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


                     THE FUTURE OF DIGITAL ASSETS: 
                   IDENTIFYING THE REGULATORY GAPS IN
                         SPOT MARKET REGULATION

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

                                HEARING

                               BEFORE THE

     SUBCOMMITTEE ON COMMODITY MARKETS, DIGITAL ASSETS, AND RURAL 
                              DEVELOPMENT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION
                               __________

                             APRIL 27, 2023
                               __________

                            Serial No. 118-9
                               __________

                                 Part 1
                               __________


                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov

                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
53-323 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

                                 ______

     Subcommittee on Commodity Markets, Digital Assets, and Rural 
                              Development

                 DUSTY JOHNSON, South Dakota, Chairman

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

                                  (ii)

                             C O N T E N T S

                              ----------                              
                                                                   Page
Caraveo, Hon. Yadira, a Representative in Congress from Colorado, 
  opening statement..............................................     3
Johnson, Hon. Dusty, a Representative in Congress from South 
  Dakota, opening statement......................................     1
    Prepared statement...........................................     2
Thompson, Hon. Glenn a Representative in Congress from 
  Pennsylvania, opening statement................................    41
    Prepared statement...........................................     4

                               Witnesses

Davis, J.D., Daniel J., Partner and Co-Chair, Financial Markets 
  and Regulation, Katten Muchin Rosenman LLP, Washington, D.C....     5
    Prepared statement...........................................     7
Maniar, J.D., Purvi R., Deputy General Counsel, FalconX Holdings 
  Ltd., San Mateo, CA............................................    12
    Prepared statement...........................................    13
Rubin, Nilmini, Chief of Staff and Head of Global Policy, Hedera 
  Hashgraph, LLC, Chevy Chase, MD................................    16
    Prepared statement...........................................    18
Massad, J.D., Hon. Timothy G., Research Fellow, Mossavar-Rahmani 
  Center for Business and Government, Kennedy School of 
  Government, Harvard University; Director, M-RCBG Digital Assets 
  Policy Project, Washington, D.C................................    22
    Prepared statement...........................................    23
Hall, J.D., Joseph A., Partner, Davis Polk & Wardwell LLP, New 
  York, NY.......................................................    31
    Prepared statement...........................................    32

 
                     THE FUTURE OF DIGITAL ASSETS: 
                   IDENTIFYING THE REGULATORY GAPS IN
                         SPOT MARKET REGULATION

                              ----------                              


                        THURSDAY, APRIL 27, 2023

                  House of Representatives,
    Subcommittee on Commodity Markets, Digital Assets, and 
                                         Rural Development,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 2:00 p.m., in 
Room 1300 of the Longworth House Office Building, Hon. Dusty 
Johnson [Chairman of the Subcommittee] presiding.
    Members present: Johnson, Rouzer, Bacon, Mann, Rose, 
Molinaro, Langworthy, Nunn, Thompson (ex officio), Caraveo, 
Davis of North Carolina, Salinas, Budzinski, Jackson of 
Illinois, and Craig.
    Staff present: Paul Balzano, Caleb Crosswhite, Nick 
Rockwell, Kevin Webb, John Konya, Emily German, Josh Lobert, 
Ashley Smith, and Dana Sandman.

 OPENING STATEMENT OF HON. DUSTY JOHNSON, A REPRESENTATIVE IN 
                   CONGRESS FROM SOUTH DAKOTA

    The Chairman. Well, we have an august panel of experts, so 
we best start on time. I want to thank everybody for coming to 
this hearing of the Subcommittee on Commodity Markets, Digital 
Assets, and Rural Development. It has the rather clunky 
abbreviation of CMDARD. Staff were instructed to find something 
better, but I guess that is the best that we could do. So be 
it.
    We do have a lot of work to dig into this year, and I am 
excited to get started. Of course, today's hearing is on 
digital assets, but it is hardly the only thing that we are 
collectively going to be working on together. I mean, clearly 
rural development is going to be really important, particularly 
in light of that title of the farm bill. We also have the 
Commodity Futures Trading Commission, which is going to be 
important, particularly given the fact that we have had both 
the Chairman and the Ranking Member commit to doing 
reauthorization of the CFTC this year. And I look forward to 
working with Ranking Member Caraveo and others on the Committee 
on that work.
    But today, we are tasked with examining digital asset 
markets and I think, most importantly, understanding what are 
the gaps in this regulatory framework and how are those gaps 
harming innovators and consumers alike. And as I mentioned, we 
have an august panel to help walk us through that.
    I think it would be an unfortunate deficiency if we didn't 
take a moment to call out the nearly unprecedented level of 
cooperation and collaboration that we have had with the House 
Financial Services Committee. This is a town where people very 
much like to fight over turf and where egos can sometimes get 
in the way of progress, but that group is convening at this 
exact same moment a complementary hearing dealing with the same 
general topic: What are the gaps in the regulatory framework, 
and how can we work together to address them? And in fact, next 
month, the collaboration gets even closer insofar as we have a 
joint hearing to examine these issues together, and those are 
not typical in this town. And that cooperation is a testament 
to the importance that both Chairman McHenry and Chairman 
Thompson, as well as the teams on both sides of the aisle have 
had to getting things done on digital assets this Congress.
    A lot of ink has been spilled on digital assets, a lot of 
it breathlessly positive, a lot of it angrily negative. I think 
reasonable people understand that digital assets and the 
underlying blockchains can bring a tremendous amount of 
opportunity. They can also be filled with a fair amount of 
hype. And we know that in this marketplace, as in every 
marketplace, there are fraudsters and hucksters that seek to 
make money while, unfortunately, giving the whole industry a 
bad name. And the hits and misses are well-known to all of us. 
You have hits like Ethereum, Hedera, Filecoin, and then you 
have outfits like BananaCoin, KodakCoin, and MoonCoin. So those 
are the highs and the lows.
    The difficult task we are starting today--and we are really 
not starting it. I know there have been lots of informal 
conversations over the course of months and even some work done 
in the last Congress. But the work that we begin anew today is 
to craft a legislative framework that will allow the next 
Ethereum or Filecoin to emerge, while at the same time 
protecting the public from the hype, the scams, and the frauds 
that we have seen all too much of in the last few years.
    This task is bigger than any single person, committee, or 
agency and in a town that so often prefers food fights to 
collaboration, it is going to take a pretty substantial 
collective effort on our part here to make sure that we get it 
right.
    In this effort, there is plenty of work for regulatory 
agencies. It is not just Congress alone, we will be looking to 
smart folks in industry, smart folks at the CFTC and the SEC, 
as well as our state banking regulators, to make sure that we 
hit the center of the bullseye.
    So I am looking forward to today's hearing and the ongoing 
collaboration with House Financial Services.
    [The prepared statement of Mr. Johnson follows:]

Prepared Statement of Hon. Dusty Johnson, a Representative in Congress 
                           from South Dakota
    Good afternoon. I want to welcome everyone to our first hearing of 
the Subcommittee on Commodity Markets, Digital Assets, and Rural 
Development.
    We have a lot of work to dig into this year and I'm excited to get 
started. Today's hearing is on digital assets, but in the coming year, 
we will also focus on rural development, oversight of the Commodity 
Futures Trading Commission, and as the Chairman and Ranking Member 
committed to last month, legislation to reauthorize the CFTC. I look 
forward to working with Ranking Member Caraveo and the rest of the 
Committee on these priorities.
    Today, we are tasked with examining digital asset markets and 
understanding how the gaps in the regulatory framework are harming 
consumers and innovators alike.
    I'm excited to note our unprecedented cooperation with the House 
Financial Services Committee in this effort. As we meet here today, 
their Digital Assets, Financial Technology, and Inclusion Subcommittee 
is convening a complementary hearing, also looking at the gaps in 
market structure regulation. And next month we will sit together in a 
joint hearing to continue examining these issues.
    This cooperation is a testament to the importance that both 
Chairman Thompson and Chairman McHenry, as well as Chairman Hill and 
me, place on getting digital asset legislation done this Congress.
    A lot of ink has been spilled on digital assets, their value, their 
purpose, and their ultimate benefit to society. For my part, I see the 
potential for valuable tools to be created with digital assets, that 
will enable Americans to solve some of life's tough problems and build 
systems to better serve the needs of everyday people. Blockchains and 
digital assets may not be as revolutionary as some claim, but I don't 
believe that every digital asset is a scam or a waste of time.
    There will be hits and misses with digital assets. For every 
project like Ethereum, Hedera, and Filecoin, there will be projects 
like BananaCoin, KodakCoin, and MoonCoin.
    The difficult task we are starting today is to craft a legislative 
framework that will allow the next Filecoin or Ethereum to emerge, 
while protecting the public from the hype, scams, and frauds, which 
have been so prevalent to crypto over the past 10 years.
    This task is bigger than any single person, committee, or agency. 
It will take a collective effort here in Congress and among our 
regulators to craft a legal framework that will protect the public 
while safeguarding opportunities for innovation.
    In this effort, there's plenty of work for our regulatory agencies 
to do, including the CFTC, the SEC, and our state and Federal banking 
regulators. But it's up to Congress to divide that work between 
regulators and ensure our public policy goals are effectively met.
    I'm looking forward to today's hearing and our ongoing 
collaboration with the House Financial Services Committee to craft 
digital asset market structure legislation.
    Thank you.

    The Chairman. And without any further ado, I would turn to 
Ranking Member Caraveo for her comments.

 OPENING STATEMENT OF HON. YADIRA CARAVEO, A REPRESENTATIVE IN 
                     CONGRESS FROM COLORADO

    Ms. Caraveo. Well, thank you, Chairman Johnson, for 
convening today's inaugural Subcommittee hearing on this 
important topic. It is an honor to serve as Ranking Member of 
the Commodity Markets, Digital Assets, and Rural Development 
Subcommittee. I appreciate the opportunity to work with 
Chairman Johnson as we identify regulatory gaps in the digital 
assets industry and look for solutions, and in the future 
opportunities, as our Subcommittee also works to improve the 
livelihoods of our rural communities.
    We have an impressive panel of witnesses before us, and I 
look forward to hearing from all.
    Over the past several years, there has been a tremendous 
amount of volatility in the digital assets industry. In 
February last year, the industry had a combined market 
capitalization of approximately $2 trillion. Today, however, 
that number is closer to $1 trillion with Bitcoin alone 
accounting for about $500 billion. We have seen catastrophic 
failures in this space, including the collapse of FTX, and 
dramatic shifts in market capitalization over relatively short 
periods of time.
    Even with the Commodity Futures Trading Commission's 
limited authorities to regulate digital commodity cash markets, 
the CFTC has to date brought 70 enforcement actions involving 
digital asset commodities, and such cases comprised more than 
20 percent of all enforcement actions filed in the last fiscal 
year.
    Considering these events, it is vital we closely examine 
current regulations to ensure investors are appropriately 
protected and that our agencies have the necessary authorities 
to oversee this new and evolving industry. Unlike most of the 
typical commodity market investors under CFTC regulation, a 
significant number of digital commodity cash market investments 
are individual retail investors. That means volatility and 
failures in these digital asset classes disproportionately 
impact everyday people and families. For sufficient customer 
protection, we must consider the everyday person's lower risk 
tolerance and ensure that appropriate disclosures are readily 
accessible and clearly communicated.
    In considering any digital assets legislation, I would be 
remiss not to emphasize that we must also include the 
appropriate funding for the CFTC to continue carrying out its 
mission of promoting the integrity, resilience, and vibrancy of 
the U.S. derivatives markets through sound regulation. The CFTC 
is the only Federal financial regulator that relies solely on 
appropriations from Congress. It is therefore our 
responsibility to ensure any additional authorities and 
oversight of a technologically complex and unique industry 
comes with additional resources. Failure to include the 
appropriate funding would severely undercut any efforts to 
reach a comprehensive and cohesive regulatory framework for the 
digital asset industry that incentivizes innovation and 
protects customers.
    With that, I would like to thank our witnesses for agreeing 
to testify today. I sincerely appreciate your willingness to be 
here and the expertise that you all bring to this conversation, 
and I look forward to a productive exchange.
    Thank you, Mr. Chairman, and I yield back my time.
    The Chairman. Thank you much. And if either Chairman 
Thompson or Ranking Member Scott come and would like to make 
some opening comments, of course we will provide them that 
opportunity. Anybody else who would like to make opening 
remarks, we would just ask that you submit those for the 
record, and we will make sure that they are included.
    [The prepared statement of Mr. Thompson follows:]

Prepared Statement of Hon. Glenn Thompson, a Representative in Congress 
                           from Pennsylvania
    Thank you, Mr. Chairman.
    I also want to welcome all of the Members of the Subcommittee here 
today.
    There was a great demand to serve on this Subcommittee this 
Congress, in no small part because of the opportunity to work on 
digital asset issues.
    I am excited about the work of the Subcommittee, and I want to 
thank you all for your willingness to serve on it.
    I think that there is great potential for digital assets to provide 
significant value for the American public.
    Not just in monetary terms, but as tools to solve real world 
problems, as we'll hear about today.
    But, as we'll also hear about today, digital asset developers, 
users, and institutions need clear, thoughtful rules of the road to 
create these solutions.
    As Chairman Johnson said, we are working hand-in-glove with the 
House Financial Services Committee to craft legislation that will do 
just that.
    This is perhaps unusual for Congress, but it's the right thing to 
do to make good public policy.
    No one can solve this issue alone. It will take the cooperation of 
committees and regulators to build a workable framework to oversee 
digital assets.
    Finally, I want to thank our witnesses for coming today to share 
their expertise with us.
    I look forward to your testimony and the discussion that follows. I 
yield back.

    The Chairman. We have a panel which we will introduce. A 
number of you are experienced testifiers, so I don't need to 
tell you this, but you have the time in front of you. Each 
Member will only be given 5 minutes to hopefully ask questions. 
Sometimes they make speeches, and I guess that is okay, too. It 
will remain green until I believe there is 1 minute left on the 
clock, at which point it will turn yellow. When it hits zero, 
you will get a red light. And if you are going on and on, you 
will hear a very light tapping from me. At about 20 seconds it 
will get more insistent. We do want you to have an opportunity 
to at least answer the question a bit, understanding that you 
will follow up afterwards to fill out the evidentiary record. 
But if a Member with only 6 seconds left has tossed it to you, 
we will give you 20 seconds to try to address their comments at 
least a little bit. But we do want to keep it moving. We will 
have lots of good questions and a lot of good discussion.
    So unless there is anything else for the good of the order, 
I will introduce each of our panelists and then provide them 
each their time to make their remarks.
    Okay. So our first witness today is Mr. Daniel Davis, who 
is a Partner and the co-Chair of Financial Markets and 
Regulation at the Katten Muchin Rosenman firm. Previously, he 
was the General Counsel at the CFTC.
    We also have Ms. Purvi Maniar, who is the Deputy General 
Counsel at FalconX Holdings.
    Our third witness is Nilmini Rubin, who is the Head of 
Global Policy at Hedera.
    Our fourth witness is Mr. Timothy Massad. Mr. Massad 
currently serves as a Research Fellow at the Kennedy School of 
Government at Harvard and is the Director of the M-RCBG Digital 
Assets Policy Project. He was, as I suspect many of you know, 
also a former Chairman of the CFTC.
    Our fifth and final witness today is Mr. Joseph A. Hall, 
who is a Partner at Davis Polk & Wardwell. He was formerly the 
managing executive for policy at the SEC.
    I want to thank all of our witnesses for joining us today.
    And with that, Mr. Davis, you are on the clock.

   STATEMENT OF DANIEL J. DAVIS, J.D., PARTNER AND CO-CHAIR, 
 FINANCIAL MARKETS AND REGULATION, KATTEN MUCHIN ROSENMAN LLP, 
                        WASHINGTON, D.C.

    Mr. Davis. Thank you, Chairman Johnson, Ranking Member 
Caraveo, Chairman Thompson, Ranking Member Scott, and Members 
of the Subcommittee. Thank you for the opportunity to speak 
with you today. As Chairman Johnson mentioned, my name is Dan 
Davis. I am co-Chair of the Financial Markets and Regulation 
Practice at Katten. From 2017 to 2021, I had the honor of 
serving as General Counsel at the CFTC. I would like to thank 
my wife Liz and son Spencer for joining me today and say hello 
to my daughters Catherine and Abigail, who will be watching 
this hearing when they return home from school. My views 
expressed today are in my personal capacity and not on behalf 
of any person, private-sector, agency, or government agency.
    Today's topic is identifying the regulatory gaps in spot 
market regulation of digital assets. My view can be summarized 
as this: There is a significant gap in Federal spot market 
regulation because the large majority of digital assets spot 
market activity falls outside the regulatory jurisdiction of 
both the CFTC and the SEC. To explain how I reached this 
conclusion, I will discuss the jurisdiction of both agencies 
and how they have exercised their authority regarding the spot 
market for digital assets.
    The major dividing line between CFTC and SEC authority is 
whether a product is a security or not. If a product is a 
security or is based on a security, the SEC generally has 
jurisdiction over that product, so this would include not only 
securities themselves, but security futures and security-based 
swaps. The SEC has regulatory jurisdiction, which means it can 
require registration, require compliance with the securities 
laws and regulations, and to conduct exams and reviews. It can 
also bring enforcement actions.
    If a product is not a security, then it likely is within 
some level of CFTC jurisdiction. The CFTC has full regulatory 
authority over a number of products such as futures, options on 
futures, and swaps. These all have their counterparts of SEC 
jurisdiction: futures, security futures, swaps, security-based 
swaps. The CFTC has regulatory jurisdiction over a couple of 
other products with a specific retail component, such as 
certain retail foreign exchange transactions and certain 
leveraged or margined retail commodity transactions. Over all 
of these products, the CFTC can require registration, require 
compliance with all applicable statutes and regulations, 
including robust customer protection provisions, and conduct 
exams and reviews.
    So what CFTC jurisdiction remains? If there is a spot 
product that is outside the CFTC regulatory authority for 
leveraged or margined retail commodity products, the CFTC only 
has enforcement authority for fraud, manipulation, or false 
reporting regarding that product. This is a backwards-looking 
authority to punish bad conduct after it has already occurred. 
No registration, no exams by the CFTC.
    Congress gave the CFTC this authority because the prices in 
the spot market significantly impact the futures and swaps 
products. And the CFTC has not hesitated to use its enforcement 
authority in the digital asset space, bringing over 80 
enforcement actions related to digital assets, including 20 
percent of its enforcement activity in the past year.
    Where does that leave us? If a digital asset activity 
occurs on the spot market, it is not a security, it is not a 
leveraged retail commodity product, then there is no CFTC or 
SEC regulatory authority over that product. There is only CFTC 
enforcement jurisdiction.
    How large is that universe? It is large, and I base that on 
two key assumptions. First, I looked at the top 15 digital 
assets by market capitalization. Now, there are thousands of 
digital assets, but the top 15 account for about 86 percent of 
the market. Second, I look to what the Commissions themselves 
have said about those 15 digital assets, not a Chairman, not a 
Commissioner, but the Commission itself because only the 
Commission can speak for itself. Based on my review, and 
looking at CFTC and SEC enforcement actions, it appears that 
the CFTC has asserted that seven of the top 15 digital assets 
are commodities. These seven digital assets are some of the 
largest, accounting for approximately 76 percent of the digital 
asset market.
    The SEC, as a Commission, has never challenged any of those 
CFTC determinations, some of which have been around for years. 
Instead, the SEC, in an enforcement action, has asserted that 
only one of the top 15 digital assets is a security. And that 
digital asset currently accounts for about two percent of the 
market, 76 to 2, 76 percent of commodity, two percent of 
security, and the rest of the top 15, about eight percent, 
undetermined. I don't think that should be very surprising 
because the market division between swaps, regulated by the 
CFTC, and securities-based swaps, regulated by the SEC, is 
about 90 percent swaps for the CFTC and ten percent security-
based swaps for the SEC.
    So I conclude where I began. There is a significant 
regulatory gap in Federal spot market regulation of digital 
assets because the large majority of digital asset spot market 
activity falls outside the regulatory jurisdiction of the CFTC 
and the SEC. Thank you.
    [The prepared statement of Mr. Davis follows:]

  Prepared Statement of Daniel J. Davis, J.D., Partner and Co-Chair, 
     Financial Markets and Regulation, Katten Muchin Rosenman LLP, 
                            Washington, D.C.
    Chairman Johnson, Ranking Member Caraveo and Members of the 
Subcommittee:

    Thank you for the opportunity to appear before you today and share 
my views about digital asset regulation, including the Commodity 
Futures Trading Commission's (CFTC) role in digital asset regulation. I 
had the honor of serving as the CFTC's General Counsel from 2017-2021 
and currently advise clients about CFTC and digital asset regulation in 
my role as partner with Katten Muchin Rosenman LLP. However, my 
appearance before you today is in my own personal capacity; I am not 
representing or speaking on behalf of any other person, private sector 
agency or governmental agency.
    I would like to address a few issues in my testimony today, 
including the current jurisdiction that the CFTC has over the digital 
asset market, including the spot market, the CFTC's substantial 
experience regarding digital assets, and the protections that the 
Commodity Exchange Act (CEA) and rules currently offer for investors, 
particularly to retail customers.
CFTC Jurisdiction Regarding Digital Assets
    As this Subcommittee is well aware, the CFTC is the primary 
regulator of the futures, options on futures, and swaps markets. The 
CFTC also regulates leveraged retail commodity transactions. The CFTC's 
full ``regulatory'' authority includes the ability to require 
registration and examine registered entities that offer these products.
    The CFTC also has enforcement jurisdiction (or anti-fraud and anti-
manipulation jurisdiction) in the commodities markets at large. Thus, 
if the CFTC thinks that there is manipulation or fraud in a spot market 
for a commodity--such as gold or bitcoin--it can institute an 
enforcement action to enjoin that activity and seek recompense of ill-
gotten gains from that activity.
    Why is it important for the CFTC to have anti-fraud and anti-
manipulation authority over the spot markets? Quite simply, because the 
spot markets highly influence the derivatives markets. Spot markets and 
derivatives markets are highly correlated. Furthermore, derivatives 
market prices are largely determined by prices in the spot market. If 
somebody can manipulate the price of the spot market, they generally 
also can influence the price of derivatives products based upon the 
underlying asset.\1\
---------------------------------------------------------------------------
    \1\ See, e.g., In re Coinbase, Inc., CFTC No. 21-03 at 3-4 (Mar. 
19, 2021).
---------------------------------------------------------------------------
    Former CFTC Commissioner Dawn Stump provided an excellent 
explanation about the rationale and nature of the CFTC's anti-fraud and 
anti-manipulation authority for the spot market:

          The public should be aware that where cash commodity markets 
        are concerned, this limited authority (anti-fraud/manipulation/
        false reporting, as opposed to day-to-day regulatory oversight) 
        is bestowed upon the CFTC as a tool to assist in its primary 
        function of regulating derivatives products, such as futures. 
        Futures contracts serve a price discovery function. Well-
        functioning futures (and other derivatives products) rely upon 
        a sound underlying cash market and may reference cash market 
        indexes in their pricing. Therefore, cash market transactions 
        can potentially be part of a scheme to manipulate prices of 
        derivatives products that are regulated by the CFTC. Congress 
        has recognized these relationships between prices of cash 
        transactions and derivatives products, and thus the CEA 
        provides the CFTC with limited enforcement authorities with 
        respect to cash transactions.\2\
---------------------------------------------------------------------------
    \2\ Concurring Statement of Commissioner Dawn D. Stump Regarding 
Enforcement Action against Coinbase, Inc., (Mar. 19, 2021), https://
www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement031921.

