of the
underlying spot markets as part of its oversight of the futures
markets. Providing the CFTC with regulatory authority over these spot
markets would leverage its current enforcement authority in these
markets.
Legislation to provide the CFTC with this additional CFTC
regulatory authority over non-security spot digital markets should
require that trading facilities for non-security spot digital assets
must be licensed by the CFTC. The legislation also should provide for
the regulation of intermediaries in the non-security spot digital asset
markets, similar to the CFTC's regulation of intermediaries in the
derivative markets.
The legislation should establish a set of core principles that
provide basic standards for the licensing and operation of a digital
asset trading facility. These core principles should be consistent with
best practices for trading facilities in other CFTC-regulated asset
classes, such as the CEA sets forth for designated contract markets for
the trading of futures contracts and swap execution facilities for the
trading of swaps.
The legislation should establish a dual track for the review of
applications by the trading facility for the approval of digital assets
proposed to be listed for trading. On one track, the SEC would review
the proposed listing to determine whether the digital asset proposed to
be traded on the facility is a security. Digital assets determined to
be securities would not be eligible for trading on the CFTC-licensed
facility and would continue to be regulated under the securities laws.
On the other track, the CFTC would review the proposed listing to
determine whether the digital asset will be traded in accordance with
the CFTC's listing standards, disclosure requirements, and trading
facility core principles.
The CFTC should be provided with a dedicated source of funding for
the regulation and oversight of the non-security digital asset spot
market. Current CFTC resources are not sufficient to undertake this
additional responsibility without compromising the CFTC's ability to
oversee the traditional commodity markets.
Apart from closing the gap in this manner, the legislation
otherwise should maintain existing agency jurisdictions and
authorities. The CFTC and SEC have the necessary and appropriate
authorities to regulate the derivative and security markets. Amendments
to the SEC's authorities over one particular asset class, such as
digital assets, would be unwarranted, unnecessary, and potentially
counterproductive. Creating new authorities based on a particular
technology or newly defined asset class could disrupt decades of
securities law precedent, create additional uncertainty about the
meaning and interpretation of both new and existing statutory terms and
classifications, and generate opportunities for regulatory arbitrage in
the capital markets based upon technology upon which the asset is
created or distributed rather than the functional nature of the asset
or instrument.
Legislation as outlined above, confined to closing the gap, would
provide important protections to members of the public and other
investors in digital assets, as well as to the financial system more
generally. It would eliminate much of the regulatory arbitrage that
currently exists between CFTC- and SEC-regulated markets due to
regulatory gaps. Further, the proposed dual track process for the
review of digital assets proposed to be traded on the facility would
provide regulatory certainty as to the legal status of a digital asset
prior to the trading of such asset on the facility. Together, these
reforms would enable the U.S. to maintain its global leadership in
financial technology and markets.
The Regulatory Gap in Digital Asset Markets
Under the Commodity Exchange Act (CEA), the CFTC has exclusive
jurisdiction over most transactions involving commodity derivatives,
such as contracts for future delivery and swaps whose value is based on
the price of an underlying commodity.\1\ This jurisdiction includes
authority to prescribe requirements for transactions involving
commodity derivatives--generally called ``regulatory authority''--and
authority to bring enforcement actions for violations of such
requirements.
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\1\ CEA 2(a)(1), 7 U.S.C. 2(a)(1). The CFTC's jurisdiction over
commodity derivatives is not exclusive if the instrument is a future or
swap on a security, in which cases jurisdiction is joint with the SEC.
For a fuller description of the CFTC's jurisdiction over commodities,
including how it relates to the SEC's jurisdiction over securities, see
Letter from Robert A. Schwartz, Deputy General Counsel, CFTC, to The
Honorable P. Kevin Castel, U.S. District Judge, Re: SEC v. Telegram
Group, Inc., et al., No. 1:19-cv-09439 (PKC), Feb. 18, 2020 (``Schwartz
letter''); available at: https://storage.courtlistener.com/recap/
gov.uscourts.nysd.524448/gov.uscourts.
nysd.524448.203.0.pdf.
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The CFTC's authority over the spot market for commodities is much
more limited. The CFTC does not have regulatory authority over the spot
market for commodities. In these spot markets the CFTC only has
enforcement authority to bring post-event enforcement actions for fraud
or manipulation.
The CEA defines commodity broadly. It includes specified
agricultural commodities, called ``enumerated commodities,'' ``all
other goods and articles, except on-
ions . . . and motion picture box office receipts,'' ``and all service,
rights, and interests . . . in which contracts for future delivery are
presently or in the future dealt in.'' \2\ Since 2015 the CFTC has
asserted that digital currency is a commodity.\3\
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\2\ CEA 1(a)(9), 7 U.S.C. 1(a)(9).
\3\ CFTC v. My Big Coin Pay, Inc., 334 F. Supp. 3d 492, 495-98 (D.
Mass. 2018) (citing cases); In re BFXNA Inc. d/b/a Bitfinex, CFTC Dkt.
No. 16-19, 2016 WL 3137612, at *5 (CFTC June 2, 2016) (``Bitcoin and
other virtual currencies are . properly defined as commodities.''). See
Schwartz letter, supra.
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CFTC Chair Behnam recently summarized the limited nature of the
CFTC's authority over the spot market for digital assets:
[T]he CFTC does not have direct statutory authority to
comprehensively regulate cash digital commodity markets. Its
jurisdiction is limited to its fraud and manipulation
enforcement authority. In the absence of direct regulatory and
surveillance authority for digital commodities in an underlying
cash market, our enforcement authority is by definition
reactionary; we can only act after fraud or manipulation has
occurred or been uncovered.\4\
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\4\ Testimony of Chairman Rostin Behnam Before the U.S. Senate
Committee on Agriculture, Nutrition & Forestry, Oversight of the
Commodity Futures Trading Commission, March 8, 2023 (footnote omitted);
available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/
opabehnam32#_ftnref10.
The SEC's authority under the securities laws is comprehensive with
respect to securities, but does not extend generally to non-security
instruments or assets. Hence, neither the CFTC nor the SEC have
comprehensive regulatory authority over non-security digital asset spot
markets. This is a major regulatory gap.
Need to Close the Gap
In its recent report on Digital Asset Financial Stability Risks and
Regulation, the Financial Stability Oversight Council (FSOC) identified
a variety of risks to investors and financial stability that arise as a
result of the gap in the regulation of non-security digital assets.\5\
The FSOC noted that ``[t]he spot market for crypto-assets that are not
securities provide relatively fewer protections for retail investors
compared to other financial markets that have significant retail
participation.'' \6\ The FSOC observed that the trading platforms in
these non-security digital asset markets ``engage in practices that a
commonly subjected to greater regulation in other financial markets.''
These include the operation of order-book style markets that typically
are subject to trading rules regarding trade execution and settlement,
custody requirements, and operational security and reliability
requirements.
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\5\ FSOC, Report on Digital Asset Financial Stability Risks and
Regulation 2022 (Oct. 2022); available at: https://home.treasury.gov/
system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
\6\ Id. at 113.
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Overall, the FSOC concluded, ``[s]ignificant market integrity and
investor protection issues may persist because of the limited direct
Federal oversight of these spot markets, due to abusive trading
practices, inadequate protection for custodied assets, or other
practices.'' \7\ The FSOC warned that if the scale of crypto asset
activities increased rapidly, these issues could pose broader financial
stability issues. The FSOC recommended that Congress pass legislation
to provide for regulatory authority over non-security digital
assets.\8\
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\7\ Id. at 114.
\8\ FSOC Report, at p. 111.
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These concerns are widespread. The Financial Stability Institute of
the Bank of International Settlements issued a recent paper that warned
more generally that the digital assets markets ``pose risks which, if
not adequately addressed, might undermine consumer protection,
financial stability and market integrity.'' \9\ The International
Monetary Fund published a study that identified numerous risks with
cryptocurrency exchanges, including ``market abuse risks,'' information
asymmetries, ``high risk of market manipulation,'' weak price discovery
functions, and, more specifically, wash trading, pump-and-dump schemes,
and whale trades.\10\
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\9\ Denise Garcia Ocampo, Nicola Branzoli and Luca Cusmano,
Financial Stability Institute, Bank of International Settlements,
Crypto, tokens and DeFi: navigating the regulatory landscape, May 2023,
at p. 4; available at: https://www.bis.org/fsi/publ/insights49.pdf.
\10\ Parma Bains, Arif Ismail, Fabiano Melo, Nobuyasu Sugimoto,
International Monetary Fund, Fintech Notes, Regulating the Crypto
Ecosystem, The Case of Unbacked Crypto Assets, Sept. 2022, at pp. 18-
19; available at: https://www.imf.org/en/Publications/fintech-notes/
Issues/2022/09/26/Regulating-the-Crypto-Ecosystem-The-Case-of-Unbacked-
Crypto-Assets-523715.
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The risks to participants in the U.S. digital asset markets are
real. ``[B]asic customer protections are often missing in the crypto
industry'' \11\ Many customers that have been exposed to practices that
are prohibited in regulated markets have been harmed as a result. These
practices include the use of customer funds to support trading by
affiliates,\12\ the use of funds of one customer to satisfy an
exchange's liabilities to another customer,\13\ and trading against
customers by exchanges.\14\ Although in some instances agencies have
been able to bring retrospective enforcement actions for fraud or
misappropriation of customer funds, these retrospective actions have
been brought after customers have been harmed. A regulated trading
environment where customer safeguards are mandatory will significantly
increase customer protections that will help prevent those harms from
occurring.
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\11\ Keynote address by Commissioner Christy Goldsmith Romero at
the Wharton School and the University of Pennsylvania Carey Law School,
Crypto's Crisis of Trust: Lessons Learned from FTX's Collapse, Jan. 18,
2023 (cataloging abusive practices, governance failures, inadequate
disclosures, deficient recordkeeping, and conflicts of interest);
available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/
oparomero5.
\12\ See, e.g., CFTC v. Samuel Bankman-Fried, FTX Trading Ltd. d/b/
a FTX.com, and Alameda Research LLC, Case 1:22-cv-10503 (SDNY Dec. 13,
2022) (``Throughout the Relevant Period, at the direction of Bankman-
Fried and at least one Alameda executive, Alameda used FTX funds,
including customer funds, to trade on other digital asset exchanges and
to fund a variety of high-risk digital asset industry investments.''),
at p. 3; available at: https://www.cftc.gov/PressRoom/PressReleases/
8638-22. Mr. Bankman-Fried has contested the charges, but several of
his associates have entered guilty pleas in the related criminal cases.
See, e.g., Corinne Ramey and David Michaels, Caroline Ellison,
Associate of FTX Founder Sam Bankman-Fried, Pleads Guilty to Criminal
Charges, Wall Street Journal, Dec. 21, 2022.
\13\ See, e.g., Final Report of Shoba Pillay, Examiner, In re
Celsius Network LLC, et al., Debtors, United States Bankruptcy Court,
Southern District of New York, Chapter 11, January 30, 2023, at p. 12;
available at: https://cases.stretto.com/public/x191/11749/PLEADINGS/
1174901312380000000039.pdf.
\14\ See, e.g., Eva Szalay, Crypto exchanges' multiple roles raise
conflict worries, Financial Times, Nov. 14, 2021 (``Rather than being a
neutral party to transactions, like a stock exchange, a crypto platform
can trade against customers, creating a situation where, for one side
to win, the other must lose--meaning that retail clients are at risk of
being treated unfairly.''); available at: https://www.ft.com/content/
8b8e6d72-b1d2-435c-88c1-4611e3a98da5; see also Allyson Versprille and
Olga Kharif, SEC's Gensler Says Crypto Exchanges Trading Against
Clients, Bloomberg, May 10, 2022; available at: https://
www.bloomberg.com/news/articles/2022-05-10/sec-chief-questions-whether-
crypto-exchanges-bet-against-clients?sref=DzeLiNol.
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Additional CFTC Authority Over Non-Security Digital Assets
The CFTC is well-positioned to undertake regulation and oversight
of the non-security digital asset spot market. The CFTC already
regulates the futures markets for key digital assets, such as Bitcoin
and Ether. The spot markets for these assets provide the settlement
prices for these futures contracts, so as part of its oversight of the
futures markets for these assets the CFTC currently conducts
surveillance of the spot markets. The CFTC already has experience and
is familiar with these spot markets.
Legislation expanding CFTC authority to regulate the non-security
digital asset spot markets should include the following:
Registration and regulation of trading facilities. Trading
facilities for non-security digital assets must be licensed by
the CFTC.
Registration and regulation of intermediaries. The CFTC's
authority over intermediaries in the futures and swaps market
for digital assets should be extended to include intermediaries
who perform similar intermediary functions in the non-security
spot digital asset markets.
Core Principles for trading facilities. CFTC-licensed
trading facilities for non-security digital assets must operate
in accordance with core principles for facility licensing and
operation.
Digital asset listing standards. To be eligible for trading
on a CFTC-licensed trading facility, the trading facility must
submit a proposed digital asset listing in accordance with
digital asset listing standards. The digital asset listing
standards should include disclosures regarding the nature of
the digital asset to be listed for trading and other
information demonstrating the digital asset will be traded in
compliance with the core principles.
Dual track review of proposed digital asset listings. On one
track, the SEC would review the proposed listing and determine
whether the digital asset to be traded is a security subject to
SEC regulation. Digital assets determined by the SEC to be a
security would need to be traded in accordance with the
security laws and would not be eligible to be listed or traded
on the CFTC facility. On the other track, for non-security
digital assets, the CFTC would review the proposed listing to
determine whether the digital asset will be traded in
accordance with the listing standards, core principles, and
CFTC regulations.
Dedicated funding source for expanded CFTC responsibility.
The legislation should provide a dedicated source of funding
for these additional CFTC responsibilities.
Maintain current authorities over digital asset markets. The
legislation should otherwise maintain the existing authorities
of the SEC and CFTC, respectively, over the securities and
derivative markets.
Each of these features is explained more fully below.
Registration and regulation of trading facilities. Any trading
facility that provides for the trading of non-security spot digital
assets must be registered with the CFTC and operate in accordance with
its license. Registration and regulation of these trading facilities in
accordance with core principles established by the legislation and
implemented by the CFTC can address many of the risks currently
presented by the trading of non-security digital assets in unregulated
spot markets.
Registration and regulation of intermediaries. Brokers, dealers,
associated persons of brokers and dealers, commodity pool operators,
and commodity trading advisors in non-security spot digital assets
should also be regulated. To the extent that these types of
intermediaries facilitate customer transactions and investments in non-
security spot digital assets, they should be regulated in a similar
manner as other types of intermediaries performing similar functions
with other CFTC-regulated asset classes. In the Dodd-Frank Act Congress
added swaps to the types of instruments to which these categories of
registration for intermediaries applied. Congress could similarly
expand these categories of registration to include non-security spot
digital assets.
Core principles for trading facilities. Similar to the licensing
requirements for a designated contact market (DCM) or swap execution
facility (SEF), the legislation should establish core principles for
facility licensing and operation. As with the DCM and SEF core
principles, the CFTC should be provided with authority to prescribe the
manner in which these core principles must be implemented by the
trading facility. Consistent with the best practices reflected in the
DCM and SEF core principles, and in light of the specific risks
presented by digital assets, the core principles should establish the
following:
Listed digital assets should not be readily susceptible to
manipulation;
A competitive, open and efficient market for executing
transactions;
Protection of market participants and markets from abusive
practices, including fraud and manipulation;
Monitoring, surveillance, and enforcement to prevent
manipulation, price distortions, and disruptions;
Recordkeeping and public disclosure of trading information;
Public disclosure of general information about trading
rules, regulations, fees, disciplinary procedures, and dispute
resolution;
Governance standards, including fitness standards for
directors and officers;
Prohibitions of conflicts of interest in the management of
the facility, including conflicts of interest with customers;
Adequacy of financial resources for facility operations;
System safeguards, including operational resilience,
disaster recovery, back-up resources, and cyber security;
Protection of customer assets, including segregation
requirements and bankruptcy protections;
Emergency authority;
Know-your-customer and anti-money laundering requirements;
and
Disclosure requirements for listed digital assets.\15\
---------------------------------------------------------------------------
\15\ The list here is consistent with list presented to the
Committee's Subcommittee on Commodity Markets by former CFTC Chairman
Massad. See Written Statement of Timothy G. Massad before the
Subcommittee on Digital Assets, Financial Technology and Inclusion U.S.
House of Representatives Financial Services Committee and the
Subcommittee on Commodity Markets, Digital Assets and Rural Development
U.S. House of Representatives Committee on Agriculture ``The Future of
Digital Assets: Measuring the Regulatory Gaps in the Digital Asset
Market'' May 10, 2023, at pp. 9-10; available at: https://
docs.house.gov/meetings/AG/AG22/20230510/115893/HHRG-118-AG22-Wstate-
MassadT-20230510.pdf.
Consistent with its current authorities over DCMs and SEFs, the
CFTC also should be provided authority to conduct examinations of
licensed facilities, including inspections of books and records.
Product Listing standards. The core principles for a non-security
digital asset trading facility should include a requirement providing
for the disclosure of key information about the digital asset. These
disclosures could include information about the issuer of the asset,
the risks presented by the asset, the technology underlying the asset,
rights and obligations that may attach to the asset, and the market
capitalization of the asset. Providing disclosures about the key
features of the digital assets to be traded will promote market
integrity and fairness by reducing information asymmetries in the
trading of these assets. These disclosures could be modeled on the
disclosures currently required for the registration of digital asset
securities, but potentially modified as appropriate to take into
account the non-security nature of these assets.\16\
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\16\ See, e.g., Chris Brummer, Disclosure, Dapps and DeFi, Stanford
Journal of Blockchain Law & Policy, Vol. 5.2, at p. 137 (2022);
available at https://assets.pubpub.org/efeeza8o/01656289809141.pdf.
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Dual track review of proposed digital asset listings. A proposed
listing of a digital asset for trading on a trading facility for non-
security digital assets should be subject to a dual track review by the
SEC and the CFTC. On one track, the SEC would review the proposed
listing to determine whether the digital asset to be traded on the
facility is a security subject to the SEC's regulations. Digital assets
that are securities would continue to be subject to the securities laws
and not eligible for trading on the facility. Proposed listings that
are determined not to be securities could be traded on the facility.
On the other track, the CFTC would review the proposed listing to
determine whether the required disclosures have been provided and the
digital asset would be traded in accordance with the core principles
and CFTC regulations. The SEC and CFTC would consult with each other
during their respective reviews to minimize duplication and maximize
efficiency.\17\ The final determinations of the CFTC and SEC with
respect to proposed product listings would be subject to judicial
review.
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\17\ Under current law, the CEA specifies a timeframe for the CFTC
to make a determination on a request for prior approval of a contract
to be traded on a DCM, CEA 5c, 7 U.S.C. 7a-2, and the Securities
Exchange Act specifies a timeframe for the SEC to approve or disapprove
a rule (which could specify a new product to be traded on an exchange)
submitted for approval by an exchange, SEA 19(b), 15 U.S.C. 78s(b).
The ability of each agency to approve a contract or rule depends upon
each agency having complete and accurate information about the proposed
contract or rule in a timely manner. For the SEC and CFTC to make their
respective determinations on a proposed digital asset listing in a
timely manner, it would be necessary to ensure that each agency has the
authority to request and obtain in a timely manner complete and
accurate information regarding the digital asset, including ensuring
that the SEC has the authority to obtain such information as may be
necessary from the issuer of the digital asset, in addition to such
information as may be need to provided by the trading facility
proposing to list the asset. Failure of an issuer or trading facility
to provide information necessary to determine the digital asset can be
traded on the facility would be a basis for a negative determination.
---------------------------------------------------------------------------
The dual track review process for digital asset listings would
address the criticisms of the current regulatory process whereby SEC
determinations regarding the status of a digital asset generally occur
retrospectively, in the context of enforcement actions after trading
has commenced. The process outlined above would provide for prospective
SEC determinations of the status of a digital asset prior to trading.
This would provide regulatory certainty for market participants and
infrastructures regarding the status of digital assets traded on the
facility.
For this process to be effective, the SEC should be provided sole
responsibility for the determination as to whether the digital asset is
a security. Under current law the SEC has the sole responsibility and
expertise to determine whether a particular instrument or asset is a
security.\18\ Authorizing another agency to make this determination
with respect to a digital asset proposed for listing on a trading
facility would create a significant risk of conflict and confusion with
SEC determination regarding the underlying asset. In addition to a
determination of the status of the digital asset to be traded on the
trading facility, it still would be necessary to preserve the SEC's
authority and responsibility to make determinations regarding the
status of the digital asset in its primary and other distributions,
which may be integrated with the distribution of the asset on a trading
facility. Splintering the authority to make determinations regarding
the status of a digital asset as a security based on the manner of its
secondary distribution would be inconsistent with current law and a
recipe for future conflict, confusion, and uncertainty, as multiple
agencies would have the authority to make determinations regarding the
legal status of a particular digital asset. Such an approach would not
provide any regulatory certainty as to the legal status of the digital
asset.\19\
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\18\ The status of a digital asset as a commodity does not affect
whether or not that asset is a security. As the CFTC's Office of
General Counsel has explained, ``the Commodity Exchange Act [] provides
that many securities are commodities to which the securities laws
apply. Thus, any given digital asset may or may not be subject to the
securities laws, but that does not depend on whether the asset is a
commodity. It depends on whether the asset is a `security' within the
meaning of the [Securities Act of 1933].'' Schwartz letter, supra, at
pp. 1-2. Whether an asset is a security subject to the SEC's
jurisdiction is a matter to be determined by the SEC under the
securities laws. See also CFTC Commissioner Dawn D. Stump, Digital
Assets Authority Infographic, Digital Assets: Clarifying CFTC
Regulatory Authority & the Fallacy of the Question, ``Is it a Commodity
or a Security?'' August 23, 2021 (``[T]o say that a particular digital
asset is a `commodity' is unremarkable''.); available at: https://
www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement082321.
\19\ Authorizing another agency to make determinations regarding
the status of an instrument as a security also could undermine the
SEC's regulation and enforcement of the securities laws more generally.
To the extent that another Federal agency opines on the application of
the securities laws to one class of assets in a manner that differs
from the manner in which the SEC applies and enforces the securities
laws, the SEC could have more difficulty enforcing those requirements
more generally.
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It also has been suggested that the SEC and CFTC could jointly
regulate digital asset spot markets. In my view and experience, joint
regulation is cumbersome, diffuses accountability, is inflexible, and
should be used sparingly only in the narrow circumstances where there
is a significant likelihood the two agencies, acting within their
respective authorities, would issue inconsistent or conflicting
determinations on the same issue or matter.
Dedicated source of funding. The CFTC should be provided with a
dedicated source of funding so that it can undertake these significant
new responsibilities without compromising its current responsibilities
for regulation, oversight, and enforcement of the derivative markets
currently within its jurisdiction. If legislation to close the gap
along these lines is enacted, the CFTC will be required to conduct a
number of rulemakings to implement the new statutory requirements for
digital asset infrastructures and intermediaries, review licensing
applications, review proposed digital asset listings, and conduct
surveillance of the non-security digital asset spot markets. It will
need significant additional resources to perform these new
responsibilities in a timely manner.
Most other Federal financial regulatory agencies are funded at
least in part by a dedicated source of funding. A dedicated funding
source can help provide stability to an agency's budget, and help
ensure that the beneficiaries of the regulated activities pay the costs
of regulation rather than the general taxpayers.
Maintain current authorities over other digital asset markets.
Apart from closing the current gap regarding the regulation of the non-
security digital asset spot markets, legislation should maintain
existing agency jurisdictions and authorities. The CFTC has the
necessary and appropriate authority to regulate the derivative markets.
The SEC has necessary and appropriate authority to regulate the
securities markets. There is no demonstrated need to alter or amend
these basic authorities, including with respect to digital assets.
Amendments to the CFTC's or the SEC's authorities over derivatives
or securities in general, or digital assets in particular, are not only
unwarranted and [unnecessary], they would be counterproductive. The CEA
and the securities laws are technology neutral. The Supreme Court has
made it clear that in determining whether something is a security
``form should be disregarded for substance.'' \20\ Amending existing
authorities based on a particular technology would disrupt decades of
precedent, create additional uncertainty about the meaning and
interpretation of both new and existing statutory terms and
classifications, and generate opportunities for regulatory arbitrage in
the capital markets based upon technology upon which the asset is
created or distributed rather than the functional nature of the asset
or instrument.\21\ Legislation to close the gap with respect to the
regulation of non-security digital asset spot markets should stay
focused on closing that gap and not disrupt current law and create new
uncertainties where there is no gap.
---------------------------------------------------------------------------
\20\ Tcherepnin v. Knight, 389 U.S. 332, 336 (1967). Further, ``the
emphasis should be on the economic realities underlying a transaction,
and not on the name appended thereto.'' United Housing Found. v.
Forman, 421 U.S. 837, 849 (1975).
\21\ See also Massad Statement, note 15, at 5 (Amending the
existing securities or commodities laws, or changing the definition of
security, ``might not only fail to bring clarity to crypto; that might
unintentionally undermine decades of regulation and jurisprudence as it
applies to traditional securities and derivatives markets. . . . [T]he
law should make clear that the SEC and CFTC would retain their existing
authority.'').
---------------------------------------------------------------------------
Conclusion
Cryptocurrencies are bought and sold by a significant number of
persons in the U.S. Last week, the Federal Reserve reported that in
2022 one in ten adults surveyed held or used cryptocurrency.\22\
Extrapolated to the public-at-large, this means millions of American
consumers and households may be conducting transactions in the spot
digital asset markets. The American consumers and households
transacting in these markets are currently exposed to numerous market
risks, including abusive trade practices, market manipulation,
conflicts of interest, governance deficiencies, the failure to
segregate customer funds, and inadequate disclosures.
---------------------------------------------------------------------------
\22\ Board of Governors of the Federal Reserve System, Economic
Well-Being of U.S. Households in 2022, May 2023, at p. 41; available
at: https://www.federalreserve.gov/publications/files/2022-report-
economic-well-being-us-households-202305.pdf.
---------------------------------------------------------------------------
Extending the CFTC's regulatory authority over the non-security
digital asset spot market would help protect customers and investors in
these digital asset markets and reduce potential systemic risk.
Authorizing the SEC to review proposed listings for the trading of spot
market digital assets on these licensed trading platforms would provide
market participants with regulatory certainty regarding the legal
classification and status of those assets prior to the trading of those
assets on the facility. Protecting American consumers and investors and
providing market participants with regulatory certainty would help
maintain our nation's leadership in financial markets and technologies.
Mr. Feenstra. Thank you for your testimony, Mr. Berkovitz.
Mr. Lukken, please begin when you are ready. You have 5
minutes.
STATEMENT OF HON. WALTER L. LUKKEN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, FUTURES INDUSTRY
ASSOCIATION; FORMER ACTING CHAIRMAN, COMMODITY FUTURES TRADING
COMMISSION, WASHINGTON, D.C.
Mr. Lukken. Thank you, Mr. Chairman, Ranking Member Scott,
Former Chairman Lucas, and Members of the Committee. Thank you
for the opportunity to testify about the need for a strong
regulatory regime for the spot digital asset market. Prior to
my role at FIA, I had the honor of serving as Commissioner and
Acting Chairman of the CFTC over a 7 year period of time, as
well as working on the Senate Agriculture, Nutrition, and
Forestry Committee involved with the passage of the Commodity
Futures Modernization Act of 2000 (Pub. L. 106-554, Appendix
E--H.R. 5660) that created the current CFTC principles-based
regulatory system.
Next year we celebrate the 50th anniversary of the
Commodity Futures Trading Commission Act of 1974 (Pub. L. 93-
463). This Act created the CFTC, providing it with exclusive
jurisdiction over futures trading, and greatly expanding the
definition of commodities beyond ag products. This was done to
capture the financial products that were beginning to be listed
on boards of trade, but the definition's catch-all language
also served to future-proof the law for innovative new
products. Indeed, over the last 5 decades, we have seen futures
contracts launched on interest rates, energy, weather, carbon
offsets, volatility, and even digital assets, as my colleague,
Chairman Giancarlo had noted.
In 2000, Congress passed another major reform, the
Commodity Futures Modernization Act, that provided the CFTC
with a new principles-based regulatory regime. In its 2 decades
of existence, the CFTC's core principles framework has proved
effective due to its flexible but clear approach. The Act
provides the CFTC with the ability to issue rules and guidance
on core principles, but provides built-in flexibility for
entities to take a different approach if they can prove the
core principles are still being met. Such flexibilities has
allowed for innovative new products and market approaches. It
has also helped the CFTC extend its regulatory regime cross-
border, given the global nature of many benchmark futures
products. This cross-border framework, built on regulatory
cooperation and comparability, would align well with the cross-
border nature of digital commodities.
The CFTC also has a strong track record of protecting
customer funds and stamping out fraud and abuse affecting
retail customers, which could benefit the spot digital asset
market. The CEA contains strong disclosure and money
segregation requirements aimed at protecting customer funds.
These protections include risk disclosures, capital and anti-
money laundering requirements, customer grade guarantees, and
Know Your Customer obligations.
Like digital assets, the CFTC and NFA have analogous
experience in the regulation of spot markets where retail
participants were experiencing abuse. I was Acting Chair of the
CFTC in 2007 and 2008, and we saw an enormous increase in
retail spot foreign currency fraud due to a gap in regulatory
authority. Congress, with this Committee's leadership, closed
this loophole in 2008, granting additional protections to
retail participants in the spot forex market.
With these changes, the CFTC and NFA were able to set
limits on leverage, require brokers to register, and be well
capitalized, and aggressively enforce rules against fraud.
Ultimately, the CFTC and NFA eliminated significant fraud and
abuse in those retail spot markets. While the CFTC does not
currently have statutory authority to regulate spot digital
markets, as this legislation would contemplate, it does have
broad enforcement powers over spot markets and commodities, and
it has used those powers aggressively to bring more than 80
enforcement actions involving wrongdoing in digital asset
commodities.
Beyond digital assets, the CFTC has a proven track record
of preserving market integrity through enforcement, using its
expertise on market manipulation. The agency has brought
forward successful manipulation cases against energy and
agricultural companies, as well as the precedent setting case
on the manipulation of the LIBOR benchmark. Given the potential
for disruptive trading and manipulation in the spot digital
asset market, the CFTC's enforcement powers make the Commission
well positioned to protect customers in this space.
Thank you again for the opportunity to testify about the
CFTC, and the benefits of the Commission's principles-based
regulatory system.
[The prepared statement of Mr. Lukken follows:]
Prepared Statement of Hon. Walter L. Lukken, President and Chief
Executive Officer, Futures Industry Association; Former Acting
Chairman, Commodity Futures Trading Commission, Washington, D.C.
Chairman Thompson, Ranking Member Scott, and Members of the
Committee, thank you for the opportunity to highlight some of the
benefits of the Commodity Futures Trading Commission's (CFTC's)
principles-based regulatory framework as you deliberate providing the
Commission with expanded regulatory jurisdiction over digital asset
spot markets.
I am the President and Chief Executive Officer of the Futures
Industry Association (FIA). FIA is the leading global trade
organization for the futures, options and centrally cleared derivatives
markets. FIA's membership includes clearing firms, also known as
futures commission merchants (FCMs), exchanges, clearinghouses, trading
companies, and commodities specialists from more than 48 countries as
well as technology vendors, law firms and other professionals serving
the industry.
Our industry's primary market regulator in the United States is the
CFTC and many of our industry's market participants are also registered
with the National Futures Association (NFA), the independent self-
regulatory organization (SRO) for the U.S. derivatives industry. It's
worth highlighting that our markets are global in nature and that many
of our members are registrants with not only the CFTC, but also the
Securities [and] Exchange Commission (SEC) in the U.S. as well as other
regulators in jurisdictions around the world.
Prior to serving as the President and CEO of FIA, I had the honor
of serving as a Commissioner of the CFTC from August 2002 to June 2009.
During that time, I served as Acting Chairman from June 2007 to January
2009 during the height of the financial crisis. Prior to the CFTC, I
also served as a member of the professional staff of the Senate
Agriculture Committee where I was involved with the passage of the
Commodity Futures Modernization Act of 2000 that created the
principles-based regulatory system we have in the futures markets
today.
