[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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \5\ See generally, ``CryptoDad--The Fight for the Future of 
Money,'' (Wiley) 2022, (Chapts., 8-10).
    \6\ Id.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \15\ Id., Dan Davis Testimony.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \23\ Id., CryptoDad, pp. 164-68.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \6\ https://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-
155.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \5\ Id.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \19\ Robinhood does not accept payments from third parties in 
connection with any decision to support digital assets on its platform.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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/.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \7\ Id. at 114.
    \8\ FSOC Report, at p. 111.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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).*
---------------------------------------------------------------------------
    \1\ Editor's note: a website snapshot is retained in Committee 
file.
---------------------------------------------------------------------------
    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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