    Thus, CFTC enforcement actions in the spot market are not primarily 
focused on policing the spot market for its own sake. The CFTC 
emphasizes, instead, its role in regulating the derivatives markets. 
Chairman Behnam made these points in a Senate Agriculture Committee 
---------------------------------------------------------------------------
hearing last month:

          As I discussed in December [2022], the 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.\3\
---------------------------------------------------------------------------
    \3\ Testimony of Chairman Rostin Behnam Before the U.S. Senate 
Committee on Agriculture, Nutrition, & Forestry, Oversight of the 
Commodity Futures Trading Commission, (Mar. 8, 2023), https://
www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam32.

    The CFTC nevertheless has actively used its enforcement authority 
in the digital assets space. It has brought at least 70 enforcement 
actions involving digital asset commodities. In the last fiscal year, 
more than 20 percent of the Commission's enforcement actions related to 
digital asset commodities.\4\
---------------------------------------------------------------------------
    \4\ Id.
---------------------------------------------------------------------------
    The CFTC has a long history of involvement with digital assets. As 
early as 2014, the first Bitcoin denominated cash-settled swaps, 
options and non-deliverable forwards began trading on CFTC-registered 
swap execution facilities.\5\ The next year the CFTC found that Bitcoin 
and other virtual currencies were commodities.\6\ The first cash-
settled Bitcoin futures contracts began trading on CFTC-registered Cboe 
Futures and CME in 2017.\7\ During the same year, the CFTC for the 
first time designated a swap execution facility and derivatives 
clearing organization to transact in physically deliverable Bitcoin 
swaps contracts. Also in 2017, the CFTC's LabCFTC released a primer on 
virtual currencies.\8\
---------------------------------------------------------------------------
    \5\ Stan Higgins, TeraExchange Receives US Approval to Launch First 
Bitcoin Derivative, Coindesk (Sept. 12, 2014), https://
www.coindesk.com/tech/2014/09/12/teraexchange-receives-us-approval-to-
launch-first-bitcoin-derivative/; In re TeraExchange LLC, CFTC Docket 
No. 15-33 at 3 (Sept. 24, 2015) (``On September 11, 2014, Tera filed 
with [the CFTC Division of Market Oversight] a submission self-
certifying the Bitcoin swap for trading on its [swap execution 
facility]. Tera began offering the Bitcoin swap for trading on 
September 12, 2014.'').
    \6\ See In re Coinflip, Inc., CFTC No. 15-29 (Sept. 17, 2015).
    \7\ CFTC, Release No. 7654-17 (Dec. 1, 2017), https://www.cftc.gov/
PressRoom/PressReleases/7654-17.
    \8\ LabCFTC, A Primer on Virtual Currencies (Oct. 17, 2017), 
https://www.cftc.gov/sites/default/files/idc/groups/public/documents/
file/labcftc_primercurrencies100417.pdf.
---------------------------------------------------------------------------
    Since 2017, the CFTC has released additional backgrounders on 
virtual currencies and related derivatives products.\9\ And CFTC Staff 
in 2018 released an advisory regarding their priorities and 
expectations when reviewing new virtual derivatives products to be 
listed on CFTC regulated markets.\10\
---------------------------------------------------------------------------
    \9\ See CFTC Backgrounder on Self-Certified Contracts for Bitcoin 
Products, https://www.cftc.gov/sites/default/files/idc/groups/public/
@newsroom/documents/file/bitcoin_fact
sheet120117.pdf; CFTC Backgrounder on Oversight of and Approach to 
Virtual Currency Futures Markets (Jan. 4, 2018), https://www.cftc.gov/
sites/default/files/idc/groups/public/%40custom
erprotection/documents/file/backgrounder_virtualcurrency01.pdf.
    \10\ See CFTC Staff Advisory No. 18-14 (May 21, 2018), https://
www.cftc.gov/node/214951.
---------------------------------------------------------------------------
    Today, there are over a dozen actively trading futures and options 
contracts on digital assets on CFTC-registered markets.\11\ These 
contracts are based on the two most-traded digital assets, Bitcoin and 
Ether. This long-standing and active oversight of digital asset 
derivatives has given the CFTC unique insights, expertise, and 
understanding of the operation of spot digital asset markets. As Dr. 
Chris Brummer noted to a similar subcommittee last year, ``the CFTC 
gained expertise in overseeing the institutionalization of significant 
infrastructures intersecting directly with the digital asset commodity 
spot market, something that the SEC, which has yet to approve a spot 
Bitcoin or digital asset commodity ETF, has arguably only accomplished 
in attenuated fashion through multiple Bitcoin Futures ETFs.'' \12\
---------------------------------------------------------------------------
    \11\ Products are ``self-certified'' by a CFTC-registered entity. 
An entity self-certifying a product must provide to the CFTC ``[a] 
concise explanation and analysis of the product and its compliance with 
applicable provisions of the [Commodity Exchange] Act, including core 
principles, and the Commission's regulations thereunder.'' 17 CFR  
40.2(a)(3)(v). Furthermore, a registered entity must ``provide [to CFTC 
staff] any additional evidence, information or data that demonstrates 
that the contract meets, initially or on a continuing basis, the 
requirements of the [Commodity Exchange] Act or the Commission's 
regulations or policies thereunder.'' Id.  40.2(b). In certain 
circumstances, the Commission can stay the trading of the contract. Id. 
 40.2(c).
    \12\ Testimony of Chris Brummer before the Subcommittee on 
Commodity Exchanges, Energy and Credit at 5 (June 23, 2022), https://
agriculture.house.gov/uploadedfiles/brum
mer_congressional_testimonythe_future_of_digital_asset_regulation.pdf. 
Indeed, last year the CFTC voluntarily opened up to public comment 
consideration of a registered entity's proposed changes to the market 
structure for certain digital asset derivatives products. CFTC Seeks 
Public Comment on FTX Request for Amended DCO Registration Order, CFTC 
Release No. 8499-22 (Mar. 10, 2022), https://www.cftc.gov/PressRoom/
PressReleases/8499-22. The CFTC received 1,500 comments in response. 
See https://comments.cftc.gov/PublicComments/Com
mentList.aspx?id=7254&ctl00_ctl00_cphContentMain_MainContent_gvCommentLi
stChangePage=
1_50. Although the request was ultimately withdrawn, the public comment 
process provided the CFTC with valuable insight into a host of 
questions regarding the market structure and operation of digital asset 
exchanges.
---------------------------------------------------------------------------
    Furthermore, the CFTC has clarified the scope of its authority to 
regulate retail commodity transactions that involve leverage, 
financing, or margin. A key statutory requirement for CFTC jurisdiction 
is whether ``actual delivery'' of retail commodity transactions have 
occurred within 28 days. The CFTC engaged in extensive rulemaking with 
the digital asset community and provided thorough guidance about the 
meaning of ``actual delivery'' as that phrase applied to digital 
assets, with multiple examples of acceptable and non-acceptable 
practices.\13\ With Commission-backed guidance on this issue in place 
after receiving and incorporating extensive public feedback, the 
Commission has used its enforcement authority to have market 
participants follow the guidance.\14\
---------------------------------------------------------------------------
    \13\ CFTC Final Interpretive Guidance, Retail Commodity 
Transactions Involving Certain Digital Assets, 85 Fed. Reg. 37734 (June 
24, 2020).
    \14\ See, e.g., In re Payward Ventures, Inc., CFTC No. 21-20 (Sept. 
28, 2021).
---------------------------------------------------------------------------
Current Regulatory Gap in the Spot Market at the Federal Level
    Neither the CFTC nor any other Federal regulator has plenary 
regulatory authority over the trading of digital assets that qualify as 
commodities. If certain transactions involving a digital asset are 
considered securities, then the SEC would have jurisdiction. To 
evaluate the amount of the Federal regulatory gap for digital asset 
transactions, the question then becomes the scope of the SEC's 
jurisdiction in the digital asset space.
    As you are all aware, there is currently a fair amount of 
discussion about the regulatory oversight of the digital asset market 
by the CFTC and the SEC, respectively. There have been discussions 
about which digital assets are under the jurisdiction of the CFTC (as a 
commodity) and of the SEC (as a security), and recently an apparent 
dispute regarding the classification of at least one digital asset--
Ether--with the CFTC consistently stating that Ether is a commodity and 
the SEC Chairman last week before the House Financial Services 
Committee refusing to acknowledge that Ether is or is not a security. 
This is an important debate, and one that I will not resolve during my 
testimony today.\15\
---------------------------------------------------------------------------
    \15\ I do note that both the CFTC and SEC have previously worked 
together to provide extensive guidance on the lines between their 
respective jurisdictions. For example, Section 712(d)(1) of the Dodd-
Frank Act required the CFTC and SEC jointly to further define the 
difference between a ``swap'' (subject to the CFTC's jurisdiction) and 
a ``security-based swap'' (subject to the SEC's jurisdiction). Within 
the space of about 2 years, the CFTC and SEC: (1) issued an advance 
notice of proposed rulemaking regarding the definitions; (2) published 
a proposed rulemaking; (3) received and reviewed almost 100 comments to 
the proposed rules; and (4) issued a final rule filling more than 150 
pages in the Federal Register giving significant guidance, examples, 
and applications of the difference between ``swaps'' and ``securities-
based swaps.'' Further Definition of ``Swap,'' ``Security-Based Swap,'' 
and ``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap 
Agreement Recordkeeping, 77 Fed. Reg. 48208, 48209-211 (Aug. 13, 2012). 
This joint effort has greatly reduced the uncertainty regarding the 
differences between ``swaps'' and ``securities-based swaps.'' In 
addition, both agencies worked together to establish quantitative 
measures, later modified and adopted by Congress, to clarify the 
jurisdictional lines between futures and security futures. See 7 U.S.C. 
 1a(35), 1a(44).
---------------------------------------------------------------------------
    What I do want to point out is that, in terms of market 
capitalization and looking at the activities of the Commissions 
themselves (not the statements of a Chairman or a Commissioner), 
``commodities'' have a much larger share of the spot digital asset 
market than ``securities.'' \16\
---------------------------------------------------------------------------
    \16\ In a recent proposed rule regarding custody requirements for 
investment advisors, the SEC asserted that ``most crypto assets are 
likely to be funds or crypto asset securities covered by the current 
[custody] rule.'' Safeguarding Advisory Client Assets, 88 Fed. Reg. 
14672, 14676 (Mar. 9, 2023). The SEC, however, did not specifically 
identify any particular digital asset as a security.
---------------------------------------------------------------------------
    Let's take the top fifteen digital assets by market capitalization. 
As of April 21, 2023, a popular crypto tracking website estimates that 
digital assets have a global market capitalization of about $1.17 
trillion.\17\ The top fifteen digital assets account for approximately 
$1.01 trillion of market capitalization, or approximately 86 percent of 
the market.\18\
---------------------------------------------------------------------------
    \17\ See CoinMarketCap, https://coinmarketcap.com/ (last visited 
April 21, 2023).
    \18\ Id.
---------------------------------------------------------------------------
    As described above, CFTC-registered derivatives products have been 
trading on the top two digital assets in market capitalization--Bitcoin 
and Ether--for several years now. Bitcoin (45.3 percent of market cap) 
and Ether (19.0 percent of market cap) collectively account for 
approximately 64.3 percent of the total digital asset market 
capitalization. If Bitcoin and Ether were securities, they should not 
be trading on CFTC-registered exchanges, and the SEC has never 
challenged the trading of these products. So, right off the bat, almost 
\2/3\ of the spot digital asset market appear to be outside the SEC's 
jurisdiction.
    One can also evaluate enforcement filings to determine which 
specific digital assets the CFTC and SEC have formally regarded as a 
security or a commodity. The numbers point to an even larger share of 
the spot digital asset market being outside the SEC's jurisdiction.
    The CFTC in enforcement filings has alleged that seven of the top 
fifteen digital assets are commodities (with estimated market 
capitalization as of April 21, 2023):

   Bitcoin (BTC) \19\ (45.3 percent)
---------------------------------------------------------------------------
    \19\ Complaint at  2, CFTC v. Binance, No. 1:23-cv-01887 (N.D. 
Ill. Mar. 27, 2023).

   Ether (ETH) \20\ (19.0 percent)
---------------------------------------------------------------------------
    \20\ Id.

   Tether (USDt) \21\ (7.0 percent)
---------------------------------------------------------------------------
    \21\ Id. at  24.

   USD Coin (USDC) \22\ (2.6 percent)
---------------------------------------------------------------------------
    \22\ Complaint at  2, CFTC v. Eisenberg, No. 1:23-cv-00173 
(S.D.N.Y. Jan. 9, 2023).

   Dogecoin (DOGE) \23\ (1.0 percent)
---------------------------------------------------------------------------
    \23\ Complaint at  1, CFTC v. McAfee, No. 1:21-cv-01919 (S.D.N.Y. 
Mar. 5, 2021).

   Binance USD (BUSD) \24\ (0.6 percent)
---------------------------------------------------------------------------
    \24\ Supra note 19 at  24.

   Litecoin (LTC) \25\ (0.5 percent)
---------------------------------------------------------------------------
    \25\ Id.

    Collectively, these seven digital assets account for approximately 
76 percent of the total market capitalization of spot digital assets.
    The SEC has never asserted in either an enforcement action or a 
rulemaking that any of the above seven digital assets was or is a 
security. Of the top fifteen digital assets in terms of market 
capitalization, the SEC appears to have asserted that only XRP, with a 
market capitalization of approximately two percent of the market, is a 
security.\26\ For the other seven digital assets in the top fifteen--
accounting for approximately 8.5 percent of market capitalization 
\27\--neither agency has specifically asserted that the digital asset 
is a security or commodity.\28\
---------------------------------------------------------------------------
    \26\ Complaint at  1, SEC v. Ripple Labs Inc., No. 1:20-cv-10832 
(S.D.N.Y. Dec. 22, 2020).
    \27\ Those seven are BNB (BNB) (4.3 percent); Cardano (ADA) (1.1 
percent); Polygon (MATIC) (0.8 percent); Solana (SOL) (0.7 percent); 
Polkadot (DOT) (0.6 percent); Shiba Inu (SHIB) (0.5 percent); and Tron 
(TRX) (0.5 percent).
    \28\ Over time it would be likely that the digital asset market 
would trend away from securities and toward commodities. That is 
because, as a digital asset either becomes more decentralized or 
becomes used for a consumptive purpose, it is less likely to be 
considered a security. In addition, if Congress or a court agree that 
secondary transactions in digital markets do not constitute an 
``investment contract'' under the securities laws, then an even smaller 
portion of activity in the digital markets would fall within the 
jurisdiction of the SEC. See, e.g., Motion to Dismiss in SEC v. Wahi, 
et al., Case No. 2:22-cv-01009, Doc. 33 at 13-27 (W.D. Wash. Feb. 6, 
2023) (advancing the argument that secondary transactions in digital 
assets do not fall within the definition of an ``investment 
contract'').
---------------------------------------------------------------------------
    Indeed, the SEC recently brought an enforcement action against 
digital asset trading platform Bittrex, Inc. (Bittrex) and related 
parties for, among other things, failure to register as a national 
securities exchange.\29\ The SEC alleges that from 2014 to the present, 
Bittrex ``made available more than 300 crypto assets for trading,'' 
\30\ including what appears to be most of the top fifteen digital 
assets by market capitalization. The SEC, however, did not assert in 
that complaint that any of the top fifteen digital assets were a 
security. Instead, the SEC relied primarily upon six digital assets 
with a total of less than 0.18 percent of the total spot digital market 
capitalization to buttress its claim that Bittrex should have 
registered with the SEC.\31\
---------------------------------------------------------------------------
    \29\ Complaint at  3, SEC v. Bittrex, Inc., No. 2:23-cv-00580 
(W.D. Wash. Apr. 17, 2023).
    \30\ Id. at  67.
    \31\ The six digital assets (and their percentage of market 
capitalization as of April 21, 2023) are: Algorand (ALGO) (0.1142 
percent); Dash (DASH) (0.0472 percent); OMG Network (OMG) (0.0144 
percent); Naga (NGC) (0.0007 percent); Monolith (TKN) (0.0002 percent); 
and I-House Token (IHT) (0.0000001 percent).
---------------------------------------------------------------------------
Customer Protections Provided in the CFTC Regime
    Entities subject to CFTC jurisdiction must provide extensive 
protections to customers purchasing CFTC-regulated products. And the 
CFTC and the National Futures Association (NFA) \32\ have not hesitated 
to enforce these customer protections. In addition to the anti-fraud 
and anti-manipulation authority described above, there are significant 
rules regarding the segregation and protection of customer funds. CFTC-
registered futures commission merchants (FCMs) must provide general 
written disclosures regarding the risks of futures trading and specific 
disclosure regarding their own circumstances.\33\ FCMs and introducing 
brokers must have privacy policies and have procedures in place to 
protect customer information.\34\
---------------------------------------------------------------------------
    \32\ The NFA has been designated by the CFTC as a registered 
futures association.
    \33\ 17 CFR  1.55; NFA Rule 2-30.
    \34\ See 17 CFR Parts 160 and 162.
---------------------------------------------------------------------------
    The CFTC also has extensive rules to protect retail customers 
engaging in certain foreign exchange transactions.\35\ Entities engaged 
in retail foreign transactions must register,\36\ meet minimum 
financial requirements,\37\ and comply with various recordkeeping and 
reporting requirements.\38\ These entities must also provide 
appropriate disclosures to retail customers about the risks of engaging 
in these types of transactions, noting, among other things, that the 
customer can ``rapidly lose all of the funds [they] deposit for such 
trading and [they] may lose more than [they] deposit.'' \39\
---------------------------------------------------------------------------
    \35\ See generally 17 CFR Part 5.
    \36\ Id.  5.3.
    \37\ Id.  5.6-5.7.
    \38\ Id.  5.10-5.11.
    \39\ Id.  5.5(a)(2)(b).
---------------------------------------------------------------------------
    The NFA has additional rules that protect customers. For example, 
NFA members and associates must observe high standards of commercial 
honor and just and equitable principles of trade. This includes dealing 
fairly with customers and others at all times.\40\ NFA members must 
also comply with express standards in all communications with the 
public generally and promotional literature specifically.\41\
---------------------------------------------------------------------------
    \40\ NFA Rule 2-4.
    \41\ NFA Rule 2-28.
---------------------------------------------------------------------------
    The NFA additionally requires members to provide specific 
disclosures regarding their digital asset activities and comply with 
certain conduct standards regarding their activities involving the 
digital assets Bitcoin and Ether.\42\
---------------------------------------------------------------------------
    \42\ NFA Rule 2-51; see also NFA Interpretive Notice 9073.
---------------------------------------------------------------------------
Conclusion
    There appears to be a significant gap at the Federal level in the 
regulation of spot digital assets. Assertions of jurisdiction by both 
the CFTC and SEC in enforcement actions suggest that most of the market 
capitalization of spot digital assets falls outside SEC jurisdiction.
    The CFTC has extensive experience in the digital asset space 
through both its (1) overseeing of trading of digital asset-based 
derivatives on CFTC-regulated exchanges and (2) asserting its anti-
fraud and anti-manipulation enforcement authorities over the spot 
markets. The CFTC and NFA also have significant experience in providing 
protections to customers participating in these markets.
    Thank you for the opportunity to appear before the Subcommittee. I 
look forward to answering any questions you may have.