FIA and its members look forward to reviewing the Committee's draft
digital asset market structure legislation and providing feedback.
Today, I am honored to testify about my significant experience with the
Commodity Exchange Act (CEA) and the exchange traded derivatives
markets both inside and outside the government.
I believe the CEA is uniquely positioned to keep pace with our
ever-changing markets, including digital assets. As this Committee
deliberates about the oversight of the spot digital asset market, it
would be well-served to study the three pillars of the CFTC's regime:
its flexible principles regulatory framework, its battle-tested
customer protection regime, and its strong enforcement capabilities.
I hope my testimony will be helpful to Members of this Committee as
you consider whether the existing framework for the regulation of the
exchange-traded and cleared derivatives markets in the U.S. should be
extended to spot digital asset markets.
A Flexible Principles-Based Regulatory Framework
Next year, we celebrate the 50th anniversary of the Commodity
Futures Trading Commission Act of 1974. This bill, and subsequent
reforms over the following 5 decades, have given the CFTC a powerful
regulatory framework that allows the agency to police fraud, abuse, and
manipulation in the markets while encouraging responsible innovation
and fair competition among participants. This Committee should be
commended for its foresight in developing this flexible regulatory
structure that has allowed these markets to grow and develop while
protecting market participants and the public from harm.
The CFTC Act of 1974 modernized the regulatory structure for the
U.S. futures markets, creating the independent agency of the Commodity
Futures Trading Commission and giving it exclusive jurisdiction over
futures contracts traded on commodities. The Act also broadened the
definition of ``commodity'' beyond agricultural products to include
financials, energies, and ``all other goods . . . articles . . .
services, rights and interests . . .''
This expansion was done to capture financial products that were
beginning to be listed on boards of trade, but this catch-all language
also served to ``future-proof'' the regulation of new products that may
not have been contemplated when the Act was first drafted.
This flexible definition, combined with Congress's grant of
exclusive jurisdiction, became a powerful ``one-two'' punch for the
agency, allowing the CFTC to provide clear rules of the road for
futures markets and enabling new products to develop without
duplicative regulations that could harm innovation. Indeed, over the
last 5 decades, we have seen innovative futures contracts launched on
interest rates, equity indices, carbon offsets, volatility, and even
digital assets.
The CFTC Act of 1974 also authorized the creation of an independent
self-regulatory organization (SRO), known as a Registered Futures
Association, that would help the CFTC oversee the registration,
auditing, and policing of market participants who interact with
customers and their funds. In 1982, the National Futures Association
was launched. Over its 40 years of existence, it has greatly
contributed to preserving the integrity of U.S. derivatives markets,
protecting retail investors and ensuring registrants meet their
regulatory responsibilities.
In 2000, Congress passed another major reform of the futures
markets, again with the aim of providing the agency with powerful tools
aimed at keeping pace with innovation and growth. The bipartisan
Commodity Futures Modernization Act of 2000 provided the CFTC with a
new principles-based regulatory regime for exchanges and
clearinghouses, among other reforms.
In its 2 decades of existence, the CFTC's core principles regime
has been a resounding success due to its flexible but clear approach.
The Act provides the CFTC with the ability to issue guidance and rules
on how a regulated entity complies with the various core principles.
However, there is also built-in flexibility for entities to take a
different approach if they can prove the core principles are still
being met.
These core principles include such directives as requiring
exchanges to only list contracts that are not readily subject to
manipulation, and ensuring exchanges have the capacity and
responsibility to prevent manipulation, price distortion, and
disruptions through market surveillance, compliance, and enforcement
practices.
Such flexible regulations have helped the CFTC extend its
regulatory regime cross-border over the preceding 3 decades. Many
benchmark products listed on regulated futures markets are global in
nature and serve as global reference prices for companies trying to
manage their risk exposures in our markets. FIA estimates that a
significant amount of CFTC-registered exchange trading volume comes
from cross border transactions.\1\ To meet this global demand from the
marketplace, the CFTC has used its flexible regulatory regime to
develop an effective cross-border regulatory framework built on foreign
authority cooperation and regulatory comparability and recognition.
This global framework aligns well with the cross-border nature of the
digital commodity markets and could represent an effective approach for
ensuring these global markets abide by comparable standards of
regulation.
---------------------------------------------------------------------------
\1\ https://www.fia.org/fia/articles/statement-united-states-house-
representatives-committee-agriculture-subcommittee.
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For new and innovative entrants, like digital asset trading
platforms, this flexible and global approach to regulation is an
extremely attractive framework that allows for new models and
approaches to develop organically without compromising oversight.
Customer Protections Under the CEA
While the futures markets are largely institutional, the CFTC and
NFA have a strong track record of protecting customer funds and
stamping out fraud and abuse affecting retail customers in our markets.
The CEA contains strong disclosure and money segregation
requirements aimed at protecting customers utilizing our markets. Since
the passage of the CEA in 1936, FCMs have been required to segregate
customer funds on behalf of customers, and their interactions with
customers have been heavily regulated to protect customers and market
stability. These protections include risk disclosures, capital
resources, credit and collateral management, anti-money laundering
requirements, guaranteeing customer trades, and ``know your customer''
obligations.
Another key customer protection afforded by the current CFTC
regulatory framework is the compartmentalization of risk inherent in
the intermediated, and leveraged, nature of the futures markets. As
agents for their customers, intermediaries serve to protect the
interests and funds of their clients. Advancements in technology have
enabled various roles within our markets, including exchanges,
intermediaries, and market makers, to be combined into one platform.
While there may be some efficiencies in this model, there are also
inherent conflicts of interest and risks that may arise, and we saw
this with the demise of FTX. While FIA is continuing to review the
Committee's draft bill, we appreciate that it includes language that
seeks to address these conflicts of interest that could arise on
certain digital asset trading platforms.
In addition to these preventive measures, the CFTC and NFA have
taken strong enforcement actions over the years against boiler rooms
and fraudulent players that have targeted retail customers. One prime
example is in retail foreign currency trading, known as forex. In 1974,
Congress excluded the interbank foreign currency markets from the
CFTC's jurisdiction, given the fact these institutional markets were
already overseen by prudential regulators. This exclusion, known as the
Treasury Amendment, carved out transactions involving foreign
currencies that were not ``for future delivery'' and ``conducted on a
board of trade.''
This language created a gap in the oversight regime for retail
participants transacting in off-exchange foreign currencies. In many
cases, these contracts were leveraged, margined, and financed, much
like futures contracts. I was Acting Chair of the CFTC in 2007 and
2008, and we saw an enormous increase in retail forex fraud.
Unfortunately, this legal uncertainty, and adverse court decisions,
prevented the CFTC from taking decisive action against this abuse.
To close this loophole, Congress approved amendments to the CEA in
2008 that granted additional protections to retail participants in the
forex market. These changes, known as the ``Zelener Fix,'' required all
margined, financed and leveraged retail transactions to occur on a CFTC
regulated exchange and required retail customers to use a registered
broker to access these markets. In addition, the CFTC promulgated
regulations introducing a new category of registrant called a retail
foreign exchange dealer (RFED) to complement the existing categories
for futures brokers, in addition to requiring RFEDs to register with
NFA.
Once Congress provided legal clarity for retail forex, the CFTC and
NFA were able to step in and set limits on leverage, require brokers to
register and be well-capitalized, and aggressively enforce rules
against fraud. Ultimately, this new authority in the hands of the CFTC
and NFA eliminated significant fraud and abuse in these retail markets,
driving many of the bad actors out of business.
While the CFTC has recently noted a rise in retail participation in
the futures markets, the customer protection regime in place appears to
be working as we are not seeing an increase in customer complaints and
retail fraud cases. NFA highlighted this in a May 2022 CFTC comment
letter \2\ that ``customer complaints and single-event customer
arbitrations filed at NFA, as well as CFTC reparation cases, remain
near all-time lows.'' This demonstrates that the Congressionally
established regulatory framework, and the efforts of the CFTC and NFA,
have contributed greatly to ensuring that robust customer protections
are in place and being enforced.
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\2\ https://www.nfa.futures.org/news/
newsComment.asp?ArticleID=5476.
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If Congress decides to provide similar regulatory oversight of the
spot digital asset markets to the CFTC, and NFA, I am confident they
would be well prepared to provide the same level of protections that
customers receive on U.S. exchange-traded and cleared derivatives
markets.
Strong Enforcement
To complement the CFTC's principles-based regime, the agency has
exercised its expansive enforcement authorities to punish wrongdoing
and to serve as a powerful deterrent for other bad actors.
While the CFTC does not have statutory authority to regulate spot
digital asset markets, it does have certain enforcement powers over all
spot markets in commodities, and it has used those powers to bring more
than 80 enforcement actions involving wrongdoing in digital asset
commodities. CFTC enforcement actions related to digital assets have
primarily targeted exchanges that illegally offer derivatives and
leveraged, margined, or financed virtual currency transactions. The
agency has also targeted businesses that engage in fraud and
manipulative behavior, as well as foreign platforms that do not
establish adequate safeguards and controls to prevent U.S. persons from
accessing their platforms.
It should also be noted that, beyond digital assets, the CFTC has a
proven track record of preserving market integrity through its
enforcement actions, including its expertise on policing market
manipulation. The agency has brought forward successful enforcement
manipulation cases against energy and agricultural companies as well as
the precedent-setting case on the manipulation of the LIBOR benchmark.
The agency has also successfully used its authorities to root out
disruptive trading practices, including illegal spoofing. Given the
potential of disruptive trading and manipulation in the spot digital
asset marketplace, the CFTC's enforcement authorities and proven track
record make the Commission well-positioned to protect customers in this
the space, should Congress decide to provide that authority.
Conclusion
Thank you for the opportunity to testify about the history of the
CFTC and the benefits of the Commission's principles-based regulatory
framework and how its flexible approach to regulation protects
customers, promotes innovation, and preserves market integrity.
I hope my testimony will be helpful to Members of this Committee as
you consider whether the existing framework for the regulation of the
exchange-traded and cleared derivatives markets in the U.S. should be
extended to spot digital asset markets.
Mr. Feenstra. Thank you for your testimony, Mr. Lukken. At
this time Members will be recognized for questions in order of
seniority, alternating between Majority and Minority Members,
and in order of their arrival for those who have joined after
the hearing has convened. You will be recognized for 5 minutes
each, in order to allow us to get to as many questions as we
possibly can. I now recognize myself for 5 minutes.
Mr. Giancarlo, since you stepped down from the CFTC
chairmanship, you have continued to focus on digital assets,
or, for our purposes here today, digital commodities. For those
Members still on the fence on the merits of digital
commodities, could you please describe their value today, and
their potential value in the future for the United States
businesses and main street Americans, beyond trading them on
the exchange? To put it another way, why should we, Congress
and the Agriculture Committee, care about digital commodities?
Mr. Giancarlo. Thank you for the question. I think the
answer to it depends somewhat on how one views the value of
this innovation. If one views this simply as some funky new
investable asset class, a la some precious metals, or Treasury
repo, or something, then the dollar--measured in dollars, the
value is circa $1 trillion, down from as much as--close to $3
trillion as much as a year ago. But if you view this more
broadly, as I have come to view it in the 8 years that I have
been studying it, as really a new architecture of value, an
architecture of finance, and banking, and money itself, then it
is really harder to estimate the value, but I want to take a
crack at it.
The existing architecture of value is one where we store
value on the balance sheets of proprietary commercials firms.
It is kind of a strange way of doing it: 90 percent of the
value is housed as liabilities. My checking account with Bank
of America, my 401(k) with Fidelity, are not stacks of $100
bills in their vault. They are IOUs to them. And as we have
seen, just in the last 120 days, those institutions can go
down. This new architecture says, ``Let us use the internet,
let us use digital networks as a way of storing value.''
That old architecture, as venerable as it is, is rather
slow, it is expensive, it is unstable, and it is exclusive.
This new architecture of an internet of value--well, in 30
years the internet has never gone down. And it has brought more
people around the globe into information gathering, into
communications than ever before. So what is the value of this
new innovation? Well, it is hard to say, but to think that
somehow the same internet that has changed everything we know
about communications, information, and retail shopping is not
going to do the same thing to banking and finance I think is
somewhat naive.
So the real question is, what are the values of this
innovation? What can we do as Americans to make sure that this
new innovation, as it goes forward and weaves its way, reflects
the values of our society? And I think that is what this
Committee has done with this legislation. It has made a
statement that says this new innovation is going to reflect
American values brought together by Congress. So----
Mr. Feenstra. And I would agree. Wouldn't you agree,
though, that it also establishes a regulatory framework for
trading digital commodities to protect millions of citizens? I
mean, to me, this is very paramount.
Mr. Giancarlo. Critically paramount. And as my other
colleagues have mentioned, our European competitors, our Asian
competitors, are moving forward with putting those frameworks
in place, and as they put those frameworks together, they are
putting their values on this innovation. America led the first
wave of the intimation because we stamped our values on it, and
this is the opportunity today to make sure this new innovation
reflects those American values as well.
Mr. Feenstra. Thank you. Mr. Lukken, in your testimony you
talked about how the CFTC's principles-based regulation is
flexible, and designed to future-proof regulation of new
products that were not considered prior to drafting the
Commodity Exchange Act. Can you talk about how this approach
can be beneficial to the CFTC's regulation of the digital asset
markets?
Mr. Lukken. I think Congress, in its foresight, figure out
how the principles-based system could give flexibility not only
to market participants who may be innovating--and the CFTC, as
noted earlier, has innovation, promoting innovation, in its
mission, actually, and the principles-based system helps that,
but importantly, it allows the regulator to keep pace with
these innovations, so the flexibility goes both ways. It goes--
both to market participants as well as the regulators to make
sure that those core principles, those 23 core principles of
our markets, are being met, no matter what innovations may be
happening.
Mr. Feenstra. Yes. Yes. Thank you. Thank you for that. Mr.
Grewal, why do you think it is beneficial that the discussion
draft is based on existing law and regulations for securities
and commodities derivatives?
Mr. Grewal. The benefit of relying upon the existing
structures, Congressman, is that it allows the investing
public, and, of course, regulators and this body, to have
confidence that we are working with standards, practices, and
histories that are well understood, and that have served the
American public reasonably well. No system is perfect, but the
Commodity Exchange Act, the CFTC's long history of regulating
underlying markets where there are listed futures, all suggest
that this Commission is more than capable of rising to the new
challenge for the new asset class.
Mr. Feenstra. Thank you. Thank you for those comments. I
now recognize Ranking Member David Scott for 5 minutes for
questions.
Mr. David Scott of Georgia. Thank you very much. I
appreciate that. Gentlemen, I want to get to the real essence
of this debate here this morning. It is so important for us to
find out what all this is going to cost to do what it is we are
here discussing to do with this emerging digital asset. And so,
in my 5 minutes, I want to hear from each of you as to what
amount of funding is all this going to take to do it
impactfully? We have our users here, and we have our SEC and
CFTC, whom I have worked with for my 21 years on this body.
Give us this. This is the missing piece in this whole debate.
What about the--funding SEC and CFTC, and to the users, is it
going to work, how it is going to work? Mr. Lukken, let me talk
with you, and I want to hear from each of you, and I think I
have about 4 minutes left. So please.
Mr. Lukken. No, I would be very simple and say that the
CFTC needs appropriate funding to make sure we are taking on
these markets. It is difficult for me----
Mr. David Scott of Georgia. When you say appropriate, tell
me, what would you say? How much?
Mr. Lukken. Yes. Well, I mean, I think you should look back
at what happened during Dodd-Frank in this--and the--for them
to take on those markets, and the appropriate teams that the
Chairman outlined in his testimony, they are going to have to
hire new additional people with expertise.
I would say that the market, although it is enormous, there
are--the legislation consolidates a lot of this regulation into
entities, we--either exchanges----
Mr. David Scott of Georgia. Mr. Lukken----
Mr. Lukken.--or brokers.
Mr. David Scott of Georgia.--I hate to interrupt you, I
want to hear from some of the others, but you have been around.
The bulk of this is going to fall on the CFTC, I am sorry. How
much? Give us about a ballpark figure of what you feel it is
going to take to do what is in this regulatory piece of
legislation.
Mr. Lukken. I would be guessing. I think Chairman Behnam
mentioned ten percent in his testimony. And you also have to
bear in mind that the NFA is going to be extremely involved in
this to do as well, and they are going to be levying fees on
the industry to raise money to do it, so those things have to
be thought of in conjunction.
Mr. David Scott of Georgia. Okay. Do you agree with that,
SEC? And give us a figure.
Mr. Berkovitz. Well----
Mr. David Scott of Georgia. Look, we have to put an amount
in this bill. And now you have a chance----
Mr. Berkovitz. Well----
Mr. David Scott of Georgia.--to tell us what you think you
need. Tell us.
Mr. Berkovitz. Yes. I mean, I can't speak for the SEC. What
this bill would do--one of the things--it would shift a lot
from the SEC to the CFTC over--certain types of assets that are
now considered securities would be--under this bill would be
digital commodities over in the CFTC's jurisdiction. Well, I
would think Chair Behnam's $120 million over 3 years would be
at least as much you would--as you would need, because this is
a substantial responsibility over a substantial new class of
assets that are currently regulated under a different agency.
$120 million, right.
Mr. Gallagher. Ranking Member Scott, I had the great
pleasure of not being Chairman of the SEC, just one of the
regular Commissioners, and part of that pleasure was not
getting involved in the budget process, so I wouldn't even be
able to guess, unlike my former Chairman colleagues up here on
the panel.
One thing I would call out, though, too, the cost of not
moving forward. From our perspective--you called us users. We
are representing customers, right? We are agents here? But the
cost of having regulation, and these markets go off, sure,
which is happening, it is real. It is not some boy crying wolf
issue. It is migrating offshore. It is going to be massive to
the U.S., to U.S. investors, lost opportunity. And then the
cost of the vagueness of the current regulatory structure is
real, and that is being borne by American investors.
Mr. David Scott of Georgia. Okay, Tim. Yes?
Mr. Grewal. Ranking Member Scott, I would just add that the
costs go even further than my colleague to my left has properly
identified. There is an important cost to a lack of standards
that industry, and investors, and consumers can understand and
follow. And that cost comes in the form of lost innovation here
in the United States, so I think that is also important to bear
in mind in weighing whatever resources would be appropriate in
order to allow the CFTC to do its job here.
Mr. David Scott of Georgia. I think I will get to all five.
Go----
Mr. Giancarlo. I would take Chairman Behnam at his word. If
he estimates $120 million over 3 years, I think he has done his
numbers.
Mr. David Scott of Georgia. $120 million? Thank you.
Mr. Feenstra. I now recognize the gentleman from Oklahoma,
Frank Lucas, for 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman, and thank you, for the
panel, to be--to agreeing to testify and spending your day with
us here in the Agriculture Committee. Mr. Giancarlo, it is good
to see you again, and I will direct my first question at you.
Earlier today I discussed with Chairman Behnam how the CFTC
and SEC will need to collaborate during the rulemaking process
proposed under the market structure draft. In his response, the
Chairman reflected on the history of CFTC's intersection with
SEC as it related to digital assets. As you reminded us in your
testimony, CFTC approved regulated future contracts tied to
Bitcoin back in 2017. So, Mr. Giancarlo, I would like to call
upon your expertise in this space with this question. Could you
discuss the history of CFTC's collaboration with the SEC
regarding digital assets, and how Congress can help this
process going forward? Share with us your scars and calluses.
Mr. Giancarlo. Thank you very much. It is good to be back
in the saddle once again before you and this great Committee. I
can't speak to the history prior to my arrival at the CFTC,
although it was rumored not to have been terribly good in prior
Administrations. One of the things that Chairman Clayton at the
SEC and I vowed to do was to improve that. And we felt that, as
people who had come from the business sector, we had an
imperative to work our--to make sure our two agencies worked
well together.
And in the area of digital assets, we formed an ad hoc
working group between our two agencies that met roughly every 2
weeks to go through innovations and digital assets
thoughtfully, intelligently, with no particular agenda to get
anything done this month or next month, but to work through the
emerging issues. And the very first one we focused on was
Bitcoin, and that support that we had from the SEC at the time
in 2017 allows us to move forward with the decision to
greenlight Bitcoin futures. So the collaboration between the
two agencies was very important.
When, at the end of my 5 year term, I met with Chairman
McHenry, and he asked me to reflect on those 5 years, and I
mentioned the work the two agencies had done together. And I
think some of that has led to some of the Title V provisions
for an advisory group, working group, between the two agencies
growing out of the work that Chairman Clayton and I, and that
was continued by Chairman Tarbert and Chairman Clayton during
their terms as well.
Mr. Lucas. It has already been discussed at this hearing
that other jurisdictions, such as the European Union and Japan,
have frameworks for digital assets, and countries like the
United Kingdom are working towards their own regulations. So I
address this question first to Mr. Lukken, and then to you, Mr.
Giancarlo. Could you each discuss how it makes our job of
writing our own rules here at home more difficult if we see
digital asset regimes flourishing outside of the United States?
Mr. Lukken. No, it is important that the U.S. show
leadership in this area, because the rest of the world is
starting to fill the void, and so you are going to see markets
develop overseas if the U.S. doesn't step up and develop a
regulatory regime. You cannot regulate by enforcement alone. It
needs the regulatory system in place to make sure that there
are standards of good conduct, and that these are happening on
well-regulated lit exchanges.
So it is incredibly important that we show that leadership,
and make sure that we coordinate with our regulatory
colleagues, because, as I mentioned, the CFTC has a regulatory
system that is global, so if we fill this gap, we can actually
show leadership in this--in these global markets.
Mr. Giancarlo. Professor Bradford of Columbia University
has written extensively on what she calls the Brussels Effect.
Brussels--the European Union looks at new legislation as an
opportunity to develop European standards, and then get the
rest of the world to have to follow those standards rather than
any others because, if they want to sell into the European
Union, they adopt those standards, and then they say, what the
heck, we will adopt it for the whole world.
And it is a way of exporting their values, which is why, in
response to an earlier question, I spoke about the importance
of stamping American values on this new innovation, very much
the way we did with the first wave of the internet. That is why
this legislation is so important. Values of consumer
protection, values of transparency, values of openness, values
of sound, but practical, principles-based regulation. And I
think that is what this legislation attempts to do as a first
step.
Mr. Lucas. Thank you very much. Very insightful, gentlemen,
as always. With that, I yield back, Mr. Chairman.
Mr. Feenstra. I now recognize the gentlewoman from
Colorado, Ms. Caravero--Caraveo? For 5 minutes.
Ms. Caraveo. Caraveo, yes. Thank you. Thank you, Mr.
Chairman, and thank you again, gentlemen, for taking time to
provide testimony today. I think you were all probably sitting
in the back earlier when I spoke to Chairman Behnam, and I
would like to ask you the same initial question. Based on your
various experiences and expertise, are there any considerations
that may be missing from this proposal? And that is for anybody
on the panel.
Mr. Gallagher. Yes, I will go first. As I mentioned
earlier, Congresswoman, I have laid out a few additional
considerations to think about. I think it is very sound in its
initial architecture. I think there are some things around the
edges that could help. And I do think, just as a general
matter, when legislating in this space, Congress should speak
very clearly to the agencies.
This is an issue--I lived the post-Dodd-Frank world as an
SEC Commissioner, so we had about 110 rulemaking mandates that
came from Congress, and some were very prescriptive, and some
less so, and where we saw problems with implementation is where
we had less prescriptive guidance coming from Congress. And
some things that seemed like they should be easy turned into a
bureaucratic quagmire, and I would just caution you against
that. If you have real strong views on a specific issue, make
it more prescriptive.
Mr. Berkovitz. I would like to note that the CFTC--as
Chairman Behnam outlined in his testimony, the CFTC markets are
different from the SEC regulated markets. The function of the
CFTC regulated markets is generally price discovery and risk
management. The function of the SEC regulated markets is
capital formation. And the regulatory regimes--each agency has
a regulatory regime fit for purpose.
The SEC's regulatory regime, as Chairman Behnam explained,
is really designed for the wholesale market. Moving into the
retail is something the CFTC hasn't traditionally done. That is
where the SEC regulatory regime really is based. There is a
lot--much more robust retail protection in an SEC regulated
market because you are dealing with people's retirement funds,
you are dealing with their life savings. You are not dealing
with cattle or whatever.
And the cattle markets deserve protection too, the farmers
or whatever, but it is a different standard. There is a
disclosure standard, and there is anti-fraud in the CFTC
markets. But the brokers in the securities markets, they have
to ask in--act in the best interest of their customers. The
investment advisors have a fiduciary duty. Many of those duties
are not present in CFTC regulated markets.
If you take an instrument that is a type of digital asset
that has those protections in the security market, and you move
it into a CFTC market, as is, the CFTC markets do not have
those protections. CFTC is a market regulator. The SEC is much
more on the investment side. You would need to supplement the
bill, I believe, the way it is drafted, with those additional
protections because they are not--as I read it, and I have only
had a few days, so maybe they are there, and I need to study it
further, but my initial read, I do not see that same level of
investor protection that currently exists in the security
markets for these instruments as they would be regulated in a
CFTC market. You can't just move an instrument from one agency
to another and say they are both market regulators. It is a lot
more complicated than that.
Ms. Caraveo. Thank you so much. That actually answered my
other question. But anybody to the first? Mr. Lukken?
Mr. Lukken. Yes, I would just mention, one unique thing
about this legislation is it does contemplate a
disintermediated marketplace, where people are going directly
to the marketplace. The futures markets have brokers that deal
with the customer, and a lot of the current CFTC law is--
customer protections are with the brokers themselves, the FCMs.
And so those protections now will be placed with the exchange
itself to segregate money, to disclosures, those sorts of
things.
There may be conflicts, I think we saw this with the FTX
debacle, that--because you conflated all these things into one
entity, there weren't the compartmentalization of risk that
typically are in these markets. The legislation does
contemplate conflicts of interest, and making sure there is
that--those firewalls, but I think it is something worth
studying, whether they actually need to be separate or not, or
registered differently than the exchange itself, and it is just
something unique that this legislation does differently.
Mr. Grewal. Congresswoman, the other thing that the draft
recognizes appropriately is a dual role for both the CFTC and
the SEC on a going forward basis, and in particular recognizes
that the SEC will continue to have a role, its primary role, in
regulating digital asset securities.
Ms. Caraveo. Thank you, so much, gentlemen. That was very
valuable feedback.
Mr. Feenstra. I now recognize the gentleman from Indiana,
Mr. Baird, for 5 minutes.
Mr. Baird. Thank you, Mr. Chairman, and I want to thank the
witnesses for being here. It is really helpful to have the kind
of expertise that you represent to share with this Committee as
we try to make decisions. My first question goes to Mr.
Giancarlo. In your written testimony, you make three
recommendations to improve the discussion draft. And I know you
haven't had a lot of time to look at that either, but this--the
first is that the bill should impose a deadline on the CFTC and
the SEC to complete the joint direct and--definition
rulemaking. Why do you think that is important?
Mr. Giancarlo. Deadlines focus the mind. Deadlines focus
the attention of the staffs. Deadlines force organizations to
marshal the resources necessary to get something done, and not
just add it to the list of to-dos. So--there is nothing like--I
have learned in business--30 years in business, there is
nothing like a deadline to get something done, and without a
deadline, one tends to go to other things on one's priority
list.
Mr. Baird. Thank you. Mr. Lukken, the Commodity Exchange
Act specifically identifies one of its purposes as promoting
responsible innovation and fair competition. Would this
proposal promote responsible innovation and fair competition to
bring the digital commodities into the CFTC's regulatory
sphere?
Mr. Lukken. Absolutely. I think the contemplated draft that
has been put out would develop exactly the system we have been
talking about, responsible, principles-based regulation. And
remember, competition is a way of policing the marketplace. It
is the free market system policing itself, and that is what we
want to unleash. We want to be referees to make sure there is a
fair system here, but allow the competitors to compete, and I
think this legislation would do that.
Mr. Baird. Thank you. Do any of the other witnesses have
any thoughts about either of these questions? The first one
being the complete joint definitional rulemaking, why you think
that is important, and then the last one here was about the
digital commodities into the CFTC's regulatory sphere. So
just----
Mr. Grewal. Congressman, if I may speak to that--speak
further to value and virtue of deadlines, the only other point
I would encourage this Committee to consider is that this
market, and these technologies, are changing very quickly. And
so while I think it is absolutely the case that deadlines
impose a certain clarity and discipline regardless of the
underlying innovations that may be taking place, here it is
critical, given just how quickly the landscape is changing.
Mr. Berkovitz. If I could have a comment on what Mr. Grewal
just said? And that is a concern potentially with the approach.
The approach fixes certain classifications, such as digital
assets, what agency gets what jurisdiction on a specific
technological way it is currently traded, or a specific
characteristic of a blockchain network, particular
characteristics of who owns how much of that network, and
exactly how it is structured. This technology is changing very
rapidly. I would just urge some caution into freezing these
regulatory categories as a state of this technology as it
exists in June of 2023.
These instruments are changing very rapidly, the markets
are changing very rapidly. Fixing these categories to
particular technology definitions at a fixed point in time may
not allow for the innovation that this technology needs. The
current system is, as former Chair Lukken said, under the SEC,
principles-based. There are principles as to what a security
is. It is not fixed to a technology. So I would just urge
caution in getting too technologically focused on the
definition of a security.
Mr. Gallagher. I would like to jump in on that one.
Congressman Baird, I, like, Mr. Grewal here, and former
Chairman Lukken, agree deadlines--and that was you, Mr.
Giancarlo, wasn't it? Sorry. Deadlines are important. We--in
Dodd-Frank--I already referenced our work in Dodd-Frank at the
SEC. We had 110 mandates. Many of them had 1 and 2 year
deadlines. I remember telling Chair Shapiro at the time, ``This
is going to take a decade.'' And I had been a staffer, I have
worked on rules, I knew what they were like. And she was very
upset when I said that, but 12 years later, they are still
finishing some of those rules.
And so the idea that you are not going to put a deadline on
this, and prioritize ahead of what many, I would say, are sort
of extraneous rules that are being worked on right now at the
agencies I think would not be a good use of your time, and the
agencies' time, so please do proceed.
Mr. Baird. I see I am out of time, and thank you very much
for your comments. I appreciate it. I yield back, Mr. Chairman.
Mr. Feenstra. I now recognize the gentlewoman from
Illinois, Ms. Budzinski, for 5 minutes.
Ms. Budzinski. Thank you, Mr. Chairman. And thank you to
the panelists for being here today. I appreciate it. My
questions are really more around consumer protections, and they
are really to any of the panelists. Many have questioned how
consumer protections will be enforced against a fully
decentralized blockchain. Do you believe adequate consumer
protections could be achieved by regulating the exchanges
platforms according to the established CFTC core principles?
What other protections could provide--could be--could we
provide under the CEA principle-based regulation, in your
opinion?
Mr. Berkovitz. Well, Congresswoman, as I stated here, I
don't think, as currently structured, the CFTC regime provides
the same level of investor protection or customer protection as
the SEC regime provides. It is not just the exchange trading.
It is the advisors and the brokers that are also part of the
infrastructure and the securities market. If you go and you
want to buy a security, you want to buy Apple stock, chances
are--well, you could do it on Mr. Gallagher's platform. You
could just buy it on his on his.
Mr. Gallagher. Please do.
Mr. Berkovitz. But if you want to go to an advisor, if you
want to get some advice from an investment advisor, how should
I plan for my retirement, what should I do, is this a good
investment, you go to an investment advisor, and they have a
fiduciary duty to act in your best interest. That doesn't exist
in the CFTC world. You go--you can go to a commodity trading
advisor, and there is a duty of disclosure. They don't have the
same clear duty in the CFTC space that you do in the security
space. A broker too. In the securities world, the brokers have
a duty to act in the best interests of the person they are
trading for, and that many times includes the duty of best
execution, to get the best deal, wherever it is, on whatever
platform it is.
Ms. Budzinski. Yes.
Mr. Berkovitz. In the CFTC, you go to the futures
commission merchant or whatever, and they have a duty not--to
tell you the truth.
Ms. Budzinski. Yes.
Mr. Berkovitz. They can't commit fraud, and they have to
safeguard your money, but they don't have that same best
execution duty.
Ms. Budzinski. Yes.