    The Chairman. And even before the insistent knocking began, 
very good. You should be proud of your father, our guests. He 
did a great job.
    Ma'am, you are up and on the clock.

  STATEMENT OF PURVI R. MANIAR, J.D., DEPUTY GENERAL COUNSEL, 
              FalconX HOLDINGS LTD., SAN MATEO, CA

    Ms. Maniar. Chairman Johnson, Chairman Thompson, Ranking 
Member Caraveo, and Members of the Subcommittee, thank you for 
this opportunity to testify before you today. In my testimony, 
I will endeavor to provide FalconX's perspective on the current 
regulatory landscape for digital assets and the benefits of 
coordinated regulation and responsible innovation in this 
realm.
    FalconX is a prime broker in the digital asset space for 
the world's leading institutions, and FalconX Bravo is proud to 
be a CFTC-registered swap dealer. Our mission is to provide 
secure, efficient, and regulatory-compliant access to these 
markets for our clients. Our institutional-only business 
includes regulated, over-the-counter derivatives with digital 
asset underliers. By employing time-tested OTC market 
structures and state-of-the-art technology, we enable our 
customers to hedge risk or gain financial exposure in this 
space. We are committed to orderly, fair, and liquid markets 
for all market participants.
    We are happy and eager to engage with policymakers and 
regulators to provide industry insights on this critical issue 
and recommend potential areas for further legislative clarity.
    Digital asset technology is underpinned by the blockchain 
and paves the way for innovative growth while offering more 
secure, transparent, and decentralized alternatives to 
traditional structures. That technology can better facilitate 
control over the sharing and storing of information. An example 
of this innovation can be seen in the blockchain networks such 
as Ethereum, which have multiple significant use-cases and 
benefits. Ethereum's groundbreaking feature is smart contracts, 
which have the ability to execute contracts without 
intermediaries.
    It is evident that the existing rules and tools at our 
disposal are insufficient to address the unique challenges 
presented by this dynamic technology. I go into more detail 
regarding the real-world utility and use-cases of such digital 
asset commodities in my written testimony.
    As the digital asset industry has evolved, different U.S. 
regulators have issued their respective rules and guidance, 
oftentimes resulting in inconsistent enforcement and an opaque 
and sometimes conflicting regulatory regime. There is no clear 
single regulator of digital assets in the U.S., and many 
regulators have claimed some form of jurisdiction, each with 
their own authorities and regulatory objectives. While it is 
not uncommon for an industry to be subject to multiple 
regulators, a lack of clear oversight and jurisdictional lines 
creates barriers to entry and confusion for a nascent industry. 
The absence of regulatory clarity in the U.S. has hindered our 
global competitiveness in this dynamic but still emerging 
industry. This moment calls for the United States to take 
resolute action and to assert leadership in the development of 
an unambiguous digital asset regulation.
    We believe that the majority of digital assets are used and 
traded like commodities. In part, this is why FalconX decided 
to actively pursue CFTC registration as the best-suited, 
available regulatory framework for digital assets in which 
FalconX makes markets and trades. It should be noted that CFTC-
registered swap dealers are subject to very robust regulatory 
requirements, many of which I have set out in more detail in my 
written testimony.
    While some digital assets may be securities, the securities 
regulatory structure is ill-suited for most digital assets. 
SEC-mandated disclosures designed for factors like earnings, 
cash flow, or material events have no analogy for digital asset 
commodities and would prevent many of their benefits such as 
peer-to-peer transactions.
    The current U.S. regulatory framework is fragmented. And 
until this is addressed, it will continue to lead to a loss of 
economic opportunity and technological advancement for the U.S. 
We believe that spot markets would benefit from the application 
of some of the CFTC's business conduct standards, in particular 
those focused on registration, reporting, and disclosure. At 
FalconX, we have found that these rules greatly enhance our 
ability to foster a transparent and orderly market for digital 
asset derivatives. Tailored to the unique characteristics of a 
digital assets spot market, we believe they could greatly 
enhance market integrity and promote market participation, 
confidence, and protection while facilitating innovation.
    We firmly believe that Congress and market regulators 
should work together to establish a framework for the digital 
asset ecosystem so that we can ensure that digital asset market 
participants and markets are safe, transparent, and orderly for 
all participants. Legislation like the Digital Commodity 
Exchange Act of 2022 (H.R. 7614, 117th Congress) achieves just 
this, and we applaud Chairman Thompson, Chairman Johnson, and 
the rest of this Committee for their leadership in this regard 
in the last Congress. We look forward to this Committee's 
efforts to advance legislation and cooperation and coordination 
with the House Financial Services Committee.
    Let me reiterate FalconX's appreciation for this 
opportunity to testify in front of you this afternoon, and I 
look forward to answering any questions you have. Thank you.
    [The prepared statement of Ms. Maniar follows:]

 Prepared Statement of Purvi R. Maniar, J.D., Deputy General Counsel, 
                  FalconX Holdings Ltd., San Mateo, CA
    Chairman Johnson, Chairman Thompson, Ranking Member Caraveo, and 
Members of the Subcommittee, thank you for this opportunity to testify 
before you today. In my testimony, I will endeavor to provide FalconX's 
perspective on the current regulatory landscape for digital assets and 
the benefits of coordinated regulation and responsible innovation in 
this realm.
    My name is Purvi Maniar, and I currently serve as the Deputy 
General Counsel of FalconX. In this role, I am responsible for 
providing legal guidance to FalconX regarding the development of 
products meeting the needs of our institutional clients in a manner 
that is compliant with governing regulations.
    FalconX provides a platform for institutional clients to hedge risk 
or gain financial exposure to digital assets, through a variety of 
products and services. We are committed to orderly, fair markets in 
this arena for all market participants.
    We are happy and eager to engage with policymakers and regulators 
to provide industry insights on this critical issue and recommend 
potential areas for further legislative clarity.
I. Background
A. FalconX
    FalconX is a prime broker in the digital assets space for the 
world's leading institutions. FalconX Bravo is a Commodity Futures 
Trading Commission (CFTC)-registered swap dealer, and it is our mission 
to provide secure, efficient, and regulatory-compliant access for our 
clients. Our business includes regulated, over-the-counter (OTC) 
derivatives with digital asset underliers. Designed specifically for 
institutional clients, FalconX utilizes a market-risk-neutral approach. 
By leveraging our extensive expertise in this arena, state-of-the-art 
technology, and by employing time-tested OTC market structures, FalconX 
provides institutional-grade products that enable our customers to 
hedge risk or gain financial exposure within this space.
B. Digital Assets
    Digital asset technology is underpinned by the blockchain and paves 
the way for innovative growth while offering more secure, transparent, 
and decentralized alternatives to traditional structures. The priority 
remains user privacy and control over personal information.
    Blockchain is a transformative technology. The potential 
applications of this technology are vast and varied, and the industries 
that can benefit from their far-reaching power are numerous. By 
enabling decentralization, efficiency, and programmability, these 
technologies pave the way for innovation and growth while promoting 
security and transparency.
    Blockchain technology enables individuals to control their data by 
storing it in a decentralized network of computers rather than a 
centralized server controlled by a single entity, such as a 
corporation. This means that users can access and manage their data 
using their private keys and grant permission for third-party access on 
a case-by-case basis, rather than granting unrestricted access to a 
central authority.
    An example of this innovation can be seen in blockchain networks 
such as Ethereum, which have multiple significant uses and benefits. 
Ethereum's groundbreaking feature is smart contracts that operate on 
its blockchain. The Ethereum chain's ability to execute contracts 
automatically without intermediaries offers a more secure, efficient, 
and transparent alternative to traditional intermediated contract-based 
processes. By enabling developers to build decentralized applications, 
Ethereum offers limitless potential for entrepreneurs to create 
innovative solutions in diverse industries. The flexibility and 
programmability of the Ethereum blockchain allow for a wide range of 
possible use cases, and as the technology continues to mature and 
evolve, we can expect to see new and innovative applications emerge.
    The platform's ability to enhance transparency and efficiency could 
transform sectors such as finance and technology, where a few prominent 
intermediaries have traditionally played a significant role. As 
Ethereum's use cases continue to evolve, it is evident that the 
existing rules and tools at our disposal are insufficient to address 
the unique challenges presented by this dynamic technology.
II. Current Regulatory Landscape
    As the digital asset industry has evolved, different U.S. 
regulators have issued their own respective rules and regulations, 
oftentimes resulting in inconsistent enforcement and an opaque and 
sometimes conflicting regulatory regime.
    There is no clear single regulator of digital assets in the United 
States. A constellation of regulators, including the Commodity Futures 
Trading Commission (CFTC), Federal Trade Commission (FTC), Securities 
and Exchange Commission (SEC), Office of the Comptroller of the 
Currency (OCC), Federal Deposit Insurance Corporation (FDIC), along 
with the Federal Reserve Board, the U.S. Treasury Department, and its 
Internal Revenue Service (IRS) and Financial Crime Enforcement Network 
(FinCEN), along with others have all claimed and asserted some form of 
jurisdiction.
    Each regulator views the industry through its own unique lens and 
in the context of its own existing authority and enforcement 
priorities, oftentimes against the backdrop of competing jurisdiction. 
While multi-pronged regulation is common across industries, given the 
nascency of this sector, the absence of clear oversight and 
jurisdictional lines has created confusing outcomes for industry 
participants and regulators alike.
    A common sentiment in policy and media discussions around digital 
assets is that entities in this arena are trying to skirt regulatory 
oversight or sufficiently robust risk management and governance 
practices. The reality is that legitimate digital asset businesses do 
not want to circumvent regulation; they want clear rules of the road so 
that they can successfully grow their business. FalconX and other 
industry leaders have sought to foster policy discussions and serve as 
a resource to lawmakers on the technology, current market structure, 
and emerging risks in support of digital asset-specific regulation as 
the regulatory landscape continues to evolve in the United States.
    Globally, major economies, including those of the UK, Japan, China, 
and the EU, have achieved significant strides toward adopting 
regulatory frameworks tailored to digital assets. These frameworks not 
only evidence an increasing appreciation for the potential benefits of 
these technologies but also enable the industry to expand, resulting in 
substantial job growth, revenue generation, and tax receipts in these 
regions.
    The absence of regulatory clarity in the U.S. has hindered its 
global competitiveness in this dynamic but still emerging sector. This 
moment calls for the United States to take resolute action.
    Despite the current challenges, there remains continued interest 
for the United States to lead by enacting digital asset-specific 
regulation. We are a leader in global markets and policymaking. 
Blockchain technology presents an opportunity for our nation to, once 
again, forge clear, comprehensive, and forward-looking regulations.
    We believe now is the right time for the United States to assert 
leadership in the development of unambiguous digital asset regulation. 
Clear legislation and accompanying regulation are necessary to keep 
existing companies from leaving the U.S. or to prevent startups from 
choosing to launch in other jurisdictions where the rules are clearer, 
and their businesses are welcomed. We should foster and attract 
innovation and aim to be leaders in the development of new 
technologies.
III. Many Digital Assets Are Commodities, Not Securities
    Many digital assets are used and traded like commodities. 
Commodities have independent utility; their value is not typically tied 
to a revenue stream or annual earnings. Instead, commodities have a 
specific use (e.g., oil is used to power machinery, Ethereum is used as 
a building block for smart contract applications). Commodities usually 
are bought and sold according to certain specifications tied to their 
use. Their prices typically fluctuate based on their use and 
macroeconomic factors such as interest rates and inflation, not any 
disclosed event like quarterly earnings. It is for this reason that the 
CFTC regulatory architecture is better suited to regulating digital 
assets.
    While some digital assets are undoubtedly securities, the 
securities regulatory architecture, in contrast, is ill-suited for most 
digital assets. Securities have no independent utility other than 
profit participation. As a result, securities regulations focus on 
robust disclosure of facts affecting that profit movement, such as 
earnings, cash flow, or material events affecting earnings. However, 
most securities law-mandated financial disclosures have little 
applicability to digital assets. Moreover, the requirement under 
securities laws that spot securities must be traded on a regulated 
exchange using third-party intermediaries eliminates the benefits of 
peer-to-peer transactions. The ability to transfer spot assets 
instantly and safely on a peer-to-peer basis, one of the key benefits 
of digital assets, does not exist if one is required to place an order 
with a broker-dealer intermediary on a third-party exchange subject to 
a multi-day settlement cycle. As a result, few digital asset companies 
have sought registration or exemption under the securities laws; 
presumably, it is why few of those applications have been granted, 
given the difficulties of shoehorning digital assets into the 
securities law framework.
    In part, this is why FalconX decided to actively pursue CFTC 
registration as the best-suited available regulatory framework for 
digital assets in which FalconX makes markets and trades.
    CFTC registration comes with significant regulation, oversight, and 
compliance tailored to the derivative products it regulates. The CFTC 
also has fraud and manipulation authority over the spot markets 
underlying those derivatives. As a registered swap dealer, FalconX is 
subject to business conduct standards that require compliance with 
policies and procedures designed to ensure our clients are treated 
fairly and undertake obligations with us in an informed and prudent 
manner. Those standards require fair dealing, robust disclosure, and 
confidential handling of client information. CFTC swap dealer 
registration also obligates FalconX to maintain sufficient regulatory 
capital, implement margin and market risk policies, and provide 
complete, robust transaction reporting to the CFTC through a swap data 
repository. Registration also involves regular regulatory examinations 
through oversight by an SRO, the National Futures Association, as well 
as regular reviews and interactions with the CFTC. We undertook this 
registration voluntarily and at great expense because we believe a 
properly regulated industry will thrive in the United States and we 
want to be an active participant in its development.
IV. A Path Forward
    The current U.S. regulatory framework is fragmented, and the risks 
to the U.S. from this lack of a cohesive regulatory approach already 
have pushed some companies founded in the U.S. to other jurisdictions 
with greater regulatory clarity. We believe that regulatory uncertainty 
constitutes a major impediment to U.S. innovation and investment. Until 
it is addressed, it will continue to lead to a loss of economic 
opportunity and technological advancement for the U.S.
    As discussed above, FalconX has seen great benefits from the 
application of CFTC rules to its swap dealing business. There are 
aspects of the CFTC regime that can be applied to spot market trading 
of digital assets that would provide a regulatory framework to protect 
customers without stifling innovation.
    FalconX believes that there are numerous benefits to applying 
certain rules from the CFTC's regulatory approach for derivatives 
markets to digital asset spot markets. The CFTC's rules are clear, 
tough, and fair. Spot markets would benefit from the application of 
some of the CFTC business conduct standards, in particular those 
focused on registration, reporting, and disclosure. At FalconX, we have 
found that these rules greatly enhance our ability to foster a 
transparent and orderly market for digital asset derivatives. Tailored 
to the unique characteristics of digital asset spot markets, they could 
greatly enhance market integrity, promote investor confidence, ensure 
investor protection, and facilitate innovation.
V. Conclusion
    Many companies in the digital asset space, like FalconX, are 
voluntarily and eagerly seeking to conduct business in a compliant and 
transparent manner. We firmly believe that Congress and market 
regulators should work together to establish a framework for the 
digital asset ecosystem so that we can both ensure that digital asset 
markets are safe, transparent, and orderly for all participants.
    Legislation like the Digital Commodity Exchange Act achieves just 
this. We applaud Chairman GT Thompson and the rest of the Committee for 
their leadership in this regard in the last Congress.
    We look forward to this Committee's efforts to progress legislation 
in cooperation and coordination with the House Financial Services 
Committee. Chairman Thompson, Chairman Johnson, and Madam Ranking 
Member, let me reiterate FalconX's appreciation for this opportunity to 
testify in front of you this afternoon.
    I look forward to answering any questions that you might have.

    The Chairman. We are two for two on time. Mrs. Rubin, the 
pressure mounts. You are up.

 STATEMENT OF NILMINI RUBIN, CHIEF OF STAFF AND HEAD OF GLOBAL 
         POLICY, HEDERA HASHGRAPH, LLC, CHEVY CHASE, MD

    Mrs. Rubin. Thank you, Chairman Johnson, Ranking Member 
Caraveo, Members of the Subcommittee for inviting me to 
testify. As today is take-your-child-to-work day, my husband 
has brought two of our three daughters here today.
    I am Nilmini Rubin, Head of Global Policy for the Hedera 
Governing Council, a decentralized multi-stakeholder governing 
body that establishes policies for the open-source Hedera 
network.
    Hedera is a fast and green distributed ledger or public 
blockchain. Essentially, Hedera provides a layer of trusted 
internet infrastructure for applications with real-world 
impact. What we call the internet is a set of computers talking 
to each other through open protocols. These protocols have 
evolved over time to enable additional features and 
capabilities that benefit society.
    Initially, protocols enabled only read-only text or Web1. 
Then, they enabled posting content and conducting commerce, or 
Web2. And now, they enable personal control of data, or Web3. 
Public blockchains are web-through platforms for other 
applications and are operated by a network of independent 
computers, or nodes. Now, these nodes do not fund their 
operations by showing advertisements or selling subscriptions. 
Instead, nodes are paid by users directly through fees like 
water or electricity. Node fees are typically tiny and 
frequent, with hundreds or thousands of transactions processed 
per second. It is not possible to use the traditional financial 
system to send fractions of a penny quickly, efficiently, and 
globally.
    To solve this problem, public blockchains use a digital 
asset or cryptocurrency to rapidly transfer value between users 
and node operators. The cryptocurrency serves as a fuel on 
which the network runs. For example, in March, the Hedera 
network processed over one billion transactions. Each 
transaction costs between \1/10\ and \1/100\ of a penny and was 
paid in the Hedera network's cryptocurrency called HBAR.
    The key takeaway here is that public blockchains need 
digital assets to operate. The ability of blockchains to 
provide trusted and timestamped records enables people to 
store, track, and monitor data in new and powerful ways. Three 
examples of products running on the Hedera network include the 
DOVU marketplace that allows farmers to generate additional 
income from actions like changing farming techniques and 
planting additional crops. Their actions are tokenized as 
carbon credits to fund carbon-reducing projects.
    The second one is atma.io built by Avery Dennison. It helps 
brands reduce waste across the supply chain for over 28 billion 
items, and it has both economic and environmental benefits.
    And the third, Everyware. It monitors vaccine cold chain 
storage across the supply chain and picks up on any 
irregularities before administering those vaccines to patients, 
keeping patients safe.
    U.S. network and market infrastructure providers need a 
complete roadmap towards compliance. The current U.S. 
regulatory environment provides no clear path to compliance for 
digital assets, leaving blockchains with two choices either 
stop operating in the U.S. or hope U.S. policy will come 
through before the enforcement of misaligned regulations.
    To protect consumers, enable innovation, and promote 
competition, we recommend Congress pass legislation creating an 
activities-based framework to regulate digital assets based on 
the nature of the transaction. First, Congress should provide a 
definition of and delineation between digital commodity and 
digital security or state when a digital asset is neither. 
Second, Congress should empower the CFTC to regulate certain 
digital commodity activities, such as operating a centralized 
spot marketplace.
    To extend U.S. leadership and competitiveness, Congress 
should establish digital asset policy that supports the use of 
public blockchains. The rest of the world is recognizing the 
potential of blockchains. Other jurisdictions such as Dubai, 
Europe, Singapore, and the United Kingdom, are creating digital 
asset regulatory certainty. The United States risks shutting 
out businesses that rely on digital assets to operate, risks 
shutting out the ability to regulate the industry, and most 
importantly, risks removing the American people's access to the 
efficiency, transparency, and data-storage tools that the rest 
of the world will be using to their competitive advantage.
    Thank you for focusing on policy for the next wave of 
digital innovation.
    [The prepared statement of Mrs. Rubin follows:]