Mr. Berkovitz. If you are moving something from a SEC world
into a CFTC world, there is a lesser duty, and the--there are
lesser investor protections. You--the SEC system provides that
to the investors, where just a CFTC market it is a wholesale
market. It assumes a level of sophistication on the CFTC side
that is there, not the retail. So you need to bolster that.
Ms. Budzinski. Okay.
Mr. Gallagher. Congresswoman, could I just jump in?
Ms. Budzinski. Yes.
Mr. Gallagher. From the SEC registered broker perspective--
and, of course, we have our affiliate, Robinhood Crypto, that
is not registered--it is doable today to provide these customer
protections. That is what we strive for everyday at Robinhood.
Let us take these learnings that we have, some of the learnings
that Mr. Berkovitz was talking about from our registered broker
side, apply them to this platform.
For platforms that want to do it right, that care about
their customers, that care about customer protection, it is
absolutely doable now, without legislation. So the idea of--
that it is not doable without SEC oversight, I don't
necessarily agree with. I think, within the construct that the
bill sets out, the CFTC has all the capabilities. And I think
Chairman Lukken pointed out a really good point, it remains to
be seen at the role of the FCM here in this role, and I think
that is where the heavy work of this customer protection could
possibly be handled. But it is entirely doable, and, quite
frankly, for a platform like us, we would say we are already
doing that. We could comply tomorrow, to provide not only the
basic investor protections, but what we view as enhanced
protections.
Ms. Budzinski. Yes.
Mr. Grewal. Congresswoman, we could and would absolutely
comply tomorrow, as Mr. Gallagher suggests. And, to the extent
there are concerns you or others on the Committee may have
about the sufficiency of consumer protections, I would
encourage you to consider that the discussion draft speaks
specifically to important restrictions that protect consumers
in important ways. For example, requirements for asset
segregation. For example, restrictions on commingling. For
example, requirements that there be full disclosure of any
conflicts arising out of affiliated entities. So the draft does
do a very good job of assuring explicitly that the types of
protections the consumers need are included as part of the
scheme.
Ms. Budzinski. Yes.
Mr. Giancarlo. And yet, Congresswoman, what many advocates
for this technology are seeking is a less intermediated world
than the one that they have been--that they have found
themselves in. And so I think, as we go forward, we need to try
to find the right balance. The goal can't be to re-erect an
entire intermediated world on this new technology, a technology
that is been developed to break through some of the
gatekeeping, rent collecting, cost collection that goes on in
the existing financial system and make it more accessible.
Ms. Budzinski. Okay. I think I am about out of time, so I
will just yield back, but thank you for your insights on that
and my question. I appreciate it.
Mr. Feenstra. I now recognize the gentleman from Tennessee,
Mr. Rose, for 5 minutes.
Mr. Rose. Thank you to our panel of witnesses for your time
today, and I will dive right into my questions. Mr. Gallagher,
I noted that there are a small handful of digital assets in the
very recent Binance and Coinbase complaints that the SEC
alleges are securities that are also available on Robinhood
Crypto's platform. To the extent this allegation were proven to
be true, couldn't you simply offer those tokens through your
SEC-registered broker/dealer?
Mr. Gallagher. Well, thank you very much for that question,
Congressman. It is a very, very telling question. The answer is
no. It--there are a few coins that have been noted in recent
SEC complaints that we do trade on our platform. We are
actively reviewing the SEC analysis to determine what, if any,
actions to take in that regard. But you would think, with a
major broker/dealer sitting on the other side of our house, our
primary business, we could simply say, ``Okay, SEC, you have
just said these are securities, I am going to go trade them on
my broker now.'' It is impossible without regulatory relief and
infrastructure changes in the securities markets.
Mr. Rose. In--and beyond what you have already identified,
are there--what are the obstacles to doing that?
Mr. Gallagher. So, Congressman, in my written testimony I
laid out a little bit about a process we called Crypto the Hard
Way at Robinhood. When Chair Gensler at the SEC, in 2021, said
``Come in and register,'' we did. We actually came in, and we
did it proactively. We weren't being investigated by the SEC.
We did it just because he wanted folks to do it, we thought it
was good for our business and our customers. We went through a
16 month process with the SEC staff trying to register a
special purpose broker/dealer, and then we were pretty
summarily told in March that that process was over, and we
would not see any fruits of that effort.
Now, one of the barriers that was raised in the discussions
was the need to fix the--what I will call the 33 Act
Disclosure. So the issuer disclosure deficiency that the SEC
used as being present in crypto markets, for us, as an agency
broker, to fix a perceived issuer disclosure issue is
impossible. We can't control the actions of third parties. And
so, by laying out that one issue it became a very high hurdle
to pass, and that is why I admire the construct in the bill
today that would get us quickly past that issue of the SEC
registration status of the issuer.
Mr. Rose. And just for the record, what is the status of
your registration effort presently?
Mr. Gallagher. I believe it is--so the technical term would
be DOA. We just got an e-mail saying no more talks, but they
would be happy to talk to us about a pending--and any
rulemaking. So if there will be a rulemaking on special purpose
brokers, we will engage quickly. I am hoping we can still make
process--progress with the SEC. I mean, the professional staff
was nothing but professional throughout the whole process. I
think they want--my sense was they wanted to find some way to
be able to do this, but it just wasn't to be had.
Mr. Rose. Thank you. I am going to shift gears a little
bit. In 2021 SEC Chair Gensler said, regarding the regulation
of digital assets, ``There are some gaps in this space. We need
additional Congressional authorities to prevent''--or ``to
prevent transactions, products, and platforms from falling
between regulatory cracks.'' In 2022 he said that exemptive
relief may be needed for crypto platforms to register with the
SEC. It now seems that his tune has changed. He now says the
securities laws are clear, but that he doesn't need--and that
he doesn't need additional authority from Congress.
Mr. Berkovitz, do you agree with Chair Gensler version one,
that he needs more authority from Congress to regulate crypto,
or do you agree with Chair Gensler version two, that the
Federal securities laws are 100 percent clear, and no relief is
necessary to regulate digital asset securities and crypto
platforms seeking to support them?
Mr. Berkovitz. Well, I think the statutory authorities are
adequate, sufficient, and appropriate, the securities laws. I
do believe that there is the regulatory gap, as I have outlined
in my testimony, that registration is needed to close the
current regulatory gap over non-security digital assets. That
is what I say in my testimony.
Mr. Rose. Thank you. I appreciate that. I--try to fit in
one more. Mr. Grewal, you mentioned your petition for SEC
rulemaking in your testimony. Why do you think it is necessary
and appropriate for us to act with new legislation if you are
also pressing for rulemaking with the SEC, as evidenced through
your petition at the same time?
Mr. Grewal. Thank you, Congressman. I am--I appreciate your
raising the petition for rulemaking we filed last July, nearly
10--or now--I guess now 11 months ago. And we--the reason we
filed that petition, even as we support legislative efforts to
the one we are discussing today, is that under the current
circumstances at the SEC, as Mr. Gallagher has alluded to, the
invitation is extended repeatedly to come in and register, and
yet, like, Robinhood, when Coinbase has attempted to do just
that, to talk about how we could register as a broker/dealer,
or an ATS, or even as an NSE, after months and months of
discussion, we were simply dismissed, with no response, or any
counterproposal, or ideas coming back from the SEC.
Mr. Rose. Thank you. My time has expired. Thanks for your
indulgence, and I yield back.
Mr. Feenstra. I now recognize the gentleman from
California, Mr. Duarte, for 5 minutes.
Mr. Duarte. Thank you. Dan Gallagher, you are the only one
with the SEC on your placard in front of you, so let us talk
about SEC stuff to start. Well----
Mr. Grewal. Because he didn't put it on there. That is the
only reason, Congressman.
Mr. Duarte. Well, you are--you made a mistake. Anyway, I go
on Charles Schwab, a brokerage, to buy a stock, and I can look
at financial details, I can look at fundamental details, I can
look at all kinds of company analytics, book value, earnings
per share. And now we are going to put crypto objects on the
stock market under the SEC guidance. How does a retail investor
know what they are getting, or what the fundamentals are, or
how do they evaluate? What are the metrics of--that help them
understand what they are buying?
Mr. Gallagher. Yes. So it is a great question, Congressman,
and the answer is disclosure, and that is what is missing right
now. Compulsory disclosure in the digital asset space is
missing.
Mr. Duarte. Disclosure of what? I am sorry. I am--how many
shares are out there, how many--are out there? What----
Mr. Gallagher. Anything.
Mr. Duarte. What are the metrics that would foretell high
likelihood of success, or at least let us evaluate one versus
another? How do you measure an airdropped crypto asset? From a
Securities Exchange point of view, what is the relevant
information? I know earnings per share, or discounted cash flow
is always a theory of stock valuation.
Mr. Gallagher. Right.
Mr. Duarte. What is the theory of crypto valuation on the--
from the SEC that we are defending to protect retail customers.
Mr. Gallagher. Right. Yes. And, look, I think the value of
disclosure is in the eye of the investor, right? Some investors
want to look at quantitative measures, like discounted cash
flows, as you said, some want to look at qualitative measures.
Who is the management team, who formed this, what--in this
instance, what does this coin do? Does it have a utility? What
network is it on? Is it stakeable, right? All of these other
features that might be important to it.
Mr. Duarte. Well, what would be the comparable of full
dilution, or earnings per share, in--when you talk about
crypto?
Mr. Gallagher. Well, you have just--you have gone right
past my level of accounting----
Mr. Giancarlo. Might I jump in? Because it is a really
interesting question. So, in the commodities world, overseen by
the CFTC, there isn't the same kind of disclosure you get in
the securities world. In other words, if you want to buy oil
futures, if you want to buy wheat futures, there isn't
disclosure put out as to how the wheat markets necessarily----
Mr. Duarte. I will get to that next, but tell me something
about the securities field.
Mr. Giancarlo. Yes. Yes.
Mr. Duarte. Can any of you answer me, what are the prime
metrics of valuing a crypto asset in the Securities Exchange
markets--regulated markets?
Mr. Gallagher. I think the reason we are having a hard time
answering it is it hasn't happened, because there has been no
registration for these assets under the securities laws.
Mr. Duarte. Okay. So we don't have a--we don't know what we
are disclosing, but we are going to be completely transparent
and disclose something?
Mr. Gallagher. Yes. Something, right.
Mr. Duarte. But we don't really know where the value is
vested? It is not earnings.
Mr. Gallagher. Well, I think a lot of this is----
Mr. Duarte. It is not business strategy. It is just
something.
Mr. Gallagher. Well, the----
Mr. Duarte. I mean, because right--we are just--right now
we are closing down SPACs, right? We are just shutting it down,
because it is too vague, too empty, too hollow, too much room
for abuse. Special Purpose Acquisition Companies.
Mr. Gallagher. Sure.
Mr. Duarte. We are shutting them down at the SEC, but now
we are going to open up crypto, and we don't know how that is
valued either.
Mr. Grewal. Congressman, if I may?
Mr. Duarte. Please.
Mr. Grewal. The most important element of disclosure,
whether you are talking about traditional equities or a crypto
asset, is what does this thing do? And in the case of crypto
assets, how does this network work? What is it aimed at
providing in real ways for real people? That would happen under
a regime of disclosure. It is important that people who
purchase these crypto assets understand that----
Mr. Duarte. Well, and----
Mr. Grewal.--and they can then make independent assessments
as to that value based upon their conclusions.
Mr. Duarte. Yes, but we talk about what is your competitive
advantage, what is your unique value proposition, what is your
corporate strategy, what are you going to do better than other
companies aren't already doing, what resources do you have, or
what is your talent pool? I don't see how any of that fits into
describing how we value a crypto asset. So I will let that sit
here. Certainly be willing to have more answers further.
The other thing is, on the commodities side, there are lots
of commodities in the world, but not all of them get listed on
the Chicago Board of Trade. How do or don't--if I look at the
ownership structure of even Ethereum and Bitcoin, the best case
scenarios, it still looks like they are very consolidated in
their ownership, and very--with a great deal of potential for
manipulation by a few large holders to--where the whales can
hurt the fish, if I look at certain charts. The tiny holders
are going to get outplayed by the larger holders. Can--what are
the standards there? How can we look to prevent that?
Mr. Lukken. The CFTC, since 1923, has had large trader
reports filed daily by people trading in the markets, so they
would have similar information for these products, so they
would see if there was an outsized position that could be
manipulated. And some of my former CFTC colleagues here know
that there is surveillance staff that tries to talk those
people out of positions, or force them to liquidate if they are
too large.
Mr. Duarte. And that is what happened on the LIBOR rate
manipulation back in 2000----
Mr. Lukken. Well, that was off-exchange, so that was----
Mr. Duarte. Was it?
Mr. Lukken.--that was part of the problem, it was off-
exchange. But when it is on-exchange, and Chairman Giancarlo
and my general----
Mr. Duarte. So you can see patterns of manipulation by
large holders? Okay. Yes, Mr. Chairman, thank you. I yield
back.
Mr. Feenstra. At this time the Committee will break to
accommodate votes. I humbly wish, and hope, that all of us
stick around. We will resume after votes, so the Committee
stands in recess, subject to the call of the chair. Two votes.
[Recess.]
Mr. Johnson [presiding.] All right, we will call back to
order this full Committee hearing. With that, first up in the
question queue is Mr. Alford from Missouri.
Mr. Alford. Thank you, Mr. Chairman. I want to start off
with a confession. I, like lot of people in my Fourth
Congressional District of Missouri, don't own any crypto, and
know little about it, so I am learning, and that is kind of
where I am approaching this today, okay? So bear with me. I am
a big believer that less government involvement in business is
the best policy, but when it comes to crypto, it seems like we
are living in the Wild West, and Marshal Dillon is nowhere to
be found. The town, the industries that you represent, is
crying out for someone to come along and lay down the law, and
to help save them.
So, Mr. Grewal, I want to start with you today. In layman's
terms, so that I can understand it, and our district can absorb
it, and America can understand, what happens if the marshal
doesn't show up? If Congress does not act, what happens in the
Westworld of crypto currency?
Mr. Grewal. Thank you very much, Congressman, and I think a
couple of important things will happen if this Congress fails
to act. First and foremost, the spot market for digital asset
commodities will continue to lack Federal supervision in a way
that will assure integrity and protections for consumers. As
Chair Behnam articulated, I thought quite well, earlier today,
as things currently sit right now, there is no Federal
protection for the spot market when it comes to digital asset
commodities. I think that is the most important thing that--
opportunity that we lost if the Congress fails to act.
The other thing that will happen is that we will continue
to see this innovation, this industry, invest more and more of
its resources outside of the United States, in jurisdictions
that have a much--a more balanced and appropriate framework and
regulatory structure for this particular industry. So it is
both about protecting consumers, on the one hand, in these
important markets, and on the other, making sure the
innovations that are being developed are being developed here
in the United States.
Mr. Alford. Mr. Gallagher, what happens if we don't act,
and the business goes to some other part of the world? What
does that do to our economy and to the industry here in
America?
Mr. Gallagher. Thanks, Congressman. I--look, I think it is
already happening. We are seeing firms, crypto firms, declare
very publicly that they are going to move to international
jurisdictions. Sometimes it is because they want to go to low
to no regulation jurisdictions. Sometimes--amazingly, we are at
a point now where even Europe is ahead of us in providing a
regulatory framework, and they want to go and chase clarity.
They actually want to go to a jurisdiction where they don't
have to worry every day about an enforcement action being
dropped, a coin being deemed a security that yesterday wasn't,
that sort of thing.
And so I think we are already there. And that is--again,
relates back to the question we had earlier about deadlines,
and things like that. I think it is incredibly important for
this Congress to act quickly with legislation, and I think then
it is going to be incumbent on the regulators to also move
quickly.
Mr. Alford. Thank you. Mr. Lukken, in your testimony you
talk about the CFTC has longstanding anti-fraud and anti-
manipulation enforcement authority over the cash or spot
markets, including for digital assets. Is the CFTC's limited
enforcement authority sufficient to effectively police the
digital asset ecosystem?
Mr. Lukken. You need a proper regulatory structure, not
just only enforcement authority. So enforcement authority--and
we have heard about CFTC and the SEC taking strong action, but
you can't regulate by enforcement. You need a regulatory
system. Most of these actors here testifying today want to be
in compliance. They want to do the right thing, compete in a
fair and responsible way. By providing a regulatory framework
we can do that, and that is going to help make sure that the
bad actors stay out of, in your case, the Wild, Wild West, and
the good actors are actually being policed properly.
Mr. Alford. Thank you so much, gentlemen, for you being
here today, and your candor, and your investment in our
economy, and our society. Thank you. I yield back.
Mr. Johnson. Ms. De La Cruz, you have 5 minutes.
Ms. De La Cruz. Thank you to all the witnesses joining us
today. My first question--Mr. Gallagher, in your written
testimony you reference the already eroding competitive
position of the U.S. with regards to digital asset markets. Is
it too late for us to change the course, and how quickly do you
feel we need to act?
Mr. Gallagher. Thank you so much for the question,
Congresswoman. Look, I don't think it is too late, but I do
think, as I mentioned in my response to Congressman Alford, it
is imperative that you move quickly. It has taken too long. The
need for legislation I think has been pretty well recognized
for years now, and in that period, other jurisdictions have
seized the moment, right? Whether it be in Asia with Singapore,
whether it be the EU--and, again, the EU is in--one of the
lightest touch regimes in the world. They are very--they are
deemed to be a very regulatory group of countries, and so it is
kind of amazing to me that they have outpaced us in this
regard.
So I think there is a chance to continue to have a thriving
U.S. digital asset market, to keep our innovators here, keep
our entrepreneurs here. One of the things that we are finding
is there is less investment in this space, right? The messaging
that has been given to those who fund this incredible new
technology is you are not wanted here, or whatever you are
going to fund is not wanted here, so let us go fund it
elsewhere, let us not fund it at all, let us fund some
different industry. And that is being felt in, very much in
Silicon Valley and across the country. So please move with all
due haste, if you can.
Ms. De La Cruz. Thank you. My next question is for Mr.
Grewal. In light of the SEC's lawsuit against Coinbase
announced this morning, could you summarize for this Committee
your interactions with Federal regulators that led to this
point?
Mr. Grewal. Thank you, Congresswoman. Well, I am still
digesting the complaint that was served earlier today. What I
can speak to in much greater detail are the many, many
interactions we have had with the SEC, going back not just
several months, but indeed several years. We have been a
publicly listed company since 2021. As you might expect, as
part of that process, we made very thorough disclosures of our
business model, our review process, the way we consider assets,
the way we assure that digital asset securities, because of the
current law, are not listed on our platform.
After all of that disclosure, after all that examination,
we were allowed to list, and so we have listed as a public
company for now 2+ years. Since that time, we have had over 30
engagements with the SEC to try to work towards a sensible
framework for regulation that would allow, for example, the
registration of platforms as either broker/dealers, or NTASs,
or a national security exchange. We received no response after
our presentations as part of those discussions.
In July of last year we filed a formal petition for
rulemaking in which we asked 50 questions that we believed
needed to be answered in order for there to be a reasonable and
comprehensive regulatory framework and structure. Months and
months have passed. We are now at 10 or 11 months. We still
have not received a response to even whether rules would be
issued, let alone what rules those might be. That is the
history that we are dealing with.
Ms. De La Cruz. So, in your view, could the SEC's concerns,
as expressed in the lawsuit, be settled through continued
dialogue? Because what I am hearing is that there hasn't been
much dialogue, it has been one-sided dialogue. Or do you--
would--what would clear this up be clear legislation from
Congress? Is that the only way to really remedy, or to settle,
the crypto industry specific gaps?
Mr. Grewal. Well, as you suggest, Congresswoman, there
hasn't been much of a dialogue. I would rather--more accurately
characterize it as a monologue. Nevertheless, we remain open
and willing to discussions around what a sensible framework
could look like. I would happily walk over to the Commission
today, as soon as this hearing were done, and have that
conversation with the Chairman, or any other member of the SEC
or staff that were interested in that conversation.
But in the absence of a true conversation or dialogue,
legislation offers the best path forward, not just for
Coinbase, but for the entire industry, so that consumers are
protected in this emerging market. That is our goal.
Ms. De La Cruz. Excellent. Thank you. With that, I yield
back.
Mr. Johnson. Thank you, ma'am. I would yield myself 5
minutes for questions. Mr. Gallagher, coming at you, give us
some sense of the disclosure regime in place at the SEC for
those offering new securities, and are those disclosures well
suited to the digital assets marketplace?
Mr. Gallagher. Thanks for the question, Congressman. The
requirements from the SEC are tailored to actual investment
contracts, to actual securities. I would say--and I have a
fundamental disagreement with the notion that most, or the vast
majority of existing digital assets are securities under the
traditional definition, as defined 80 years ago in a Supreme
Court case regarding orange groves.
So, I don't think the current SEC requirements are
appropriately tailored to digital assets. I do think, from what
I have seen in the bill, that the basic disclosure principles
in the bill, in the DAMS Act, source code, transaction history,
plan of development, the basic economics of the offering, the
list of affiliates, material risks, all these things, those are
core issues that would be certainly subsumed within the current
SEC requirements, but more tailored to this industry, to the
digital asset industry.
Mr. Johnson. So I don't want to put words in your mouth,
Mr. Gallagher, so feel free to push back on me, but it seemed
as though you are saying that the passage of this bill would
put into place a disclosure system that is more effective, and
is better tailored to the marketplace, than what we have today?
Mr. Gallagher. What we have today is nothing, Congressman.
What we have today are no registered coins of any merit. And I
think some might point out a few coins that registered under
the 1934 Act because of an enforcement case. Those aren't real.
We don't have 1933 Act registered coins that, today. So yes, I
think that what is laid out in the DAMS Act is a great--at a
minimum, a great starting point. It could be the endpoint too.
Mr. Johnson. Yes. Thanks. And for our three former
Commissioners of the CFTC, thanks for being here. We are
obviously very grateful to have your insight. We have heard
today about how the CFTC is a principles-based regulator, about
how they can be nimble, about how they regulate in such a way
to allow for innovation within product offerings. I think
sometimes that can be recharacterized as light touch regulation
without an appropriate focus on customer protection. So for the
three former Commissioners, give me a sense. Are those
mischaracterizations as off base as I assume they are?
Mr. Giancarlo. Well, maybe I will lead off and just simply
point out, just as a fact the CFTC markets did not fail during
the great financial crisis. Whether that regulatory structure
is characterized as light touch, heavy touch, it worked, as
compared to perhaps some of those heavy touch jurisdiction--
regulatory jurisdictions, where there was a great deal of
failure.
Mr. Berkovitz. I think the CFTC regulatory system is fit
for purpose for the markets it regulates. I think it does a
good job. I think the combination of principles and
prescriptiveness, and the core principles in CFTC regulation,
works well for the markets that CFTC regulates, and protects
adequately the market participants in the market it regulates.
I do not believe that regime is adequate to protect
participants in the securities markets, so I would be wary of
moving securities from SEC jurisdiction into the CFTC markets.
I do not think the customers and investors receive the same
degree of protection in the CFTC regulated markets as they
receive in the SEC regulated markets across the board. It is
not just markets. There are many more aspects to the regulatory
regimes than just the trading of these assets on exchanges.
Mr. Lukken. Well, the principles-based system, I think
there is a misunderstanding that somehow it is light touch. It
is flexible, but don't get me wrong--and the registrants that
have to comply with the Commodity Exchange Act have significant
duties and responsibilities in doing so, and--protecting
customers. And so I think you have seen over the years, as
defaults happen in our markets, those customers have been
largely protected, and--I mean, all the way through bankruptcy,
and so this bill tries to replicate that.
I take a little bit of difference of opinion with my
colleague here. I think the CFTC is more than capable of taking
on certain customer protections for these new markets, and
agree securities should be regulated by the SEC, but the CFTC
certainly has the ability. They showed that during the retail
foreign currency spot markets, when Congress gave them the
authority to oversee that, and we are now at record low
customer protection complaints, according to the NFA. So, to
me, the CFTC certainly has the ability to take on this
marketplace.
Mr. Johnson. Yes, I think that is very well said. I think
there is all the evidence in the world that there are robust
customer protections within that regime, that the CFTC is a
strong market regulator. And as you mentioned, Mr. Giancarlo,
that those registrants, that environment, that landscape, has
been at least somewhat to--quite resilient to broader market
disruptions. That is not for nothing, right?
With that, I would yield back. Mr. Soto, followed by Mr.
Molinaro, that is the batting order. Sir, you have 5 minutes.
Mr. Soto. Thank you so much, Mr. Chairman. When I get to
talk to my constituents about things such as digital tokens,
and cryptocurrency, stablecoins, Non-Fungible Tokens, people's
eyes glaze over, right? And I think that is one of the
challenges as we are working in legislation for this area. I am
also one of the co-Chairs of the Blockchain Caucus, and I have
worked with folks on both sides of the aisle to try to come up
with a legislative regime to define jurisdiction between the
CFTC, FTC, SEC. And so, first, if we were to define a digital
asset, how do you think it should be defined? And I am going to
leave that open for the whole panel, and then we will go to
jurisdiction next. But, Mr. Chairman?
Mr. Giancarlo. Thank you. And, Mr. Soto, I must say, it is
nice to see you again. The last time I saw you, we were playing
guitars in this very room.
Mr. Soto. We were rocking it out.
Mr. Giancarlo. Former Chairman----
Mr. Soto. We were rocking it out, definitely.
Mr. Giancarlo. Mr. Grewal said something interesting
before. I want to actually build on it answering that question.
When looking at any crypto, I think it is important to look at
the underlying blockchain. The value is in what does the
underlying blockchain do? What is its purpose, what does it
serve? And it can serve in many different functions.
There are some that say all cryptos are securities, but I
think that is only the case if the underlying blockchain serves
a capital formation purpose. An underlying blockchain may serve
something that looks like a commodity. It may serve something
that looks like a banking function. It may look like something
that does governance. It may look like something that creates
different forms of--art forms. The--this technology doesn't
easily fit into one simple box, and so the answer to the
question lies in what is the purpose of the underlying
blockchain? What purpose does it serve?
And that is why it is challenging, and, again we commend--I
think all my colleagues commend this Committee for the very
healthy first stab it has taken at this, and to try to come up
with some definitions that will work as a lasting legal
framework we can adopt.
Mr. Soto. And, Mr. Chairman, therein lies the problem,
right? It could be a commodity, it could be a security, it
could be a currency. Mr. Grewal, where do you think we should
line up in digital assets, and do you have any opinions on
where jurisdiction should lie between CFTC, SEC, and
potentially FTC as well?
Mr. Grewal. Thank you very much, Congressman. I think the
discussion draft actually goes a great distance towards the--
striking the right balance, because, as you rightly pointed
out, these assets are, and often do serve a myriad of purpose
and reflect a myriad of qualities. I think that the most
important thing that is--ought to be considered here, and--I
believe is reflected in the current draft is to acknowledge
that the characteristics of assets can and do change over time.
It may be the case, particularly for assets that were
created solely for the purpose of capital formation, as Mr.
Giancarlo identifies, that the asset is initially properly
treated as a security and remains--and should continue to be
treated as a security for all time. But there are many other
assets which evolve as they decentralize, and as the
information asymmetry between a small group of people with
unique access with operation of the network changes, and you
have broader distribution of the assets in ways that really
require a different type of disclosure for a different type of
participant in the network. That is why I think the discussion
draft strikes the right balance.
Mr. Soto. Thanks--thank you, Mr. Grewal, and our Securities
Clarity Act (H.R. 3572) with Representative Emmer actually goes
into the taxation part of this. Commissioner Gallagher, where
do you see us defining digital assets and jurisdiction?
Mr. Gallagher. Congressman, I don't have much to add from
what has already been said. I do think the discussion draft
does a really fine job of getting at this very tough issue.
These products do change. We recognize the basic definition,
right, is basically a blockchain-based asset. We talk in terms
of coins at Robinhood, and I do think setting the definition,
and having legislation that anticipates the life cycle, and the
potential for change in these assets is critically important.
Mr. Soto. Thank you.
Mr. Gallagher. I will point out, too, our--Robinhood
customers--you said your constituents, their eyes roll over.
Our customers, their eyes get real big when they start talking
about crypto assets.
Mr. Soto. I said glaze over, not roll----
Mr. Gallagher. Glaze over, okay. All right.
Mr. Soto. It is complicated, not that they are sarcastic
about it, just for the record.
Mr. Gallagher. Well, let me keep the record clear.
Mr. Soto. Commissioner Berkovitz, where do--where should we
fall on digital assets on----
Mr. Berkovitz. Actually, I am happy to say that I found an
issue where I agree with my colleagues, in terms of the
definition of digital asset, and the terms--that assets can
change over time. But I would emphasize again, and I think I am
in agreement with my former Chairman, that the technological
description of the asset, or the technology by which it is
traded or distributed, is not determinative of whether it is a
security, it is its functional nature as a capital-raising
instrument. That--so I would have a digital asset apart from
the definition of security. Thank you.
Mr. Soto. Thank you. My time has expired.
Mr. Johnson. The honorable gentleman from New York, Mr.
Molinaro.
Mr. Molinaro. That was a very kind introduction, Mr.
Chairman. I appreciate that very much. I don't play the guitar,
but I am very happy the two of you could at least agree for a
moment. Thanks, Mr. Chairman. So I want to return to the very
question of defining decentralization. And I think, of course,
we all recognize that the success of this particular proposed
legislation is really found here, in establishing a process
that accommodates tokens that mature and become decentralized
over time. So, Mr. Giancarlo, I am just going to return to this
with you.
The discussion draft does both, but your testimony stated
the CFTC and SEC should work together to certify a blockchain--
that a blockchain is decentralized. Right now, of course, it
is--only the SEC's is defined within the draft. Can you just
elaborate, how might that function--and, by the way, I--perhaps
address this question of anonymity, obviously. How do we--how
could we prove decentralization as the draft is written?
Mr. Giancarlo. Yes. So the point I made in my testimony,
and--to answer the first part of your question, is--I think it
is vitally important that the CFTC have a role in that
determination as to whether protocol is sufficiently
decentralized to be a commodity, because, at the end of the
day, the CFTC will then have to regulate it, and will have to
make sure that it trades on its regulated exchanges. So I think
that leaving that decision only to one agency, as opposed to
two agencies, they both have a vested interest. And hopefully
we--the bill can put together a mechanism where the two
agencies can come together on that determination.
In my testimony I also said that the determination that
something having been decentralized might become centralized
sufficient to become a security I think is also something there
should be a mutuality of import into that determination. So it
is one of the suggestions that I have made for improvement of
the bill, to make sure that the CFTC's role in that
decentralization/centralization determination is recognized in
the legislation.
Mr. Molinaro. And so, as written, though, do we have the
tools--are the tools in place to adequately identify that
decentralization? And I think the question of anonymity is a
problem, right? Who owns how much of what?
Mr. Giancarlo. Right. In the commodities world, unlike in
the securities world, before we even get into digital assets,
when it comes to commodities that come out of the ground, as
opposed to-- which the CFTC regulates, as opposed to securities
that are issued by corporations, that distinction is quite
clear, right? And there is no disclosure on coal, or wheat, or
other commodities from a central party. What do market
participants there do? And I was making this point earlier,
they rely on third parties to provide a lot of that data set.
And today, even in the decentralized digital asset space,
there are third parties, there are chain analysis, there are
other firms that are actually providing very good data sets.
So, as we think about a world of decentralized digital
commodities, we shouldn't have to use old forms, and think
there should be somebody in the center that is issuing
disclosure. There will be third parties stepping up, providing
very good analysis that people investing in digital commodities
will look to.
Mr. Molinaro. I am confident we are going to dive deeper
into this topic. I want to just switch, if I could, to Mr.
Berkovitz. The Dodd-Frank Act significantly expanded the
jurisdiction of CFTC to include the $500 trillion swaps market,
which required the agency to undertake significant new
rulemaking. Was the Commission able to effectively implement
those new rules, and do you believe the swaps market is now
better regulated than it was before Dodd-Frank?
Mr. Berkovitz. Absolutely, Congressman. The Dodd-Frank Act,
I believe has significantly improved the resilience, and
reduced systemic risks in the previously unregulated swap
market, and it is very--I am very privileged and proud of
having the opportunity to serve at the CFTC at that time. But I
would say that the joint rulemakings that the CFTC did with the
SEC during that time were really very resource intensive, and a
very high priority of both Chairs. Chair Gensler and Chair
Shapiro really put those joint rulemakings at a very high
priority. But it was successful in the end, I believe.