Prepared Statement of Nilmini Rubin, Chief of Staff and Head of Global 
             Policy, Hedera Hashgraph, LLC, Chevy Chase, MD
    Thank you, Chairman Johnson, Ranking Member Caraveo, and Members of 
the Subcommittee on Commodity Markets, Digital Assets, and Rural 
Development for inviting me to testify today.
    I am Nilmini Rubin, Head of Global Policy for the Hedera Governing 
Council, a decentralized, multi-stakeholder governing body that 
establishes policies for the open-source Hedera Network. Having spent 
about twelve years as a House Foreign Affairs Committee and Senate 
Foreign Relations Committee professional staff member, I am honored to 
testify before Congress.
    The Hedera Governing Council is one of many organizations working 
on the Hedera network, a public blockchain launched in September of 
2019, built on top of the open-source hashgraph technology. The Hedera 
Network is a fast and green public blockchain whose general purpose 
applications go well beyond financial services.
    I speak today on behalf of only one part of the decentralized 
Hedera network ecosystem--Hedera Hashgraph, LLC, a U.S. company, whose 
members consist of twenty-eight leading global companies and 
universities that comprise the Hedera Governing Council: abrdn, Avery 
Dennison, Boeing, Chainlink Labs, DBS Bank, Dell Technologies, Dentons, 
Deutsche Telekom, DLA Piper, EDF (Electricite de France), eftpos, FIS 
(WorldPay), Google, IBM, the Indian Institute of Technology (IIT), LG 
Electronics, The London School of Economics (LSE), Magalu, Nomura 
Holdings, ServiceNow, Shinhan Bank, Standard Bank Group, Swirlds, Tata 
Communications, Ubisoft, University College London (UCL), Wipro, and 
Zain Group. My remarks do not necessarily reflect the views of any 
particular Hedera member.
Why Public Blockchains Need Digital Assets
    What we call ``the internet'' is essentially a decentralized set of 
computers talking to each other through open protocols on a public 
network. Each protocol was created by a multi-stakeholder governing 
body. Those protocols, like TCP/IP, DNS, HTTPS, etc., have never 
stopped evolving to enable additional features and capabilities that 
benefit society. Initially, internet protocols just enabled a handful 
of institutions to share information and send direct messages (the 
`read-only' web or ``web1''). Protocol innovations enabled people 
around the world to self-publish and securely message anyone (read and 
write web or ``web2'')--unlocking the information revolution. Those 
web2 protocol innovations enabled the secure sharing of images and 
videos; secure credit card transactions--unlocking e-commerce; and 
mobile apps connectivity--unlocking ubiquitous use of the internet 
anywhere.
    Public blockchains are often referred to as ``web3'' because they 
deliver the next major protocol innovation. Public blockchains enable 
unprecedented personal control--the ability to read, write, and own 
your data and assets--without dependency on centralized intermediaries. 
Unlike in web2, where a user account only exists on a single company's 
servers, in web3 the entire blockchain network records account 
ownership. Individuals hold cryptographic keys that enable access to 
the account. This means that in web3 user accounts are persistent 
across an unlimited array of services that exist on top of blockchain 
networks, without requiring users to perpetually create new accounts 
and passwords.
    These web3 protocols, and cryptographically provable individual 
ownership, allow major innovations including decentralized digital 
identity. Decentralized identity allows an individual to control what 
personal information is shared, and with whom it is shared, rather than 
relying upon an ``identity provider'' to manage this for them, often 
under a terms of service agreement the user doesn't fully understand. 
So, if I need to prove that I am over 21, I could use my digital ID and 
choose not to share additional information like my address which helps 
me protect my safety.
    Fundamentally, there are two ways to run a blockchain: (1) private 
blockchains used for internal operations or with a consortium of 
partners; and (2) public blockchains that anyone can build applications 
on.
    Public blockchains are operated by a network of independent 
computers, or ``nodes.'' Since public blockchain nodes act as the 
platform on which other applications are built, they cannot fund their 
operations by showing advertisements or selling subscriptions like web2 
intermediaries. Instead, nodes must be compensated by users directly 
through fees, like water and electricity charges. The node fees are 
typically tiny and frequent, with hundreds or thousands of messages or 
transactions processed per second. It is not possible to use the 
existing financial system to send fractions of a penny so quickly, 
efficiently and globally.
    To solve this problem, public blockchains use a digital asset, or 
cryptocurrency, to transfer value directly between users and operators. 
The nodes process these transfers in seconds. As there is no 
intermediary, they go through an automated consensus-generating process 
to ensure all computers agree on the amount of cryptocurrency in each 
network account. The cryptocurrency serves as the fuel on which the 
network runs. For example, during the previous month, the Hedera 
Network processed over 600 transactions per second--in total over 1.5 
billion transactions. Each transaction cost between a tenth ($0.001) 
and hundredth ($0.0001) of a penny, paid in the network's native 
cryptocurrency called ``hbar.''
Public Blockchains Advance the Economy and Humanity
    The ability of blockchains to provide immutable, auditable, and 
order-based records, enables businesses and organizations to store, 
track and monitor data in new and powerful ways. Products running now 
on Hedera store, track, and monitor data to reduce waste, fraud, and 
abuse, and provide economic, social, and environmental benefits, for 
example:

   Data storage and provenance--supporting human rights: 
        Starling Lab, co-founded by Stanford University's School of 
        Engineering and the University of Southern California's Shoah 
        Foundation, built a framework on Hedera and other blockchains 
        to verify, and preserve the authenticity of photos and other 
        evidence.

     Starling Labs is preserving the USC Shoah Foundation's 
            Holocaust archive and testimonies from tampering, 
            effectively storing, distributing, and verifying the 
            testimonials through sophisticated automated tracking and 
            tracing.\1\
---------------------------------------------------------------------------
    \1\ https://www.jpost.com/diaspora/antisemitism/how-blockchain-can-
preserve-holocaust-testimonies-from-manipulation-657308.

     Starling Lab and Hala Systems submitted a digital 
            evidence package to the Office of the Prosecutor of the 
            International Criminal Court documenting possible war 
            crimes in Kharkiv, Ukraine. The package was an unbroken 
            chain of digital evidence establishing data provenance, 
            proving it had not been tampered with from the field to the 
            courtroom--a first for any court submission in the 
            world.\2\
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    \2\ https://dornsife.usc.edu/cagr-news/news/2022/06/33571-starling-
lab-and-hala-systems-file-cryptographic-submission-evidence-war-crimes.

   Value exchange--supporting rural development: DOVU is a 
        marketplace, built on Hedera, to inexpensively issue tokenized 
        carbon credits in order to fund projects that remove, capture, 
        or sequester carbon from the environment. This presents an 
        opportunity for participating farmers to generate additional 
        income by unlocking carbon sequestered in soil; increase the 
        amount of carbon sequestered, and selling the carbon to buyers 
        looking for offsets. The entire audit trail technology is built 
        on top of Hedera's Guardian open-source framework, and verifies 
        the entire journey for any carbon project from onboarding to 
        retirement, with simple visualizations and documentation.\3\
---------------------------------------------------------------------------
    \3\ https://dovu.earth/en/news/.

   Transparent platforms--supporting the environment: CYNK, 
        Africa's first verified carbon emissions reduction platform, 
        built a product on Hedera to track and trade emission reduction 
        tokens generated by Tamuwa, Kenya's largest biomass company. 
        CYNK provides an immutable audit trail for all of Tamuwa's 
        carbon credits, bringing trust and transparency to the 
        emissions reduction platform.\4\
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    \4\ https://furtherafrica.com/2022/10/05/first-african-emissions-
reduction-platform-to-begin-trading/.

   Supply chain traceability--supporting waste reduction: 
        atma.io, built by Avery Dennison, utilizes Hedera and helps 
        brands meet net-zero targets and reduce waste across the supply 
        chain. As more than 28 billion items across apparel, retail, 
        food and healthcare move through the supply chain, their 
        movements are recorded as transactions, timestamped and stored 
        on Hedera. This allows atma.io to provide a granular view of 
        carbon emissions and enables targeted carbon reductions.\5\
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    \5\ https://www.labelsandlabeling.com/news/sustainability/atmaio-
utilize-hedera-network-co2-emissions.

   Supply chain monitoring--supporting vaccine safety: 
        Everyware built a product on Hedera to monitor vaccine cold-
        chain storage and pick up on any irregularities before 
        administering those vaccines to patients. Everyware's sensors 
        monitor the temperature of refrigerators storing the 
        temperature-sensitive vaccines in real-time, and transmit the 
        data to its cloud platform, which is encrypted and then saved 
        on to Hedera's blockchain network.\6\
---------------------------------------------------------------------------
    \6\ https://www.cnbc.com/2021/01/19/uk-hospitals-use-blockchain-to-
track-coronavirus-vaccine-temperature.html.

   Supply chain tracking--supporting pharmaceutical safety: AVC 
        Global and Medical Value Chain (MVC), built a product on Hedera 
        and another blockchain to track all pharmaceuticals coming into 
        the Kingdom of Bahrain. Their SmartPass technology 
        cryptographically tracks the entire supply chain to allow users 
        to authenticate pharmaceuticals and avoid dangerous 
        counterfeits.\7\
---------------------------------------------------------------------------
    \7\ https://www.unlock-bc.com/news/2021-05-25/bahrain-based-
medical-value-chain-fully-integrated-with-blockchain-hedera-hashgraph/.

    In addition, establishing strong digital asset policy frameworks 
and regulation advances American values. Before hosting the Summit for 
Democracy in March, the U.S. government issued a call to the private 
sector to address global democratic challenges. Hedera was proud to 
respond and committed to convening a roundtable on how blockchain 
technologies can support democracy. Hedera will invite companies, trade 
associations, advocacy groups, academics and government officials, 
publicly share a summary of the discussion, and make recommendations 
for next steps.\8\
---------------------------------------------------------------------------
    \8\ https://www.state.gov/private-sector-commitments-to-advance-
democracy/.
---------------------------------------------------------------------------
Recommendations for Congress
    The sale of digital assets to raise money for the creation of a 
network or application is fundamentally different from the use of 
digital assets as a fuel to pay for network activity costs or obtain 
access to other goods or services, and regulations should be tailored 
to address the unique characteristics of each. Participants in each 
transaction should be able to have a clear understanding of how the 
regulations apply and what their obligations are.
    Built on the premise that digital asset regulation should protect 
consumers, enable innovation, and promote competition, we recommend 
passage of legislation to create an activities-based framework that 
regulates the use of digital assets based on the nature of the 
transaction:

   First, Congress should provide a clear definition of and 
        delineation between ``Digital Commodity'' and ``Digital 
        Security,'' or when a digital asset is neither. Currently, it 
        is not clear whether the Commodity Futures Trading Commission 
        (CFTC) or the Securities and Exchange Commission (SEC) is the 
        primary regulator for any given digital asset or transaction.

   Second, Congress should empower the CFTC to regulate certain 
        Digital Commodity activities, such as operating a centralized 
        spot marketplace. Network and market infrastructure providers 
        in the U.S. today do not have a complete roadmap toward 
        compliance and appropriate regulatory oversight. For example, 
        if trading platforms must register as a designated contract 
        market (DCM) and intermediaries must register as a futures 
        commission merchant (FCM), how can businesses be brought into 
        the existing regulatory perimeter without friction or harm to 
        purchasers and users? Clarity here will greatly improve 
        consumer safety as adoption of these technologies and their 
        benefits accelerate.

    In the same way not all assets are securities, not all digital 
assets are securities. Not all digital assets are securities because 
not all digital assets have the same purpose, characteristics, and 
historical facts and circumstances. Applying existing securities law to 
all cryptocurrencies severely limits--if not prohibits--the actual use 
of public blockchains. For example, a supply chain application for the 
manufacturing process of a food item to ensure accurate tracking of 
expiration dates for consumer safety may require the use of an SEC-
registered broker-dealer just to pay a 1 transaction fee in 
cryptocurrency to log a supply chain event.
    Legislative clarity for innovative products has been done before. 
The 2010 Dodd-Frank Wall Street Consumer Protection Act allocated 
rulemaking authority for swaps to more than one Federal agency. In 
Title VII of the Dodd-Frank Act, Congress recognized that derivatives 
contracts differed meaningfully and allocated authority for swaps 
involving a commodity interest to the CFTC, while at the same time 
granting rulemaking and oversight of swaps involving an underlying 
security to the SEC. Today, swaps market regulation is largely viewed 
as an example of successful allocation of regulatory authority between 
two agencies. The same approach could be taken to digital assets.
    Digital asset use is inherently international and it is important 
that any regulation takes that into account. The CFTC has an 
established process for permitted substituted compliance with non-U.S. 
regulatory regimes. Known as Comparability Determinations, the CFTC has 
the authority to determine that a foreign jurisdiction's regulatory 
requirements are comparable to the CFTC's requirements under U.S. 
law.\9\
---------------------------------------------------------------------------
    \9\ See Comparability Determination for Substituted Compliance 
Purposes at https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/
index.htm.

    To regulate fast-developing innovations like digital assets, the 
CFTC is a more appropriate regulator than the SEC because the CFTC 
adheres to the concept of ``principles-based regulation'' while the SEC 
---------------------------------------------------------------------------
follows a prescriptive rules based approach.

    As former CFTC Chair Heath Tarbert noted, ``It is important to 
recognize that principles-based regulation is not a euphemism for 
`deregulation' or a `light-touch' approach--far from it. Principles-
based regulation is a different way of achieving the same regulatory 
outcomes as rules-based regulation. But it simply does so in what is, 
in many cases, a more efficient and flexible manner.'' \10\ The current 
regulatory environment in the U.S. provides no clear path to 
compliance, leaving two choices: (1) find that path overseas; or (2) 
continue hoping regulation will catch up before enforcement punishes 
another innovator for being a square peg they cannot fit into their 
round hole of prescriptive rules designed for very different 
activities, decades before these innovative activities were ever 
considered.
---------------------------------------------------------------------------
    \10\ See Fintech Regulation Needs More Principles, Not More Rules 
at https://fortune.com/2019/11/19/bitcoin-blockchain-fintech-
regulation-ctfc/.
---------------------------------------------------------------------------
Conclusion
    The internet is global but it was invented here in the U.S., 
allowing American values to underpin fundamental internet protocols. 
Congress must define rules in the U.S. to allow public blockchains to 
thrive so that the next wave of internet value creation continues to 
echo the U.S.' commitment to markets and democracy. Other countries and 
regions, including China, the European Union, Singapore, the United 
Arab Emirates and the United Kingdom, are swiftly moving forward with 
their own digital asset regulations. The resulting regulatory certainty 
may give companies currently based in those locations an advantage over 
U.S. companies; it may encourage companies to move to some of those 
locations; and it may present national security risks.
    Thank you for your focus on digital assets and setting the rules 
that will enable American innovators to continue to play a leading role 
in crafting the future of the internet.

    The Chairman. Very well said.
    Mr. Massad, you are up, three for three.

  STATEMENT OF HON. TIMOTHY G. MASSAD, J.D., RESEARCH FELLOW, 
 MOSSAVAR-RAHMANI CENTER FOR BUSINESS AND GOVERNMENT, KENNEDY 
                     SCHOOL OF GOVERNMENT, 
         HARVARD UNIVERSITY; DIRECTOR; M-RCBG DIGITAL 
            ASSETS POLICY PROJECT, WASHINGTON, D.C.

    Mr. Massad. Chairman Thompson, Chairman Johnson, Ranking 
Member Caraveo, Members of the Committee and staff, I am 
honored to be testifying before you today. It is almost a 
decade since I first testified before this Committee about the 
lack of a comprehensive regulatory framework for crypto. Four 
years ago, I wrote a paper on the need to strengthen 
regulation, which began with the following sentence: ``There is 
a gap in the regulation of crypto assets that Congress needs to 
fix.'' That gap still exists today, of course, and it is the 
absence of a Federal regulator for the spot market and crypto 
tokens that are not securities, as has been explained. And it 
is a principal reason why investor protection in the crypto 
market is extremely weak, and that was made painfully obvious 
by the failures of several crypto firms last year such as FTX, 
which resulted in hundreds of thousands of people suffering 
losses.
    Now, there are other gaps. I have noted some of those in my 
written testimony, but I will focus on this one.
    For years now, I have said that either the SEC or the CFTC 
needs to be given the authority and the resources to regulate 
that spot market. Today, I want to suggest to you that there is 
another path forward, an easier path forward, and it addresses 
the fact that the lack of investor protection is also related 
to this debate about whether crypto tokens should be considered 
securities or commodities or something else. Industry 
participants complained about the lack of regulatory clarity, 
but trading and lending platforms also claim they are dealing 
only in tokens that are securities, thereby avoiding direct 
Federal oversight. SEC Chair Gensler, on the other hand, says 
most tokens are securities, and the problem is a lack of 
compliance with existing requirements.
    While the SEC has brought enforcement actions on this 
issue, that path could take a long time to reach sufficient 
clarity. And while there are legislative proposals to address 
this issue, by revising regulatory categories, I am concerned 
those could generate as much confusion as clarity
    There is an alternative path forward. It would increase 
investor protection quickly, without rewriting decades of law 
or diminishing the existing authority of either the SEC or the 
CFTC. The investor protection standards we need are largely the 
same, regardless of whether a token falls in the securities or 
commodities bucket. Therefore, Congress would pass a law 
mandating that any trading or lending platform that trades 
Bitcoin or Ethereum must comply with a core set of principles 
unless that platform has already registered with the SEC or the 
CFTC. The principles would include protection of customer 
assets, prevention of fraud and manipulation, prohibition of 
conflicts of interest, and others as I have set forth in my 
written statement. Congress would direct the SEC and the CFTC 
to develop joint rules implementing these principles or create 
a self-regulatory organization, SRO, to do so.
    This approach has several advantages. First, it is simple. 
The requirements would apply to any trading or lending platform 
that trades Bitcoin or Ethereum. That captures almost all of 
the market, if not the entire market.
    Second, it focuses on the core of the problem. Over 90 
percent of spot trading volume takes place on centralized 
intermediaries. This approach would dramatically raise the 
level of investor protection on those platforms. Simply 
eliminating wash trading where someone trades with themselves 
or an affiliate to inflate the price or trading volume of an 
asset and which has been estimated to represent 50 to 90 
percent of the volume on many platforms would be a huge 
improvement. And of course, the rules can also be customized to 
apply to decentralized platforms.
    Third, it is practical. It is based on the market as it 
exists today. It would not require a bifurcation of trading 
into one platform for security tokens and one for commodity 
tokens. And that is useful because actual trading takes place 
in pairs of tokens that can often be in different buckets.
    In addition, by using an SRO, the industry could be 
required to pay for the cost of the approach. You would not 
have to allocate money. The approach would not involve 
rewriting existing securities or commodities laws, and such 
proposals might not only fail to bring clarity to crypto, they 
might unintentionally undermine decades of regulation and 
jurisprudence. In particular, the law should make clear that 
the CFTC and SEC would retain their existing authority. The SEC 
could still contend that any particular token is a security, 
and if it prevailed, the intermediary would have to stop 
dealing in that token or move it to a registered platform, but 
the intermediary would not be shut down. That would assure 
platforms and their customers that operations will continue on 
a far more responsible basis.
    The approach finally is incremental. While 
comprehensiveness is desirable, it can take a long time to 
build consensus. I believe it is better to do something 
incremental that can protect millions of investors and serve as 
a foundation which can be improved over time. This is 
essentially the same thing that former SEC Chair Jay Clayton 
and I proposed in a Wall Street Journal op-ed. And the point is 
that this is a proposal that can be supported by people, 
regardless of one's view of the value of crypto, whether you 
are breathlessly positive or angrily negative I believe you 
said, Mr. Chairman, and it is a proposal people on both sides 
of the political aisle can support.
    Thank you.
    [The prepared statement of Mr. Massad follows:]