Mr. Molinaro. Sure. And this alludes to--or touches on
something you alluded to earlier. If given the proper authority
and resources from Congress, is there any reason to expect that
the agency would not be able to issue oversight over digital
commodities about markets?
Mr. Berkovitz. The non-security digital spot markets,
without affecting current agency jurisdictions, yes, I believe
so.
Mr. Molinaro. Yes. All right. Let me just ask generally--
this is more for the people at home who do understand this
piece. Is the risk of scams, or another FTX-like scandal, more
likely with or without Congressional action? To anyone.
Mr. Grewal. Without.
Mr. Gallagher. Agree, without.
Mr. Berkovitz. Agree.
Mr. Molinaro. Thank you, Mr. Chairman. I yield back.
Mr. Johnson. Before we close today's hearing, we would ask
for some closing comments from the Ranking Member, Mr. David
Scott.
Mr. David Scott of Georgia. Well, thank you very much. And
first I want to thank Chairman Behnam, our current CFTC
Chairman, for his comments and insight earlier this morning.
And now, for this panel, I want to thank the Honorable J.
Christopher Giancarlo, former Chairman of the Commodity Futures
Trading Commission, Mr. Paul Grewal, Chief Legal Officer of
Coinbase. Thank you. The Honorable Don Gallagher, Chief Legal,
Compliance, and Corporate Affairs Officer of Robinhood Markets,
Inc. former Commissioner also of the United States Securities
and Exchange Commission. Thank you. Then the Honorable Don
Berkovitz, former Commissioner, Commodity Futures Trading
Commission, and the Honorable Walter Lukken, President and
Chief Executive Officer of Future Industry Association, and
former Acting Chairman of the Commodity Futures Trading
Commission. We have had just a spectacular and informative
hearing from you all.
And we are burdened with two very serious challenges. First
of all, to deal with this new and emerging aspect of our great
financial system, and then we have two different agencies
handling the regulation of it, the Securities and Exchange
Commission, the CFTC. Commodities and securities, all there
together. But the big issue that we have yet to deal with, and
we have to deal with, is making sure that we appropriate the
proper funding so that you can do the job. And that is our job.
And that is why this hearing was so important. We have to do it
right.
And we can't skimp with this. This is the biggest challenge
facing our financial system, certainly in most of our lifetime
here. We have faced many challenges in the history of our great
nation's financial system, but this one is revolutionary, and
we have to make sure we fund it properly. And so we look to you
to work with us here in Congress to make sure that we provide
you with the resources, the financial strength, to do the job,
and to do it right for the American people, and our nation, and
the world. Because this could be very critical to do it right,
to keep our economy and financial system number one in the
world. Thank you for your valuable contribution.
Mr. Johnson. Washington, D.C. is a town that sometimes
confuses activity with progress. We are all running a million
miles a minute, and so after each hearing I try to take just a
few seconds to ask myself what major themes appeared out of
that hearing. And, to me, it was--it is crystal clear what--we
have heard it from both panels today, as well as from the
questions and statements of the Members, three major themes.
First off, there is uncertainty surrounding the transition
of digital assets from security to commodity, and that that
uncertainty injures innovation and market activity in this
country. That is number one. Number two, that there--we are in
need of a spot market regulator in the digital asset space.
Number three, that the discussion draft makes important and
serious advancements in closing both of those gaps. And so I
want to thank our panelists for helping us to fill out those
themes a bit, to give us some sense of how the discussion draft
can be strengthened, and what the path forward might look like.
And, with that, I would note that, under the Rules of the
Committee, the record of today's hearing will remain open for
10 calendar days to receive additional material and
supplemental written responses from the witnesses to any
questions that were posed to them by Members. And, unless there
is anything else to come before this Committee, we will stand
adjourned.
[Whereupon, at 2:50 p.m., the Committee was adjourned.]
[Material submitted for inclusion in the record follows:]
Supplementary Material Submitted by Hon. Glenn Thompson, a
Representative in Congress from Pennsylvania
Digital Asset Market Structure Discussion Draft
(a) Short Title.--This Act may be cited as the ``[To be added Act
of 2023]''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title; table of contents.
TITLE I--DEFINITIONS; RULEMAKING; PROVISIONAL REGISTRATION
Sec. 101. Definitions under the Securities Act of 1933.
Sec. 102. Definitions under the Commodity Exchange Act.
Sec. 103. Definitions under this Act.
Sec. 104. Joint rulemakings.
Sec. 105. Provisional registration of CFTC intermediaries.
Sec. 106. Provisional registration of SEC intermediaries.
TITLE II--DIGITAL ASSET EXEMPTIONS
Sec. 201. Exempted transactions in digital assets.
Sec. 202. Requirements to transact in certain digital assets.
Sec. 203. Enhanced disclosure requirements.
Sec. 204. Certification of certain digital assets.
TITLE III--REGISTRATION FOR DIGITAL ASSET INTERMEDIARIES AT THE
SECURITIES AND EXCHANGE COMMISSION
Sec. 301. Treatment of digital commodities and other digital assets.
Sec. 302. [Anti-fraud] authority over payment stablecoins.
Sec. 303. Eligibility of alternative trading systems.
Sec. 304. Customer protection rule modernization.
Sec. 305. Modernization of recordkeeping requirements.
Sec. 306. Modifications to existing rules for digital assets.
Sec. 307. Treatment of certain digital assets in connection with
federally regulated intermediaries.
Sec. 308. Dual registration.
Sec. 309. Exclusion for ancillary activities.
TITLE IV--REGISTRATION FOR DIGITAL ASSET INTERMEDIARIES AT THE COMMODITY
FUTURES TRADING COMMISSION
Sec. 401. Commission jurisdiction over digital commodity transactions.
Sec. 402. Requiring futures commission merchants to use qualified
digital commodity custodians.
Sec. 403. Trading certification and approval for digital commodities.
Sec. 404. Registration of digital commodity exchanges.
Sec. 405. Qualified digital commodity custodians.
Sec. 406. Registration and regulation of digital commodity brokers and
dealers.
Sec. 407. Exclusion for ancillary activities.
TITLE V--INNOVATION AND TECHNOLOGY IMPROVEMENTS
Sec. 501. Codification of the SEC Strategic Hub for Innovation and
Financial Technology.
Sec. 502. Codification of LabCFTC.
Sec. 503. CFTC-SEC Joint Advisory Committee on Digital Assets.
Sec. 504. Modernization of the Securities and Exchange Commission
mission.
Sec. 505. Study on decentralized finance.
Sec. 506. Study on non-fungible digital assets.
TITLE I--DEFINITIONS; RULEMAKING; PROVISIONAL REGISTRATION SEC. 101.
DEFINITIONS UNDER THE SECURITIES ACT OF 1933.
Section 2(a) of the Securities Act of 1933 (15 U.S.C. 77b(a)) is
amended by adding at the end the following:
``(20) Affiliated persons.--The term `affiliated person'
means--
``(A) with respect to a digital asset issuer--
``(i) a person that directly, or indirectly
through one or more intermediaries, controls,
or is controlled by, or is under common control
with, such digital asset issuer; and
``(ii) a person that was described under
clause (i) at any point in the previous 3-month
period; or
``(B) with respect to any digital asset--
``(i) a person that beneficially owns 5
percent or more of the units of such digital
asset that are then outstanding; and
``(ii) a person that was described under
clause (i) at any point in the previous 3-month
period.
``(21) Blockchain.--The term `blockchain' means any
technology--
``(A) where data is--
``(i) shared across a network to create a
public ledger of verified transactions or
information among network participants;
``(ii) linked using cryptography to maintain
the integrity of the public ledger and to
execute other functions; and
``(iii) distributed to network participants
in an automated fashion to concurrently update
network participants on the state of the public
ledger and any other functions; and
``(B) composed of source code that is publicly
available.
``(22) Blockchain network.--The term `blockchain network'
means any blockchain or blockchain protocol.
``(23) Blockchain protocol.--The term `blockchain protocol'
means any self-executing software deployed to a blockchain
composed of source code that is publicly available and
accessible, including a smart contract or any network of smart
contracts.
``(24) Decentralized network.--With respect to a blockchain
network to which a digital asset relates, the term
`decentralized network' means the following conditions are met:
``(A) During the previous 12-month period, no person,
acting on the person's own, excluding any decentralized
organization--
``(i) had the unilateral authority, directly
or indirectly, through any contract,
arrangement, understanding, relationship, or
otherwise, to control or materially alter the
functionality or operation of the blockchain
network; or
``(ii) had the unilateral authority to
restrict or prohibit any person who is not a
related person or an affiliated person from--
``(I) using, earning, or transmitting
the digital asset;
``(II) deploying software that uses
or integrates with the blockchain
network;
``(III) participating in on-chain
governance decisions with respect to
the blockchain network; or
``(IV) operating a node, validator,
or other form of computational
infrastructure with respect to the
blockchain network.
``(B) During the previous 12-month period, neither
any digital asset issuer nor any affiliated person,
excluding any decentralized organization--
``(i) beneficially owned units of such
digital asset that represented at any time 20
percent or more units of such digital asset
that are then outstanding; and
``(ii) had the unilateral authority to direct
the voting of units of such digital asset that
represented at any time 20 percent or more of
the outstanding voting power of such digital
assets.
``(C) During the previous 3-month period, the digital
asset issuer, any affiliated person, or any related
person has not implemented or contributed any
intellectual property to the software code of the
blockchain network that materially alters the
functionality or operation of the blockchain network.
``(D) During the previous 3-month period, neither any
digital asset issuer nor any affiliated person--
``(i) has marketed to the public the digital
assets or the blockchain network; or
``(ii) issued a unit of the digital asset.
``(E) During the previous 12-month period, all
issuances of units of the digital asset through the
programmatic functioning of the blockchain network were
end-user distributions.
``(25) Decentralized organization.--
``(A) In general.--The term `decentralized
organization' means, with respect to a blockchain
network, any organization of persons using the digital
assets related to such blockchain network to form
consensus in the development, publication, management,
or administration of such blockchain network, which is
controlled by the entirety of persons holding such
digital assets and not by any particular person.
``(B) Exclusion.--The term `decentralized
organization' does not include any organization
directly engaged in an activity that requires
registration with the Commission or the Commodity
Futures Trading Commission other than--
``(i) developing, publishing, managing, or
administering a blockchain network; or
``(ii) an activity with respect to which the
organization is exempt from such registration.
``(26) Digital asset.--
``(A) In general.--The term `digital asset' means any
fungible digital representation of value that can be
exclusively possessed and transferred, person to
person, without necessary reliance on an intermediary,
and is recorded on a cryptographically secured public
distributed ledger.
``(B) Relationship to a blockchain network.--A
digital asset is considered to relate to a blockchain
network if the digital asset is intrinsically linked to
the blockchain network, including--
``(i) where the digital asset's value is
reasonably expected to be generated by the
programmatic functioning of the blockchain
network;
``(ii) where the asset has voting rights with
respect to the blockchain network; or
``(iii) where the digital asset is issued
through the programmatic functioning of the
blockchain network.
``(27) Digital asset issuer.--With respect to a digital
asset, the term `digital asset issuer'--
``(A) means--
``(i) any person that deploys the source code
providing for the creation of such digital
asset;
``(ii) any person that makes an initial
distribution of a unit of the digital asset; or
``(iii) any sponsor; and
``(B) does not include--
``(i) any person deploying source code on the
instruction of a principal; or
``(ii) any software creating such digital
asset.
``(28) Digital asset maturity date.--The term `digital asset
maturity date' means, with respect to any units of a digital
asset, the first date on which 20 percent or more of the total
units of such digital asset that are then outstanding as of
such date are--
``(A) digital commodities; or
``(B) digital assets that have been registered with
the Commission and issued and sold by a digital asset
issuer.
``(29) Digital commodity.--The term `digital commodity' has
the meaning given that term under section 1a of the Commodity
Exchange Act (7 U.S.C. 1a).
``(30) End-user distribution.--The term `end-user
distribution' means an issuance of a unit of a digital asset
that--
``(A) does not involve an exchange of more than a
nominal value of cash, property, or other assets;
``(B) is distributed in a broad, non-discretionary
manner based on conditions capable of being satisfied
by any participant in the blockchain network,
including, as incentive-based rewards--
``(i) to users of the digital asset orany
blockchain network to which the digital asset
relates; or
``(ii) for activities directly related to the
operation of the blockchain network, such as
mining, validating, staking, or other activity
directly tied to the operation of the
blockchain network; and
``(C) relates to a blockchain network that is a
functional network and for which the information
described in section 203 of [SHORT TITLE] has been
certified and made publicly available.
``(31) Functional network.--With respect to a blockchain
network to which a digital asset relates, the term `functional
network' means--
``(A) the network allows network participants to use
such digital asset for--
``(i) the transmission and storage of value
on the blockchain network;
``(ii) the participation in an application
running on the blockchain network; or
``(iii) the participation in governance of
the blockchain network; and
``(B) the digital asset does not confer any express
contractual rights between the holder and the digital
asset issuer.
``(32) Payment stablecoin.--The term `payment stablecoin'--
``(A) means a digital asset--
``(i) that is or is designed to be used as a
means of payment or settlement; and
``(ii) the issuer of which--
``(I) is obligated to convert,
redeem, or repurchase for a fixed
amount of monetary value; and
``(II) represents will maintain or
creates the reasonable expectation that
it will maintain a stable value
relative to the value of a fixed amount
of monetary value; and
``(B) that is not--
``(i) a national currency; or
``(ii) a security issued by an investment
company registered under section 8(a) of the
Investment Company Act of 1940 (15 U.S.C. 80a-
8(a)).
``(33) Related person.--With respect to a digital asset
issuer, the term `related person'means--
``(A) a founder, promoter, employee, consultant,
advisor, or person serving in a similar capacity;
``(B) any person that is or was in the previous 6-
month period an executive officer, director, trustee,
general partner, advisory board member, or person
serving in a similar capacity; and
``(C) any equity holder or other security holder of a
digital asset issuer.
``(34) Restricted digital asset.--The term `restricted
digital asset' means a digital asset that is--
``(A) purchased directly from the digital asset
issuer or an affiliated person in a private offering;
``(B) distributed to a digital asset issuer, a
related person, or an affiliated person in an end-user
distribution; or
``(C) distributed to any other person through a
transaction that is not an end-user distribution.
``(35) Securities laws.--The term `securities laws' has the
meaning given that term under section 3(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)).
``(36) Source code.--The term `source code' means a text
listing of commands to be compiled or assembled into an
executable computer program used by network participants to
access the network, amend the code, and confirm transactions.
``(37) Sponsor.--The term `sponsor' means, with respect to
any issuance of digital assets, any person that--
``(A) participates in an arrangement for the primary
purpose of effecting a sale, end-user distribution, or
other issuance of such digital assets, including--
``(i) the granting of a license or assignment
of intellectual property;
``(ii) the making available of free software
or open source licenses; or
``(iii) the granting of other rights or
transfer of assets material to execution of
such sale, distribution, or other issuance; or
``(B) undertakes any other activity designed to avoid
a classification as a `digital asset issuer' for
purposes of this Act.''.
SEC. 102. DEFINITIONS UNDER THE COMMODITY EXCHANGE ACT.
Section 1a of the Commodity Exchange Act (7 U.S.C. 1a) is amended--
(1) in paragraph (40), by striking subparagraph (F) and the
following:
``(F) a digital commodity exchange registered under
section 5i.''; and
(2) by adding at the end the following:
``(52) Digital commodity.--
``(A) In general.--The term `digital
commodity' means--
``(i) a digital asset that was issued
to any person, other than a digital
asset issuer, a related person, or an
affiliated person, through an end-user
distribution;
``(ii) a digital asset that is held
by any person, other than a digital
asset issuer, a related person, or an
affiliated person, after each network
to which the digital asset relates is--
``(I) a functional network;
and
``(II) certified to be a
decentralized network under
section 204 of [SHORT TITLE];
or
``(iii) a unit of the digital asset
that is held by a related person or an
affiliated person for so long as each
blockchain network to which the digital
asset relates is--
``(I) a functional network;
and
``(II) certified to be a
decentralized network under
section 204 of the [SHORT
TITLE].
``(B) Exclusion.--The term `digital
commodity' does not include a payment
stablecoin.
``(53) Digital commodity broker.--
``(A) In general.--The term `digital
commodity broker' means any person who, in a
digital commodity cash or spot market, is--
``(i) engaged in soliciting or
accepting orders for the purchase or
sale of a unit of a digital commodity
from a customer that is not an eligible
contract participant;
``(ii) engaged in soliciting or
accepting orders for the purchase or
sale of a unit of a digital commodity
from a customer on or subject to the
rules of a registered entity; or
``(iii) registered with the
Commission as a digital commodity
broker.
``(B) Exception.--The term `digital commodity
broker' does not include a person solely
because the person mines or validates a digital
commodity transaction.
``(54) Digital commodity custodian.--The term
`digital commodity custodian' means an entity in the
business of holding, maintaining, or safeguarding
digital commodities.
``(55) Digital commodity dealer.--
``(A) In general.--The term `digital
commodity dealer' means any person who--
``(i) in digital commodity cash or
spot markets--
``(I) holds itself out as a
dealer in a digital commodity;
``(II) makes a market in a
digital commodity;
``(III) regularly enters into
digital commodity transactions
as an ordinary course of
business for its own account;
or
``(IV) engages in any
activity causing the person to
be commonly known in the trade
as a dealer or market maker in
a digital commodity; or
``(ii) is registered with the
Commission as a digital commodity
dealer.
``(B) Exception.--The term `digital commodity
dealer' does not include a person solely
because the person--
``(i) enters into digital a commodity
transaction with an eligible contract
participant;
``(ii) enters into a digital
commodity transaction on or through a
registered digital commodity exchange;
``(iii) enters into a digital
commodity transaction for the person's
own account, either individually or in
a fiduciary capacity, but not as a part
of a regular business; or
``(iv) mines or validates a digital
commodity transaction.
``(56) Digital commodity exchange.--The term `digital
commodity exchange' means a trading facility that
offers or seeks to offer a cash or spot market in at
least 1 digital commodity.
``(57) Digital asset-related definitions.--The terms
`affiliated person', `blockchain network',
`decentralized network', `digital asset', `digital
asset issuer', `end-user distribution', `functional
network', `payment stablecoin', `related person', and
`restricted digital asset' have the meaning given the
terms, respectively, under section 2(a) of the
Securities Act of 1933 (15 U.S.C. 77b(a)).''.
SEC. 103. DEFINITIONS UNDER THIS ACT.
In this Act:
(1) Alternative trading system.--The term ``alternative
trading system'' has the meaning given that term under section
242.300 of title 17, Code of Federal Regulations.
(2) Definitions under the commodity exchange act.--The terms
``digital commodity'', ``digital commodity broker'', and
``digital commodity exchange'' have the meaning given those
terms, respectively, under section 1a of the Commodity Exchange
Act (7 U.S.C. 1a).
(3) Definitions under the securities act of 1933.--The terms
``affiliated person'', ``blockchain'', ``blockchain network'',
``blockchain protocol'', ``decentralized network'', ``digital
asset'', ``digital asset issuer'', ``digital asset maturity
date'', ``end-user distribution'', ``functional network'',
``payment stablecoin'', ``restricted digital asset'',
``securities laws'', and ``source code'' have the meaning given
those terms, respectively, under section 2(a) of the Securities
Act of 1933 (15 U.S.C. 77b(a)).
(4) Definitions under the securities exchange act of 1934.--
The terms ``broker'', ``dealer'', and ``self-regulatory
organization'' have the meaning given those terms,
respectively, under section 3(a) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)).
SEC. 104. JOINT RULEMAKINGS.
(a) Definitions.--The Commodity Futures Trading Commission and the
Securities and Exchange Commission shall, jointly, issue rules to
further define the following terms:
(1) The terms ``affiliated person'', ``blockchain'',
``blockchain network'', ``blockchain protocol'',
``decentralized network'', ``decentralized organization'',
``digital asset'', ``digital asset issuer'', ``digital asset
maturity date'', ``end-user distribution'', ``functional
network'', ``related person'', ``restricted digital asset'',
``source code'', and ``sponsor'', as defined under section 2(a)
of the Securities Act of 1933.
(2) The term ``digital commodity'', as defined under section
1a of the Commodity Exchange Act.
(b) Joint Rulemaking for Exchanges.--The Commodity Futures
Trading Commission and the Securities and Exchange Commission
shall, jointly, issue rules to exempt persons dually registered
with the Commodity Futures Trading Commission as a digital
commodity exchange and with the Securities and Exchange
Commission as an alternative trading system from duplicative,
conflicting, or unduly burdensome provisions of this Act, the
securities laws, and the Commodity Exchange Act and the rules
thereunder, to the extent such exemption would foster the
development of fair and orderly markets in digital assets, be
necessary or appropriate in the public interest, and be
consistent with the protection of investors.
SEC. 105. PROVISIONAL REGISTRATION OF CFTC INTERMEDIARIES.
(a) Transition to Full Registration for Digital Commodity
Exchanges, Brokers, and Dealers.--
(1) In general.--
(A) Provisional registration statement.--Any person
may file a provisional registration statement with the
Commodity Futures Trading Commission (in this
subsection referred to as the ``Commission'') as a--
(i) provisional digital commodity exchange,
for a person intending to register as a digital
commodity exchange under section 5i of the
Commodity Exchange Act;
(ii) provisional digital commodity broker,
for a person intending to register as a digital
commodity broker under section 4u of the
Commodity Exchange Act; or
(iii) [] provisional digital commodity
dealer, for a person intending to register as a
digital commodity dealer under section 4u of
the Commodity Exchange Act.
(B) Filing.--A person desiring to file a provisional
registration statement under subparagraph (A) shall
submit to the Commission an application in such form
and containing--
(i) the nature of the registrations the filer
intends to pursue;
(ii) the information required by paragraph
(2);
(iii) a certification of compliance with the
requirements of paragraph (3); and
(iv) such other information as the Commission
may require.
(2) Disclosure of general information.--A person filing a
provisional registration statement under paragraph (1) shall
disclose to the Commission the following:
(A) Information concerning the management of the
person, including information describing--
(i) the ownership and management of the
person;
(ii) the financial condition of the person;
(iii) affiliated entities engaging in digital
asset-related activities;
(iv) potential conflicts of interest; and
(v) other information relevant to the
management of the person, as determined by the
Commission.
(B) Information concerning the operations of the
person, including--
(i) any rulebook or other customer order
[fulfillment] rules;
(ii) risk management procedures; and
(iii) a description of the product listing
process.
(3) Requirements.--A person filing a provisional registration
statement under paragraph (1) shall certify to the Commission
that the person complies, in such manner as the Commission may
by rule or order determine, with the following requirements:
(A) Books and records.--A person filing a provisional
registration statement under paragraph (1) shall--
(i) make such reports as are required by the
Commission by rule regarding the transactions,
positions, and financial condition of the
person;
(ii) keep books and records in such form and
manner and for such period as may be prescribed
by the Commission; and
(iii) keep the books and records referred to
in clause (ii) open to inspection and
examination by any representative of the
Commission.
(B) Customer disclosures.--A person filing a
provisional registration statement under paragraph (1)
shall--
(i) make disclosures to customers of the
person related to offering digital commodities,
relevant to--
(I) the experience of the customer;
and
(II) the risk tolerance of the
customer;
(ii) provide information to customers of the
person related to each digital commodity,
including--
(I) the history of the digital
commodity;
(II) the functionality of the digital
commodity;
(III) the operation of the digital
commodity; and
(IV) the economics of the digital
commodity.
(C) Customer assets.--
(i) In general.--A person filing a
provisional registration statement under
paragraph (1) shall--
(I) hold customer money, assets, and
property in a manner to minimize the
risk of loss to the customer or
unreasonable delay in customer access
to money, assets, and property of the
customer;
(II) treat and deal with all money,
assets, and property of any customer
received as belonging to the customer;
(III) segregate all money, assets,
and property received from any customer
of the person from the funds of the
person, except that--
(aa) the money, assets, and
property of any customer may be
commingled with that of any
other customer, if separately
accounted for; and
(bb) the share of the money,
assets, and property, as in the
normal course of business are
necessary to margin, guarantee,
secure, transfer, adjust, or
settle a contract of sale of a
digital commodity, may be
withdrawn and applied to do so,
including the payment of
commissions, brokerage,
interest, taxes, storage, and
other charges lawfully accruing
in connection with the contract
of sale of a digital commodity.
(ii) Additional resources.--
(I) In general.--This section shall
not prevent or be construed to prevent
a person filing a provisional
registration statement under paragraph
(1) from adding to the customer money,
assets, and property required to be
segregated under clause (i), additional
amounts of money, as sets, or property
from the account of the person as the
person determines necessary to prevent
the account of a customer from becoming
under-segregated.
(II) Treatment as customer funds.--
Any money, assets, or property
deposited pursuant to subclause (I)
shall be considered customer property
within the meaning of this paragraph.
(D) Listings.--
(i) Permitted digital commodities.--
(I) Listing on digital commodity
exchanges.--
(aa) In general.--Except as
provided in clause (ii), a
person filing a provisional
registration statement under
paragraph (1) as a provisional
digital commodity exchange may
list for trading any digital
asset that is listed for
trading on the date such person
filed the provisional
registration statement with the
Commission.
(bb) Exchange certification
for existing assets.--On filing
a provisional registration
statement described under item
(aa), the exchange shall submit
to the Commission and the
Securities and Exchange
Commission a certification that
any digital asset listed on the
exchange that was issued before
the date of the enactment of
this Act--
(AA) is related to a
blockchain network that
is a functional network
and a decentralized
network; and
(BB) satisfies the
listing standards under
section 5i(c)(3) of the
Commodity Exchange Act.
(cc) New listings.--A
provisional digital commodity
exchange may submit to the
Commission and the Securities
and Exchange Commission for
review under item (bb) a
certification attesting that
any digital asset the exchange
seeks to list--
(AA) is related to a
blockchain network that
is a functional network
and a decentralized
network; and
(BB) satisfies the
listing standards under
section 5i(c)(3) of the
Commodity Exchange Act.
(II) Permitted activities by brokers
and dealers.--Except as provided in
clause (ii), a provisional digital
commodity broker or digital commodity
dealer may offer for trading any
digital commodity that is--
(aa) offered for trading on
the date of the provisional
digital commodity broker or
digital commodity dealer filed
a provisional registration
statement with the Commission;
or
(bb) offered for trading on a
provisional digital commodity
exchange.
(ii) De-listing of digital assets.--
(I) Notice of noncompliance.--
(aa) In general.--After such
time as the Commission and the
Securities and Exchange
Commission finalize the joint
rulemaking described under
section 104, the Commission and
the Securities and Exchange
Commission may issue notices to
an entity under this section.
(bb) Notice from the
commission.--The Commission may
provide notice to a
provisionally registered
digital commodity exchange that
a digital asset certified under
clause (i)(I)(bb) does not
satisfy the listing standards
under 5i(c)(3) of the Commodity
Exchange Act.
(cc) Notice from the
securities and exchange
commission.--The Securities and
Exchange Commission may provide
notice to a provisionally
registered digital commodity
exchange that a digital asset
certified under clause
(i)(I)(bb) is not related to a
blockchain network that is a
functional network and a
decentralized network
(II) De-listing required.--
(aa) Provisional digital
commodity exchange.--A
provisional digital commodity
exchange shall de-list a
digital asset from trading if
the provisional digital
commodity exchange--
(AA) did not submit a
certification under
clause (i)(I)(bb) with
respect to the digital
asset; or
(BB) received a
notice under subclause
(I) with respect to the
digital asset.
(bb) Provisional digital
commodity brokers and
dealers.--A provisional digital
commodity broker or digital
commodity dealer shall de-list
a digital asset from trading
if--
(AA) within 6 months
after the date of the
enactment of this Act,
a provisional digital
commodity exchange has
not submitted a
certification under
clause (i)(I)(bb) with
respect to the digital
asset; or
(BB) a provisionally
registered digital
commodity exchange has
received a notice under
subclause (I) with
respect to the digital
asset.
(cc) Reasonable time.--With
respect to a required de-
listing, the Commission shall
provide a provisional digital
commodity exchange, digital
commodity broker, or digital
commodity dealer sufficient
time to ensure--
(AA) an orderly wind-
down of trading
activities; and
(BB) the prevention
of disruptive trading.
(4) Expiration of provisional registration.--
(A) In general.--No person may file a provisional
registration statement with the Commission after the
rules for the registration of digital commodity
exchanges or digital commodity brokers or digital
commodity dealers are finalized, as appropriate.
(B) Transition to full registration.--The Commission
shall provide for an orderly transition to full
registration for any entity that has filed a
provisional registration statement under this
subsection.
(C) Revocation of registration.--The Commission shall
revoke a provisional registration statement filed by
any person that fails to comply with this section,
after providing notice to the person of the failure of
the person to comply and affording the person a
reasonable opportunity to correct the noncompliance.
(5) Deferment of enforcement.--
(A) In general.--Any person who has filed a
provisional registration statement under this section
and is in compliance with this section shall not be
subject to an enforcement action by the Commodity
Futures Trading Commission or the Securities and
Exchange Commission, or any other cause of action,
for--
(i) listing for trading a digital asset that
is not a digital commodity; or
(ii) failing to register as a digital
commodity exchange, digital commodity broker,
or digital commodity dealer.
(B) Full registration.--A registered digital
commodity exchange, registered digital commodity
broker, and registered digital commodity dealer shall
not be subject to an enforcement action by the
Commodity Futures Trading Commission or the Securities
and Exchange Commission, or any other cause of action,
while such person was in compliance with this section,
for--
(i) listing for trading a digital asset that
is not a digital commodity; or
(ii) failing to register as a digital
commodity exchange.
SEC. 106. PROVISIONAL REGISTRATION OF SEC INTERMEDIARIES.
(a) Provisional Registration.--
(1) In general.--Any person engaging in, or proposing to
engage in, activities of a broker, dealer, or alternative
trading system involving digital assets that would be subject
to registration with the Securities and Exchange Commission (in
this subsection referred to as the ``Commission'') may file a
provisional registration statement with the Commission, and any
relevant self-regulatory organization, as a broker, dealer, or
alternative trading system, as appropriate, by providing the
Commission and any relevant self-regulatory organization with a
statement stating the intention of the person to provisionally
register as such under this section.
(2) Inspection and examination.--Each broker, dealer, or
alternative trading system that has filed a provisional
registration statement pursuant to this section shall be
subject to inspection and examination by the Commission.
(3) Registration prior to final rules.--
(A) In general.--The Commission shall permit any
person engaging in, or proposing to engage in,
activities of a broker, dealer, or alternative trading
system involving digital assets to file a provision
registration statement pursuant to this section.
(B) Enforcement deferred.--Beginning on the date of
the enactment of this Act and ending on the date the
Commission establishes a registration process for
purposes of this section, a person engaging in, or
proposing to engage in, activities of a broker, dealer,
or alterative trading system involving digital assets
shall not be subject to an enforcement action by the
Commission for a violation of this Act or the
securities laws related to a failure to register with
the Commission before engaging in such activities.
(4) Exception.--A person may not file a provisional
registration statement to be a broker, dealer, or alternative
trading system is such person is disqualified under the
securities laws or rules issued thereunder from acting as a
broker, dealer, or alternative trading system, as applicable.
(5) Treatment under customer protection rules.--The revisions
required under section 304 shall apply to a broker, dealer, or
alternative trading system that has provisionally registered
pursuant to this section to the same extent as such revisions
apply to a registered broker or dealer.
(b) Transition to Full Registration.--
(1) In general.--When finalizing the rules required under
this section, the Commission shall provide for an orderly
transition to full registration for each broker, dealer, or
alternative trading system which has filed a provisional
registration statement.
(2) Revocation of registration.--The Commission shall revoke
a provisional registration statement under this section of any
broker, dealer, or alternative trading system which fails to
comply with this section after notice of such failure to comply
and a reasonable opportunity to correct the deficiency.
(c) Deferment of Enforcement.--
(1) In general.--A broker, dealer, or alternative trading
system which has filed a provisional registration statement and
is in compliance with the requirements of this section shall
not be subject to an enforcement action by the Commission for
engaging in activities involving digital assets, while the
provisional registration statement for the broker, dealer, or
alternative trading system is in effect, for--
(A) a violation of offering a digital asset deemed a
security; or
(B) failure to register as a broker, dealer, or
alternative trading system.
(2) Full registration.--A registered broker, dealer, or
alternative trading system shall not be subject to an
enforcement action by the Commission, while it was
provisionally registered for--
(A) a violation of offering a digital asset deemed a
security; or
(B) for failure to register as a broker, dealer, or
alternative trading system.
TITLE II--DIGITAL ASSET EXEMPTIONS
SEC. 201. EXEMPTED TRANSACTIONS IN DIGITAL ASSETS.
(a) In General.--The Securities Act of 1933 (15 U.S.C. 77a et seq.)
is amended--
(1) in section 4(a), by adding at the end the following:
``(8) transactions involving the offer or sale of
units of a digital asset by a digital asset issuer,
if--
``(A) the aggregate amount of units of the
digital asset sold by the digital asset issuer,
including any amount sold in reliance on the
exemption provided under this paragraph, during
the 12-month period preceding the date of such
transaction, including the amount sold in such
transaction, is not more than $75,000,000;
``(B) with respect to a transaction involving
the purchase of units of a digital asset by a
person who is not an accredited investor, the
aggregate amount of all units of digital assets
purchased by such person during the 12-month
period preceding the date of such transaction,
including the unit of a digital asset purchased
in such transaction, does not exceed the
greater of--
``(i) 5 percent of the person's
annual income or joint income with that
person's spouse or spousal equivalent ;
or
``(ii) 5 percent of the person's net
worth or joint net worth with the
person's spouse or spousal equivalent;
``(C) after the completion of the
transaction, the purchaser does not own more
than 10 percent of the total amount of the
units of the digital asset sold in reliance on
the exemption under this paragraph;
``(D) the transaction does not involve the
offer or sale of equity securities, debt
securities, or debt securities convertible or
exchangeable to equity interests;
``(E) the transaction does not involve the
offer or sale of a unit of a digital asset by a
digital asset issuer that--
``(i) is not organized under the laws
of a State, a territory of the United
States or the District of Columbia;
``(ii) is a development stage company
that either--
``(I) has no specific
business plan or purpose; or
``(II) has indicated that the
business plan of the company is
to merge with or acquire an
unidentified company;
``(iii) is an investment company, as
defined in section 3 of the Investment
Company Act of 1940 (15 U.S.C. 80a-3),
or is excluded from the definition of
investment company by section 3(b) or
section 3(c) of that Act (15 U.S.C.
80a-3(b) or80a-3(c));
``(iv) is issuing fractional
undivided interests in oil or gas
rights, or a similar interest in other
mineral rights;
``(v) is, or has been, subject to any
order of the Commission entered
pursuant to section 12(j) of the
Securities Exchange Act of 1934 during
the 5-year period before the filing of
the offering statement; and
``(vi) is disqualified pursuant to
section 230.262 of title 17, Code of
Federal Regulations; and
``(F) the issuer meets the requirements of
section 4B(a).''; and
(2) by inserting after section 4A the following:
``SEC. 4B. REQUIREMENTS WITH RESPECT TO CERTAIN DIGITAL
ASSET TRANSACTIONS.
``(a) Requirements for Digital Asset Issuers.--
``(1) Information required in statement.--A
digital asset issuer offering or selling a unit
of digital asset in reliance on section 4(a)(8)
shall file with the Commission a statement
containing the following information:
``(A) The name, legal status
(including the jurisdiction in which
the issuer is organized and the date of
organization), and website of the
digital asset issuer.
``(B) A certification that the
digital asset issuer meets the relevant
requirements described under section
4(a)(8). ``(C) An overview of the
material aspectsof the offering.
``(D) A description of the purpose
and intended use of the offering
proceeds.
``(E) A description of the plan of
distribution of any unit of a digital
asset that is to be offered.
``(F) A description of the material
risks surrounding ownership of a unit
of a digital asset.
``(G) A description of exempt
offerings conducted within the past
three years by the digital asset
issuer.
``(H) A description of the digital
asset issuer and the current number of
employees of the digital asset issuer.
``(I) A description of any material
transactions or relationships between
the digital asset issuer and affiliated
persons.
``(2) Information required for purchasers.--A
digital asset issuer shall disclose the
information described under section 203 of
[SHORT TITLE] on a freely accessible public
website.
``(3) Ongoing disclosure requirements.--A
digital asset issuer that has filed a statement
under paragraph (1) to offer and sell a unit of
a digital asset in reliance on section 4(a)(8)
shall file the following with the Commission:
``(A) Annual reports.--An annual
report that includes any material
changes to the information described
under paragraph (2) for the current
fiscal year and for any fiscal year
thereafter, unless the issuer is no
longer obligated to file such annual
report pursuant to paragraph (4).
``(B) Semiannual reports.--Every six
months, a report containing--
``(i) an updated description
of the current state and
timeline for the development of
the blockchain network to which
the digital asset relates,
showing how and when the
blockchain network intends or
intended to be considered a
functional network and a
decentralized network; and
``(ii) any material changes
to the information in the most
recent annual report.
``(C) Current reports.--A current
report shall be filed with the
Commission reflecting any fundamental
changes to the information previously
reported to the Commission by the
digital asset issuer.
``(4) Termination of reporting
requirements.--
``(A) In general.--The ongoing
reporting requirements under paragraph
(3) shall not apply to a digital asset
issuer 180 days after the end of the
covered fiscal year.
``(B) Covered fiscal year defined.--
In this paragraph, the term `covered
fiscal year' means the first fiscal
year of an issuer in which the
blockchain network to which the digital
asset relates is a functional network
and certified to be a decentralized
network under section 204 of [SHORT
TITLE].
``(b) Requirements for Intermediaries.--
``(1) In general.--A person acting as an
intermediary in a transaction involving the
offer or sale of a unit of a digital asset in
reliance on section 4(a)(8) shall--
``(A) register with the Commission as
a broker under section 15(b) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o(b)); and
``(B) be a member of a national
securities association registered under
section 15A of the Securities Exchange
Act of 1934 (15 U.S.C. 78o-3).
``(2) Purchaser qualification.--
``(A) In general.--Each time, before
accepting any commitment (including any
additional commitment from the same
person), an intermediary or digital
asset issuer shall have a reasonable
basis for believing that the purchaser
satisfies the requirements of section
4(a)(8).
``(B) Reliance on purchaser's
representations.--For purposes of
subparagraph (A), an intermediary or
digital asset issuer may rely on a
purchaser's representations concerning
the purchaser's annual income and net
worth and the amount of the purchaser's
other investments made, unless the
intermediary or digital asset issuer
has reason to question the reliability
of the representation.
``(C) Reliance on intermediary.--For
purposes of determining whether a
transaction meets the requirements
described under subparagraph (A)
through (C) of section 4(a)(8), a
digital asset issuer may rely on the
efforts of an intermediary.
``(c) Additional Provisions.--
``(1) Acceptance of written offers; sales.--
After an issuer files a statement under
paragraph (1) to offer and sell a digital asset
in reliance on section 4(a)(8)--
``(A) written offers of the digital
asset may be made; and
``(B) the issuer may sell the digital
assets in reliance on section 4(a)(8),
if such sales meet all other
requirements.
``(2) Solicitation of interest.--
``(A) In general.--At any time before
the filing of a statement under
paragraph (1), a digital asset issuer
may communicate orally or in writing to
determine whether there is any interest
in a contemplated offering. Such
communications are deemed to be an
offer of a unit of a digital asset for
sale for purposes of the [anti-fraud]
provisions of the Federal securities
laws. No solicitation or acceptance of
money or other consideration, nor of
any commitment, binding or otherwise,
from any person is permitted until the
statement is filed.
``(B) Conditions.--In any
communication described under
subparagraph (A), the digital asset
issuer shall--
``(i) state that no money or
other consideration is being
solicited, and if sent in
response, will not be accepted;
``(ii) state that no offer to
buy a unit of a digital asset
can be accepted and no part of
the purchase price can be
received until the statement is
filed and then only through an
intermediary; and
``(iii) state that a person's
indication of interest involves
no obligation or commitment of
any kind.
``(C) Indications of interest.--Any
written communication described under
subparagraph (A) may include a means by
which a person may indicate to the
digital asset issuer that such person
is interested in a potential offering.
A digital asset issuer may require a
name, address, telephone number, or
email address in any response form
included with a communication described
under subparagraph (A).
``(3) Disqualification provisions.--The
Commission shall issue rules to apply the
disqualification provisions under section
230.262 of title 17, Code of Federal
Regulations, to the exemption provided under
section 4(a)(8).
``(4) Digital assets deemed restricted
securities.--A unit of a digital asset acquired
directly or indirectly from the digital asset
issuer in a transaction, or chain of
transactions, made in reliance on the exemption
provided under section 4(a)(8) is deemed a
restricted digital asset.''.
(b) Additional Exemptions.--
(1) Certain registration requirements.--Section 12(g)(6) of
the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)(6)) is
amended by striking ``under section 4(6)'' and inserting
``under section 4(a)(6) or 4(a)(8)''.
(2) Exemption from state regulation.--Section 18(b)(4) of the
Securities Act of 1933 (15 U.S.C. 77r(b)(4)) is amended--
(A) in section (B), by striking ``section 4(4)'' and
inserting ``section 4(a)(4)'';
(B) in section (C), by striking ``section 4(6)'' and
inserting ``section 4(a)(6)'';
(C) in subparagraph (F)--
(i) by striking ``section 4(2)'' each place
such term appears and inserting ``section
4(a)(2)'';
(ii) by striking ``or'' at the end;
(D) in subparagraph (G), by striking the period and
inserting ``; or''; and
(E) by adding at the end the following:
``(H) section 4(a)(8).''.
SEC. 202. REQUIREMENTS TO TRANSACT IN CERTAIN DIGITAL ASSETS.
(a) Transactions in Certain Restricted Digital Assets.--
(1) In general.--Notwithstanding any other provision of law,
subject to paragraph (2), a restricted digital asset may be
offered and sold on an alternative trading system by any person
other than a digital asset issuer if, at the time of such offer
or sale, the information described in section 203 has been
certified and made publicly available for any blockchain
network to which the restricted digital asset relates.
(2) Additional rules for related and affiliated persons.--A
restricted digital asset owned by a related person or an
affiliated person may only be offered or sold after 12 months
after the later of--
(A) the date on which such restricted digital asset
was acquired; or
(B) the digital asset maturity date.
(b) Digital Commodities.--
(1) In general.--Subject to paragraph (2), a digital
commodity may be offered and sold by any person other than a
digital asset issuer, a related person, or an affiliated
person.
(2) Previously restricted digital assets.--A digital
commodity that was a restricted digital asset when it was first
acquired, may only be offered or sold by a related person or an
affiliated person if--
(A) the holder of the digital commodity owned the
digital commodity while it was a restricted digital
asset for 12 months after the later of--
(i) the date on which such restricted digital
asset was acquired; or
(ii) the digital asset maturity date; and
(B) the digital commodity is offered or sold on or
subject to the rules of a digital commodity exchange
registered under section 5i of the Commodity Exchange
Act.
(3) Not an investment contract.--For purposes of the
securities laws, a transaction in a digital commodity made in
compliance with paragraph (1) or (2) shall not be a transaction
in an investment contract.
(c) Sales Restrictions for Affiliated Persons.--A digital asset may
be offered or sold by an affiliated person under subsection (a) or (b)
if--
(1) the aggregate amount of such digital assets sold in any
3-month period by the affiliated person is not greater than one
percent of the digital assets then outstanding; or
(2) the affiliated person promptly, following the placement
of an order to sell one percent of the digital assets then
outstanding during any 3-month period, reports the sale to--
(A) the Commodity Futures Trading Commission, in the
case of an order to sell a digital commodity on or
subject to the rules of a digital commodity exchange;
or
(B) the Securities and Exchange Commission, in the
case of a sell order for a restricted digital asset
placed with an alternative trading system.
(d) Treatment Under the Securities Laws.--
(1) Not an investment contract.--For purposes of the
securities laws, an end-user distribution shall not be a
transaction in an investment contract.
(2) Exemption.--Section 5 of the Securities Act of 1933 (15
U.S.C. 77e) shall not apply to an end-user distribution or a
unit of digital asset issued in such a distribution.
SEC. 203. ENHANCED DISCLOSURE REQUIREMENTS.
(a) Disclosure Information.--With respect to a digital asset and
any blockchain network to which the digital asset relates, the
information described under this section is as follows:
(1) Source code.--The source code for any blockchain network
to which the digital asset relates.
(2) Transaction history.--A description of the steps
necessary to independently access, search, and verify the
transaction history of any blockchain network to which the
digital asset relates.
(3) Digital asset economics.--A description of the purpose of
any blockchain network to which the digital asset relates and
the operation of any such blockchain network, including--
(A) information explaining the launch and supply
process, including the number of digital assets to be
issued in an initial allocation, the total number of
digital assets to be created, the release schedule for
the digital assets, and the total number of digital
assets then outstanding;
(B) information on any applicable consensus mechanism
or process for validating transactions, method of
generating or mining digital assets, and any process
for burning or destroying digital assets on the
blockchain network;
(C) an explanation of governance mechanisms for
implementing changes to the blockchain network or
forming consensus among holders of such digital assets;
and
(D) sufficient information for a third party to
create a tool for verifying the transaction history of
the digital asset.
(4) Plan of development.--The current state and timeline for
the development of any blockchain network to which the digital
asset relates, showing how and when the blockchain network
intends or intended to be considered a functional network and
decentralized network.
(5) Development disclosures.--A list of all persons who are
related persons or affiliated persons who have been issued a
unit of a digital asset by a digital asset issuer or have a
right to a unit of a digital asset from a digital asset issuer.
(6) Risk factor disclosures.--Where appropriate, provide
under the caption ``Risk Factors'' a description of the
material risks surrounding ownership of a unit of a digital
asset. This discussion shall be organized logically with
relevant headings and each risk factor shall be set forth under
a subcaption that adequately describes the risk.
(b) Certification.--With respect to a digital asset and any
blockchain network to which the digital asset relates, the information
required to be made available under this section has been certified if
the digital asset issuer, an affiliated person, or a decentralized
organization (or, if no digital asset issuer, affiliated person, or
decentralized organization are identifiable, an alternative trading
system or digital commodity exchange) certifies on a quarterly basis to
the Securities and Exchange Commission and Commodity Futures Trading
Commission that the information is true and correct.
SEC. 204. CERTIFICATION OF CERTAIN DIGITAL ASSETS.
(a) Certification.--Any person may certify to the Securities and
Exchange Commission (in this subsection referred to as the
``Commission'') that the blockchain network to which a digital asset
relates is a decentralized network.
(b) Filing Requirements.--A certification described under
subsection (a) shall be filed with the Commission, and include--
(1) information regarding the person making the
certification; and
(2) an analysis of the factors on which such person based the
certification that the blockchain network is a decentralized
network.
(c) Rebuttable Presumption.--The Commission may rebut a
certification described under subsection (a) with respect to a
blockchain network if the Commission, within 30 days of receiving such
certification, determines that the blockchain network is not a
decentralized network.
(d) Certification Review.--
(1) In general.--Any blockchain network that relates to a
digital asset for which a certification has been made under
subsection (a) shall be considered a decentralized network 30
days after the date on which the Commission receives a
certification under subsection (a), unless the Commission
notifies the person who made the certification within such time
that the Commission is staying the certification due to--
(A) an inadequate explanation by the person making
the certification; or
(B) any novel or complex issues which require
additional time to consider.
(2) Public notice.--The Commission shall make the following
available to the public and provide a copy to the Commodity
Futures Trading Commission:
(A) Each certification received under subsection (a).
(B) Each stay of the Commission under this section,
and the reasons therefore.
(C) Any response from a person making a certification
under subsection (a) to a stay of the certification by
the Commission.
(e) Stay of Certification.--
(1) In general.--A notification by the Commission pursuant to
subsection (d)(1) shall stay the certification once for up to
an additional 90 days from the date of the notification.
(2) Public comment period.--Before the end of the 30-day
period described under subsection (d)(1), the Commission may
begin a public comment period of at least 30 days in
conjunction with a stay under this section.
(f) Disposition of Certification.--
(1) In general.--A certification made under subsection (a)
shall--
(A) become effective--
(i) upon the publication of a notification
from the Commission to the person who made the
certification that the Commission does not
object to the certification; or
(ii) at the expiration of the certification
review period; and
(B) not become effective upon the publication of a
notification from the Commission to the person who made
the certification that the Commission has rebutted the
certification.
(2) Detailed analysis included with rebuttal.--The Commission
shall include, with each publication of a notification of
rebuttal described under paragraph (1)(B), a detailed analysis
of the factors on which the decision was based.
(g) Reconsideration.--
(1) In general.--Any certification of a blockchain network
that becomes effective pursuant to subsection (f) shall be
eligible to be reconsidered by the Commission one year after
the date on which the certification becomes effective and each
year thereafter.
(2) Reconsideration process.--To reconsider a certification
under (f), the Commission shall--
(A) publish a notice announcing the reconsideration
120 days before the anniversary of the initial
certification;
(B) provide a 30 day comment period, beginning 90
days before the anniversary of the initial
certification; and
(C) after the end of the 30-day comment required
under subparagraph (B) and no later than 30 days prior
to the anniversary of the initial certification,
publish either--
(i) a rebuttal of the certification; or
(ii) a notice that the Commission is not
rebutting the certification.
(3) Detailed analysis required.--The Commission shall
include, with each publication of a notification of rebuttal
described under paragraph (2)(C)(i), a detailed analysis of the
factors on which the decision was based.
(h) Appeal of Rebuttal.--If the Commission rebuts a certification
under this section, either initially or in a reconsideration under
subsection (g), the person making such certification may appeal the
decision of the Commission to a court of competent jurisdiction.
TITLE III--REGISTRATION FOR DIGITAL ASSET INTERMEDIARIES AT THE
SECURITIES AND EXCHANGE COMMISSION
SEC. 301. TREATMENT OF DIGITAL COMMODITIES AND OTHER DIGITAL ASSETS.
(a) Securities Act of 1933.--Section 2(a)(1) of the Securities Act
of 1933 (15 U.S.C. 77b(a)(1)) is amended by adding at the end the
following: ``The term does not include a digital commodity or payment
stablecoin.''.
(b) Securities Exchange Act of 1934.--Section 3(a) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended--
(1) in paragraph (6), by striking ``receiving deposits or
exercising fiduciary powers'' and inserting ``receiving
deposits, exercising fiduciary powers, or offering custody and
safekeeping services'';
(2) in paragraph (10), by adding at the end the following:
``Subject to subsection (i), the term does not include a
digital commodity or payment stablecoin.'';
(3) by redesignating the second paragraph (80) (relating to
funding portals) as paragraph (81); and
(4) by adding at the end the following:
``(82) Digital asset-related terms.--The terms
`blockchain network', `digital asset', `digital
commodity', `payment stablecoin', and `restricted
digital asset' have the meaning given those terms,
respectively, under section 2(a) of the Securities Act
of 1933 (15 U.S.C. 77b(a)).''.
(c) Investment Advisers Act of 1940.--Section 202(a) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-2) is amended--
(1) in paragraph (2), by striking ``receiving deposits or
exercising fiduciary powers'' and inserting ``receiving
deposits, exercising fiduciary powers, or offering custody and
safekeeping services,'';
(2) in paragraph (18), by adding at the end the following:
``The term does not include a digital commodity or payment
stablecoin.'';
(3) by redesignating the second paragraph (29) (relating to
commodity pools) as paragraph (31);
(4) by adding at the end, the following:
``(32) Digital asset-related terms.--The terms
`digital commodity' and `payment stablecoin' have the
meaning given those terms, respectively, under section
2(a) of the Securities Act of 1933 (15 U.S.C.
77b(a)).''.
(d) Investment Company Act of 1940.--Section 2(a) of the Investment
Company Act of 1940 (15 U.S.C. 80a-2) is amended--
(1) in paragraph (5), by striking ``receiving deposits or
exercising fiduciary powers'' and inserting ``receiving
deposits, exercising fiduciary powers, or offering custody and
safekeeping services,'';
(2) in paragraph (36), by adding at the end the following:
``The term does not include a digital commodity or payment
stablecoin.''; and
(3) by adding at the end, the following:
``(55) Digital asset-related terms.--The terms
`digital commodity' and `payment stablecoin' have the
meaning given those terms, respectively, under section
2(a) of the Securities Act of 1933 (15 U.S.C.
77b(a)).''.
SEC. 302. [ANTI-FRAUD] AUTHORITY OVER PAYMENT STABLECOINS.
Section 10 of the Securities Exchange Act of 1934 (15 U.S.C. 78j)
is amended--
(1) by designating the undesignated matter at the end of that
section as paragraph (3) of subsection (c); and
(2) in subsection (c)(3), as so designated--
(A) by striking ``Rules promulgated under subsection
(b)'' and inserting ``Subsection (b) and rules
promulgated thereunder'';
(B) by inserting ``and shall apply to payment
stablecoins with respect to those circumstances in
which the payment stablecoins are brokered, traded, or
custodied by a broker or dealer or through an
alternative trading system to the same extent as they
apply to securities'' after ``to the same extent as
they apply to securities'' each place it occurs; and
(C) by inserting before the period at the end the
following: ``provided, that the Commission shall have
no authority under subsection (b) or rules promulgated
thereunder with respect to payment stablecoins
(including the design, structure, or operation of such
payment stablecoins) except with respect to
circumstances in which the payment stablecoins are
brokered, traded, or custodied by a broker or dealer or
through an alternative trading system''.
SEC. 303. ELIGIBILITY OF ALTERNATIVE TRADING SYSTEMS.
(a) In General.--Section 5 of the Securities Exchange Act of 1934
(15 U.S.C. 78e) is amended--
(1) by striking ``It'' and inserting the following:
``(a) In General.--It''; and
(2) by adding at the end the following:
``(b) Digital Asset Protections.--
``(1) In general.--The Commission may not
preclude a trading platform from operating
pursuant to a covered exemption on the basis
that the assets traded or to be traded on such
platform are digital assets.
``(2) Covered exemption.--In this subsection,
the term `covered exemption' means an exemption
with respect to--
``(A) the requirements of subsection
(a); and
``(B) any other rule of the
Commission relating to the definition
of `exchange'.''.
(b) Rulemaking.--
(1) In general.--Not later than 270 days after the date of
the enactment of this Act, the Securities and Exchange
Commission shall revise the covered regulations to--
(A) exempt an alternative trading system permitting
the trading of only securities, covered assets, or both
from registration as a national securities exchange
under section 6 of the Securities Exchange Act of 1934
(15 U.S.C. 78f); and
(B) permit disintermediated trading between holders
of covered assets and real-time settlement through
custody of the covered assets, consistent with what is
necessary or appropriate in the public interest or for
the protection of investors.
(2) Definitions.--In this subsection--
(A) Covered assets.--The term ``covered assets''
means restricted digital assets, digital commodities,
and payment stablecoins.
(B) Covered regulations.--The term ``covered
regulations'' means sections 242.301, 242.302, 242.303,
and 242.304 of title 17, Code of Federal Regulations.
SEC. 304. CUSTOMER PROTECTION RULE MODERNIZATION.
Not later than 270 days after the date of enactment of this Act,
the Securities and Exchange Commission shall revise section 240.15c3-3
of title 17, Code of Federal Regulations, to provide that a registered
broker or dealer shall be considered to have control of digital assets,
in addition to such other methods as the Securities and Exchange
Commission may permit, if--
(1) the broker or dealer holds such digital asset at a bank
(as defined in section 3(a) of the Securities Exchange Act of
1934 (15 U.S.C. 78c(a)))--
(A) that is recognized by the appropriate Federal
banking agency or State bank supervisor (as such terms
are defined, respectively, in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813)) as having
custody over such assets;
(B) the delivery of which to the broker or dealer
does not require the payment of money or value; and
(C) that has acknowledged in writing that the digital
asset in its custody or control is free of charge,
lien, or claim of any kind in favor of such bank or any
person claiming through the bank; or
(2) the broker or dealer establishes, maintains, and enforces
written policies, procedures, and controls reasonably designed
to demonstrate that the broker has control over the digital
asset it holds in custody to protect against the theft, loss,
or unauthorized use of the private keys necessary to access and
transfer such digital assets.
SEC. 305. MODERNIZATION OF RECORDKEEPING REQUIREMENTS.
(a) In General.--For purposes of determining custody of assets and
maintenance of books and records by brokers, dealers, transfer agents,
clearing agencies, and exchanges under the Securities and Exchange Act
of 1934 (15 U.S.C. 78a et seq.), a person may consider records of
ownership of a digital asset determinable from a cryptographically
secured distributed ledger as accurately indicating ownership.
(b) Revision of Rules.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission shall
issue and revise rules--
(1) in accordance with subsection (a); and
(2) to authorize registered transfer agents to use the
technology described in such subsection to carry out the
functions of such transfer agents under section 17A(c)(1) of
the Securities Exchange Act of 1934 (15 U.S.C. 78q-1(c)(1)).
SEC. 306. MODIFICATIONS TO EXISTING RULES FOR DIGITAL ASSETS.
(a) Study Required.--Not later than 180 days after the date of the
enactment of this Act, the Securities and Exchange Commission shall
complete a study with respect to the modernization of specified
regulations under title 17, Code of Federal Regulations to apply to
digital assets.
(b) Rule Revision Required.--Not later than 180 days after the date
the study required under subsection (a) is completed, the Securities
and Exchange Commission shall propose rules to modernize the specified
regulations. Such rules may not be unnecessary or unduly burdensome.
(c) Specified Regulations.--In this section, the term ``specified
regulations'' means--
(1) regulation NMS under part 242 of title 17, Code of
Federal Regulations;
(2) regulation SCI under part 242 of such title;
(3) section 240.15c3-5 of such title; and
(4) section 240.15c2-11 of such title.
SEC. 307. TREATMENT OF CERTAIN DIGITAL ASSETS IN CONNECTION WITH
FEDERALLY REGULATED INTERMEDIARIES.
Section 18(b) of the Securities Act of 1933 (15 U.S.C. 77r(b)) is
amended by adding at the end the following:
``(5) Exemption for certain digital assets in connection with
federally regulated intermediaries.--A digital asset is a
covered security with respect to a transaction that is exempt
from registration under this Act when--
``(A) it is brokered, traded, custodied, or cleared
by a broker or dealer registered under section 15 of
the Securities Exchange Act of 1934; or
``(B) traded through an alternative trading system
(as defined under section 242.301 of title 17, Code of
Federal Regulations.''.
SEC. 308. DUAL REGISTRATION.
Any person that is registered with the Securities and Exchange
Commission as a broker, dealer, or alternative trading system may
register with the Commodity Futures Trading Commission, as appropriate,
as--
(1) a digital commodity exchange under section 5i of the
Commodity Exchange Act (7 U.S.C. 1 et seq.), as added by this
Act, if the person offers or seeks to offer a cash or spot
market in at least one digital commodity;
(2) a digital commodity broker under section 4u of the
Commodity Exchange Act, as added by this Act, if the person is
engaged in soliciting or accepting orders in digital commodity
cash or spot markets; or
(3) a digital commodity dealer under section 4u of the
Commodity Exchange Act, as added by this Act, if the person
holds themself out as a dealer in digital commodity cash or
spot markets.
SEC. 309. EXCLUSION FOR ANCILLARY ACTIVITIES.
The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is
amended by inserting after section 15G the following:
``SEC. 15H. EXCLUSION FOR ANCILLARY ACTIVITIES.
``(a) In General.--Notwithstanding any other provision of
this Act, a person shall not be subject to the regulatory
requirements of this Act solely based on the person undertaking
any ancillary activities.
``(b) Exceptions.--Subsection (a) shall not be construed to
apply to the anti-manipulation and anti-fraud authorities of
the Commission.
``(c) Ancillary Activities Defined.--In this section, the
term `ancillary activities' means any of the following
activities related to the operation of a blockchain network:
``(1) Network transactions compilation, pool
operating, relating, searching, sequencing, validating,
or acting in a similar capacity with respect to a
restricted digital asset.
``(2) Providing computational work, or procuring,
offering or utilizing network bandwidth, or other
similar incidental services with respect to a
restricted digital asset.
``(3) Providing a user-interface that enables a user
to read and access data about a blockchain network,
send messages, or otherwise interact with a blockchain
network.
``(4) Developing, publishing, constituting,
administering, maintaining, or otherwise distributing a
blockchain network.
``(5) Developing, publishing, constituting,
administering, maintaining, or otherwise distributing
software or systems that create or deploy a hardware or
software wallet or other system facilitating an
individual user's own personal ability to keep,
safeguard, or custody the user's restricted digital
assets or related private keys.''.
TITLE IV--REGISTRATION FOR DIGITAL ASSET INTERMEDIARIES AT THE
COMMODITY FUTURES TRADING COMMISSION
SEC. 401. COMMISSION JURISDICTION OVER DIGITAL COMMODITY TRANSACTIONS.
(a) In General.--Section 2(c)(2) of the Commodity Exchange Act (7
U.S.C. 2(c)(2)) is amended--
(1) in subparagraph (D)(ii)--
(A) in subclause (III), in the matter that precedes
item (aa), by inserting ``of a commodity, other than a
digital commodity,'' before ``that''; and
(B) by redesignating subclauses (IV) and (V) as
subclauses (V) and (VI) and inserting after subclause
(III) the following:
``(IV) a contract of sale of a digital
commodity that--
``(aa) results in actual delivery, as
the Commission shall by rule determine,
within 2 days or such other period as
the Commission may determine by rule or
regulation based upon the typical
commercial practice in cash or spot
markets for the digital commodity
involved; or
``(bb) is executed with a registered
digital commodity dealer--
``(AA) directly;
``(BB) through a registered
digital commodity broker; or
``(CC) on or subject to the
rules of a registered digital
commodity exchange;''; and
(2) by adding at the end the following:
``(F) Commission jurisdiction with respect to digital
commodity transactions.--
``(i) In general.--Subject to sections 6d and
12(e), the Commission shall have exclusive
jurisdiction with respect to any account,
agreement, contract, or transaction involving a
contract of sale of a digital commodity in
interstate commerce, including in a digital
commodity cash or spot market, that is offered,
solicited, traded, facilitated, executed,
cleared, reported, or otherwise dealt in--
``(I) on or subject to the rules of a
registered entity or an entity that is
required to be registered as a
registered entity; or
``(II) by any other entity
registered, or required to be
registered, with the Commission.
``(ii) Limitations.--Clause (i) shall not
apply with respect to custodial or depository
activities for a digital commodity, or
custodial or depository activities for any
promise or right to a future digital commodity,
of an entity regulated by an appropriate
Federal banking agency or a State bank
supervisor (within the meaning of section 3 of
the Federal Deposit Insurance Act).
``(iii) Savings clause.--Clause (i) shall not
affect, or be interpreted to affect, the scope
of the jurisdiction of the Commission with
respect to--
``(I) any contract for the purchase
or sale of any commodity for future
delivery, security futures product, or
swap;
``(II) any agreement, contract, or
transaction described in subparagraph
(C)(i) or (D)(i);
``(III) any commodity option
authorized under section 4c; or
``(IV) any leverage transaction
authorized under section 19.
``(G) Agreements, contracts, and transactions in
stablecoins.--
``(i) In general.--Except as provided in
clause (ii)--
``(I) nothing in this Act governs or
applies to an agreement, contract, or
transaction in or with a payment
stablecoin; and
``(II) a registered entity or other
entity registered with the Commission
shall not offer, offer to enter into,
enter into, execute, confirm the
execution of, or conduct any office or
business for the purpose of soliciting,
accepting any order for, or otherwise
dealing in, any transaction in, or in
connection with, a payment stablecoin.
``(ii) Permitted payment stablecoin
transactions.--
``(I) A registered entity and any
other entity registered with the
Commission may transact, offer, offer
to enter into, enter into, execute,
confirm the execution of, solicit, or
accept any order for a payment
stablecoin, as provided in subclauses
(II) and (III).