 Prepared Statement of Hon. Timothy G. Massad, J.D.,* Research Fellow, 
Mossavar-Rahmani Center for Business and Government, Kennedy School of 
Government, Harvard University; Director; M-RCBG Digital Assets Policy 
                       Project, Washington, D.C.
---------------------------------------------------------------------------
    * Research Fellow and Director, Digital Assets Policy Project, 
Harvard Kennedy School Mossavar-Rahmani Center for Business and 
Government; Chairman of the Commodity Futures Trading Commission (2014-
2017); Assistant Secretary for Financial Stability of the U.S. Treasury 
(2010-2014).
---------------------------------------------------------------------------
    Chairman Thompson, Ranking Member Scott, Subcommittee Chairman 
Johnson, Subcommittee Ranking Member Caraveo, Members of the Committee 
and staff, I am honored to be testifying before you today. It is almost 
a decade since I first testified before this Committee about the lack 
of a comprehensive regulatory framework for crypto in the United 
States. Four years ago, I wrote a paper published by the Brookings 
Institute on the need to strengthen crypto asset regulation. It began 
with the following sentence: ``There is a gap in the regulation of 
crypto assets that Congress needs to fix.'' \1\ While I am pleased this 
hearing is being held, it is unfortunate that there are still 
significant gaps in crypto asset regulation.
---------------------------------------------------------------------------
    \1\ Timothy Massad, It's Time to Strengthen the Regulation of 
Crypto-Assets, The Brookings Institute, p. 2 (Mar. 2019), https://
www.brookings.edu/research/its-time-to-strengthen-the-regulation-of-
crypto-assets/ (hereinafter ``Massad 2019'').
---------------------------------------------------------------------------
    The gap I talked about then was the absence of a Federal regulator 
for the spot market in crypto tokens that are not securities, such as 
bitcoin. It was during my tenure as Chairman of the Commodity Futures 
Trading Commission (CFTC) that the agency declared bitcoin and other 
virtual currencies to be commodities, which gave the agency authority 
to regulate derivatives based on such commodities, but its authority 
over the spot market for any commodity is quite limited.\2\
---------------------------------------------------------------------------
    \2\ The CFTC has authority to bring enforcement actions for fraud 
and manipulation in the spot market and to regulate certain retail 
leveraged transactions, but it does not have the authority to prescribe 
standards under which trading platforms or other intermediaries must 
operate. For a discussion of the CFTC's authority, see ibid, pp. 32-33 
as well as Timothy Massad and Howell Jackson, How to improve regulation 
of crypto today--without Congressional action--and make the industry 
pay for it, The Brookings Institute, pp. 8-9 (October, 2022), https://
www.brookings.edu/research/how-to-improve-regulation-of-crypto-today-
without-congressional-action-and-make-the-industry-pay-for-it/ 
(hereinafter ``Massad-Jackson 2022'').
---------------------------------------------------------------------------
    Because of this and other reasons, investor protection is woefully 
inadequate on crypto trading and lending platforms. These platforms do 
not observe standards common in our financial markets that ensure 
protection of customer assets, prohibition of conflicts of interest, 
prevention of fraud and manipulation, and adequate transparency, among 
other things. That was made painfully obvious last year by the failures 
of trading platform FTX, crypto lender Celsius, the Terra/Luna 
stablecoin and others, resulting in hundreds of thousands of investors 
sufferinglosses.
    There are other gaps in crypto-asset regulation. One is the lack of 
a Federal regulatory framework for stablecoins. The report of the 
Financial Stability Oversight Council issued last fall identified 
additional gaps consisting of the opportunities for regulatory 
arbitrage and ``whether vertically integrated market structures can or 
should be accommodated under existing laws and regulations.'' \3\ While 
I agree with these findings and share the concerns in the FSOC report, 
I will focus on the gap in oversight of the spot market and make some 
brief comments about the absence of a Federal regulatory framework for 
stablecoins.
---------------------------------------------------------------------------
    \3\ Financial Stability Oversight Council, Report on Digital Asset 
Financial Stability Risks and Regulation, p. 5 (October 2022), https://
home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf 
(hereinafter the ``FSOC Report'').
---------------------------------------------------------------------------
    In my 2019 paper, I proposed that either the Securities and 
Exchange Commission or the Commodity Futures Trading Commission be 
given authority to regulate the spot market for crypto assets that are 
not securities. Either agency is capable of doing so provided it is 
given sufficient resources. I know first hand the challenges faced by 
the CFTC because of its limited budget, and the task of regulating the 
crypto asset (non-security) spot market would require significant 
resources.
    Today, I want to suggest that there is another path forward as 
well. It addresses the fact that spot market regulation is very 
challenging because of the question of how to classify digital assets: 
are they securities or commodities or something else? Should we create 
a new regulatory category for them? The debate over this issue is a 
major reason why crypto trading and lending platforms do not observe 
standards that are common in other financial markets. Industry 
participants complain about a lack of clarity in the rules for 
resolving this issue and have called for regulators to create a new set 
of rules specifically for crypto. But meanwhile trading and lending 
platforms claim they are only dealing in tokens that are not 
securities--thereby avoiding direct Federal oversight. Chair Gary 
Gensler of the Securities and Exchange Commission (SEC) says most 
tokens are securities and the problem is a lack of compliance with 
existing legal requirements.\4\ There is no need to write new rules 
just because of a new technology, and doing so might undermine decades 
of precedents that have contributed to the strength of our capital 
markets generally.
---------------------------------------------------------------------------
    \4\ See, for example, Chair Gensler's testimony before the U.S. 
House of Representatives Financial Services Committee on April 18, 
2023, at https://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=408690.
---------------------------------------------------------------------------
    The SEC has some pending enforcement actions that may bring greater 
clarity to this question. But that is uncertain and could take time, 
during which investors will continue to be at risk. Moreover, even if 
the SEC prevails in particular cases, it may face a game of whack-a-
mole, where proponents of other tokens and the trading and lending 
platforms themselves argue that other tokens are different from the 
particular facts of an SEC victory, triggering further litigation.
    Meanwhile, Members of Congress have proposed legislation that would 
create new regulatory categories meant to resolve this issue, often in 
conjunction with giving new authority to the CFTC for the spot market. 
While admirable in intent, the risk is creating new regulatory 
categories of assets might generate more confusion than clarity, and 
lead to disputes over their own meaning that could take years to 
resolve. They could also have unintended adverse ancillary effects with 
respect to regulation of capital markets generally.
    There is an alternative path forward. It would increase investor 
protection quickly without rewriting decades of law in one bill. It 
would not diminish the existing authority of either the SEC or the 
CFTC.
    The idea is to create a baseline of investor protection by 
recognizing that many of the standards we need are the same regardless 
of whether a token falls in the securities or commodities bucket. 
Congress would pass a law mandating that any trading or lending 
platform that trades bitcoin or ethereum must comply with a set of core 
principles, unless the platform has already registered with the SEC or 
CFTC as a securities or derivatives intermediary. The principles would 
include protection of customer assets, prevention of fraud and 
manipulation, prohibition of conflicts of interest, adequate disclosure 
to investors, regular reporting, pre and post trade transparency, risk 
management and governance standards, among others.
    Congress would direct the SEC and the CFTC to develop joint rules 
implementing these principles (and the principles could also be made 
applicable pending issuance of such rules). Rules could also be 
developed by creating a new self-regulatory organization (SRO) jointly 
supervised by the SEC and the CFTC. SROs have been critical to the 
regulation of our securities and derivatives markets for decades, and 
there is precedent for SROs registered with both the SEC and the 
CFTC.\5\ The SRO could also be charged with enforcing the rules.
---------------------------------------------------------------------------
    \5\ See Massad-Jackson 2022, supra note 2.
---------------------------------------------------------------------------
    I believe this approach has several advantages. It is simple. It 
focuses on the core of the problem. It is practical and feasible. It 
can be implemented quickly and efficiently. It does not rewrite 
existing law in ways that may create more confusion than clarity. And 
it is incremental. Let me explain each of these aspects and then 
provide some greater detail and background.
    First, simplicity: the approach is based on a clear definition of 
jurisdiction. The requirements would apply to any trading or lending 
platform that trades bitcoin or ethereum, which are chosen because they 
represent so much of the market. There would not be confusion as to 
what entities must comply, though one could add other tokens to the 
list or include a minimum volume threshold to exclude insignificant 
activity. It would also be based on principles that are already 
wellknown in financial market regulation, the desirability of which 
should command wide support.
    Second, it focuses on the core of the problem. Over 90% of spot 
market trading is estimated to occur through centralized 
intermediaries.\6\ If we can raise the level of investor protection on 
those intermediaries, that will help prevent the kinds of losses we 
have seen recently. It may also take some of the speculative air out of 
the sails of this industry. For example, wash trading--where someone 
trades with themselves or an affiliate to inflate the price or trading 
volume of an asset--has been estimated to represent 50% or more of the 
trading on crypto platforms.\7\ If we simply prevented that, it would 
be a huge improvement. The proposal can also cover decentralized 
platforms, as the agencies or SRO can be directed to develop 
appropriate adjustments to rules for those as well.
---------------------------------------------------------------------------
    \6\ See Coingecko, 2022 Annual Crypto Industry Report which 
estimated that as of the end of 2022, centralized exchanges had 93% of 
market share.
    \7\ See Lin William Cong, et al., Crypto Wash Trading (July 2021), 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3530220 (estimating 
that wash trades account for 70 percent of volume on unregulated 
cryptocurrency exchanges); see also Jialan, Chen et al., Do 
Cryptocurrency Exchanges Fake Trading Volume? 586 Physica A. 126405 
(Jan. 15, 2022); Matthew Hougan, et al., Economic and Non-Economic 
Trading In Bitcoin: Exploring the Real Spot Market For The World's 
First Digital Commodity, Bitwise Asset Management (May 24, 2019), 
https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-
5574233-185408.pdf (study demonstrating that ``95% of reported trading 
volume in bitcoin is fake or non-economic in nature''); Javier Paz, 
More Than Half of All Bitcoin Trades are Fake, Forbes (Aug. 26, 2022), 
https://www.forbes.com/sites/javierpaz/2022/08/26/more-than-half-of-
all-bitcoin-trades-are-fake/?sh=
11ea350b6681; see also Steve Inskeep, et al., How ``wash trading'' is 
perpetuating crypto fraud, NPR (Sept. 23, 2022), https://www.npr.org/
2022/09/23/1124662811/how-wash-trading-is-perpetuating-crypto-fraud.
---------------------------------------------------------------------------
    Third, it is practical and feasible. It is practical because it is 
based on the market as it exists today. The subject platforms would be 
required to implement the principles regardless of arguments about what 
is a security and what is a commodity. It would not require a 
bifurcation of trading into one platform for security tokens and one 
for commodity tokens. This is particularly useful because crypto 
trading involves pairs of tokens that might be classified into 
different buckets. It is feasible because the SEC and the CFTC have the 
experience to implement the principles and there are precedents for 
them working together. By forming an SRO, they could draw on the 
expertise of existing SROs such as the Financial Industry Regulatory 
Association (FINRA) and the National Futures Association (NFA). 
Finally, the cost of the SRO's activities could be imposed on the 
industry through membership fees, consistent with existing practice.
    The approach would not involve rewriting existing securities or 
commodities law. There would be no changes to the definition of 
security, which 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.
    In particular, the law should not diminish the existing authority 
of either the SEC or the CFTC. It should make clear that the SEC would 
retain its authority to contend that any particular token is a 
security. If, for example, it prevailed in any particular case, an 
intermediary would still have to comply--by ceasing to deal in that 
token, or only doing so on a registered platform--but it would not be 
shut down as long as it was complying with these basic standards. This 
would assure the platforms, and their customers, that operations will 
continue--on a far more responsible basis--while classification and 
other issues are resolved.
    Finally, the approach is incremental in several ways. It does not 
seek to regulate all crypto transactions or all players in the crypto 
world from the get-go or resolve the classification questions. It does 
not rewrite the law as noted. While comprehensiveness is desirable, it 
can take a long time to build consensus, and it is much harder to get 
it right. It is better to do something incremental now that can protect 
millions of investors and serve as a foundation which can be added to 
and improved over time.
How Did We Get Here?
    Former SEC Chairman Jay Clayton and I have advocated essentially 
this approach in a Wall Street Journal op-ed late last year. We wrote 
about how ``the unique genesis of crypto assets . . . complicated the 
regulatory challenge.''

          Unlike other financial innovations, bitcoin was launched 
        globally and directly to retail consumers, with a claim that it 
        would make traditional intermediaries obsolete. Because 
        financial regulation is implemented on a national basis and 
        largely through intermediaries, this ``global retail'' path of 
        emergence has challenged regulators as traditional tools are 
        less effective.'' \8\
---------------------------------------------------------------------------
    \8\ Jay Clayton and Timothy Massad, ``How to Start Regulating the 
Crypto Markets--Immediately,'' The Wall Street Journal, (Dec. 4, 2022), 
https://www.wsj.com/articles/how-regulate-cryptocurrency-markets-
11670110885.

    It is ironic that an innovation that claimed it would make 
traditional intermediaries obsolete actually created a whole new 
category of intermediaries--crypto trading and lending platforms. These 
new intermediaries are also less accountable than the traditional ones 
that the creator of bitcoin and many crypto proponents complain about.
    Former Chair Clayton and I went on to say that other complicating 
factors have been the fact that ``the use case of many crypto assets is 
often cloudy''--it is not always clear whether a particular token 
offers an investment opportunity, access to goods or services, or a 
bank-like product. In addition, the U.S. has a fragmented financial 
regulatory system with multiple regulators responsible for different 
product areas.\9\ These factors have all contributed to the lack of a 
strong investor protection framework.
---------------------------------------------------------------------------
    \9\ Id.
---------------------------------------------------------------------------
Achieving Investor Protection Now, While Classification Arguments 
        Continue
    A key virtue of this approach is that it will allow us to improve 
investor protection without having first to resolve questions of which 
tokens are securities and which are commodities. Crypto trading 
platforms are all quick to say they do not trade or list any tokens 
that are securities, but there is significant variation in what they do 
actually list, which should make us ask why that is the case.
    For example, as of a recent date, the four largest U.S. platforms--
Binance U.S., Coinbase, Gemini and Kraken, listed approximately 60 
tokens in common, such as bitcoin and ethereum.\10\ Each platform, 
however, lists a lot more tokens. The number ranges from over 250 
(Coinbase) to about half that amount (Gemini). Collectively, the four 
platforms list a total of around 400 different tokens, and each one 
lists many tokens that none of the others list.
---------------------------------------------------------------------------
    \10\ These numbers are based on a manual comparison of listings 
noted on their respective websites.
---------------------------------------------------------------------------
    If each platform is confident that all the tokens it lists are not 
securities, why don't they list more tokens in common? Would they say 
all 400 tokens are not securities and claim their selection is based on 
other factors?
    There are surely other factors that are considered, but it seems 
unlikely these would account for the degree of difference. For example, 
Coinbase says it considers other factors such as ``customer demand 
(i.e., trading volume, market cap), traction of token/application 
(i.e., token holders) and anticipated liquidity.'' \11\ Changpeng 
(C.Z.) Zhao, the co-founder and chief executive officer of Binance.com, 
once put it more bluntly: ``If a coin has a large number of users, then 
we will list it. That's the overwhelming significant attribute.'' \12\
---------------------------------------------------------------------------
    \11\ Coinbase Exchange, ``Listing Prioritization Process & 
Standards,'' (Oct. 2022), https://assets.ctfassets.net/c5bd0wqjc7v0/
1DqPApt37t3uBHAMFUxPyI/4fa9169f9a8d90191d322635e597b
fda/Coinbase_Exchange_Listing_Prioritization_Process_and_Standards.pdf
    \12\ Helen Partz, ``Binance CEO reveals one key factor for token 
listings,'' Cointelegraph, (Nov. 30, 2021), https://cointelegraph.com/
news/binance-ceo-reveals-one-key-factor-for-token-listings.
---------------------------------------------------------------------------
    While it would seem reasonable for platforms to consider consumer 
demand, one would expect that criteria to lead to platforms listing the 
same tokens, not different tokens. And if instead selections reflect 
the platforms' different judgements about technical or security issues, 
that would suggest a need for better disclosure about tokens that are 
listed.
    As I noted earlier, there are pending cases that may provide 
further light on these classification issues, and my approach does not 
interfere with the exercise of the SEC or CFTC's authority or the 
proper role of the courts in resolving those questions. Indeed, if the 
SEC succeeds in establishing that a token is a security, then trading 
in that token would need to be on an SEC registered exchange. But we do 
not need to wait for any such case to be resolved.
The Principles
    The principles that Congress would articulate would be familiar 
ones used in our securities and derivatives markets. The list could 
include the following:

   governance standards (including fitness standards for 
        directors and officers);

   protection of customer assets, including segregation and 
        protection in bankruptcy;

   conflicts of interest (including prohibitions or limitations 
        on the ability of trading platforms to engage in proprietary 
        trading or having financial interests in listed assets);

   having adequate financial resources, including capital and 
        margin;

   recordkeeping and periodic public disclosures;

   execution and settlement of transactions in a competitive, 
        open, efficient and timely manner[;]

   pre- and post-trade transparency requirements;

   prevention of fraud, manipulation and abusive practices 
        (including prevention of wash trading);

   disclosures to customers, including regarding fees, 
        recourse, and dispute resolution; \13\
---------------------------------------------------------------------------
    \13\ Howell Jackson and I noted in our SRO paper (see note 2) that 
some have been critical of FINRA's arbitration proceedings for investor 
disputes involving securities transactions. See, e.g., Mark Egan, et 
al., Arbitration with Uninformed Consumers, Harvard Business School 
Finance Working Paper No. 19-046 (May 11, 2021), https://
papers.ssrn.com/sol3/papers.cfm?abstract_id=3260442. Whatever concerns 
one might have about FINRA arbitration proceedings as currently 
implemented, the point to recognize is that consumers investing in 
crypto-asset markets now have no mechanism for supervised dispute 
resolution. Moreover, the most stringent system of oversight currently 
under debate for crypto-assets--full compliance with SEC requirements--
implicitly contemplates the application of FINRA arbitration 
requirements. Conceivably a crypto-asset SRO might adopt better 
arbitration rules, but whatever rules they adopt would most likely be 
an improvement upon the status quo.

---------------------------------------------------------------------------
   risk management practices;

   operational resilience, cybersecurity standards and business 
        continuity and disaster recovery policies; and

   know your customer (KYC), anti-money laundering (AML) and 
        combating financial terrorism (CFT) standards.\14\
---------------------------------------------------------------------------
    \14\ See also Massad and Jackson (2022), supra, note 2.

    There could also be a requirement that a platform must make sure 
there is disclosure regarding a token, whether provided by a person 
seeking admission of a token to trading or otherwise. This is the 
approach taken in the new Regulation of the European Parliament and of 
the Council on Markets in Crypto-assets (MiCA), which provides that a 
crypto token cannot be listed unless there is a white paper on file 
that provides basic information.\15\ The disclosure requirements need 
not mirror existing securities law requirements. Georgetown Law 
Professor Chris Brummer has argued that Regulation S-K, the SEC's 
primary disclosure regulation, is both ``over-inclusive and under-
inclusive'' with respect to crypto: ``it fails in some instances to 
account for critical aspects of the digital assets ecosystem, and in 
others imposes obligations with little to no relevance, creating both a 
lack of clarity and inefficiency in compliance.'' \16\ The approach 
suggested here allows for development of disclosure requirements 
without undercutting existing securities law which would continue to 
apply to any token ultimately deemed a security.
---------------------------------------------------------------------------
    \15\ The white paper must contain ``(a) information about the 
offeror or the person seeking admission to trading; (b) information 
about the issuer, if different from the offeror or person seeking 
admission to trading; (c) information about the operator of the trading 
platform in cases where it draws up the crypto-asset white paper; (d) 
information about the crypto-asset project; (e) information about the 
offer to the public of the crypto-asset or its admission to trading; 
(f) information about the crypto-asset; (g) information on the rights 
and obligations attached to the crypto asset; (h) information on the 
underlying technology; (i) information on the risks; (j) information on 
the principal adverse impacts on the climate and other environment-
related adverse impacts of the consensus mechanism used to issue the 
crypto-asset.''
    These requirements are spelled out in further detail in an 
appendix. There is also a requirement that the paper not contain any 
material omission. See European Parliament, ``Position of the European 
Parliament adopted at first reading on 20 April 2023 with a view to the 
adoption of Regulation (EU) 2023/ . . . of the European Parliament and 
of the Council on markets in crypto-assets, and amending Regulations 
(EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and 
(EU) 2019/1937'' (April 24, 2023), Procedure: 2020/0265(COD), available 
at https://www.europarl.europa.eu/doceo/document/TA-9-2023-
0117_EN.html#title2.
    \16\ Georgetown Law Professor Chris Brummer has argued that 
Regulation S-K, the SEC's primary disclosure regulation, is both 
``over-inclusive and under-inclusive'' with respect to crypto: ``it 
fails in some instances to account for critical aspects of the digital 
assets ecosystem, and in others imposes obligations with little to no 
relevance, creating both a lack of clarity and inefficiency in 
compliance.'' Chris Brummer, Georgetown Law School, Testimony before 
the Agriculture Committee of the U.S. House of Representatives, 
Subcommittee on Commodity Exchanges, Energy, and Credit (June 23, 
2002), https://docs.house.gov/meetings/AG/AG22/20220623/114931/HHRG-
117-AG22-Wstate-BrummerC-20220623-U1.pdf.
---------------------------------------------------------------------------
    In addition to improving investor protection, requiring 
intermediaries to observe these principles will serve some broader 
policy goals. It will strengthen our ability to prevent crypto markets 
from being used for illicit activity. It will give regulators greater 
information that can help prevent any potential risks to financial 
stability. Requiring crypto intermediaries to have stronger resiliency 
standards and cybersecurity protections--which is critical given how 
common hacks and outages have been--can also help reduce the risk that 
such hacks and attacks result in collateral damage to other parts of 
the financial system.
Implementing the Approach Through a Self-Regulatory Organization
    While Congress could direct the SEC and the CFTC to jointly develop 
and enforce rules implementing the principles, a more efficient 
approach may be to have the two agencies create and supervise a self-
regulatory organization that would do so. Professor Howell Jackson of 
Harvard Law School and I have written about how such an approach could 
work in a recent paper.
    The ``self-regulatory'' aspect of an SRO does not mean lax 
standards, as long as the SRO is properly supervised by the SEC and 
CFTC. On the contrary, our country's SROs have been important 
components of the regulation of our securities and derivatives markets 
for decades. They have been central to the development and 
implementation of strong standards, as well as enforcement of those 
standards against industry participants.
    Although the SEC and CFTC have authority to create an SRO without 
legislation, and there are precedents for joint SROs,\17\ having 
Congress direct the agencies to do so would make clear the importance 
of and authority for such an approach. A jointly supervised SRO is also 
appropriate given the fact that both the SEC and CFTC have some 
jurisdiction over crypto. To the extent there are some differences in 
existing law with respect to an agency's authority over or relationship 
to an SRO (such as in the process for approving rules), those could be 
harmonized or resolved in favor of one approach over another.\18\ An 
SRO could make it easier to conduct supervision and enforcement, 
because those activities could be conducted by SRO staff rather than 
joint teams of the two agencies. The Congress could also make clear 
that the SRO would be financed from industry member dues, as is the 
practice with existing SROs.
---------------------------------------------------------------------------
    \17\ See Massad-Jackson 2022, at note 2.
    \18\ For example, under current law, the SEC must approve an SRO's 
proposed rules; if the CFTC does not object to a proposed rule, it is 
deemed approved.
---------------------------------------------------------------------------
State Law Cannot Fill the Gaps
    We cannot rely on state law to address the gaps in crypto 
regulation. The state law requirements that are imposed today on crypto 
trading firms are minimal, arising primarily from state money 
transmitter laws. Those laws have their origins in the telegraph era, 
and generally impose only minimal requirements pertaining to net worth, 
security and permissible investments. They do not provide a regulatory 
framework comparable to that created by the Federal laws and 
regulations governing the securities and derivatives markets. (They do 
trigger a requirement to register as a money service business with the 
Treasury Department and the application of the Bank Secrecy Act, which 
imposes anti-money laundering and other requirements.) Relying on state 
law would be analogous to relying on state blue sky laws to regulate 
the securities market after the crash of 1929, rather than what we 
actually did--which was to pass the Securities Act, the Securities 
Exchange Act and the other laws that are the foundation of the 
strongest capital markets in the world. Moreover, even to the extent 
that a few states have strengthened their laws or might choose to do so 
in the future to address the obvious lack of investor protection in the 
crypto sector, there would still be inconsistency as between different 
states' requirements. This creates opportunities for regulatory 
arbitrage that the FSOC report highlighted.\19\
---------------------------------------------------------------------------
    \19\ See supra note 3.
---------------------------------------------------------------------------
The Path Forward Should Not Depend on Consensus on the Value of Crypto
    A recent Economic Report to the President issued by the White House 
takes a very negative view on the value of crypto to date:

          ``In addition to the decentralized custody and control of 
        money, it has been argued that crypto assets may provide other 
        benefits, such as improving payment systems, increasing 
        financial inclusion, and creating mechanisms for the 
        distribution of intellectual property and financial value that 
        bypass intermediaries that extract value from both the provider 
        and recipient . . . So far, crypto assets have brought none of 
        these benefits . . . Indeed, crypto assets to date do not 
        appear to offer investments with any fundamental value . . . 
        instead, their innovation has been mostly about creating 
        artificial scarcity in order to support crypto assets' prices--
        and many of them have no fundamental value.'' \20\
---------------------------------------------------------------------------
    \20\ The White House, Economic Report of the President, p. 238 
(March 2023), https://www.whitehouse.gov/wp-content/uploads/2023/03/
ERP-2023.pdf.