``(II) The requirements of this Act
shall apply to, and the Commission
shall have jurisdiction over, an
agreement, contract, or transaction
with or for a payment stablecoin that
is offered, offered to enter into,
entered into, executed, confirmed the
execution of, solicited, or accepted--
``(aa) on or subject to the
rules of a registered entity
that is registered with the
Commission; or
``(bb) by any other entity
registered by the Commission.
``(III) The provisions of this Act
and the jurisdiction of the Commission
shall apply to any agreement, contract,
or transaction described in subclause
(II) as if the payment stablecoin were
a digital commodity.
``(IV) A registered entity and any
other entity registered with the
Commission may use a payment stablecoin
in general business transactions that
are not otherwise subject to regulation
by the Commission.''.
(b) Conforming Amendment.--Section 2(a)(1)(A) of such Act (7 U.S.C.
2(a)(1)(A)) is amended in the 1st sentence by inserting ``subsection
(c)(2)(F) of this section or'' before ``section 19''.
SEC. 402. REQUIRING FUTURES COMMISSION MERCHANTS TO USE QUALIFIED
DIGITAL COMMODITY CUSTODIANS.
Section 4d of the Commodity Exchange Act (7 U.S.C. 6d) is amended--
(1) in subsection (a)(2)--
(A) in the 1st proviso, by striking ``any bank or
trust company'' and inserting ``any bank, trust
company, or qualified digital commodity custodian'';
and
(B) by inserting ``: Provided further, That any such
property that is a digital commodity shall be held in a
qualified digital commodity custodian'' before the
period at the end; and
(2) in subsection (f)(3)(A)(i), by striking ``any bank or
trust company'' and inserting ``any bank, trust company, or
qualified digital commodity custodian''.
SEC. 403. TRADING CERTIFICATION AND APPROVAL FOR DIGITAL COMMODITIES.
Section 5c of the Commodity Exchange Act (7 U.S.C. 7a-2) is
amended--
(1) in subsection (a), by striking ``5(d) and 5b(c)(2)'' and
inserting ``5(d), 5b(c)(2), and 5i(c)'';
(2) in subsection (b)--
(A) in each of paragraphs (1) and (2), by inserting
``digital commodity exchange,'' before ``derivatives'';
and
(B) in paragraph (3), by inserting ``digital
commodity exchange,'' before ``derivatives'' each place
it appears;
(3) in subsection (c)--
(A) in paragraph (2), by inserting ``or
participants'' before ``(in'';
(B) in paragraph (4)(B), by striking ``1a(10)'' and
inserting ``1a(9)''; and
(C) in paragraph (5), by adding at the end the
following:
``(D) Special rules for digital commodity
contracts.--In certifying any new rule or rule
amendment, or listing any new contract or
instrument, in connection with a contract of
sale of a commodity for future delivery,
option, swap, or other agreement, contract, or
transaction, that is based on or references a
digital commodity, a registered entity shall
make or rely on a certification under
subsection (d) for the digital commodity.'';
and
(4) by inserting after subsection (c) the following:
``(d) Certifications for Digital Commodity Trading.--
``(1) In general.--Notwithstanding subsection
(c), for the purposes of listing or offering a
digital commodity for trading in a digital
commodity cash or spot market, an eligible
entity shall issue a written certification that
the digital commodity meets the requirements of
this Act (including regulations thereunder).
``(2) Contents of the certification.--
``(A) In general.--In making a
written certification under this
paragraph, the eligible entity shall
furnish to the Commission--
``(i) an analysis of how the
digital commodity meets the
requirements of section
5i(c)(3);
``(ii) information about the
digital commodity regarding--
``(I) its purpose and
use;
``(II) its unit
creation or release
process;
``(III) its consensus
mechanism;
``(IV) its governance
structure;
``(V) its
participation and
distribution; and
``(VI) its current
and proposed
functionality; and
``(iii) any other
information, analysis, or
documentation the Commission
may, by rule, require.
``(B) Reliance on prior
disclosures.--In making a certification
under this subsection, an eligible
entity may rely on the records and
disclosures of any relevant person
registered with the Securities and
Exchange Commission or other State or
Federal agency.
``(3) Modifications.--
``(A) In general.--An eligible entity
shall modify a certification made under
paragraph (1) to--
``(i) account for significant
changes in nature, operation,
or functionality of the digital
commodity; or
``(ii) permit trading in
units of a digital commodity
which were once restricted
digital assets.
``(B) Recertification.--Modifications
required by this subsection shall be
subject to the same disapproval and
review process as a new certification
under paragraphs (4) and (5), unless
the Commission or such registered
futures association (or committee
thereof) to which the Commission has,
by rule or order, delegated such
authority finds that the digital asset
no longer meets the requirements of
this subsection (including regulations
thereunder).
``(4) Disapproval.--
``(A) In general.--The written
certification described in paragraph
(1) shall become effective unless the
Commission or such registered futures
association (or committee thereof) to
which the Commission has, by rule or
order, delegated such authority, finds
that the digital asset does not meet
the requirements of this Act (including
regulations thereunder).
``(B) Analysis required.--The
Commission shall include, with any
findings referred to in subparagraph
(A), a detailed analysis of the factors
on which the decision was based.
``(5) Review.--
``(A) In general.--The written
certification described in paragraph
(1) shall become effective, pursuant to
the certification by the eligible
entity and notice of the certification
to the public (in a manner determined
by the Commission) on the date that
is--
``(i) 20 business days after
the date the Commission
receives the certification (or
such shorter period as
determined by the Commission by
rule or regulation), in the
case of a digital commodity
that has not been certified
under this section or for which
a certification is being
modified under paragraph (3);
or
``(ii) 2 business days after
the date the Commission
receives the certification (or
such shorter period as
determined by the Commission by
rule or regulation) for any
digital commodity that has been
certified under this section.
``(B) Extensions.--The time for
consideration under subparagraph (A)
may be extended through notice to the
eligible entity that there are novel or
complex issues that require additional
time to analyze, that the explanation
by the submitting eligible entity is
inadequate, or of a potential
inconsistency with this Act--
``(i) once, for 30 business
days, through written notice to
the eligible entity by the
Chairman or such other
executive office of a
registered futures association
to which the Commission has, by
rule or order, delegated such
authority; and
``(ii) once, for an
additional 30 business days,
through written notice to the
digital commodity exchange from
the Commission or such
registered futures association
(or committee thereof) to which
the Commission has, by rule or
order, delegated such
authority, that includes a
description of any deficiencies
with the certification,
including any--
``(I) novel or
complex issues which
require additional time
to analyze;
``(II) missing
information or
inadequate
explanations; or
``(III) potential
inconsistencies with
this Act.
``(6) Certification required.--
Notwithstanding any other requirement
of this Act, a registered entity or
other entity registered with the
Commission shall not list for trading,
accept for clearing, offer to enter
into, enter into, execute, confirm the
execution of, or conduct any office or
business anywhere in the United States,
its territories or possessions, for the
purpose of soliciting, or accepting any
order for, or otherwise dealing in, any
transaction in, or in connection with,
a digital asset, unless a certification
has been made under this section for
the digital asset.
``(7) Eligible entity defined.--In
this subsection, the term `eligible
entity' means a registered entity or
group of registered entities acting
jointly.''.
SEC. 404. REGISTRATION OF DIGITAL COMMODITY EXCHANGES.
The Commodity Exchange Act (7 U.S.C. 1 et seq.) is amended by
inserting after section 5h the following:
``SEC. 5i. REGISTRATION OF DIGITAL COMMODITY EXCHANGES.
``(a) In General.--
``(1) Registration.--
``(A) In general.--A trading facility that
offers or seeks to offer a cash or spot market
in at least 1 digital commodity shall register
with the Commission as a digital commodity
exchange.
``(B) Application.--A person desiring to
register as a digital commodity exchange shall
submit to the Commission an application in such
form and containing such information as the
Commission may require for the purpose of
making the determinations required for
approval.
``(C) Exemptions.--A trading facility that
offers or seeks to offer a cash or spot market
in at least 1 digital commodity shall not be
required to register under this section if the
trading facility--
``(i) permits no more than a de
minimis amount of trading activity; or
``(ii) serves only customers in a
single State or territory.
``(2) Additional registrations.--
``(A) With the commission.--
``(i) In general.--A registered
digital commodity exchange may also
register as--
``(I) a designated contract
market;
``(II) a swap execution
facility; or
``(III) a digital commodity
broker.
``(ii) Rules.--The Commission shall
prescribe rules for an entity with
multiple registrations under clause (i)
to--
``(I) exempt the entity from
duplicative, conflicting, or
unduly burdensome provisions of
this Act and the rules under
this Act, to the extent such an
exemption would foster the
development of fair and orderly
cash or spot markets in digital
commodities, be necessary or
appropriate in the public
interest, and be consistent
with the protection of
customers; and
``(II) provide for portfolio
margining.
``(B) With the securities and exchange
commission.--A registered digital commodity
exchange may register with the Securities and
Exchange Commission as an alternative trading
system to list or trade contracts of sale for
digital assets deemed securities.
``(C) With a registered futures
association.--
``(i) In general.--A registered
digital commodity exchange shall also
be a member of a registered futures
association and comply with rules
related to such activity, if the
registered digital commodity exchange--
``(I) accepts customer funds
required to be segregated under
subsection (d); or
``(II) maintains an account
for the trading of digital
commodities directly with any
person who is not an eligible
contract participant under
subsection (e).
``(ii) Rulemaking required.--The
Commission shall require any registered
futures association with a digital
commodity exchange as a member to
provide such rules as may be necessary
to further compliance with subsections
(d) and (e), protect customers, and
promote the public interest.
``(D) Registration required.--A person
required to be registered as a digital
commodity exchange under this section shall
register with the Commission as such regardless
of whether the person is registered as such
with another State or Federal regulator.
``(b) Trading.--
``(1) Prohibition on certain trading practices.--
``(A) Section 4b shall apply to any
agreement, contract, or transaction in a
digital commodity as if the agreement,
contract, or transaction were a contract of
sale of a commodity for future delivery.
``(B) Section 4c shall apply to any
agreement, contract, or transaction in a
digital commodity as if the agreement,
contract, or transaction were a transaction
involving the purchase or sale of a commodity
for future delivery.
``(2) Prohibition on certain trading activities.--A
registered digital commodity exchange shall not--
``(A) offer any contract of sale of a
commodity for future delivery, option, or swap
for trading without also being registered as a
designated contract market or swap execution
facility;
``(B) act as counterparty to any margined,
leveraged, or financed transaction under
section 2(c)(2)(D); or
``(C) act as any counterparty to any
margined, leveraged, or financed transaction
under section 2(c)(2)(C) without also being
registered in a capacity determined by the
Commission by rule or regulation.
``(3) Trading securities.--A registered digital
commodity exchange that is also registered with the
Securities and Exchange Commission may offer a contract
of sale of a digital asset deemed a security.
``(4) Rules for certain digital asset sales.--The
digital commodity exchange shall have in place such
rules as may be necessary to reasonably ensure the
orderly sale of any unit of a digital commodity sold by
a related person or an affiliated person.
``(c) Core Principles for Digital Commodity Exchanges.--
``(1) Compliance with core principles.--
``(A) In general.--To be registered, and
maintain registration, as a digital commodity
exchange, a digital commodity exchange shall
comply with--
``(i) the core principles described
in this subsection; and
``(ii) any requirement that the
Commission may impose by rule or
regulation pursuant to section 8a(5).
``(B) Reasonable discretion of a digital
commodity exchange.--Unless otherwise
determined by the Commission by rule or
regulation, a digital commodity exchange
described in subparagraph (A) shall have
reasonable discretion in establishing the
manner in which the digital commodity exchange
complies with the core principles described in
this subsection.
``(2) Compliance with rules.--A digital commodity
exchange shall--
``(A) establish and enforce compliance with
any rule of the digital commodity exchange,
including--
``(i) the terms and conditions of the
trades traded or processed on or
through the digital commodity exchange;
and
``(ii) any limitation on access to
the digital commodity exchange;
``(B) establish and enforce trading, trade
processing, and participation rules that will
deter abuses and have the capacity to detect,
investigate, and enforce those rules, including
means--
``(i) to provide market participants
with impartial access to the market;
and
``(ii) to capture information that
may be used in establishing whether
rule violations have occurred; and
``(C) establish rules governing the operation
of the exchange, including rules specifying
trading procedures to be used in entering and
executing orders traded or posted on the
facility.
``(3) Listing standards for digital commodities.--
``(A) In general.--A digital commodity
exchange shall permit trading in only a digital
commodity that is not readily susceptible to
manipulation.
``(B) Public information requirements.--
``(i) In general.--A digital
commodity exchange shall permit trading
only in a digital commodity if the
information required in clause (ii) is
correct, current, and available to this
public.
``(ii) Required information.--With
respect to a digital commodity and each
blockchain network to which the digital
commodity relates for which the digital
commodity exchange will make the
digital asset available to the
customers of the digital commodity
exchange, the information required in
this clause is as follows:
``(I) Source code.--The
source code for any blockchain
network to which the digital
commodity relates.
``(II) Transaction history.--
A narrative description of the
steps necessary to
independently access, search,
and verify the transaction
history of any blockchain
network to which the digital
commodity relates.
``(III) Digital asset
economics.--A narrative
description of the purpose of
any blockchain network to which
the digital asset relates and
the operation of any such
blockchain network, including--
``(aa) information
explaining the launch
and supply process,
including the number of
digital assets to be
issued in an initial
allocation, the total
number of digital
assets to be created,
the release schedule
for the digital assets,
and the total number of
digital assets then
outstanding;
``(bb) information
detailing any
applicable consensus
mechanism or process
for validating
transactions, method of
generating or mining
digital assets, and any
process for burning or
destroying digital
assets on the
blockchain network;
``(cc) an explanation
of governance
mechanisms for
implementing changes to
the blockchain network
or forming consensus
among holders of the
digital assets; and
``(dd) sufficient
information for a third
party to create a tool
for verifying the
transaction history of
the digital asset.
``(C) Additional listing considerations.--In
addition to the requirements of subparagraphs
(A) and (B), a digital commodity exchange shall
consider--
``(i) whether a sufficient percentage
of the units of the digital asset are
units of a digital commodity to permit
robust price discovery;
``(ii) whether it is reasonably
unlikely that the transaction history
can be fraudulently altered by any
person or group of persons acting
collectively;
``(iii) whether the operating
structure and system of the digital
commodity is secure from cybersecurity
threats;
``(iv) whether the functionality of
the digital commodity will protect
holders from operational failures;
``(v) whether sufficient public
information about the operation,
functionality, and use of the digital
commodity is available; and
``(vi) any other factor which the
Commission has, by rule, determined to
be in the public interest or in
furtherance of the requirements of this
Act.
``(D) Restricted digital assets.--A digital
commodity exchange shall not permit the trading
of a unit of a digital asset that is a
restricted digital asset.
``(4) Treatment of customer assets.--A digital
commodity exchange shall establish standards and
procedures that are designed to protect and ensure the
safety of customer money, assets, and property.
``(5) Monitoring of trading and trade processing.--
``(A) In general.--A digital commodity
exchange shall provide a competitive, open, and
efficient market and mechanism for executing
transactions that protects the price discovery
process of trading on the exchange.
``(B) Protection of markets and market
participants.--A digital commodity exchange
shall establish and enforce rules--
``(i) to protect markets and market
participants from abusive practices
committed by any party, including
abusive practices committed by a party
acting as an agent for a participant;
and
``(ii) to promote fair and equitable
trading on the exchange.
``(C) Trading procedures.--A digital
commodity exchange shall--
``(i) establish and enforce rules or
terms and conditions defining, or
specifications detailing--
``(I) trading procedures to
be used in entering and
executing orders traded on or
through the facilities of the
digital commodity exchange; and
``(II) procedures for trade
processing of digital
commodities on or through the
facilities of the digital
commodity exchange; and
``(ii) monitor trading in digital
commodities to prevent manipulation,
price distortion, and disruptions of
the delivery or cash settlement process
through surveillance, compliance, and
disciplinary practices and procedures,
including methods for conducting real-
time monitoring of trading and
comprehensive and accurate trade
reconstructions.
``(6) Ability to obtain information.--A digital
commodity exchange shall--
``(A) establish and enforce rules that will
allow the facility to obtain any necessary
information to perform any of the functions
described in this section;
``(B) provide the information to the
Commission on request; and
``(C) have the capacity to carry out such
international information-sharing agreements as
the Commission may require.
``(7) Emergency authority.--A digital commodity
exchange shall adopt rules to provide for the exercise
of emergency authority, in consultation or cooperation
with the Commission or a registered entity, as is
necessary and appropriate, including the authority to
facilitate the liquidation or transfer of open
positions in any digital commodity or to suspend or
curtail trading in a digital commodity.
``(8) Timely publication of trading information.--
``(A) In general.--A digital commodity
exchange shall make public timely information
on price, trading volume, and other trading
data on digital commodities to the extent
prescribed by the Commission.
``(B) Capacity of digital commodity
exchange.--A digital commodity exchange shall
have the capacity to electronically capture and
transmit trade information with respect to
transactions executed on the exchange.
``(9) Recordkeeping and reporting.--
``(A) In general.--A digital commodity
exchange shall--
``(i) maintain records of all
activities relating to the business of
the facility, including a complete
audit trail, in a form and manner
acceptable to the Commission for a
period of 5 years;
``(ii) report to the Commission, in a
form and manner acceptable to the
Commission, such information as the
Commission determines to be necessary
or appropriate for the Commission to
perform the duties of the Commission
under this Act; and
``(iii) keep any such records of
digital commodities which relate to a
security open to inspection and
examination by the Securities and
Exchange Commission.
``(B) Information-sharing.--Subject to
section 8, and on request, the Commission shall
share information collected under subparagraph
(A) with--
``(i) the Board;
``(ii) the Securities and Exchange
Commission;
``(iii) each appropriate Federal
banking agency;
``(iv) each appropriate State bank
supervisor (within the meaning of
section 3 of the Federal Deposit
Insurance Act);
``(v) the Financial Stability
Oversight Council;
``(vi) the Department of Justice; and
``(vii) any other person that the
Commission determines to be
appropriate, including--
``(I) foreign financial
supervisors (including foreign
futures authorities);
``(II) foreign central banks;
and
``(III) foreign ministries.
``(C) Confidentiality agreement.--Before the
Commission may share information with any
entity described in subparagraph (B), the
Commission shall receive a written agreement
from the entity stating that the entity shall
abide by the confidentiality requirements
described in section 8 relating to the
information on digital commodities that is
provided.
``(D) Providing information.--A digital
commodity exchange shall provide to the
Commission (including any designee of the
Commission) information under subparagraph (A)
in such form and at such frequency as is
requiredby the Commission.
``(10) Antitrust considerations.--Unless necessary or
appropriate to achieve the purposes of this Act, a
digital commodity exchange shall not--
``(A) adopt any rules or take any actions
that result in any unreasonable restraint of
trade; or
``(B) impose any material anticompetitive
burden on trading.
``(11) Conflicts of interest.--A registered digital
commodity exchange shall implement conflict-of-interest
systems and procedures that--
``(A) establish structural and institutional
safeguards--
``(i) to minimize conflicts of
interest that might potentially bias
the judgment or supervision of the
digital commodity exchange and
contravene the principles of fair and
equitable trading and the business
conduct standards described in this
Act, including conflicts arising out of
transactions or arrangements with
affiliates (including affiliates
engaging in digital commodity
activities) which may include
information partitions and the legal
separation of different persons or
entities involved in digital commodity
activities; and
``(ii) to ensure that the activities
of any person within the digital
commodity exchange or any affiliated
entity relating to research or analysis
of the price or market for any digital
commodity or acting in a role of
providing dealing, brokering, or
advising activities are separated by
appropriate informational partitions
within the digital commodity exchange
or any affiliated entity from the
review, pressure, or oversight of
persons whose involvement in pricing,
trading, exchange, or clearing
activities might potentially bias their
judgment or supervision and contravene
the core principles of open access and
the business conduct standards
described in this Act; and
``(B) address such other issues as the
Commission determines to be appropriate.
``(12) Financial resources.--
``(A) In general.--A digital commodity
exchange shall have adequate financial,
operational, and managerial resources, as
determined by the Commission, to discharge each
responsibility of the digital commodity
exchange.
``(B) Minimum amount of financial
resources.--A digital commodity exchange shall
possess financial resources that, at a minimum,
exceed the total amount that would enable the
digital commodity exchange to conduct an
orderly wind-down of its activities.
``(13) Governance fitness standards.--
``(A) Governance arrangements.--A digital
commodity exchange shall establish governance
arrangements that are transparent to fulfill
public interest requirements.
``(B) Fitness standards.--A digital commodity
exchange shall establish and enforce
appropriate fitness standards for--
``(i) directors; and
``(ii) any individual or entity with
direct access to, or control of,
customer assets.
``(14) System safeguards.--A digital commodity
exchange shall--
``(A) establish and maintain a program of
risk analysis and oversight to identify and
minimize sources of operational and security
risks, through the development of appropriate
controls and procedures, and automated systems,
that--
``(i) are reliable and secure; and
``(ii) have adequate scalable
capacity;
``(B) establish and maintain emergency
procedures, backup facilities, and a plan for
disaster recovery that allow for--
``(i) the timely recovery and
resumption of operations; and
``(ii) the fulfillment of the
responsibilities and obligations of the
digital commodity exchange; and
``(C) periodically conduct tests to verify
that the backup resources of the digital
commodity exchange are sufficient to ensure
continued--
``(i) order processing and trade
matching;
``(ii) price reporting;
``(iii) market surveillance; and
``(iv) maintenance of a comprehensive
and accurate audit trail.
``(d) Holding of Customer Assets.--
``(1) In general.--A digital commodity exchange shall
hold customer money, assets, and property in a manner
to minimize the risk of loss to the customer or
unreasonable delay in the access to the money, assets,
and property of the customer.
``(A) Segregation of funds.--
``(i) In general.--A digital
commodity exchange shall treat and deal
with all money, assets, and property
that is received by the digital
commodity exchange, or accrues to a
customer as the result of trading in
digital commodities, as belonging to
the customer.
``(ii) Commingling prohibited.--
Money, assets, and property of a
customer described in clause (i) shall
be separately accounted for and shall
not be commingled with the funds of the
digital commodity exchange or be used
to margin, secure, or guarantee any
trades or accounts of any customer or
person other than the person for whom
the same are held.
``(B) Exceptions.--
``(i) Use of funds.--
``(I) In general.--
Notwithstanding subparagraph
(A), money, assets, and
property of customers of a
digital commodity exchange
described in subparagraph (A)
may, for convenience, be
commingled and deposited in the
same account or accounts with
any bank, trust company,
derivatives clearing
organization, or qualified
digital commodity custodian.
``(II) Withdrawal.--
Notwithstanding subparagraph
(A), such share of the money,
assets, and property described
in item (aa) as in the normal
course of business shall be
necessary to margin, guarantee,
secure, transfer, adjust, or
settle a contract of sale of a
digital commodity with a
registered entity may be
withdrawn and applied to such
purposes, including the payment
of commissions, brokerage,
interest, taxes, storage, and
other charges, lawfully
accruing in connection with the
contract of sale of a digital
commodity.
``(ii) Commission action.--
Notwithstanding subparagraph (A), in
accordance with such terms and
conditions as the Commission may
prescribe by rule, regulation, or
order, any money, assets, or property
of the customers of a digital commodity
exchange described in subparagraph (A)
may be commingled and deposited in
customer accounts with any other money,
assets, or property received by the
digital commodity exchange and required
by the Commission to be separately
accounted for and treated and dealt
with as belonging to the customer of
the digital commodity exchange.
``(2) Permitted investments.--Money described in
subparagraph (A) may be invested in obligations of the
United States, in general obligations of any State or
of any political subdivision of a State, and in
obligations fully guaranteed as to principal and
interest by the United States, or in any other
investment that the Commission may by rule or
regulation prescribe, and such investments shall be
made in accordance with such rules and regulations and
subject to such conditions as the Commission may
prescribe.
``(3) Customer protection during bankruptcy.--
``(A) Customer property.--All assets held on
behalf of a customer by a digital commodity
exchange, and all money, assets, and property
of any customer received by a digital commodity
exchange registered under section 5i of this
Act for trading or custody, or to facilitate,
margin, guarantee, or secure contracts of sale
of a digital commodity (including money,
assets, or property accruing to the customer as
the result of the transactions), shall be
considered customer property for purposes of
section 761 of title 11, United States Code.
``(B) Transactions.--A transaction involving
a unit of a digital commodity occurring on or
subject to the rules of a digital commodity
exchange shall be considered a `contract for
the purchase or sale of a commodity for future
delivery, on or subject to the rules of, a
contract market or board of trade' for the
purposes of the definition of a `commodity
contract' in section 761 of title 11, United
States Code.
``(C) Exchanges.--A digital commodity
exchange shall be considered a futures
commission merchant for purposes of section 761
of title 11, United States Code.
``(4) Misuse of customer property.--It shall be
unlawful--
``(A) for any digital commodity exchange that
has received any customer money, assets, or
property for custody to dispose of, or use any
such money, assets, or property as belonging to
the digital commodity exchange; or
``(B) for any other person, including any
depository, other digital commodity exchange,
or digital commodity custodian that has
received any customer money, assets, or
property for deposit, to hold, dispose of, or
use any such money, assets, or property as
belonging to the depositing digital commodity
exchange or any person other than the customers
of the digital commodity exchange.
``(e) Customer Protection.--For each registered digital
commodity exchange that maintains an account for the trading of
digital commodities directly with a person who is not an
eligible contract participant, the Commission shall require the
digital commodity exchange to register as a digital commodity
broker, solely to solicit orders for the digital commodity
exchange, directly from any person who is not an eligible
contract participant.
``(f) Designation of Chief Compliance Officer.--
``(1) In general.--A digital commodity exchange shall
designate an individual to serve as a chief compliance
officer.
``(2) Duties.--The chief compliance officer shall--
``(A) report directly to the board or to the
senior officer of the exchange;
``(B) review compliance with the core
principles in this subsection;
``(C) in consultation with the board of the
exchange, a body performing a function similar
to that of a board, or the senior officer of
the exchange, resolve any conflicts of interest
that may arise;
``(D) establish and administer the policies
and procedures required to be established
pursuant to this section;
``(E) ensure compliance with this Act and the
rules and regulations issued under this Act,
including rules prescribed by the Commission
pursuant to this section; and
``(F) establish procedures for the
remediation of noncompliance issues found
during compliance office reviews, look backs,
internal or external audit findings, self-
reported errors, or through validated
complaints.
``(3) Requirements for procedures.--In establishing
procedures under paragraph (2)(F), the chief compliance
officer shall design the procedures to establish the
handling, management response, remediation, retesting,
and closing of noncompliance issues.
``(4) Annual reports.--
``(A) In general.--In accordance with rules
prescribed by the Commission, the chief
compliance officer shall annually prepare and
sign a report that contains a description of--
``(i) the compliance of the digital
commodity exchange with this Act; and
``(ii) the policies and procedures,
including the code of ethics and
conflict of interest policies, of the
digital commodity exchange.
``(B) Requirements.--The chief compliance
officer shall--
``(i) submit each report described in
subparagraph (A) with the appropriate
financial report of the digital
commodity exchange that is required to
be submitted to the Commission pursuant
to this section; and
``(ii) include in the report a
certification that, under penalty of
law, the report is accurate and
complete.
``(g) Appointment of Trustee.--
``(1) In general.--If a proceeding under section 5e
results in the suspension or revocation of the
registration of a digital commodity exchange, or if a
digital commodity exchange withdraws from registration,
the Commission, on notice to the digital commodity
exchange, may apply to the appropriate United States
district court where the digital commodity exchange is
located for the appointment of a trustee.
``(2) Assumption of jurisdiction.--If the Commission
applies for appointment of a trustee under paragraph
(1)--
``(A) the court may take exclusive
jurisdiction over the digital commodity
exchange and the records and assets of the
digital commodity exchange, wherever located;
and
``(B) if the court takes jurisdiction under
subparagraph (A), the court shall appoint the
Commission, or a person designated by the
Commission, as trustee with power to take
possession and continue to operate or terminate
the operations of the digital commodity
exchange in an orderly manner for the
protection of customers subject to such terms
and conditions as the court may prescribe.
``(h) Qualified Digital Commodity Custodian.--A digital
commodity exchange shall hold in a qualified digital commodity
custodian each unit of a digital commodity that is--
``(1) the property of a customer of the digital
commodity exchange;
``(2) required to be held by the digital commodity
exchange under subsection (c)(12) of this section; or
``(3) otherwise so required by the Commission to
reasonably protect customers or promote the public
interest.
``(i) Exemptions.--In order to promote responsible economic
or financial innovation and fair competition, or protect
customers, the Commission may (on its own initiative or on
application of the registered digital commodity exchange)
exempt, either unconditionally or on stated terms or conditions
or for stated periods and either retroactively or
prospectively, or both, a registered digital commodity exchange
from the requirements of this section, if the Commission
determines that--
``(1)(A) the exemption would be consistent with the
public interest and the purposes of this Act; and
``(B) the exemption will not have a material adverse
effect on the ability of the Commission or the digital
commodity exchange to discharge regulatory or self-
regulatory duties under this Act; or
``(2) the digital commodity exchange is subject to
comparable, comprehensive supervision and regulation by
the appropriate government authorities in the home
country of the exchange.
``(j) Customer Defined.--In this section, the term `customer'
means any person that maintains an account for the trading of
digital commodities directly with a digital commodity exchange
(other than a person that is owned or controlled, directly or
indirectly, by the digital commodity exchange) for its own
behalf or on behalf of other any person.
``(k) Federal Preemption.--Notwithstanding any other
provision of law, the Commission shall have exclusive
jurisdiction over any digital commodity exchange registered
under this section.''.
SEC. 405. QUALIFIED DIGITAL COMMODITY CUSTODIANS.
The Commodity Exchange Act (7 U.S.C. 1 et seq.), as amended by the
preceding provisions of this Act, is amended by inserting after section
5i the following:
``SEC. 5j. QUALIFIED DIGITAL COMMODITY CUSTODIANS.
``(a) In General.--The Commission shall designate a digital
commodity custodian as a qualified digital commodity custodian,
if--
``(1) the digital commodity custodian is--
``(A) subject to the supervision of the
Commission, an appropriate Federal banking
agency, or the Securities and Exchange
Commission, and permitted by the supervisor to
engage in custodial activity;
``(B) subject to the supervision of a State
bank supervisor (within the meaning of section
3 of the Federal Deposit Insurance Act), unless
the Commission finds the digital commodity
custodian is not subject to adequate
supervision and appropriate regulation; or
``(C) subject to the supervision of an
appropriate foreign governmental authority in
the home country of the digital commodity
custodian, if the Commission finds that the
digital commodity custodian is subject to
adequate supervision and appropriate
regulation; and
``(2) the digital commodity custodian agrees to such
regular and periodic sharing of information regarding
any accounts relating to an entity registered with the
Commission, as the Commission determines by rule shall
be reasonably necessary to effectuate any of the
provisions, or to accomplish any of the purposes, of
this Act.
``(b) Rulemaking Authority.--For purposes of subsection (a),
the Commission, by rule or order, shall define `adequate
supervision' and `appropriate regulation' as any regulatory
regime which meets such minimum standards for supervision and
regulation as the Commission determines are reasonably
necessary to protect the property of customers of a registered
digital commodity exchange, including minimum standards
relating to--
``(1) accessibility of customer assets;
``(2) financial resources;
``(3) risk management requirements;
``(4) governance arrangements;
``(5) fitness standards;
``(6) recordkeeping;
``(7) information-sharing; and
``(8) conflicts of interest.
``(c) Authority to Temporarily Suspend Standards.--The
Commission may, by rule or order, temporarily suspend, in whole
or in part, any requirement imposed under, or any standard
referred to in, this section if the Commission determines that
the suspension would be consistent with the public interest and
the purposes of this Act.''.
SEC. 406. REGISTRATION AND REGULATION OF DIGITAL COMMODITY BROKERS AND
DEALERS.
The Commodity Exchange Act (7 U.S.C. 1 et seq.), as amended by the
preceding provisions of this Act, is amended by inserting after section
4t the following:
``SEC. 4u. REGISTRATION AND REGULATION OF DIGITAL COM-
MODITY BROKERS AND DEALERS.