    Those who question the fundamental value of the crypto sector may 
believe that regulating crypto trading and lending firms will tend to 
legitimize or encourage more investment in a sector we should prefer to 
see decline, move offshore or at least not grow. By contrast, there are 
those who will argue that the United States is failing to create a 
regulatory framework that encourages the development of technology they 
believe is transformative and is deserving of a dedicated regulatory 
regime. They worry that important innovation will move overseas.
    I continue to hold the views expressed in my 2019 paper:

          ``. . . whether [crypto assets] are the next big thing or 
        modern-day Dutch tulips should not determine whether or how we 
        regulate them. There is nothing so exceptional about crypto 
        assets that justifies giving them a regulatory pass. Nor should 
        they be taxed or regulated out of existence. A traditional 
        principle of financial market regulation in the United States 
        has been to refrain from normative judgements about 
        investments, require transparency and integrity in markets and 
        let investors make their own decisions. We should follow that 
        same principle here.'' \21\
---------------------------------------------------------------------------
    \21\ Massad 2019 supra at note 1, p. 6.

    This is important also as other jurisdictions work to clarify their 
crypto regulatory regimes. The possibility that activity moves abroad 
may not reduce risk to our markets or our citizens; it could simply 
make it harder for regulators to monitor and regulate that risk.
    The approach I am suggesting can find support on both sides of the 
political aisle. Former SEC Chair Jay Clayton and I advocated 
essentially this same approach in our Wall Street Journal op-ed late 
last year. We began by noting that ``only someone who has been living 
under a rock could think cryptocurrency markets don't need stronger 
regulation.'' \22\ We proposed that the SEC and CFTC develop a set of 
common, basic investor protection requirements and require platforms to 
adopt them if they haven't already registered with the SEC as a 
securities intermediary or with the CFTC as a derivatives intermediary. 
This would strengthen investor protection without either agency 
relinquishing any authority while classification and other issues are 
resolved.
---------------------------------------------------------------------------
    \22\ See supra, at note 8.
---------------------------------------------------------------------------
    In short, this is a proposal that people on both sides of the 
aisle, and people with different views on the merits of crypto, can 
support.
Another Critical Gap: The Lack of a Federal Regulatory Framework for 
        Stablecoins
    I wish to discuss briefly another critical gap, which is the lack 
of a Federal regulatory framework for stablecoins, which are used 
extensively in the crypto spot market. Stablecoin market capitalization 
has grown quickly in the last few years, and has not declined 
dramatically despite the fact that the crypto market has generally lost 
\2/3\ of its value since late 2021. The risks posed by stablecoins have 
been described in detail in two recent government reports--the report 
of the President's Working Group on Financial Markets, the Federal 
Deposit Insurance Corporation and the Office of the Comptroller of the 
Currency,\23\ and the report of the FSOC previously noted.\24\ I will 
therefore not summarize those risks, nor the inadequacies of present 
regulation which are also described in those reports. Both those 
reports call on Congress to pass new legislation to provide specific 
authority to regulate stablecoins.
---------------------------------------------------------------------------
    \23\ President's Working Group on Financial Markets, the Federal 
Deposit Insurance Corporation, and the Office of the Comptroller of the 
Currency, Report on Stablecoins (Nov. 1, 2021), https://
home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf 
(hereinafter the ``PWG Report'').
    \24\ FSOC report, supra at note 3.
---------------------------------------------------------------------------
    I believe we need to bring stablecoin activity within the Federal 
regulatory perimeter rather than attempt to keep it outside. I believe 
that is a better way to oversee and manage the risks that stablecoins 
pose, both to consumers and to the traditional financial system and 
financial stability generally. Limiting interconnections between crypto 
and the traditional banking sector generally, which appears to be the 
current policy of our bank regulators, may slow the growth of certain 
crypto activities, but it risks pushing the activity overseas, or to 
less-regulated or non-regulated areas of financial activity. That could 
ultimately make it harder to oversee and manage the risk. Bringing the 
activity within the regulatory perimeter is also the best way to 
realize any positive potential that stablecoins might offer. Although 
stablecoins are used mostly within the crypto sector today, they might 
have potential to improve payments in other areas.\25\
---------------------------------------------------------------------------
    \25\ In the interests of full disclosure, I note that I am a member 
of PayPal's Advisory Council on Blockchain, Crypto and Digital 
Currencies. I am testifying in my personal capacity and the views I 
express are entirely my own.
---------------------------------------------------------------------------
    Professors Jackson of Harvard Law School and Dan Awrey of Cornell 
Law School and I wrote a paper recently outlining how such a regulatory 
framework could be created today by our financial regulators (primarily 
our banking regulators) under existing law without new legislation. 
However, our bank regulators appear reluctant or unwilling to do so 
unless given specific authority by Congress.
    Therefore, I support legislation that would create a framework for 
stablecoin regulation based on principles followed primarily in our 
regulation of banks. As long as stablecoins are used as a payment 
mechanism, and do not pay interest or a return to their holders, I 
believe it is best to regulate them as payment instruments. There need 
to be prudential requirements on the issuer, including that stablecoins 
be fully backed by reserves in the form of cash or high quality liquid 
assets as well as capital and liquidity requirements. Operational 
requirements on the stablecoin issuer are necessary as well, such as 
KYC and AML requirements, risk management standards, cybersecurity, and 
restrictions on use of customer data. There should be standards on the 
issuer's selection and oversight of decentralized blockchains on which 
stablecoins are transferred. There also need to be standards requiring 
interoperability of stablecoins and prevention of concentration of 
power, as well as limitations on certain commercial affiliations.
    The Digital Assets Policy Project at the Harvard Kennedy School, 
which I direct, held a roundtable on stablecoin regulation last 
November attended by senior leaders from government, the stablecoin 
industry, traditional financial institutions, academia and others. 
Although the event was conducted under Chatham House rules, a summary 
of the discussion and other materials, including comparisons of 
different legislative proposals on stablecoins, can be found at the 
Digital Assets Policy Project website.
    I would be happy to answer any questions. Thank you.

    The Chairman. Thank you very much, sir.
    Mr. Hall, you are recognized for 5 minutes.

   STATEMENT OF JOSEPH A. HALL, J.D., PARTNER, DAVIS POLK & 
                   WARDWELL LLP, NEW YORK, NY

    Mr. Hall. Chairman Johnson, Ranking Member Caraveo, and 
Members of the Subcommittee, I am Joe Hall, and I am a Partner 
in the law firm Davis Polk & Wardwell.
    The question of where blockchain-based digital assets fit 
in our regulatory framework frustrates businesses and continues 
to divide regulators. I believe the lack of certainty has had 
real costs in terms of consumer confidence in protection, lost 
economic activity, and unnecessary hurdles to competing with 
foreign markets. And so when I hear that blockchain technology 
has not lived up to the hype, I sometimes wonder how we would 
even know.
    At the root of the problem is a simple observation. Many 
kinds of digital assets are inherently different from the 
stocks, bonds, options, and futures that our existing 
regulatory structures were built for. Digital assets may not 
represent a claim on the revenues or assets of a business or 
look much like the agricultural products, natural resources, or 
financial commodities with prices that need to be hedged. 
Instead, digital assets might be deployed to verify a 
transaction between two strangers or to facilitate decision-
making by a dispersed network of coders or to encourage honest 
behavior in the fulfillment of an obligation.
    Because they combine functionality with easy traceability, 
one can say that digital assets are in fact different in kind 
from what preceded them. Now, our system of financial market 
regulation depends on the ability to distinguish securities 
from commodities, and so we have to determine whether digital 
assets are securities under SEC jurisdiction or commodities 
under CFTC jurisdiction. And as it turns out, it is not so 
clear. The Supreme Court says that, quote, ``When a purchaser 
is motivated by a desire to use or consume the item purchased, 
the securities laws do not apply.
    And now different Federal and state regulators, including 
the SEC and the CFTC, have taken conflicting positions on 
whether some of the most common digital assets are securities. 
And the SEC suggests market participants should consider a list 
of 50 or 60 different characteristics, none of which is 
necessarily determinative on the understanding that when their 
presence is stronger, then it is more likely that the digital 
asset is a security. And now that is not a recipe for 
predictability. It is not easy for businesses to plan and 
invest when the answer to their most pressing question is, 
maybe what you want to do is okay, but maybe it is not.
    Given this uncertainty, a couple of questions naturally 
arise. Why not just register with the SEC? And given how well-
trod the path of SEC registration is, are people who take the 
position that their digital assets are commodities simply 
behaving as scofflaws? That has not been my experience.
    The problem is, today, registering with the SEC is not a 
practical alternative. First, the obligations that attach to 
securities make it impractical to use them in everyday 
transactions, and that is because the securities framework was 
built for passive investment instruments, and virtually 
everyone who touches them is subject to extensive regulation by 
the SEC in ways that, frankly, make sense for debt and equity 
securities. This framework wasn't built to govern commercial 
activities like sending a payment. And despite the rise of 
blockchain technology over the last 10 years, the SEC has taken 
no apparent action to adapt its rulebook to facilitate 
activities involving digital assets.
    Second, even if the SEC did adapt its rules, market 
participants would continue to face insurmountable barriers to 
conducting business across state lines, and that is because 
each state regulates the sale of securities, each with its own 
registration process, and digital assets are not exempt. There 
is no coordination among states on digital assets, and 
businesses who try to register will find themselves quickly 
facing a gauntlet of 50 different state securities 
commissioners.
    If there were practical routes to registration, I am 
confident that many businesses would in fact register. But 
today, the security-or-not question means that if a digital 
asset is a security, then we regulate it out of existence or at 
least out of the United States, but if it isn't, then consumers 
lack reliable information in the protection of Federal market 
oversight.
    I don't believe it is practical to task the regulators with 
sorting this out. Our approach to financial regulation relies 
on competition, and it relies on our Federal financial 
regulators pushing against the boundaries of their 
jurisdiction. I believe that competition among the regulators 
is a feature, not a bug of our system.
    So I believe it is time to move past the tired debate over 
whether digital assets are securities under existing law. 
Congress should instead step in with a new regulatory approach 
tailored to this asset class. Concepts drawn from the Federal 
securities and commodities laws can inform our new paradigm, 
but regulators will need clear direction from Congress on how 
these precedents should apply.
    I appreciate the Committee's time today and look forward to 
answering your questions. Thank you.
    [The prepared statement of Mr. Hall follows:]

  Prepared Statement of Joseph A. Hall, J.D.,* Partner, Davis Polk & 
                       Wardwell LLP, New York, NY
---------------------------------------------------------------------------
    * I am a Partner in the law firm of Davis Polk & Wardwell LLP in 
New York City, where I began my career in 1989. As a member of the 
firm's capital markets group, I advise public and private companies, 
asset managers and financial intermediaries on transactional, corporate 
governance and securities compliance and enforcement matters. In the 
last decade my practice has focused increasingly on the intersection of 
federal securities law with cryptoassets and participants in the 
digital asset industry.
    From 2003 to 2005, I served on the staff of the Securities and 
Exchange Commission, ultimately as managing executive for policy under 
Chairman William H. Donaldson. From 1988 to 1989 I served as a law 
clerk for the Hon. Phyllis A. Kravitch of the U.S. Court of Appeals for 
the 11th Circuit in Savannah and Atlanta, Ga. I am a graduate of the 
University of North Carolina at Chapel Hill and Columbia Law School.
    Today I am presenting my own views, and not those of my firm or any 
client of the firm.
---------------------------------------------------------------------------
    Chairman Johnson, Ranking Member Caraveo, and Members of the 
Committee:

    Thank you for the privilege to speak before you today.
    My name is Joe Hall and I am a Partner in the law firm of Davis 
Polk & Wardwell, where I have practiced securities law for the last 3 
decades. Earlier in my career--a few years before anyone had heard of 
Satoshi Nakamoto--I served as a senior staff member of the Securities 
and Exchange Commission.
    The question of where blockchain-based digital assets fit into our 
regulatory framework frustrates and bewilders entrepreneurs, small 
businesses and large public companies, and continues to divide 
regulators \1\ and experts in financial services regulation.\2\ I 
believe the persistent lack of certainty and workable rules has had 
real costs in terms of consumer confidence and protection, foregone 
investment, lost economic activity, and unnecessary hurdles to our 
ability to compete with foreign markets. And so when I hear that 
blockchain technology ``hasn't lived up to the hype,'' \3\ I sometimes 
wonder how we would even know.
---------------------------------------------------------------------------
    \1\ E.g., CFTC, Statement of Commissioner Caroline D. Pham on SEC 
v. Wahi (Jul. 21, 2022), https://www.cftc.gov/PressRoom/
SpeechesTestimony/phamstatement072122.
    \2\ See generally Davis Polk & Wardwell, Client Update: Bipartisan 
crypto bills could clarify current regulatory confusion--if they tackle 
Howey (Aug. 10, 2022), https://www.davispolk.com/insights/client-
update/bipartisan-crypto-bills-could-clarify-current-regulatory-
confusion-if-they.
    \3\ E.g., 12 Examples of ``Revolutionary'' Tech That's Not Living 
up to the Hype, Forbes (Aug. 24, 2022), https://www.forbes.com/sites/
forbestechcouncil/2022/08/24/12-examples-of-revolutionary-tech-thats-
not-living-up-to-the-hype/?sh=233e56663d22.
---------------------------------------------------------------------------
    I would like to focus my remarks on a pair of questions:

   Is the regulatory environment really uncertain?

   Even if it is, why not simply go ahead and register with the 
        SEC--just to be careful?
Regulatory uncertainty is real
    I acknowledge that there are well-informed and thoughtful people 
who hold the view that claims of regulatory uncertainty are overblown 
at best,\4\ but from my perspective as a practitioner having advised 
clients on a wide range of digital asset matters, I respectfully 
disagree.
---------------------------------------------------------------------------
    \4\ See, e.g., Gary Gensler, Getting Crypto Firms to Do Their Work 
Within the Bounds of the Law, The Hill (Mar. 9, 2023), https://
thehill.com/opinion/congress-blog/3891970-getting-crypto-firms-to-do-
their-work-within-the-bounds-of-the-law/.
---------------------------------------------------------------------------
    At the root of the problem lies this simple observation: Many kinds 
of digital assets are qualitatively different from the stocks, bonds, 
options and futures that we have experience with and that our existing 
market regulatory structures were purpose-built for. These new assets 
may not represent a claim on the revenues or properties of a business, 
or look much like useful resources with fluctuating prices that 
producers, manufacturers and consumers need to hedge. Instead, digital 
assets might be deployed to verify the details of a transaction between 
two strangers, or to facilitate decisionmaking by a dispersed and ever-
changing network of coders, or to encourage honest behavior in the 
fulfillment of a bargained-for obligation. Because they combine 
inherent functionality with qualities of an easily tradable and 
storable instrument, one could say that digital assets are different in 
kind from what preceded them.\5\
---------------------------------------------------------------------------
    \5\ Elsewhere I've argued that because the digital asset class is 
far from monolithic, a variety of regulatory approaches may be needed 
to protect consumer interests and foster competition and innovation. 
Regulating Crypto: A Guide to the Unfolding Debate, Bloomberg Law (Dec. 
2022), https://www.davispolk.com/sites/default/files/2022-12/
Joe%20Hall%20-%20Bloomberg
%20Law%20-%20Regulating_Crypto.pdf. This in turn suggests the need for 
a statutory taxonomy based on the describable characteristics of major 
groupings of digital assets, rather than an approach that builds on 
generic ``investment contract'' terminology, as discussed in note 30 
below. E.g., Lee A. Schneider, Introduction: A ``Sensible'' Token 
Classification System, Chambers Global Practice Guides: Fintech 2022, 
https://drive.google.com/file/d/1v4JM8Dk4R8pi1
LvZYU4pILNlIXl1jdQ1/view.
---------------------------------------------------------------------------
    And just as digital assets are different from traditional assets, 
their trading markets--shaped by economic and business decisions made 
over time by a growing industry--are structured differently from the 
markets for traditional stocks, bonds, options and futures. For 
example, some functions that are split between intermediaries in 
traditional asset markets are often combined within a single firm in 
digital asset markets.
    As the Committee knows well, our Federal system of financial market 
regulation depends on the ability to distinguish securities from 
commodities.\6\ If a particular asset is a security, then trading of 
the asset in both the spot and derivatives markets is subject to 
comprehensive oversight by the SEC under the Federal securities laws. 
On the other hand, if the asset is a commodity, then we do not impose 
comprehensive Federal regulation over the spot market for that 
asset,\7\ but trading in the derivatives market is subject to 
comprehensive oversight by the Commodity Futures Trading Commission 
under the Federal commodities laws.
---------------------------------------------------------------------------
    \6\ As a technical matter, securities are also commodities. The 
Commodity Exchange Act definition of ``commodity'' is broad and 
encompasses securities along with substantially ``all other goods and 
articles,'' but Section 2 of that Act allocates regulatory authority 
over securities to the SEC. See 7 U.S.C.  1a(9), 2(a)(1)(A) 
(``nothing contained in this section shall . supersede or limit the 
jurisdiction at any time conferred on the Securities and Exchange 
Commission'').
    \7\ Although the CFTC does not have comprehensive regulatory 
authority over commodity spot markets, in 2010 Congress granted the 
CFTC anti-fraud, false reporting, and anti-manipulation enforcement 
authority over commodity spot markets in interstate commerce, including 
digital asset spot markets. See Section 6(c)(1) of the Commodity 
Exchange Act, 7 U.S.C.  9(1)(A); Cong. Research Svc., Crypto-Asset 
Exchanges: Current Practices and Policy Issues (Jul. 23, 2021), at 2, 
https://crsreports.congress.gov/product/pdf/IN/IN11708.
---------------------------------------------------------------------------
    If a digital asset is a security, it cannot be offered and sold 
into the public markets without Federal registration, a regulatory 
review process and a prospectus containing prescribed business, 
management and financial information. After the security has been sold 
and begins to trade in the secondary markets, virtually all 
intermediaries who touch it--exchanges, broker-dealers, clearinghouses, 
transfer agents, custodians--are themselves subject to pervasive SEC 
registration and oversight, and the issuer remains subject to ongoing 
reporting requirements. But if the digital asset is a commodity, none 
of these advance and ongoing requirements apply.
    And so--and not for the first time in the history of Federal 
financial market oversight \8\--we have to determine whether these new 
assets are securities under the jurisdiction of the SEC, or commodities 
under the jurisdiction of the CFTC.
---------------------------------------------------------------------------
    \8\ The CFTC and SEC reached an agreement in 1981 known as the 
``Shad-Johnson Jurisdictional Accord'' to resolve a dispute between the 
agencies over the regulation of single-stock and stock-index futures; 
futures on single stocks and ``narrow-based'' stock indices were 
thereafter agreed to be regulated as securities, while futures on 
``broad-based'' stock indices were to be regulated as commodity 
futures. Congress codified the accord into law in 1983. See GAO, 
Report: CFTC and SEC: Issues Related to the Shad-Johnson Jurisdictional 
Accord (2000), at 1, https://www.gao.gov/products/ggd-00-89.
---------------------------------------------------------------------------
    As it turns out, making this call is not so clear-cut.
    The point is often made that the Federal securities laws are 
flexible enough to encompass digital assets, and indeed Justice 
Thurgood Marshall once observed that ``Congress's purpose in enacting 
the securities laws was to regulate investments, in whatever form they 
are made and by whatever name they are called.'' \9\ But as Justice 
Powell pointed out a few years earlier in an opinion that Justice 
Marshall joined, ``when a purchaser is motivated by a desire to use or 
consume the item purchased . . . the securities laws do not apply.'' 
\10\
---------------------------------------------------------------------------
    \9\ Reves v. Ernst & Young, 494 U.S. 56, 60-61 (1990).
    \10\ United Housing Found., Inc. v. Forman, 421 U.S. 837, 852-853 
(1975).
---------------------------------------------------------------------------
    Determining whether a particular digital asset is a commodity and 
not a security can thus turn on its consumptive uses, and as I noted 
earlier, many digital assets offer a use case separate and apart from 
any investment appeal. Because of this, serious arguments can usually 
be made on both sides of the question of whether any widely traded 
digital asset is a security, even if some dealings in the asset share 
hallmarks of a securities transaction.
    The SEC has emphasized that the question of whether a particular 
digital asset is a security is a facts-and-circumstances determination 
\11\--and that the answer can change over time.\12\ When analyzing a 
digital asset transaction, the SEC suggests market participants should 
consider a non-exclusive list of 50 or 60 ``characteristics,'' none of 
which is ``necessarily determinative,'' on the understanding that when 
their ``presence'' is ``stronger'' it is ``more likely'' that the 
digital asset, or the transaction in which it is offered and sold, 
involves a security.
---------------------------------------------------------------------------
    \11\ See SEC, Framework for ``Investment Contract'' Analysis Of 
Digital Assets (Apr. 3, 2019), at 2, https://www.sec.gov/files/dlt-
framework.pdf (``Whether a particular digital asset at the time of its 
offer or sale satisfies the Howey test depends on the specific facts 
and circumstances.'').
    \12\ Id. at 5 and 8 (discussing considerations for ``evaluating 
whether a digital asset previously sold as a security should be 
reevaluated at the time of later offers or sales'').
---------------------------------------------------------------------------
    This is not a recipe for predictability and regulatory certainty.
    The CFTC has determined that both Bitcoin and Ether are 
commodities.\13\ The SEC agrees that Bitcoin, the Ur-digital asset, is 
not a security, though unfortunately it has never published its 
analysis and so we don't know how the SEC weighed the dozens of 
relevant characteristics in arriving at this conclusion.\14\ In the 
past, SEC officials have indicated that Ether was not a security,\15\ 
though today there is some question whether the agency continues to 
hold this view.\16\
---------------------------------------------------------------------------
    \13\ See, e.g., CFTC, In re Coinflip, Inc., No. 15-29 (Sept. 17, 
2015), https://www.cftc.gov/sites/default/files/idc/groups/public/
@lrenforcementactions/documents/legalpleading/enfcoinflipr
order09172015.pdf (``Bitcoin and other virtual currencies are . . . 
properly defined as commodities.''); CFTC, In Case You Missed It: 
Chairman Tarbert Comments on Cryptocurrency Regulation at Yahoo! 
Finance All Markets Summit, Press Release Number 8051-19 (Oct. 10, 
2019), https://www.cftc.gov/PressRoom/PressReleases/8051-19 (``It is my 
view as Chairman of the CFTC that ether is a commodity, and therefore 
it will be regulated under the CEA.'').
    \14\ E.g., Letter from Brent J. Fields, Assoc. Dir., Div. of Inv. 
Mgt., SEC, to Jacob E. Comer (Oct. 1, 2019), https://www.sec.gov/
Archives/edgar/data/1776589/999999999719007180/filename1.pdf (``[W]e 
disagree with your conclusion that bitcoin is a security. We think that 
conclusion is incorrect under both the reasoning of SEC v. Howey and 
the framework that the staff applies in analyzing digital assets.'').
    \15\ William Hinman, Dir., Div. of Corp. Fin., SEC, Remarks at the 
Yahoo Finance All Markets Summit: Digital Asset Transactions: When 
Howey Met Gary (Plastic) (Jun. 14, 2018), https://www.sec.gov/news/
speech/speech-hinman-061418 (``And putting aside the fundraising that 
accompanied the creation of Ether, based on my understanding of the 
present state of Ether, the Ethereum network and its decentralized 
structure, current offers and sales of Ether are not securities 
transactions.'').
    \16\ See, e.g., Paul Kieran and Vicky Ge, Ether's New ``Staking'' 
Model Could Draw SEC Attention, Wall St. J. (Sept. 15, 2022), https://
www.wsj.com/articles/ethers-new-staking-model-could-draw-sec-attention-
11663266224.
---------------------------------------------------------------------------
    The SEC has never affirmatively stated that any other popularly 
traded digital asset is not a security, and senior officials have often 
expressed the view that the ``vast majority'' of digital assets are in 
fact securities.\17\ Of course, with more than 23,000 digital assets 
estimated to have been created,\18\ but only a handful making up the 
bulk of the market's value,\19\ two propositions can simultaneously be 
true: (1) the vast majority of digital assets are securities, but (2) 
the digital assets that people most commonly use, trade and hold are 
not.
---------------------------------------------------------------------------
    \17\ See, e.g., SEC, Testimony of Chair Gary Gensler Before the 
United States House of Representatives Committee on Financial Services 
(Apr. 18, 2023), https://www.sec.gov/news/testimony/gensler-testimony-
house-financial-services-041823.
    \18\ See CoinMarketCap, https://coinmarketcap.com (last visited 
Apr. 25, 2023).
    \19\ Id. According to CoinMarketCap, on April 25, 2023 the market 
capitalization of all traded digital assets was in excess of $1 
trillion. Bitcoin accounted for approximately 45% of this total, and 
the ten digital assets with the largest market capitalizations 
(including Bitcoin) accounted for approximately 85%.
---------------------------------------------------------------------------
    Perhaps an understatement, but it's not easy for businesses to plan 
and invest when the answer to their most pressing question is: ``Maybe 
what you want to do is OK, but maybe it's not.''
SEC registration is not currently practical
    Given the uncertainty over whether any particular digital asset is 
a security, and the risk of severe and costly consequences for the 
organization that created it, any investor who buys and resells it 
within a short period of time, and any entity who facilitates trading, 
custodying or clearing it,\20\ a couple of questions naturally arise:
---------------------------------------------------------------------------
    \20\ These consequences include SEC fines and sanctions for conduct 
(including that which is neither fraudulent nor manipulative) in 
violation of any registration requirement under the Federal securities 
laws, as well as private causes of action for participation in an 
unregistered public offering of securities. See, e.g., 15 U.S.C.  77k 
,77l 78ff. Willful violations of the Federal securities laws are also 
subject to criminal penalties. See, e.g., 15 U.S.C.  77x, 78ff(a).

---------------------------------------------------------------------------
   Why not just register with the SEC?

   Sure, it might take longer and be more expensive, but isn't 
        it just completing some paperwork and paying a fee? After all, 
        people have been registering with the SEC for nearly a century!

    And given how well-trod the path of SEC registration is, are people 
who take the position that their digital assets are commodities simply 
scofflaws trying to evade compliance?
    That has not been my experience.
    Let me pause to acknowledge the obvious: there has been plenty of 
fraud in the digital asset market. This does not come as a surprise; 
there are always bad actors in the financial sector, and no asset class 
in our financial markets is exempt from fraud, manipulation and 
misrepresentation--indeed, this is one of the primary reasons we have 
financial services regulation and strong regulators like the CFTC and 
SEC to begin with. But just as we do not impute the conduct of Bernie 
Madoff to all asset managers, so we should not impute the conduct of 
Sam Bankman-Fried to all participants in the digital asset industry.
    The problem is that simply registering with the SEC in order to 
avoid the potential risk that the regulator will later say that your 
digital asset is a security is not, today, a practical alternative. 
There are two principal reasons.
    First, the regulatory obligations that attach to transactions in 
securities make it impractical to use them for everyday commercial 
purposes--as a means of payment or transmission of value, or for uses 
like peer-to-peer lending, file storage or gaming. This is because 
secondary-market transactions in securities occur within a framework in 
which intermediaries who trade or facilitate trading in securities,\21\ 
clear transactions in securities, effect transfers of securities or 
custody securities for third parties, are subject to extensive 
regulation and supervision by the SEC and self-regulatory organizations 
under SEC oversight. This framework was not built to govern simple 
commercial activities like a consumer's sending a payment with a widely 
available medium of exchange.\22\
---------------------------------------------------------------------------
    \21\ The SEC recently reopened for public comment a proposal to 
require exchange registration when ``the activities of any combination 
of actors constitute, maintain, or provide, together, a market place or 
facilities for bringing together buyers and sellers for securities.'' 
See SEC, Supplemental Information and Reopening of Comment Period for 
Amendments to Exchange Act Rule 3b-16 Regarding the Definition of 
``Exchange,'' Rel. No. 34-97309 (Apr. 14, 2023), at 29, https://
www.sec.gov/rules/proposed/2023/34-97309.pdf. For a discussion of some 
of the interpretive questions this could raise in the digital asset 
marketplace, see Statement of Hester M. Peirce, Comm'r, SEC, Rendering 
Innovation Kaput: Statement on Amending the Definition of Exchange 
(Apr. 14, 2023), https://www.sec.gov/news/statement/peirce-rendering-
inovation-2023-04-12.
    \22\ My colleague Zach Zweihorn describes the consequences of this 
framework for the digital asset markets in testimony today before the 
Financial Services Committee. See Testimony of Zachary J. Zweihorn 
Before the United States House of Representatives Committee on 
Financial Services, Subcommittee on Digital Assets, Financial 
Technology, and Inclusion (Apr. 27, 2023), https://www.davispolk.com/
sites/default/files/2023-04/written-statement-zachary-zweihorn.
pdf.
---------------------------------------------------------------------------
    But despite our experience with blockchain technology over the past 
decade, the SEC has taken little apparent action--no rule proposal, no 
concept release--to adapt its rulebook to facilitate secondary-market 
activities involving digital assets.\23\ Indeed, the SEC has not 
broached questions as basic as whether a blockchain would itself 
somehow need to be registered as a securities clearinghouse.\24\
---------------------------------------------------------------------------
    \23\ And far from seeking to avoid regulation, industry 
participants have repeatedly sought SEC engagement and guidance, 
including calling on the SEC for rulemaking. E.g., Letter from Paul 
Grewal, Chief Legal Officer, Coinbase Global Inc., to Vanessa 
Countryman, Sec'y, SEC, Petition for Rulemaking-Digital Asset 
Securities Regulation (Jul. 21, 2022), https://www.sec.gov/rules/
petitions/2022/petn4-789.pdf.
    \24\ Congress has given the SEC broad authority under Section 28 of 
the Securities Act of 1933, 15 U.S.C.  77z-3, and Section 36 of the 
Securities Exchange Act of 1934, 15 U.S.C.  78m, to tailor the Federal 
securities laws to transactions in digital asset securities upon a 
finding that doing so is consistent with the public interest and the 
protection of investors.
---------------------------------------------------------------------------
    I have a sense as to why the SEC may not have acted, and I 
certainly do not believe it is because the agency has been ignoring the 
issues or somehow favors enforcement over rulemaking--this agency never 
hesitates to use all available tools in its kit.
    Instead, it would be extremely difficult--some would say 
impermissible \25\--for the SEC to architect a regulatory framework for 
a new industry without express Congressional authority. And, as we know 
from past efforts to introduce significant market structure 
changes,\26\ the sort of effort that would be required could rapidly 
become all-consuming for an agency that already has many important 
priorities on its plate.
---------------------------------------------------------------------------
    \25\ It is easy to predict challenges to such an administrative 
effort based on the ``major questions'' doctrine. See West Virginia v. 
EPA, 142 S. Ct. 2587, 2609 (2022) (holding that an agency cannot bring 
about a major policy absent `` `clear Congressional authorization' for 
the authority it claims'' (quoting Utility Air Reg. Grp. v. EPA, 573 
U.S. 302, 324 (2014)); Alabama Ass'n of Realtors v. Dep't of Health & 
Hum. Servs., 141 S. Ct. 2485, 2489 (2021) (per curiam) (counseling 
courts against accepting an agency's interpretation if it would result 
in a sweeping claim of new authority, even if the statutory text is 
ambiguous or the agency's interpretation is plausible); Utility Air, 
573 U.S. at 324 (an agency may not ``discover'' ``unheralded power'' in 
a ``long extant-statute'' that it has never relied on to regulate a 
business in the manner it seeks in a new, major policy).
    \26\ For an example, the Committee could revisit the contentious 
history behind the 2005 adoption of Regulation NMS, which introduced 
changes to the national market system for equities. See, e.g., Comment 
Letters of Rep. Peter King, Member of Congress, et al. (Jan. 25, 2005), 
https://www.sec.gov/rules/proposed/s71004/s71004-727.pdf; Rep. Paul E. 
Kanjorski, Member of Congress (Jan. 25, 2005), https://www.sec.gov/
rules/proposed/s71004/s71004-730.pdf; Reps. Deborah Pryce and Eric 
Cantor, Members of Congress (Feb. 7, 2005), https://www.sec.gov/rules/
proposed/s71004/s71004-775.pdf.
---------------------------------------------------------------------------
    Second, even if the SEC did adapt the rulebook to facilitate 
secondary-market activities involving digital assets, market 
participants would continue to face near-insurmountable barriers to 
conducting business across state lines. This is because each state has 
``blue sky'' laws governing the offer and sale of securities, each with 
its own registration, review and approval process.\27\ Unlike the 
disclosure-based Federal regime, the state process is ``merit based,'' 
with each regulator exercising broad power to forbid the offer and sale 
of securities within its state's borders if it concludes that a 
security is too speculative, too expensive or otherwise not suitable 
for the public.
---------------------------------------------------------------------------
    \27\ Although it might be possible for the SEC to preempt blue sky 
laws through rulemaking, this would be unprecedented and controversial. 
The SEC could use its authority under Section 18(b)(3) of the 
Securities Act of 1933, 15 U.S.C.  77r(b)(3), in order to provide that 
any purchaser of a digital asset security sold in a transaction meeting 
specified conditions, which could include the availability of SEC-
prescribed disclosure, is a ``qualified purchaser'' of that security, 
which would result in it being a ``covered security'' and therefore 
exempt from blue sky registration requirements (though not from state 
anti-fraud authority). The SEC would be required to conclude that the 
qualified-purchaser designation for these digital asset securities was 
consistent with the public interest and the protection of investors.
---------------------------------------------------------------------------
    The blue sky process varies widely from state to state and can be 
slow and inscrutable. There is no coordination among the states on an 
approach to standardize or harmonize the review and approval of digital 
asset securities, and Congress has already recognized the practical 
problems that even well-administered blue sky laws pose for businesses 
who, having successfully negotiated the SEC registration process, 
nevertheless find themselves hamstrung by the gauntlet of 50 state 
securities commissions. Indeed, this is why in 1996 Congress preempted 
blue sky registration requirements for any security listed on the New 
York Stock Exchange or Nasdaq Stock Market.\28\
---------------------------------------------------------------------------
    \28\ National Securities Markets Improvement Act of 1996, Pub. L. 
No. 104-290, 110 Stat. 3416.
---------------------------------------------------------------------------
    And so if there were practical routes and predictable consequences 
to registration, then I am highly confident that many responsible 
businesses would eagerly register despite the well-grounded position 
that their activities are not subject to regulation under Federal 
securities law. But the net impact of the two consequences I have 
described means that today, treating a digital asset as a security 
generally means that it loses all ability to trade and function.
Consumers and businesses need Congress to weigh in
    I believe consumers want and deserve better comparative information 
about digital assets, given their complexity and variety, than they do 
about traditional agricultural, mineral and industrial commodities. 
This suggests that our historic approach to the regulation of commodity 
markets is no more appropriate to the digital asset class than our 
historic approach to the regulation of securities markets.
    But responsible businesses are effectively compelled to rely on the 
position that their digital assets are commodities and not securities, 
even though this yields a situation in which consumers and the market 
as a whole lack consistent information about specific digital assets, 
and intermediaries in the spot market are not subject to sensible, 
fairly applied standards for handling customer assets and orders. It is 
not wrong to wonder whether standards like these, enforced by an 
energetic regulator like the CFTC or SEC, could have prevented the FTX 
debacle.
    And so I have described a quandary which yields a status quo that 
is not acceptable. The binary ``security-or-not'' question means that 
if a digital asset is a security then it is regulated out of existence, 
but if it isn't a security then consumers lack both reliable 
information and the protection of Federal market oversight.\29\
---------------------------------------------------------------------------
    \29\ See Financial Stability Oversight Council, Report on Digital 
Asset Financial Stability Risks and Regulation (2022), at 112-114, 
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-
2022.pdf.
---------------------------------------------------------------------------
    How then to address this quandary?
    I do not believe tasking the regulators with sorting it out among 
themselves is a practical solution. The genius behind our Federal 
approach to financial services regulation is competition. We want our 
Federal financial services regulators to push at the boundaries of 
their jurisdiction; to guard their turf. That is how we make sure 
things don't fall through the cracks in our massive and endlessly 
changing economy. A unified financial services regulator may be fine 
for a less dynamic economy, but not for ours: Competition among 
regulators is a feature of our system, not a bug. Hoping the regulators 
can resolve these thorny jurisdictional issues among themselves is 
therefore not the answer.
    It's my belief that we should move past the tired debate over 
whether digital assets are securities under existing law. Instead, 
Congress should step in with a new regulatory approach tailored to this 
asset class, with a clear allocation of authority over both the primary 
and secondary markets. Although concepts drawn from both Federal 
commodities and securities law can inform a new regulatory paradigm, 
the appropriate regulators will need clear direction from Congress on 
how these precedents should apply.\30\ For example, Congress may direct 
the regulators not to impose structural changes on the market simply 
because functional activities in the securities or commodities markets 
have historically been carried out with different organizational forms. 
Or Congress may direct the regulators not to impose financial statement 
requirements on a digital asset creator whose digital asset does not 
represent a debt or equity interest in the creator itself.
---------------------------------------------------------------------------
    \30\ I believe any new legislation should avoid terminology drawn 
from investment-contract jurisprudence developed under SEC v. W.J. 
Howey Co., 328 U.S. 293 (1946) and succeeding cases. The ``Howey 
test,'' as it is known, is essential to the SEC's regulatory and 
enforcement program because it enables the agency to police activities 
that are squarely within the zone of Federal securities law, regardless 
of what they are called or how they are structured. This is illustrated 
by the facts of the Howey case itself, in which Mr. Howey offered his 
investors passive equity-like returns from a citrus fruit business, 
albeit not in the form of common stock--and was therefore judged to 
have sold an ``investment contract,'' which is a security. Of course 
the oranges, tangerines and grapefruits produced by the business were 
not themselves securities.
    Or were they? The seemingly obvious distinction between a 
transaction (the investment contract) and a valuable product or object 
of the transaction (the orange) has proven exceedingly difficult to pin 
down in the digital asset context, as others have pointed out. E.g., 
Jai Massari, Why Cryptoassets Are Not Securities, Harvard L. Sch. Forum 
on Corp. Governance (Dec. 6, 2022), https://corpgov.law.harvard.edu/
2022/12/06/why-cryptoassets-are-not-securities/, in which the author 
discusses Lewis Rinaudo Cohen, Gregory Strong, Freeman Lewin and Sarah 
Chen, The Ineluctable Modality of Securities Law: Why Fungible Crypto 
Assets Are Not Securities (discussion draft Nov. 10, 2022), https://
dlxlaw.com/wp-content/uploads/2022/11/The-Ineluctable-Modality-of-
Securities-Law-DLx-Law-Discussion-Draft-Nov.-10-2022.pdf.
    Part of the difficulty is attributable to encrustations from nearly 
80 years of wielding Howey in all manner of factual circumstances, many 
involving questionable conduct or even outright fraud. As the maxim 
goes, bad facts make bad law. Writing on a clean slate and steering 
clear of the term ``investment contract'' and hoary concepts like 
``investment of money,'' ``common enterprise,'' ``expectation of 
profits'' and ``entrepreneurial or managerial efforts of others,'' 
Congress has the opportunity to liberate the digital asset industry 
once and for all from worn-out and obfuscating analogies to 
chinchillas, whiskey warehouse receipts, New York City co-ops--and yes, 
Mr. Howey's oranges.
---------------------------------------------------------------------------
    All of these decisions can and should be on the table when Congress 
decides to act.
    I appreciate the Committee's time today and look forward to 
addressing any questions you may have. Thank you.