``(a) Registration.--It shall be unlawful for any person to
act as a digital commodity broker or digital commodity dealer
unless the person is registered as such with the Commission.
``(b) Requirements.--
``(1) In general.--A person shall register as a
digital commodity broker or digital commodity dealer by
filing a registration application with the Commission.
``(2) Contents.--
``(A) In general.--The application shall be
made in such form and manner as is prescribed
by the Commission, and shall contain such
information as the Commission considers
necessary concerning the business in which the
applicant is or will be engaged.
``(B) Continual reporting.--A person that is
registered as a digital commodity broker or
digital commodity dealer shall continue to
submit to the Commission reports that contain
such information pertaining to the business of
the person as the Commission may require.
``(3) Transition.--Within 180 days after the date of
the enactment of this section, the Commission shall
prescribe rules providing for the registration of
digital commodity brokers and digital commodity dealers
under this section.
``(4) Statutory disqualification.--Except to the
extent otherwise specifically provided by rule,
regulation, or order, it shall be unlawful for a
digital commodity broker or digital commodity dealer to
permit any person who is associated with a digital
commodity broker or a digital commodity dealer and who
is subject to a statutory disqualification to effect or
be involved in effecting a transaction on behalf of the
digital commodity broker or the digital commodity
dealer, respectively, if the digital commodity broker
or digital commodity dealer, respectively, knew, or in
the exercise of reasonable care should have known, of
the statutory disqualification.
``(5) Limitations on certain assets.--A registered
digital commodity broker or registered digital
commodity dealer shall not offer, offer to enter into,
enter into, or facilitate any transaction with a
digital commodity which has not been certified under
section 5c(d).
``(c) Additional Registrations.--
``(1) With the commission.--Any person required to be
registered as a digital commodity broker or digital
commodity dealer may also be registered as a futures
commission merchant, introducing broker, or swap
dealer.
``(2) With the securities and exchange commission.--
Any person required to be registered as a digital
commodity broker or digital commodity dealer under this
section may register with the Securities and Exchange
Commission as a broker or dealer, pursuant to section
15(b) of the Securities Exchange Act of 1934, as
applicable, if the broker or dealer limits its
solicitation of orders, acceptance of orders, or
execution of orders, or placing of orders on behalf of
others involving any contract of sale to digital
assets.
``(3) With a registered futures association
registration.--Any person required to be registered as
a digital commodity broker or digital commodity dealer
under this section shall register as such with a
registered futures association.
``(4) Registration required.--Any person required to
be registered as a digital commodity broker or digital
commodity dealer under this section shall register with
the Commission as such regardless of whether the person
is registered as such with another State or Federal
regulator.
``(d) Rulemaking.--
``(1) In general.--The Commission shall prescribe
such rules applicable to registered digital commodity
brokers and registered digital commodity dealers as are
appropriate to carry out this section, including rules
in the public interest that limit the activities of
digital commodity brokers and digital commodity
dealers.
``(2) Multiple registrants.--The Commission shall
prescribe rules or regulations permitting, or may
otherwise authorize, exemptions or additional
requirements applicable to persons with multiple
registrations under this Act, including as futures
commission merchants, introducing brokers, digital
commodity brokers, digital commodity dealers, or swap
dealers, as may be in the public interest to reduce
compliance costs and promote customer protection.
``(e) Capital Requirements.--
``(1) In general.--Each registered digital commodity
broker and registered digital commodity dealer shall
meet such minimum capital requirements as the
Commission may prescribe to ensure that the digital
commodity broker or digital commodity dealer,
respectively, is able to--
``(A) conduct an orderly wind-down of the
activities of the digital commodity broker or
digital commodity dealer, respectively; and
``(B) fulfill the customer obligations of the
digital commodity broker or digital commodity
dealer, respectively, for any margined,
leveraged, or financed transactions.
``(2) Rule of construction.--Nothing in this section
shall limit, or be construed to limit, the authority of
the Securities and Exchange Commission to set financial
responsibility rules for a broker or dealer registered
pursuant to section 15(b) of the Securities Exchange
Act of 1934 (15 U.S.C. 78o(b)) (except for section
15(b)(11) of such Act (15 U.S.C. 78o(b)(11)) in
accordance with section 15(c)(3) of such Act (15 U.S.C.
78o(c)(3)).
``(3) Futures commission merchants and other
dealers.--
``(A) In general.--Each futures commission
merchant, introducing broker, broker, and
dealer shall maintain sufficient capital to
comply with the stricter of any applicable
capital requirements to which the futures
commission merchant, introducing broker,
broker, or dealer, respectively, is subject
under this Act or the Securities Exchange Act
of 1934 (15 U.S.C. 78a et seq.).
``(B) Coordination of capital requirements.--
``(i) Commission rule.--The
Commission shall, by rule, provide
appropriate offsets to any applicable
capital requirement for a person with
multiple registrations as a digital
commodity dealer, digital commodity
broker, futures commission merchant, or
introducing broker.
``(ii) Joint rule.--The Commission
and the Securities and Exchange
Commission shall jointly, by rule,
provide appropriate offsets to any
applicable capital requirement for a
person with multiple registrations as a
digital commodity dealer, digital
commodity broker, futures commission
merchant, introducing broker, broker,
or dealer.
``(f) Reporting and Recordkeeping.--Each registered digital
commodity broker and registered digital commodity dealer--
``(1) shall make such reports as are required by the
Commission by rule or regulation regarding the
transactions, positions, and financial condition of the
digital commodity broker or digital commodity dealer,
respectively;
``(2) shall keep books and records in such form and
manner and for such period as may be prescribed by the
Commission by rule or regulation; and
``(3) shall keep the books and records open to
inspection and examination by any representative of the
Commission.
``(g) Daily Trading Records.--
``(1) In general.--Each registered digital commodity
broker and registered digital commodity dealer shall
maintain daily trading records of the transactions of
the digital commodity broker or digital commodity
dealer, respectively, and all related records
(including related forward or derivatives transactions)
and recorded communications, including electronic mail,
instant messages, and recordings of telephone calls,
for such period as the Commission may require by rule
or regulation.
``(2) Information requirements.--The daily trading
records shall include such information as the
Commission shall require by rule or regulation.
``(3) Counterparty records.--Each registered digital
commodity broker and registered digital commodity
dealer shall maintain daily trading records for each
customer or counterparty in a manner and form that is
identifiable with each digital commodity transaction.
``(4) Audit trail.--Each registered digital commodity
broker and registered digital commodity dealer shall
maintain a complete audit trail for conducting
comprehensive and accurate trade reconstructions.
``(h) Business Conduct Standards.--
``(1) In general.--Each registered digital commodity
broker and registered digital commodity dealer shall
conform with such business conduct standards as the
Commission, by rule or regulation, prescribes related
to--
``(A) fraud, manipulation, and other abusive
practices involving spot or margined,
leveraged, or financed digital commodity
transactions (including transactions that are
offered but not entered into);
``(B) diligent supervision of the business of
the registered digital commodity broker or
digital commodity dealer, respectively; and
``(C) such other matters as the Commission
deems appropriate.
``(2) Business conduct requirements.--The Commission
shall, by rule, prescribe business conduct requirements
which--
``(A) require disclosure by a registered
digital commodity broker and registered digital
commodity dealer to any counterparty to the
transaction (other than an eligible contract
participant) of--
``(i) information about the material
risks and characteristics of the
digital commodity;
``(ii) information about the material
risks and characteristics of the
transaction;
``(B) establish a duty for such a digital
commodity broker and such a digital commodity
dealer to communicate in a fair and balanced
manner based on principles of fair dealing and
good faith;
``(C) establish standards governing digital
commodity platform marketing and advertising,
including testimonials and endorsements; and
``(D) establish such other standards and
requirements as the Commission may determine
are--
``(i) in the public interest;
``(ii) appropriate for the protection
of customers; or
``(iii) otherwise in furtherance of
the purposes of this Act.
``(3) Special requirements for digital commodity
brokers or dealers acting as advisors.--It shall be
unlawful for a registered digital commodity broker or
registered digital commodity dealer to--
``(A) employ any device, scheme, or artifice
to defraud any customer or counterparty;
``(B) engage in any transaction, practice, or
course of business that operates as a fraud or
deceit on any customer or counterparty; or
``(C) engage in any act, practice, or course
of business that is fraudulent, deceptive, or
manipulative.
``(i) Duties.--
``(1) Risk management procedures.--Each registered
digital commodity broker and registered digital
commodity dealer shall establish robust and
professional risk management systems adequate for
managing the day-to-day business of the digital
commodity broker or digital commodity dealer,
respectively.
``(2) Disclosure of general information.--Each
registered digital commodity broker and registered
digital commodity dealer shall disclose to the
Commission information concerning--
``(A) the terms and conditions of the
transactions of the digital commodity broker or
digital commodity dealer, respectively;
``(B) the trading operations, mechanisms, and
practices of the digital commodity broker or
digital commodity dealer, respectively;
``(C) financial integrity protections
relating to the activities of the digital
commodity broker or digital commodity dealer,
respectively; and
``(D) other information relevant to trading
in digital commodities by the digital commodity
broker or digital commodity dealer,
respectively.
``(3) Ability to obtain information.--Each registered
digital commodity broker and registered digital
commodity dealer shall--
``(A) establish and enforce internal systems
and procedures to obtain any necessary
information to perform any of the functions
described in this section; and
``(B) provide the information to the
Commission, on request.
``(4) Conflicts of interest.--Each registered digital
commodity broker and digital commodity dealer shall
implement conflict-of-interest systems and procedures
that--
``(A) establish structural and institutional
safeguards--
``(i) to minimize conflicts of
interest that might potentially bias
the judgment or supervision of the
digital commodity broker or digital
commodity dealer, respectively, and
contravene the principles of fair and
equitable trading and the business
conduct standards described in this
Act, including conflicts arising out of
transactions or arrangements with
affiliates (including affiliates acting
as issuers, market-makers, or
custodians), which may include
information partitions and the legal
separation of different digital
commodity transaction intermediaries;
and
``(ii) to ensure that the activities
of any person within the firm relating
to research or analysis of the price or
market for any digital commodity or
acting in a role of providing exchange
activities or making determinations as
to accepting exchange customers are
separated by appropriate informational
partitions within the firm from the
review, pressure, or oversight of
persons whose involvement in pricing,
trading, exchange, or clearing
activities might potentially bias their
judgment or supervision and contravene
the core principles of open access and
the business conduct standards
described in this Act; and
``(B) address such other issues as the
Commission determines to be appropriate.
``(5) Antitrust considerations.--Unless necessary or
appropriate to achieve the purposes of this Act, a
digital commodity broker or digital commodity dealer
shall not--
``(A) adopt any process or take any action
that results in any unreasonable restraint of
trade; or
``(B) impose any material anticompetitive
burden on trading or clearing.
``(j) Designation of Chief Compliance Officer.--
``(1) In general.--Each registered digital commodity
broker and registered digital commodity dealer shall
designate an individual to serve as a chief compliance
officer.
``(2) Duties.--The chief compliance officer shall--
``(A) report directly to the board or to the
senior officer of the registered digital
commodity broker and registered digital
commodity dealer;
``(B) review the compliance of the registered
digital commodity broker and registered digital
commodity dealer with respect to the registered
digital commodity broker and registered digital
commodity dealer requirements described in this
section;
``(C) in consultation with the board of
directors, a body performing a function similar
to the board, or the senior officer of the
organization, resolve any conflicts of interest
that may arise;
``(D) be responsible for administering each
policy and procedure that is required to be
established pursuant to this section;
``(E) ensure compliance with this Act
(including regulations), including each rule
prescribed by the Commission under this
section;
``(F) establish procedures for the
remediation of noncompliance issues identified
by the chief compliance officer through any--
``(i) compliance office review;
``(ii) look-back;
``(iii) internal or external audit
finding;
``(iv) self-reported error; or
``(v) validated complaint; and
``(G) establish and follow appropriate
procedures for the handling, management
response, remediation, retesting, and closing
of noncompliance issues.
``(3) Annual reports.--
``(A) In general.--In accordance with rules
prescribed by the Commission, the chief
compliance officer shall annually prepare and
sign a report that contains a description of--
``(i) the compliance of the
registered digital commodity broker and
registered digital commodity dealer
with respect to this Act (including
regulations); and
``(ii) each policy and procedure of
the registered digital commodity broker
and registered digital commodity dealer
of the chief compliance officer
(including the code of ethics and
conflict of interest policies).
``(B) Requirements.--The chief compliance
officer shall ensure that a compliance report
under subparagraph (A)--
``(i) accompanies each appropriate
financial report of the registered
digital commodity broker and registered
digital commodity dealer that is
required to be furnished to the
Commission pursuant to this section;
and
``(ii) includes a certification that,
under penalty of law, the compliance
report is accurate and complete.
``(k) Segregation of Digital Commodities.--
``(1) Holding of customer assets.--
``(A) In general.--Each registered digital
commodity broker and registered digital
commodity dealer shall hold customer money,
assets, and property in a manner to minimize
the risk of loss to the customer or
unreasonable delay in customer access to the
money, assets, and property of the customer.
``(B) Qualified digital commodity
custodian.--Each registered digital commodity
broker and registered digital commodity dealer
shall hold in a qualified digital commodity
custodian each unit of a digital commodity that
is--
``(i) the property of a customer or
counterparty of the digital commodity
broker or digital commodity dealer,
respectively; or
``(ii) otherwise so required by the
Commission to reasonably protect
customers or promote the public
interest.
``(2) Segregation of funds.--
``(A) In general.--Each registered digital
commodity broker and registered digital
commodity dealer shall treat and deal with all
money, assets, and property that is received by
the registered digital commodity broker or
registered digital commodity dealer, or accrues
to a customer as the result of trading in
digital commodities, as belonging to the
customer.
``(B) Commingling prohibited.--
``(i) In general.--Except as provided
in clause (ii), each registered digital
commodity broker and registered digital
commodity dealer shall separately
account for money, assets, and property
of a digital commodity customer, and
shall not commingle any such money,
assets, or property with the funds of
the digital commodity broker or digital
commodity dealer, respectively, or use
any such money, assets, or property to
margin, secure, or guarantee any trades
or accounts of any customer or person
other than the person for whom the
money, assets, or property are held.
``(ii) Exceptions.--
``(I) Use of funds.--
``(aa) In general.--A
registered digital
commodity broker or
registered digital
commodity dealer may,
for convenience,
commingle and deposit
in the same account or
accounts with any bank,
trust company,
derivatives clearing
organization, or
qualified digital
commodity custodian
money, assets, and
property of customers.
``(bb) Withdrawal.--
The share of the money,
assets, and property
described in item (aa)
as in the normal course
of business shall be
necessary to margin,
guarantee, secure,
transfer, adjust, or
settle a digital
commodity transaction
with a registered
entity may be withdrawn
and applied to such
purposes, including the
payment of commissions,
brokerage, interest,
taxes, storage, and
other charges, lawfully
accruing in connection
with the digital
commodity transaction.
``(II) Commission action.--In
accordance with such terms and
conditions as the Commission
may prescribe by rule,
regulation, or order, any
money, assets, or property of
the customers of a registered
digital commodity broker or
registered digital commodity
dealer may be commingled and
deposited in customer accounts
with any other money, assets,
or property received by the
digital commodity broker or
digital commodity dealer,
respectively, and required by
the Commission to be separately
accounted for and treated and
dealt with as belonging to the
customer of the digital
commodity broker or digital
commodity dealer, respectively.
``(3) Permitted investments.--Money described in
paragraph (2) may be invested in obligations of the
United States, in general obligations of any State or
of any political subdivision of a State, in obligations
fully guaranteed as to principal and interest by the
United States, or in any other investment that the
Commission may by rule or regulation allow.
``(4) Prohibition.--It shall be unlawful for any
person, including any derivatives clearing organization
or depository institution, that has received any money,
securities, or property for deposit in a separate
account or accounts as provided in paragraph (2) to
hold, dispose of, or use any of the money, assets, or
property as belonging to the depositing registered
digital commodity broker, the depositing registered
digital commodity dealer, or any person other than the
digital commodity customer of the digital commodity
broker or digital commodity dealer, respectively.
``(5) Customer protection during bankruptcy.--
``(A) Customer property.--All money, assets,
or property described in paragraph (2) shall be
considered customer property for purposes of
section 761 of title 11, United States Code.
``(B) Transactions.--A transaction involving
a unit of a digital commodity occurring with a
digital commodity dealer shall be considered a
`contract for the purchase or sale of a
commodity for future delivery, on or subject to
the rules of, a contract market or board of
trade' for purposes of the definition of a
`commodity contract' in section 761 of title
11, United States Code.
``(C) Brokers and dealers.--A registered
digital commodity dealer and a registered
digital commodity broker shall be considered a
futures commission merchant for purposes of
section 761 of title 11, United States Code.
``(D) Assets removed from segregation.--
Assets removed from segregation due to a
customer election under paragraph (5) shall not
be considered customer property for purposes of
section 761 of title 11, United States Code.
``(l) Exemptions.--In order to promote responsible economic
or financial innovation and fair competition, or protect
customers, the Commission may (on its own initiative or on
application of the registered digital commodity broker or
registered digital commodity exchange) exempt, unconditionally
or on stated terms or conditions, or for stated periods, and
retroactively or prospectively, or both, a registered digital
commodity broker or registered digital commodity exchange from
the requirements of this section, if the Commission determines
that--
``(1)(A) the exemption would be consistent with the
public interest and the purposes of this Act; and
``(B) the exemption will not have a material adverse
effect on the ability of the Commission or the digital
commodity exchange to discharge regulatory or self-
regulatory duties under this Act; or
``(2) the registered digital commodity broker or
registered digital commodity exchange is subject to
comparable, comprehensive supervision and regulation by
the appropriate government authorities in the home
country of the registered digital commodity broker or
registered digital commodity exchange, respectively.''.
SEC. 407. EXCLUSION FOR ANCILLARY ACTIVITIES.The Commodity Exchange Act
(7 U.S.C. 1 et seq.), as amended by the preceding provisions of
this Act, is amended by inserting after section 4u the
following:
``SEC. 4v. EXCLUSION FOR ANCILLARY ACTIVITIES.
``(a) In General.--Notwithstanding any other provision of
this Act, a person shall not be subject to the regulatory
requirements of this Act solely based on the person undertaking
any ancillary activities.
``(b) Exceptions.--Subsection (a) shall not be construed to
apply to the anti-manipulation, anti-fraud, or false reporting
enforcement authorities of the Commission.
``(c) Ancillary Activities Defined.--In this section, the
term `ancillary activities' means any of the following
activities related to the operation of a blockchain network:
``(1) Network transactions compilation, pool
operating, relating, searching, sequencing, validating,
or acting in a similar capacity with respect to a
digital commodity transaction.
``(2) Providing computational work, or procuring,
offering or utilizing network bandwidth, or other
similar incidental services with respect to a digital
commodity transaction.
``(3) Providing a user-interface that enables a user
to read, and access data about a blockchain network,
send messages, or otherwise interact with a blockchain
network.
``(4) Developing, publishing, constituting,
administering, maintaining, or otherwise distributing a
blockchain network.
``(5) Developing, publishing, constituting,
administering, maintaining, or otherwise distributing
software or systems that create or deploy a hardware or
software wallet or other system facilitating an
individual user's own personal ability to keep,
safeguard, or custody the user's restricted digital
assets or related private keys.''.
TITLE V--INNOVATION AND TECHNOLOGY IMPROVEMENTS
SEC. 501. CODIFICATION OF THE SEC STRATEGIC HUB FOR INNOVATION AND
FINANCIAL TECHNOLOGY.
Section 4 of the Securities Exchange Act of 1934 (15 U.S.C. 78d) is
amended by adding at the end the following:
``(l) Strategic Hub for Innovation and Financial
Technology.--
``(1) Office established.--There is established
within the Commission the Strategic Hub for Innovation
and Financial Technology (referred to in this section
as the `FinHub').
``(2) Purposes.--The purposes of FinHub are as
follows:
``(A) To assist in shaping the approach of
the Commission to technological advancements in
the financial industry.
``(B) To examine FinTech innovations within
capital markets, market participants, and
investors.
``(C) To coordinate the response of the
Commission to emerging technologies in
financial, regulatory, and supervisory systems.
``(3) Director of finhub.--FinHub shall have a
Director who shall be appointed by the Commission, from
among individuals having experience in both emerging
technologies and Federal securities law and serve at
the pleasure of the Commission. The Director shall
report directly to the Commission and perform such
functions and duties as the Commission may prescribe.
``(4) Responsibilities.--FinHub shall--
``(A) foster responsible technological
innovation and fair competition within the
Commission, including around financial
technology, regulatory technology, and
supervisory technology;
``(B) provide internal education and training
to the Commission regarding financial
technology;
``(C) advise the Commission regarding
financial technology that would serve the
Commission's oversight functions;
``(D) analyze technological advancements and
the impact of regulatory requirements on
financial technology companies;
``(E) advise the Commission with respect to
rulemakings or other agency or staff action
regarding financial technology;
``(F) provide businesses working in emerging
financial technology fields with information on
the Commission, its rules and regulations; and
``(G) encourage firms working in emerging
technology fields to engage with the Commission
and obtain feedback from the Commission on
potential regulatory issues.
``(5) Access to documents.--The Commission shall
ensure that FinHub has full access to the documents and
information of the Commission and any self-regulatory
organization, as necessary to carry out the functions
of FinHub.
``(6) Report to congress.--
``(A) In general.--Not later than October 31
of each year after 2024, FinHub shall submit to
the Committee on Banking, Housing, and Urban
Affairs of the Senate and the Committee on
Financial Services of the House of
Representatives a report on the activities of
FinHub during the immediately preceding fiscal
year.
``(B) Contents.--Each report required under
subparagraph (A) shall include--
``(i) the total number of persons
that met with FinHub;
``(ii) the total number of market
participants FinHub met with, including
the classification of those
participants;
``(iii) a summary of general issues
discussed during meetings with persons;
``(iv) information on steps FinHub
has taken to improve Commission
services, including responsiveness to
the concerns of persons;
``(v) recommendations--
``(I) with respect to the
regulations of the Commission
and the guidance and orders of
the Commission; and
``(II) for such legislative
actions as the FinHub
determines appropriate; and
``(vi) any other information, as
determined appropriate by the Director
of FinHub.
``(C) Confidentiality.--A report under
subparagraph (A) may not contain confidential
information.
``(7) Systems of records.--
``(A) In general.--The Commission shall
establish a detailed system of records (as
defined under section 552a of title 5, United
States Code) to assist FinHub in communicating
with interested parties.
``(B) Entities covered by the system.--
Entities covered by the system required under
subparagraph (A) include entities or persons
submitting requests or inquiries and other
information to Commission through FinHub.
``(C) Security and storage of records.--
FinHub shall store--
``(i) electronic records--
``(I) in the system required
under subparagraph (A); or
``(II) on the secure network
or other electronic medium,
such as encrypted hard drives
or back-up media, of the
Commission; and
``(ii) paper records in
secure facilities.
``(8) Effective date.--This subsection shall take
effect on the date that is 180 days after the date of
the enactment of this subsection.''.
SEC. 502. CODIFICATION OF LABCFTC.
(a) In General.--Section 18 of the Commodity Exchange Act (7 U.S.C.
22) is amended by adding at the end the following:
``(c) LabCFTC.--
``(1) Establishment.--There is established in the
Commission LabCFTC.
``(2) Purpose.--The purposes of LabCFTC are to--
``(A) foster responsible financial technology
innovation and fair competition for the benefit
of the American public;
``(B) serve as an information platform to
inform the Commission about new financial
technology innovation; and
``(C) provide outreach to financial
technology innovators to discuss their
innovations and the regulatory framework
established by this Act and the regulations
promulgated thereunder.
``(3) Director.--LabCFTC shall have a Director, who
shall be appointed by the Commission and serve at the
pleasure of the Commission. Notwithstanding section
2(a)(6)(A), the Director shall report directly to the
Commission and perform such functions and duties as the
Commission may prescribe.
``(4) Duties.--LabCFTC shall--
``(A) advise the Commission with respect to
rulemakings or other agency or staff action
regarding financial technology;
``(B) provide internal education and training
to the Commission regarding financial
technology;
``(C) advise the Commission regarding
financial technology that would bolster the
Commission's oversight functions;
``(D) engage with academia, students, and
professionals on financial technology issues,
ideas, and technology relevant to activities
under this Act;
``(E) provide persons working in emerging
technology fields with information on the
Commission, its rules and regulations, and the
role of a registered futures association; and
``(F) encourage persons working in emerging
technology fields to engage with the Commission
and obtain feedback from the Commission on
potential regulatory issues.
``(5) Access to documents.--The Commission shall
ensure that LabCFTC has full access to the documents
and information of the Commission and any self-
regulatory organization, as necessary to carry out the
functions of LabCFTC.
``(6) Report to congress.--
``(A) In general.--Not later than October 31
of each year after 2024, LabCFTC shall submit
to the Committee on Agriculture of the House of
Representatives and the Committee on
Agriculture, Nutrition, and Forestry of the
Senate a report on its activities.
``(B) Contents.--Each report required under
paragraph (1) shall include--
``(i) the total number of persons
that met with LabCFTC;
``(ii) a summary of general issues
discussed during meetings with the
person;
``(iii) information on steps LabCFTC
has taken to improve Commission
services, including responsiveness to
the concerns of persons;
``(iv) recommendations made to the
Commission with respect to the
regulations, guidance, and orders of
the Commission and such legislative
actions as may be appropriate; and
``(v) any other information
determined appropriate by the Director
of LabCFTC.
``(C) Confidentiality.--A report under
paragraph (A) shall abide by the
confidentiality requirements in section 8.
``(7) Systems of records.--
``(A) In general.--The Commission shall
establish a detailed system of records (as
defined in section 552a of title 5, United
States Code) to assist the Office in
communicating with interested parties.
``(B) Entities covered by the system.--The
entities covered by the system of records shall
include entities submitting requests or
inquiries and other information to the
Commission through the Office. Proprietary
information provided to the Office by entities
or persons shall be subject to the disclosure
restrictions provided in section 8 of the
Commodity Exchange Act.
``(C) Security and storage of records.--The
system of records shall store records
electronically or on paper in secure
facilities, and shall store electronic records
on the secure network of the Commission and on
other electronic media, such as encrypted hard
drives and back-up media, as needed.''.
(b) Conforming Amendments.--Section 2(a)(6)(A) of such Act (7
U.S.C. 2(a)(6)(A)) is amended--
(1) by striking ``paragraph and in'' and inserting
``paragraph,''; and
(2) by inserting ``and section 18(c)(3),'' before ``the
executive''.
(c) Effective Date.--The Commodity Futures Trading Commission shall
implement the amendments made by this section (including complying with
section 18(c)(7) of the Commodity Exchange Act) within 180 days after
the date of the enactment of this Act.
SEC. 503. CFTC-SEC JOINT ADVISORY COMMITTEE ON DIGITAL ASSETS.
(a) Establishment.--The Commodity Futures Trading Commission and
the Securities and Exchange Commission (in this section referred to as
the ``Commissions'') shall jointly establish the Joint Advisory
Committee on Digital Assets (in this section referred to as the
``Committee'').
(b) Purpose.--
(1) In general.--The Committee shall--
(A) provide the Commissions with advice on the rules,
regulations, and policies of the Commissions related to
digital assets;
(B) further the regulatory harmonization of digital
asset policy between the Commissions;
(C) examine and disseminate methods for describing,
measuring, and quantifying digital asset--
(i) decentralization;
(ii) functionality;
(iii) information asymmetries; and
(iv) transaction and network security; and
(D) discuss the implementation by the Commissions of
this Act and the amendments made by this Act.
(2) Review by agencies.--Each Commission shall--
(A) review the findings and recommendations of the
Committee;
(B) each time the Committee submits a finding or
recommendation to a Commission, promptly issue a public
statement--
(i) assessing the finding or recommendation
of the Committee;
(ii) disclosing the action or decision not to
take action made by the Commission in response
to a finding or recommendation; and
(iii) the reasons for the action or decision
not to take action; and
(C) each time the Committee submits a finding or
recommendation to a Commission, provide the Committee
with a formal response to the finding or recommendation
not later than 3 months after the date of the
submission of the finding or recommendation.
(c) Membership and Leadership.--
(1) Non-federal members.--
(A) In general.--The Commissions shall appoint at
least 20 nongovernmental stakeholders with a wide
diversity of opinion and who represent a broad spectrum
of interests representing the digital asset ecosystem,
equally divided between the Commissions, to serve as
members of the Committee. The appointees shall
include--
(i) digital asset issuers;
(ii) persons registered with the Commissions
and engaged in digital asset related
activities;
(iii) individuals engaged in academic
research relating to digital assets; and
(iv) digital asset users.
(B) Members not commission employees.--Members
appointed under subparagraph (A) shall not be deemed to
be employees or agents of a Commission solely by reason
of membership on the Committee.
(2) Co-designated federal officers.--
(A) Number; appointment.--There shall be 2 co-
designated Federal officers of the Committee, as
follows:
(i) The Director of LabCFTC of the Commodity
Futures Trading Commission.
(ii) The Director of the Strategic Hub for
Innovation and Financial Technology.
(B) Duties.--The duties required by chapter 10 of
title 5, United States Code, to be carried out by a
designated Federal officer with respect to the
Committee shall be shared by the co-designated Federal
officers of the Committee.
(3) Committee leadership.--
(A) Composition; election.--The Committee members
shall elect, from among the Committee members--
(i) a chair;
(ii) a vice chair;
(iii) a secretary; and
(iv) an assistant secretary.
(B) Term of office.--Each member elected under
subparagraph (A) in a 2-year period referred to in
section 1013(b)(2) of title 5, United States Code,
shall serve in the capacity for which the member was so
elected, until the end of the 2-year period.
(d) No Compensation for Committee Members.--
(1) Non-federal members.--All Committee members appointed
under subsection (d)(1) shall--
(A) serve without compensation; and
(B) while away from the home or regular place of
business of the member in the performance of services
for the Committee, be allowed travel expenses,
including per diem in lieu of subsistence, in the same
manner as persons employed intermittently in the
Government service are allowed expenses under section
5703(b) of title 5, United States Code.
(2) No compensation for co-designated federal officers.--The
co-designated Federal officers shall serve without compensation
in addition to that received for their services as officers or
employees of the United States.
(e) Frequency of Meetings.--The Committee shall meet--
(1) not less frequently than twice annually; and
(2) at such other times as either Agency may request.
(f) Duration.--Section 1013(a)(2) of title 5, United States Code,
shall not apply to the Committee.
(g) Time Limits.--The Commissions shall--
(1) adopt a joint charter for the Committee within 90 days
after the date of the enactment of this section;
(2) appoint members to the Committee within 120 days after
such date of enactment; and
(3) hold the initial meeting of the Committee within 180 days
after such date of enactment.
(h) Funding.--The Commissions may jointly fund the Committee.
SEC. 504. MODERNIZATION OF THE SECURITIES AND EXCHANGE COMMISSION
MISSION.
(a) Securities Act of 1933.--Section 2(b) of the Securities Act of
1933 (15 U.S.C. 77(b)) is amended--
(1) in the heading, by inserting ``Innovation,'' after
``Efficiency,''; and
(2) by inserting ``innovation,'' after ``efficiency,''.
(b) Securities Exchange Act of 1934.--Section 3(f) of the
Securities Exchange Act of 1934 (15 U.S.C. 78(c)) is amended--
(1) in the heading, by inserting ``Innovation,'' after
``Efficiency,''; and
(2) by inserting ``innovation,'' after ``efficiency,''.
(c) Investment Advisers Act Of 1940.--Section 2(c) of the
Investment Advisers Act of 1940 (15 U.S.C. 80a-2) is amended--
(1) in the heading, by inserting ``Innovation,'' after
``Efficiency,''; and
(2) by inserting ``innovation,'' after ``efficiency,''.
SEC. 505. STUDY ON DECENTRALIZED FINANCE.
(a) In General.--The Securities and Exchange Commission and the
Commodity Futures Trading Commission shall jointly carry out a study on
decentralized finance that analyzes--
(1) the nature, size, role, and use of decentralized finance
protocols;
(2) the operation of smart contracts that comprise
decentralized finance protocols;
(3) the interoperability of smart contracts and blockchain
technology;
(4) the interoperability of smart contracts and software-
based systems, such as websites and software wallets;
(5) the software-based governance systems through which
decentralized finance may be administered or operated,
including--
(A) whether the systems enhance or detract from--
(i) the decentralization of the decentralized
finance; and
(ii) the inherent risks of the systems; and
(B) any procedures or requirements that would
mitigate the risks identified in subparagraph (A)(ii);
(6) the benefits of decentralized finance, including--
(A) operational resilience and interoperability of
blockchain-based systems;
(B) market competition and innovation;
(C) transaction efficiency; and
(D) transparency and traceability of transactions;
and
(7) the risks of decentralized finance, including--
(A) pseudonymity of users and transactions;
(B) lack of intermediaries; and
(C) cybersecurity vulnerabilities;
(8) the extent to which decentralized finance has integrated
with the traditional financial markets and any potential risks
to stability of such markets from the integration;
(9) how the levels of illicit activity in decentralized
finance compare with the levels of illicit activity in
traditional financial markets; and
(10) how decentralized finance may increase the accessibility
of cross-border transactions.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the Securities and Exchange Commission and the Commodity
Futures Trading Commission shall jointly submit to the relevant
congressional committees a report that includes the results of the
study required by subsection (a).
(c) GAO Study.--The Comptroller General of the United States
shall--
(1) carry out a study on decentralized finance that analyzes
the information described under paragraphs (1) through (10) of
subsection (a); and
(2) not later than 1 year after the date of enactment of this
Act, submit to the relevant congressional committees a report
that includes the results of the study required by paragraph
(1).
(d) Definitions.--In this section:
(1) Decentralized finance.--The term ``decentralized
finance'' means a system of software applications that--
(A) are created through smart contracts deployed to
permissionless blockchain technology; and
(B) allow users to engage in financial transactions
in a self-directed manner so that a third-party
intermediary does not effectuate the transactions or
take custody of digital assets of a user during any
part of the transactions.
(2) Relevant congressional committees.--The term ``relevant
congressional committees'' means--
(A) the Committees on Financial Services and
Agriculture of the House of Representatives; and
(B) the Committees on Banking, Housing, and Urban
Affairs and Agriculture, Nutrition, and Forestry of the
Senate.
SEC. 506. STUDY ON NON-FUNGIBLE DIGITAL ASSETS.
(a) The Secretary of Commerce shall, in consultation with the
Office of Science and Technology Policy, the Securities and Exchange
Commission, and the Commodity Futures Trading Commission carry out a
study of non-fungible digital assets that analyzes--
(1) the nature, size, role, purpose, and use of non-fungible
digital assets;
(2) the similarities and differences between non-fungible
digital assets and other digital assets, including digital
commodities and payments stablecoins, and how the markets for
those digital assets intersect with each other;
(3) how non-fungible digital assets are minted by issuers and
subsequently administered to purchasers;
(4) how non-fungible digital assets are stored after being
purchased by a consumer;
(5) the interoperability of non-fungible digital assets
between different blockchain networks;
(6) the scalability of different non-fungible digital asset
marketplaces;
(7) the benefits of non-fungible digital assets, including
verifiable digital ownership;
(8) the risks of non-fungible tokens, including--
(A) intellectual property rights;
(B) cybersecurity risks; and
(C) market risks;
(9) whether and how non-fungible digital assets have
integrated with traditional marketplaces, including those for
music, real estate, gaming, events, and travel;
(10) any potential risks to such traditional markets from
such integration; and
(11) the levels and types of illicit activity in non-fungible
digital asset markets.
(b) Report.--Not later than 1 year after the date of the enactment
of this Act, the Secretary of Commerce, shall make publicly available a
report that includes the results of the study required by subsection
(a).
Digital Asset Market Structure Discussion Draft Summary
The current regulatory framework for digital assets hinders
innovation and fails to provide adequate consumer protection. The House
Committee on Financial Services and the House Committee on Agriculture
are addressing these shortcomings by establishing a functional
framework that works for both market participants and consumers. This
functional framework would provide digital asset firms with regulatory
certainty and fill the gap that exists between the authorities of the
Commodity Futures Trading Commission (CFTC) and the Securities and
Exchange Commission (SEC).
The Digital Asset Market Structure Discussion Draft (Discussion
Draft) provides the CFTC with jurisdiction over digital commodities and
clarifies the SEC's jurisdiction over digital assets offered as part of
an investment contract. Additionally, the Act establishes a process to
permit the secondary market trading of digital commodities, if they
were initially offered as part of an investment contract. Finally, the
Act imposes robust customer protections on all entities required to be
registered with the SEC and CFTC.
Classification as a Security vs. a Commodity
The Act also builds on the current exemption regime for the offer
and sale of digital assets pursuant to an investment contract including
a disclosure regime to address the potential risks associated with
digital assets. Under this exemption, digital asset issuers will need
to demonstrate that their digital assets operate on a decentralized
network and fulfil certain fit-for-purpose disclosure requirements. The
Act specifies that a digital asset can be considered a digital
commodity if certain conditions are met. This would be determined by
the network being functional and considered decentralized.
The Act includes definitions for a decentralized network and a
functional network and provides a certification process under which a
digital asset issuer may certify to the SEC that the network on which
the digital asset relates is decentralized. The SEC may object to the
certification if the SEC determines the certification is inconsistent
with the Act, but must provide a detailed analysis of its reasons for
doing so.
Regulation of SEC Intermediaries
The Act would enable registration of digital asset trading
platforms as an Alternative Trading System (ATS). The Act would
prohibit the SEC from denying a trading platform from an exemption to
operate as an ATS on the basis that the platform trades digital assets.
It would also allow an ATS to offer digital commodities and payment
stablecoins on their platforms. The Act also requires the SEC to modify
its rules to allow broker-dealers to custody digital assets, if they
meet certain requirements. Additionally, the Act would require the SEC
to write rules to modernize certain regulations for digital assets.
Regulation of CFTC Intermediaries
The Act creates a Digital Commodity Exchange (DCE) framework that
is similar to existing exchange frameworks in the Commodity Exchange
Act (CEA) for Designated Contract Markets and Swap Execution
Facilities. A registered DCE would be required to comply with
requirements within the Act, certain longstanding CEA core principles,
as well as CFTC regulations including the monitoring of trading
activity, prohibition of abusive trading practices, minimum capital
requirements, public reporting of trading information, conflicts of
interest, governance standards, and cybersecurity. DCEs must also
register with a registered futures association and comply with its
customer protection rules if it directly serves customers.
Additionally, before listing digital commodities, DCEs would need
to certify with the CFTC that the digital commodity is not readily
susceptible to manipulation before being listed to trade, including
considering its availability, structure, functionality, and public
information.
Further, the Act creates a Digital Commodity Broker (DCB) and a
Digital Commodity Dealer (DCD) framework. Because they directly serve
customers, all DCBs and DCDs are required to register with a registered
futures association and meet prescriptive business conduct requirements
related to minimum capital, fair dealing, risk disclosures, advertising
limitations, conflicts of interest, recordkeeping and reporting, daily
trading records, and employee fitness standards.
The proposed legislation also builds on the existing commodity
market requirements imposed on Futures Commission Merchants (FCMs) to
protect customer assets. DCEs would be required to segregate customer
assets and hold them in digital commodity custodians, which will be
subject to minimum standards for supervision and comprehensive
regulation set by the CFTC. Further, the Act provides bankruptcy
protections for customers when the FCM is acting as a counterparty.
Regulatory Coordination
The Act would permit a single CFTC entity to obtain multiple
licenses with the CFTC, depending on the nature of the services the
entity engaged in, except that no exchange would be permitted to be
registered as a dealer directly. The Act would also permit certain
entities to dually register with the CFTC and SEC to be permitted to
facilitate transactions in multiple types of digital assets.
Innovation and Coordination
The Act codifies the establishment of both the Strategic Hub for
Innovation and Financial Technology (FinHub) at the SEC and LabCFTC at
the CFTC. The offices will serve as information resources for the
Commissions on financial technology (FinTech) innovation. The offices
will also make the Commissions more accessible to FinTech innovators
and serve as a forum for innovators seeking a better understanding of
the Commissions' regulatory frameworks.
The Act also establishes a Joint CFTC-SEC Advisory Committee on
Digital Assets, which will consist of 20 market participants, who will
provide advice to the CFTC and SEC related to digital assets. The Act
requires the CFTC and the SEC to conduct a joint study on decentralized
finance. The Act also requires the Department of Commerce, in
consultation with the White House Office of Science and Technology, the
SEC, and the CFTC to conduct a study on non-fungible digital assets.
Regulatory Transition
The Act provides for a transition period for entities to come into
temporary compliance with both the SEC and CFTC immediately, while the
Commissions are writing final rules to bring comprehensive oversight to
these markets. Existing digital assets are eligible for a safe harbor
under which they are permitted to trade during this period, until the
SEC or CFTC issues a notice to the trading venue that they are not
digital commodities.
Digital Asset Market Structure Discussion Draft Section-by-Section
Title I--Definitions; Rulemaking; Provisional Registration
Sec. 101. Definitions under the Securities Act of 1933.
Section 101 provides for definitions under the Securities Act of
1933.
Sec. 102. Definitions under the Commodity Exchange Act.
Section 102 provides for definitions under the Commodity Exchange
Act.
Sec. 103. Definitions under this Act.
Section 103 provides for definitions under this Act.
Sec. 104. Joint rulemakings.
Section 104 provides for joint rulemakings between the Securities
and Exchange Commission (SEC) and the Commodity Futures Trading
Commission (CFTC), including joint rulemakings related to defining key
terms in the Act and the oversight of dually registered exchanges.
Sec. 105. Provisional Registration of CFTC intermediaries.
Section 105 permits a digital commodity exchange, digital commodity
broker, or a digital commodity dealer to file a provisional
registration statement with the CFTC. Filing a provisional registration
requires a filer to submit information regarding the company to the
Commission, submit to inspection by the Commission, and provide
disclosures and segregate customer assets. Filing a provisional
registration provides limited relief from the requirements of this Act,
until such time as the rules are written and permanent registration
commences.
Sec. 106. Provisional registration of SEC intermediaries.
Section 106 permits a broker-dealer and alternative trading system
(ATS) to file a provisional registration statement with the SEC. Filing
a provisional registration requires a filer to submit information
regarding the company to the Commission and submit to inspection by the
Commission. Filing a provisional registration provides limited relief
from the requirements of this Act, until such time as the rules are
written and permanent registration commences.
Title II--Digital Asset Exemptions
Sec. 201. Exempted transactions in digital assets.
Section 201 establishes an exemption from the securities laws for a
digital asset issuer's sale of digital assets that meet the following
conditions: (1) the issuer's total sales of the digital asset over the
prior 12 months does not exceed $75 million; (2) a non-accredited
investor's purchases of the digital asset from the issuer over the
prior 12 months are less than the greater of 5% of the purchaser's
annual income or 5% of their net worth; (3) the purchaser does not own
more than 10% of the units of the digital asset after the completion of
the transaction; and (4) the transaction does not involve equity or
debt securities.
The digital asset issuer must file information with the Commission
as prescribed by the Act. The digital asset issuer must file annual and
semiannual reports until a defined period after the blockchain network
is certified decentralized. Any intermediaries involved in the offer or
sale of a unit of a digital asset under this exemption must be
registered with the SEC. A unit of a digital asset acquired from the
digital asset issuer in reliance on this exemption is deemed a
restricted digital asset.
Sec. 202. Requirements to transact in certain digital assets.
Section 202 sets out the conditions under which certain persons are
permitted to engage in restricted digital asset transactions and
digital commodity transactions. Generally, restricted digital assets
are permitted to trade on an ATS under the supervision of the SEC and
digital commodities are permitted to trade on a Digital Commodity
Exchange (DCE) under the supervision of the CFTC.
Sec. 203. Enhanced disclosure requirements.
Section 203 provides for a new disclosure regime to be completed by
a digital asset issuer, affiliated person, related person, or other
appropriate entity. The information required to be disclosed is focused
on the nature of the risks surrounding digital assets, including source
code, project economics, development plan, related and affiliated
persons, and other risk factors.
Sec. 204. Certification of certain digital assets.
Section 204 provides for a process for a blockchain relating to a
digital asset to be certified as decentralized. The certification
process permits any person to certify to the SEC that the blockchain
network meets the requirements of the Act. The SEC is then provided an
opportunity to rebut the assertion that the network meets the
decentralization test.
Title III--Registration for Digital Asset Intermediaries at the
Securities and Exchange Commission
Sec. 301. Treatment of digital commodities and other digital assets.
Section 301 excludes digital commodities and payment stablecoins
from the definition of a security under the securities laws. This
section aligns the definition of bank in the Exchange Act with the
Advisers Act and Investment Company Act and clarifies the activities of
trust companies engaging in custody and safekeeping services.
Sec. 302. [Anti-fraud] authority over payment stablecoins.
Section 302 provides the SEC with authority over transactions with
or involving payment stablecoins that occur on or with a SEC registered
entity, as though those payment stablecoins are a security solely for
purposes of the Commission's anti-fraud or anti-manipulation
enforcement authorities. The SEC shall have no authority over the
design, structure, or operation of payment stablecoins.
Sec. 303. Eligibility of alternative trading systems.
Section 303 specifies that the SEC may not exclude a trading
platform from operating pursuant to an exemption as an ATS solely on
the basis that the assets traded are digital assets. It also requires
the SEC to revise regulations to exempt ATSs that offer digital assets,
digital commodities, and payment stablecoins from registration as a
national securities exchange and revise the ATS framework to permit
disintermediated trading and real-time settlement consistent with what
is necessary or appropriate in the public interest or for the
protection of investors.
Sec. 304. Customer protection rule modernization.
Section 304 requires the SEC within 270 days to revise the Customer
Protection Rule to provide that a registered broker-dealer is
considered to have control of digital assets if the broker-dealer holds
digital assets with a bank, if certain conditions are met, or
establishes written policies and procedures demonstrating that the
broker has exclusive control over the digital asset.
Sec. 305. Modernization of recordkeeping requirements.
Section 305 requires the SEC to promulgate rules that enable
cryptographically secured distributed ledgers to satisfy the books and
records requirements and to specify that registered transfer agents are
able to use cryptographically secured distributed ledgers to meet
obligations.
Sec. 306. Modifications to existing rules for digital assets.
Section 306 requires the SEC to complete a study and revise rules
under Regulation National Market System, Regulation Systems Compliance
and Integrity, and the Market Access Rule, among others, to modernize
such rules for digital assets.
Sec. 307. Treatment of certain digital assets in connection with
federally regulated intermediaries.
Section 307 adds digital assets to ``covered securities'' which are
exempt from state blue sky law registration requirements.
Sec. 308. Dual registration.
Section 308 requires SEC-registered intermediaries offering or
seeking to offer a cash or spot market in at least one digital
commodity to register with the CFTC.
Sec. 309. Exclusion for ancillary activities.
Section 309 defines certain ancillary activities related to the
operations and maintenance of blockchain networks and exempts such
activities from direct SEC regulation, although not from the
Commission's anti-fraud or anti-manipulation enforcement authorities.
Ancillary activities are defined as validating or providing
incidental services with respect to a restricted digital asset,
providing user-interfaces for a blockchain network, publishing and
updating software, or developing wallets for blockchain networks.
Title IV--Registration for Digital Asset Intermediaries at the
Commodity Futures Trading Commission
Sec. 401. Commission jurisdiction over digital commodity transactions.
Section 401 sets out the new authority of the CFTC over certain
transactions in digital assets. Specifically, the section provides the
Commission with new exclusive regulatory jurisdiction over digital
commodity cash or spot markets which occur on or with CFTC the new
registered entities created in this Act: digital commodity exchanges,
digital commodity dealers, and digital commodity brokers. This new
authority complements the Commission's existing anti-fraud and anti-
manipulation authority over all cash or spot market commodity
transactions, including cash or spot market transactions in digital
assets.
Section 401 provides the Commission with authority over
transactions with or involving payment stablecoins that occur on or
with a CFTC registered entity, as a payment stablecoin is a digital
commodity. The CFTC shall have no authority over the design, structure,
or operation of such payment stablecoins.
Sec. 402. Requiring futures commission merchants to use qualified
digital commodity custodians.
Section 402 requires Future Commission Merchants (FCM) to hold
customers' digital commodities in a qualified digital commodity
custodian (QDCC).
Sec. 403. Trading certification and approval for digital commodities.
Section 403 establishes the process by which a registered entity
may determine that digital commodities are eligible to be traded on
CFTC registered entities and through other CFTC registered
intermediaries.
The process requires a registered entity to submit a certification
to the Commission that the digital commodity meets the requirements of
the Commodity Exchange Act, including the listing requirements under
section 404, and to provide disclosures about the functionality and
operations of the digital commodity. The Commission then has up to 80
days to review the certification for its accuracy, completeness, and
veracity.
Sec. 404. Registration of digital commodity exchanges.
Section 404 provides for the registration and regulation of digital
commodity exchanges (DCE).Registration requires DCEs to comply with
core principles, including listing standards, treatment of customer
assets, trade surveillance, capital, conflicts of interest, reporting
and system safeguards. Subject to the core principles, DCEs are allowed
to list only those digital commodities that are not susceptible to
manipulation and for which they have made public disclosures regarding
source code, transaction history, and digital asset economics.
DCEs are also subject to comprehensive requirements to segregate
customer funds, provide risk-appropriate disclosures to retail
customers, and be members of a registered futures association and
comply with any additional rules they impose.
Sec. 405. Qualified digital commodity custodians.
Section 405 sets out the requirements for custodians to be
qualified digital asset custodians, and thus eligible to hold the
digital assets of customers of entities registered with the CFTC. While
the Commission is not given authority to directly regulate custodians,
it is provided authority to set minimum standards for those custodians
holding customer digital assets within the CFTC regulated perimeter.
Sec. 406. Registration and regulation of digital commodity brokers and
dealers.
Section 406 provides for the registration and regulation of digital
commodity brokers (DCB) and digital commodity dealers (DCD).
Registration requires DCBs and DCDs to comply with requirements
pertaining to business conduct standards, fair dealing, customer
disclosures, segregation of customer funds, conflicts of interest,
minimum capital requirements, reporting and record keeping, and other
requirements.
In addition, DCBs and DCDs are required to be members of a
registered futures association and comply with any additional rules
they impose.
Sec. 407. Exclusion for ancillary activities.
Section 407 defines certain ancillary activities related to the
operations and maintenance of blockchain networks and exempts such
activities from direct CFTC regulation, although not from the
Commission's anti-fraud, anti-manipulation, or false reporting
enforcement authorities.
Ancillary activities are defined as validating or providing
incidental services with respect to a digital commodity, providing
user-interfaces for a blockchain network, publishing and updating
software, or developing wallets for blockchain networks.
Title V--Innovation and Technology Improvements
Sec. 501. Codification of the SEC Strategic Hub for Innovation and
Financial Technology (FinHub).
Section 501 establishes the SEC Strategic Hub for Innovation and
Financial Technology (FinHub), which will assist the SEC with its
approach to technological advancements, examine the impact that FinTech
innovations have on capital markets, market participants, and
investors, and coordinate the SEC's response to emerging technologies
in financial, regulatory, and supervisory systems. FinHub will report
to the Commission to ensure that each Commissioner can avail themselves
of the expertise of the office. The Office shall submit an annual
report to Congress on its activity.
Sec. 502. Codification of LabCFTC.
Section 502 establishes LabCFTC in the CFTC, which will serve as an
information source for the CFTC on financial technology (FinTech)
innovation. The Office will report to the Commission to ensure that
each Commissioner can avail themselves of the expertise of the office.
The Office will ensure the CFTC is more accessible to FinTech
innovators and bolster the CFTC's understanding of new technologies.
The Office will also serve as a forum for innovators seeking a better
understanding of the CFTC's regulatory framework. The Office shall
submit an annual report to Congress on its activity.
Sec. 503. CFTC-SEC Joint Advisory Committee on Digital Assets.
Section 503 establishes a Joint CFTC-SEC Advisory Committee on
Digital Assets composed of digital asset marketplace stakeholders.
Among its many duties, the Joint Advisory Committee will provide
recommendations to the CFTC and SEC regarding their respective
promulgation of rules under the Act. The section also requires the CFTC
and SEC to publicly respond to any recommendations made by the Joint
Advisory Committee.
Sec. 504. Modernization of the Securities and Exchange Commission
Mission.
Section 504 amends the Securities Act of 1933, the Securities Act
of 1934, and the Investment Advisers Act of 1940 by adding
``innovation'' to the factors the SEC must consider when issuing a
rulemaking.
Sec. 505. Study on decentralized finance.
Section 505 requires the SEC and the CFTC to conduct a study on
decentralized finance (DeFi), which will include an analysis of the
size, scope, role, nature, and use of DeFi protocols, the benefits and
risks of DeFi, how DeFi has integrated into the traditional financial
markets, including the risks of DeFi integration, and the levels and
types of illicit activities in DeFi compared to traditional financial
markets. The report will be submitted to Congress one year after
enactment. GAO shall also conduct a report on DeFi and submit it to
Congress one year after enactment.
DeFi is defined as a system of software applications that (1) are
created through smart contracts deployed to permissionless blockchain
technology; and (2) allow users to engage in financial transactions in
a self-directed manner such that no third-party intermediary
effectuates such transactions or takes custody of a user's digital
assets during any part of such transaction.
Sec. 506. Study on non-fungible digital assets.
Section 506 requires the Department of Commerce, in consultation
with the White House Office of Science and Technology, the CFTC, and
the SEC, to conduct a study on non-fungible digital assets (NFT), which
will include an analysis of the size, scope, role, nature, and use of
non-fungible digital assets, the similarities and differences between
non-fungible digital assets and other digital assets, the benefits and
risks of non-fungible digital assets, how non-fungible digital assets
have integrated into traditional marketplaces, including the risks of
such integration, and the levels and types of illicit activities in
non-fungible digital asset markets. The report will be made publicly
available one year after enactment.
Exhibit 1: Summary of Title [II]
------------------------------------------------------------------------
Secondary
Digital Asset Primary Digital Asset Transactions Can
Holder Transactions Received Occur If
------------------------------------------------------------------------
Ordinary End-User Digital Digital Commodity
Persons Distributions Commodities Exchange--Trades
as Digital
Commodities,
subject to
requirements:
Sales pursuant to Restricted Alternative Trading
Title II digital Digital System--Trades as
asset exemption Assets Restricted Digital
Assets, subject to
requirements:
Digital Commodity
Exchange--Trades
as Digital
Commodities,
subject to
requirements:
Related Sales pursuant to Restricted Alternative Trading
Persons Title II or Digital System--Trades as
applicable Assets Restricted Digital
securities laws. Assets, subject to
Distributions requirements:
pursuant to
applicable
securities laws.
End-User
Distributions
Digital Commodity
Exchange--Trades
as Digital
Commodities,
subject to
requirements:
Affiliated Sales pursuant to Restricted Alternative Trading
Persons Title II or Digital System--Trades as
applicable Assets Restricted Digital
securities laws. Assets, subject to
Distributions requirements:
pursuant to
applicable
securities laws.
End-User
Distributions
Digital Commodity
Exchange--Trades
as Digital
Commodities,
subject to
requirements:
------------------------------------------------------------------------
Exhibit 2: Digital Asset Project Lifecycle
______
Supplementary Material Submitted by Hon. Rostin Behnam, Chairman,
Commodity Futures Trading Commission
Insert
Mrs. Hayes. Well, thank you. My time has expired, but I would
love to hear more from you on what you could do with funding to
actually support this legislation.
If we received funding to support this legislation, we would
establish a regulatory regime for digital assets that are not
securities. This would include drafting rules that establish regulatory
requirements, and guardrails. We would register exchanges, brokers and
dealers if they meet appropriate standards, bringing greater
transparency to the market.
In addition, we would we deploy surveillance tools to prosecute
fraud when it does occur.
______
Submitted Questions
Response from Hon. Rostin Behnam, Chairman, Commodity Futures Trading
Commission
Questions Submitted by Hon. Trent Kelly, a Representative in Congress
from Mississippi
Question 1. Chairman Behnam, the Dodd-Frank Act embraced a split
regulatory regime between the CFTC and SEC when it established
regulatory clarity for swaps after decades of ambiguity and litigation.
While the SEC is the primary regulator for securities-based swaps, CFTC
has primary regulatory authority over all other swap instruments, which
can take all manner of shapes and configurations. Do you see parallels
between the way Dodd-Frank created an effective regime for swaps
instruments and the need for appropriate regulation of digital assets
today?
Answer. There are parallels between how Dodd-Frank established a
split regime for swap instruments and the need for regulation of
digital assets today. Congress gave the agencies directives, which
helped the CFTC and the SEC work through regulatory and jurisdictional
issues related to different types of swaps. We did that over a number
of years and today we have a well-functioning regulatory regime. I am,
therefore, confident we can meet the complex and novel issues raised by
digital asset markets in an expedited and orderly manner.
Question 2. Chairman Behnam, given the SEC Chair's recently
expressed view that ``everything other than bitcoin'' might be a
security, there seems to be a risk that the SEC and CFTC have already
taken--and may take additional--conflicting positions on whether
certain assets, such as Ether and Litecoin, are commodities or
securities. In your view, what are the public policy implications of
such inconsistencies and how should they be addressed? Is this posture
sustainable?
Answer. I recognize that there can be difficult legal issues
presented in digital asset-related cases that may implicate the
jurisdiction of multiple regulators. The critical issue is closing the
regulatory gap for non-security digital assets. Given the absence of
Congressional legislation, the CFTC will continue being proactive in
this space when our jurisdiction is implicated. We will also continue
to work with the SEC and other agencies to ensure that wrongdoers are
held accountable.
Questions Submitted by Hon. Salud O. Carbajal, a Representative in
Congress from California
Question 1. Chairman Behnam, you state in your testimony that
digital asset markets are often promoted as a form of financial
inclusion to populations that may be most vulnerable to the inherent
risks in these assets as well as to predatory financial schemes. And
that any legislation in this area should recognize this dynamic and
require additional work and study to better understand how these
populations interact with this market and ensure they are adequately
protected. Can you elaborate in more detail on who these populations
are and how any legislation in this space should address this dynamic
to ensure these populations are protected?
Answer. One possible legislative approach is set out in The Digital
Commodities Consumer Protection Act, introduced by Senators Stabenow
and Boozman, which requires the CFTC to conduct a study on digital
assets and historically under-served populations. We would use our
experience and the conclusions of that study to develop tools for safe,
inclusive access to digital markets.
Currently, the CFTC's Office of Consumer Education and Outreach is
statutorily authorized to educate and inform customers in our markets
about risks related to fraud and manipulation. OCEO has issued numerous
customer advisories and related materials specifically about the
digital asset market (see https://www.cftc.gov/digitalassets/
index.htm).*
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\1\ Editor's note: a website snapshot is retained in Committee
file.
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If the CFTC is given greater authority, the OCEO, in conjunction
with the CFTC's operating divisions, will review the digital commodity
market and the relevant investor population, and proactively engage
with customers to assess investor risks in those markets, provide
information about the CFTC's customer protection regime and continue to
publish customer advisories regarding market risks.
Question 2. Chairman Behnam, in your testimony, you talked about
the need for sufficient funding as the CFTC is the only financial
market regulator relying solely on Congressional appropriations. To
take on the additional responsibility of oversight of non-security
digital assets, do you think the CFTC currently has sufficient funding?
Can you elaborate on what would happen if additional authority were
provided but resources are reduced?
Answer. If Congress were to give the CFTC regulatory responsibility
over digital asset commodity spot markets, the agency would need to
start implementation work immediately. We would therefore need
additional appropriations from Congress above our current year funding
request to meet these costs.
As mentioned in my testimony before the Committee on June [6],
2023, the CFTC is the only financial market regulator that relies on
appropriated dollars from Congress for its funding and that does not
have a self-funding mechanism. For the CFTC, as for any regulator
taking on new authority, it is imperative that the Congress provide the
resources necessary to implement that new authority. Regulation of the
digital commodity market will bring new responsibilities to the CFTC
that cannot be managed by simply folding this market into our existing
regulatory regime with existing resources.
I am grateful for the Committees support for including language
that provides $120 million over 5 years to be spent on needs directly
related to implementation of any new authority granted by Congress over
the digital asset commodity markets.
If additional authority were provided, but resources were reduced,
the agency's ability to fulfill its current statutorily mandated
oversight responsibilities would be significantly compromised.
Response from Hon. Dan M. Berkovitz, Former Commissioner, Commodity
Futures Trading Commission; Former General Counsel, U.S.
Securities and Exchange Commission
Question Submitted by Hon. Trent Kelly, a Representative in Congress
from Mississippi
Question. Mr. Berkovitz, some have called for the CFTC and SEC to
jointly regulate all digital assets? Do you believe that is a practical
approach to resolving the regulatory gaps that exist with respect to
this market?
Answer. Generally, single agency regulation is more effective and
efficient than joint regulation, particularly when two five-member
commissions with different overall statutory mandates and regulatory
structures are involved. A regulatory process that involves ten
decision-makers in two different Federal agencies with different
statutory mandates and regulatory priorities is inherently more time-
consuming and complex than if only one agency is involved. When
agencies are required to act jointly, accountability is more diffuse,
which lessens the ability of the public to participate in decision-
making and the responsiveness of each agency and its officials to the
public.
In certain circumstances, joint rulemaking can be an effective way
to address issues common to both agencies or more clearly define
respective agency jurisdictions. The joint CFTC-SEC rulemaking mandated
by the Dodd-Frank Act to jointly define key terms for the
implementation of that Act, such as the definition of swap, security-
based swap, swap dealer and security-based swap dealer, was effective
in delineating agency jurisdiction over these instruments and entities.
Once the definitional rulemaking was completed, however, each agency
was singly responsible for regulating the instruments and entities
within its jurisdiction.
The most effective and efficient way to close the exists regulatory
gaps with respect to digital assets would be for Congress to assign a
single agency the responsibility and authority for regulating in those
areas, and to ensure that the assigned agency has the appropriate tools
for such regulation. The current regulatory gap involves the spot
market for digital assets that are neither securities within the SEC's
jurisdiction nor derivatives within the CFTC's jurisdiction. It would
be most efficient and effective to assign responsibility for the
regulation of this market to either the CFTC or the SEC. Joint
regulation over assets in this market is not necessary and would be
inefficient and less effective than single agency regulation.
Response from Hon. Walter L. Lukken, President and Chief Executive
Officer, Futures Industry Association; Former Acting Chairman,
Commodity Futures Trading Commission
Question Submitted by Hon. Trent Kelly, a Representative in Congress
from Mississippi
Question. Mr. Lukken in your testimony, you talk about how the CFTC
has longstanding anti-fraud and anti-manipulation enforcement authority
over the cash or spot markets, including for digital assets. Is the
CFTC's limited enforcement authority sufficient to effectively police
the digital asset ecosystem?
Answer. You cannot regulate a market through enforcement authority
alone. A proper regulatory structure must have both regulatory tools
aimed at protecting end-users and the integrity of the markets as well
as enforcement powers aimed at punishing wrongful activity and
deterring bad behavior.
The CFTC has existing strong enforcement powers over all spot
markets in commodities, and it has used those powers to bring more than
80 enforcement actions involving wrongdoing in digital asset
commodities. CFTC enforcement actions related to digital assets have
primarily targeted exchanges that illegally offer derivatives and
leveraged, margined, or financed virtual currency transactions. The
agency has also targeted businesses that engage in fraud and
manipulative behavior, as well as foreign platforms that do not
establish adequate safeguards and controls to prevent U.S. persons from
accessing their platforms.
While the CFTC's existing enforcement authority offers effective
tools to punish wrongdoing and to serve as a powerful deterrent for
other bad actors, it is also true that there is an existing gap in the
regulation of the spot market of digital that are not securities. This
was identified in an October 2022 report \1\ * of the Financial
Stability Oversight Council (FSOC). While ultimately the decision to
expand the CFTC's regulatory jurisdiction is a decision for Congress to
make, I would agree that regulation of the spot digital asset markets
would provide greater up-front protections for customers by possibly
preventing many bad actors from wrongdoing through CFTC rules and
oversight.
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\1\ https://home.treasury.gov/news/press-releases/jy0986.
* Editor's note: the press release and report are retained in
Committee file.
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