    The Chairman. Excellent job, panelists. Thank you very 
much. And for the families of Mrs. Rubin and Mr. Davis who are 
around it, at the conclusion of the hearing if you would like 
to get a picture with your parents up here with Ranking Member 
Caraveo and I or without me, just with her, we can certainly 
make that happen as a commemorative photo.
    I will recognize myself for 5 minutes.
    Mr. Davis, I want to start with you. Well, I think every 
panelist talked about a lack of certainty impairing the 
marketplace. They talked about it in different ways, but I 
think they all hit on it. And so in your testimony, you 
mentioned that the CFTC and the SEC have had some disagreements 
about classification. And we need look no further than Ether, 
where we have had the CFTC routinely state that it is a 
commodity. The SEC agreed for a time, but now we have Chair 
Gensler, who has hinted around the margins that perhaps the 
change in their validation status might change their 
classification as a commodity.
    So, Mr. Davis, tell us, those kinds of conflicting 
statements, what impact do they have on the market and product 
development?
    Mr. Davis. Well, as someone who practices in this space, it 
is very difficult to give advice to clients who come to us, 
very diligent citizens who very much want to follow the law. 
They are very interested in technology, they are fascinated 
with the possibilities that technology creates, and they are 
not lawyers, and they come to us and they say, ``Look, we want 
to follow the law, we want to do what is right, tell us how to 
do it.'' And so when you have those conflicting statements 
regarding any type of a digital asset, it creates uncertainty.
    Now, as I noted in my testimony, I think the case for 
Bitcoin and Ether being non-securities is strongest, right? The 
CFTC has been saying with respect to Bitcoin for almost 10 
years now that it is a commodity, and with respect to Ether, 
not nearly as long but for at least 5 years. And the other 
thing that has happened with Bitcoin and Ether is both of those 
products had been trading on CFTC-regulated markets for years 
now.
    And so what I like to tell people is, look, Bitcoin and 
Ether are the clearest cases for something not being a 
security. And as has been alluded to, those two digital assets 
accounted for roughly \2/3\ of the market capitalization. And 
so even if you just square away the categorization of simply 
those two digital assets, you have given clarity to \2/3\ of 
the market.
    The Chairman. Yes, very well said. And, Mr. Hall, I didn't 
hear it in your verbal testimony, but in your written 
testimony, you talked about a non-exclusive list of 50 to 60 
characteristics that the SEC can rely upon, none of which is 
necessarily determinative, and they may result in regulatory 
outcomes which are not reproducible, predictable, or certain. I 
think I know what each of those words mean, but I guess I would 
like a little more meat on the bone, sir. What do they mean in 
this context, and why is that problematic?
    Mr. Davis. Sure. Thank you. Look, regulators and the 
private bar or the regulated need to be able to look at the 
facts of their asset, they need to be able to look at the facts 
of their activities, and they need to be able to draw a 
conclusion about whether their proposed activity is subject to 
regulation. If so, how is it subject to regulation? So we have 
to speak a common language, and a common language that needs to 
have rules that we all understand, that we all understand the 
consequences of it. If the question is, is this digital asset a 
security--and that is the basic question that we face in any 
digital asset activity. If the answer is here is a list of 50 
factors that you need to consider and none of them is 
determinative and so, therefore, no matter how many you tote up 
in that list, ultimately, you may or may not have a security, 
you are just asking people to make a judgment call. And if the 
regulator weighs those factors in one way and the regulated 
party weighs it in a different way, we will just come up with a 
different conclusion.
    And so I said in my testimony that the SEC's test does not 
produce or does not lead to reproducible results. I have to be 
able to look at the facts and come to the same conclusion about 
whether an asset is a security as the regulator will do. And, 
it is not helped by the fact that the one digital asset that 
the SEC seems to be pretty clear is not a security, which is 
Bitcoin, the SEC has frankly never showed us how they weighed 
those 50 factors on Bitcoin alone. So we end up stabbing in the 
dark and not surprisingly coming to conclusions that the 
regulator may disagree with.
    The Chairman. Very good. It looks like it is time for 
Congress to get our act together to help with some of these 
clarities. Thank you very much.
    With that, I would--well, before we recognize the Ranking 
Member, the order is Mr. Thompson will go after Ms. Caraveo and 
then, Mr. Davis, you are on deck thereafter.
    The Ranking Member is recognized.
    Ms. Caraveo. Thank you again, Mr. Chairman, and thank you 
to the panel for your testimony.
    Colorado actually just recently became the first state 
where residents have the opportunity to pay their taxes in 
cryptocurrency, so I especially appreciate the opportunity to 
discuss digital assets because as more and more Americans 
invest, it is important, as I said earlier, that we recognize 
these regulatory gaps so that we continue to spur innovation, 
but also protect customers.
    So, Mr. Massad, under your leadership, the CFTC began this 
conversation regarding virtual currencies and potential CFTC 
oversight as early as 2014. And the agency determined that 
virtual currencies can be commodities and began to take 
enforcement actions. Could you discuss the process through 
which those initial determinations were made by the Commission 
and the resources that were necessary to support that work?
    Mr. Massad. Certainly. Thank you for the question. The 
definition of commodity obviously doesn't contemplate digital 
assets, but it does refer to language that was included several 
decades ago that said all services, rights, and interests in 
which contracts for future delivery are presently or in the 
future dealt in. Market participants were coming into my office 
saying we are thinking about doing a Bitcoin swap or a Bitcoin 
future. What do you think? And we thought about it, and we 
said, we think that means they are commodities because they 
were talking about contracts for future delivery. So that is 
the action we took in a settlement first with an entity called 
CoinFlip, and then another one with Terra exchange, and that 
was then built on. But it is important then to keep that 
concept in mind that it was because market participants were 
contemplating or engaging in derivatives on those commodities. 
Now, there are arguments that it should even be interpreted 
more broadly, but that is where we started.
    As far as the resources question, at that time, that was a 
fairly small part of our activity. But now the market is huge. 
And neither agency really has the resources it needs to police 
this market, given what we have seen particularly from the 
recent failures is evidence of failure to protect customer 
assets, fraud and manipulation, conflicts of interest, lack of 
governance, and so forth.
    Ms. Caraveo. You really are leading directly into my second 
question is what is the potential effect of Congress passing 
legislation to address those gaps but not providing additional 
funding or resources?
    Mr. Massad. Well, I think that would be a real mistake. 
Now, you are going to have to give the agencies funding if you 
expect them to really police this market. Now, I have noted 
that if you create an SRO, that could impose a lot of the 
burden of the cost on the industry, just the way we do with all 
our SROs. But clearly, this is a huge market, and it will 
require additional resources.
    Ms. Caraveo. Great. In the last year, the CFTC has brought 
a number of major enforcement actions against major players in 
the digital asset industry, including FTX, and recent actions 
taken against Binance. While we are here today discussing 
regulatory gaps, many of these enforcement actions really seem 
to be the result of fraud or misrepresentation. For example, in 
the months following the FTX collapse, many suggestions were 
made by Commissioners and stakeholders on how to prevent 
similar future collapses.
    So for anyone on the panel, in addition to providing 
authority to regulate swap digital commodity markets, what 
other authorities or disclosures should be considered providing 
for the CFTC? And that is open to anyone.
    Mr. Massad. Well, again, as I have said, what I would like 
to see is a way to provide authority and resources to raise the 
level of investor protection without rewriting the law just 
yet. We may want to create new definitions. There are lots of 
them that have been proposed in various proposals of Congress, 
including the Chairman's and others. And those have a lot to be 
said for them. But they are all different if you look at them. 
And the danger is, I think we don't have enough information 
even about the tokens. We don't have a disclosure regime for 
the tokens to know whether, in fact, there is an enterprise 
with people involved who are doing things to enhance the value 
of that token, which is the basis for whether it is a security. 
So I don't know how anyone can say that is not a security when 
you don't even have the information about the token. So again, 
my proposal is let's elevate investor protection first. Let's 
get a little more disclosure, and then come back and revisit 
how we should define this.
    Ms. Caraveo. Thank you. With that, I yield back my time.
    The Chairman. Ladies and gentlemen, the legend of Howard, 
Pennsylvania, the Chairman of the full Committee, Mr. GT 
Thompson.

 OPENING STATEMENT OF HON. GLENN THOMPSON, A REPRESENTATIVE IN 
                   CONGRESS FROM PENNSYLVANIA

    Mr. Thompson. That was a good walk-on. Couldn't you put 
some music to that, too? That would be even better. Yes, 
Howard, Pennsylvania, 600 people, one red light.
    Hey, good afternoon, everybody, and thank you to all the 
witnesses that are here today for lending your expertise to 
this incredibly important hearing. And thank you to the 
Chairman and Ranking Member for your leadership and your 
commitment, your passion in this area. And to all the folks, 
all of our Members who are serving on this Subcommittee, there 
was a great demand to serve on this Subcommittee this Congress 
in no small part because of the opportunity to work on digital 
asset issues, a critical issue going forward.
    And I am excited about the work of the Subcommittee. I want 
to thank you all for your willingness to serve on this 
Subcommittee. I think that there is a great potential for 
digital assets to provide significant value to the American 
public, Web3.0, not just in monetary terms, but also as tools 
to solve real-world problems, as have been reflected on that 
today.
    But, digital asset developers, users, institutions need 
clear, thoughtful rules of the road to create the solutions. As 
Chairman Johnson said, we are working hand-in-glove with the 
House Financial Services Committee to craft legislation that 
will do just that. This is perhaps unusual for Congress, but it 
is the right thing to do to make good public policy. No one can 
solve this issue alone. It will take the cooperation of 
committees and regulators to build a workable framework to 
oversee digital assets. And I am so thankful for all the 
witnesses for sharing their expertise.
    I will start my questions with Mrs. Rubin. I would like to 
further explore with you the practical uses of digital assets 
and blockchain technology. In your testimony, you talk about 
how several organizations are using the Hedera network to 
improve their businesses. Can you elaborate on a project or two 
who utilize your network to accomplish daily or commercial 
activities?
    Mrs. Rubin. Thank you, Mr. Chairman, for this question. I 
included a few use cases in the testimony. One was DOVU, which 
allows farmers to tokenize the work that they are doing. So 
let's say they have a regular crop and they plant additional 
flowers around the edge that has different environmental 
benefits and carbon benefits. They can tokenize that and sell 
it as an offset. If they decide to drill instead of tilling, 
they can tokenize that changed farming technique and make money 
on it. It is really fascinating. Another one that I thought was 
fun was Tune.FM. And it is kind of like Spotify but on the 
blockchain, so it will allows artists to get paid immediately. 
Like, as soon as someone is listening to it, then that tiny 
amount of money goes to them. They don't have to like wait. 
They don't have to prove there are a certain number of 
listeners. It is clearly on the blockchain, this number of 
people listen to your song and this is how much you get per 
amount of time that the song was played.
    Another that really moved me was with AVC Global and 
medical value chain. And what it does is it allows--it uses 
Hedera to authenticate pharmaceuticals so you can track and 
make sure that that pharmaceutical is legitimate. It turns out 
that counterfeit pharmaceuticals, it doesn't just cost 
companies money when they are used. It endangers people's lives 
because these pharmaceuticals are not real. So these are just 
amazing use cases that we haven't even begun to explore.
    Mr. Thompson. Well, thank you for that.
    Ms. Maniar, as you know, there has been much debate in the 
U.S. on whether digital assets are considered commodities or 
securities. We heard that discussion today. Some Federal 
regulators have claimed that all digital assets except Bitcoin 
are securities. If all digital assets were deemed securities 
tomorrow, how would that affect the customers of FalconX?
    Ms. Maniar. Thank you for your question, Mr. Chairman. It 
would certainly mean that our customers would be disrupted. 
They would have an asset that they are holding that they would 
have no clear avenue to be able to transfer, which really gets 
at what the heart of the technology is for, which is the ease 
of transfer and being able to control the terms in which you do 
it in a disintermediated fashion. It would be extremely 
disruptive to their businesses.
    Mr. Thompson. Yes. Well, thank you to each of you for your 
expertise, your testimony, your oral and your written 
testimony, is much appreciated.
    Mr. Chairman, I yield back.
    The Chairman. We will have Davis, Langworthy, Budzinski. 
Mr. Davis, you are recognized for 5 minutes.
    Mr. Davis of North Carolina. Thank you so much, Mr. 
Chairman, and to our Ranking Member. And thank you to the 
witnesses who are here. It is always good to see--I think I 
would concur that the music was absent. We need that.
    But to all the witnesses again, thank you for joining us 
today.
    Most people in my district in eastern North Carolina very 
likely have never heard, I would imagine, of this, CFTC or the 
SEC. I am just keeping it real today. Most Americans probably 
haven't either. But more and more Americans have heard of 
cryptocurrencies and have either purchased them themselves or 
have raised concerns about how they will affect the traditional 
economic markets. So my question is, what would you tell people 
in my district why the CFTC or the SEC matters to them or how 
these agencies would impact them on a day-to-day basis?
    Mr. Massad. Thank you for the question, Congressman. It is 
estimated that about 17 percent of Americans have purchased 
cryptocurrency. A lot of those--and that is also scaled toward 
younger generations, and it is scaled somewhat toward lower-
income people. And a lot of those people have suffered 
significant losses. A lot of them bought after prices had gone 
up quite a bit, and then prices fell dramatically, and we had 
failures of some big firms. A lot of them lost retirement 
savings, college savings, other assets very important to them.
    Having a regulatory framework is no guarantee against 
failure, but it can certainly help prevent it. And particularly 
because the types of things that have come out as to what the 
failed institutions did in terms of using customer assets 
improperly, using them through affiliates that had conflicts of 
interest, failures to prevent fraud and manipulation, I think 
those are the kinds of things that a good regulatory framework 
can prevent.
    My own view is we shouldn't be basing policy on a judgment 
about the merits of cryptocurrencies. They are obviously out 
there, and people are investing. But we do need to set up a 
framework that gives people some assurance that there is 
integrity and transparency and protection of customer assets.
    Mr. Davis of North Carolina. There has been more and more 
talk about officials and those in the public about a central 
bank digital currency in the U.S.. Can you speak then on if you 
have heard from the Federal Government pursuing this policy? 
And, if so, what would that mean for, again, the average 
consumer and how they conduct business?
    Mr. Massad. Well, I think the Federal Reserve is engaged in 
research on a CBDC, but I think that is years away at best, 5, 
10 years away if we decide to have one. It is not clear that we 
need one. There are a lot of policy issues both ways. 
Cryptocurrencies are here today, and there are stablecoins, 
which effectively--the value of those are tied to the dollar, 
and those could be significant in payments. But again, we lack 
a regulatory framework for those as well.
    So my own view is we need to create the proper regulatory 
frameworks for the unbacked crypto tokens, as well as a proper 
regulatory framework for stablecoins. We need to be pursuing 
research on CBDCs and how to improve our payment systems, but I 
see those things as happening on a longer track.
    Mr. Davis of North Carolina. Yes. Well, I would just end 
today by saying I have heard so much from residents back home. 
And at the same time, there appears to be so much of an 
opportunity here to educate the public, common, everyday people 
on this whole topic and why we are here. And I can't say 
enough. When I think about fraud, scams that are taking place, 
the complexity of this, I can't say enough to our leadership, 
to our Ranking Member and above to our Chairman for having us 
here today and also for the Financial Services. I yield back.
    The Chairman. Thank you, Mr. Davis. The lineup is Mr. 
Langworthy, Ms. Budzinski, and then Mr. Rouzer unless somebody 
else comes back in.
    Mr. Langworthy from New York, you are recognized for 5 
minutes.
    Mr. Langworthy. Thank you, Mr. Chairman, Ranking Member.
    Mrs. Rubin, last week, the European Parliament passed their 
crypto asset legislative framework known as MiCA (Markets in 
Crypto-assets). I heard from several crypto companies that, due 
to the lack of regulatory clarity, that many firms are choosing 
to domicile their companies in jurisdictions that do have 
clarity. In addition, a recent study published by the Developer 
Report reported that the U.S. is continuing to lose its lead in 
blockchain going from 40 percent of the developers globally to 
29 percent. Mrs. Rubin, are you seeing this innovation flight 
as well? If you are seeing that, how can we reverse that?
    Mrs. Rubin. Thank you, Mr. Langworthy, for that question. 
Yes, the flight that you are discussing is real, and it is 
happening. People are fleeing to jurisdictions with regulatory 
clarity because they want to know that their businesses are 
operating within the law and that they can operate fully and 
that they can make investments that will stand. So it is kind 
of this shocking situation where the United States, which is 
usually at the forefront of every technology, is now standing 
back and allowing other jurisdictions to run ahead. And this is 
not just bad for the businesses themselves, but it is a bad for 
the American consumers because we won't have access to these 
transformative technologies.
    Hedera was created by U.S. veterans, people who were 
teaching at the Air Force Academy. Like we launched Hedera here 
in the United States as a global platform. Our firm desires to 
make this be a platform from here, but it is very scary and 
fearful to be working in an environment without regulatory 
clarity, so the number one thing that you could do is help 
provide that regulatory clarity.
    Mr. Langworthy. Thank you very much.
    And, Ms. Maniar, pivoting here to China, we know that 
adversaries like China and Russia, they are exploring ways to 
undermine the U.S. dollar and our position as the world leader 
in finance. As you know, markets have thrived under U.S. 
leadership as our values of economic freedom, capital 
formation, and consumer protection. They have shaped the global 
economy. Many are calling crypto the next wave of financial 
innovation. So what are the risks if the U.S. stands idly by 
while our adversaries take the lead in this area in the future 
of finance?
    Ms. Maniar. Thank you, Congressman, for your question. I 
certainly agree. I think it is incredibly important that we 
remain relevant and a leader in developing what this technology 
looks like. If the technology is developed offshore and we are 
going to see U.S. market participants not being interested in 
engaging in the technology, but they are going to receive what 
is developed overseas. And the U.S. has always been a leader in 
technology and financial markets, as you pointed out, and we 
really look to see that we continue to do that for this asset 
class as well.
    Mr. Langworthy. Okay. Would any of the other panelists wish 
to weigh in on that question?
    Mr. Massad. Sure, I think it is very important for the U.S. 
to be focused on the technology of payments generally. I think 
we are still a ways away from the dollar really being 
threatened. The dollar's dominance is related, as you know, to 
a number of factors, the strength of our economy, the rule of 
law, the stability of our government. But I think the 
technology of payments is important. And, it is possible that 
countries could move away from using the dollar as a payment 
mechanism, even if they continue to invest in our Treasury 
securities. So that is why I have supported research not just 
on CBDCs, but improving payments in other ways, a stablecoin 
framework, and so forth.
    Mr. Langworthy. Thank you very much. And I yield back, Mr. 
Chairman.
    The Chairman. Thank you very much. We will go Budzinski and 
then Nunn--I am sorry, Rose, Mr. Rose, and then we will go Ms. 
Salinas. All right. You are recognized for 5 minutes.
    Ms. Budzinski. Thank you, Mr. Chairman, and thank you, 
Ranking Member. And thank you to the panelists. I really 
appreciate your expertise and your testimony as it relates to 
this topic.
    I share a lot of the sentiment that Congressman Davis just 
shared with you as it relates to his district and kind of from 
the consumer end-user perspective and constituents that might 
not all be as up to speed on the financial services sector and 
all the ins and outs of cryptocurrency. And so as I think 
everyone is looking for new opportunities to take advantage of 
making a little bit more money, but we want to make sure that 
consumers are also obviously protected.
    Just to kind of piggyback a little bit on what Congressman 
Davis was asking is could you give some ideas of like maybe 
some better communication that we might be able to have with 
consumers around the risks that they are taking on in this new 
industry but that I think settling some of that risk and 
getting people more comfortable with it also could have them 
make more calculated decisions that financially could benefit 
them. I think communication is really key and something that we 
haven't really been able to tackle in a good way. So I am just 
curious what you might think about that.
    Mr. Massad. Well, sure, I would be happy to address that. I 
mean, I think one of the challenges is that I think even with 
people who have gotten into this space investing, they may be 
aware that the crypto assets themselves have risk because they 
are volatile. But what they don't appreciate sometimes is these 
trading platforms have a lot of risk because they are 
unregulated. And that is exemplified by, again, the studies 
that show how much wash trading there are where basically 
someone is trading with themselves to inflate the price or 
inflate the volume. And there are holders of Bitcoin, the so-
called whales, people who hold a lot of Bitcoin who potentially 
can easily manipulate that price.
    The same is true with protection of customer assets. They 
don't realize that their customer assets are not protected in 
the same way that they are if you buy a share of stock or if 
you deposit money in a bank. There is no insurance scheme, of 
course, and there is not even what we have for securities where 
we at least have a regime on brokers or even in commodity 
futures, we have better protections in bankruptcy. There is no 
protections in bankruptcy for consumers. I think if we had a 
stronger regulatory regime, part of that would also be an 
education campaign so people are aware of these risks.
    Ms. Budzinski. That is a great idea. Any other thoughts?
    Mr. Davis. I am most familiar with the CFTC, but there are 
robust consumer protection mechanisms under CFTC rules and 
regulations. And, CFTC does cover a significant retail base. 
There are retail foreign exchange transactions that are subject 
to CFTC, and there is also leveraged retail commodity 
transactions. So if I buy Bitcoin and I want to leverage up and 
buy five times or six times or seven times Bitcoin, that is a 
product that is currently regulated by the CFTC.
    And so, that agency has already been wrestling with that 
question about, ``Okay, we know we are dealing with retail, we 
know it is a product that has some differences than other 
products they may be dealing with. How do we get proper 
disclosures? What types of requirements do we give to the 
exchanges or the people who operate in this space so we limit 
or avoid wash trading?'' And I think one of the benefits of a 
CFTC style of regulation is that the exchange itself obtains 
responsibilities for implementing core principles and having an 
effective rulebook that is reviewed by the CFTC and agreed upon 
by the CFTC that they have to follow and impose and enforce. 
And that can include those types of provisions, customer 
disclosures that are common sense that can be understood by the 
regular retail investor, understanding of the risks that you 
take. This wash training problem that the former Chairman has 
talked about, I mean, the CFTC has brought enforcement actions 
against wash trading in some of the biggest digital assets out 
there. So I think a lot of the ingredients are there to be able 
to give your retail investor the type of information and 
protection and information so they can make an informed choice.
    Ms. Budzinski. Thank you. I will ask one really quick 
question, too. And your testimony has touched on a lot of this, 
but if we could just kind of go back to a new regulatory 
framework for digital assets, if you could just topline go 
through for me really quick what are the guiding principles do 
you believe should be at the core of any regulation? I know you 
have talked about this a little bit but if we could review it 
again one more time.
    Mr. Massad. Sure, I think they are very similar to the 
principles we have in our securities and derivatives markets 
today, the protection of customer assets, systems to prevent 
fraud and manipulation, governance measures, including fitness 
of directors, regular reporting, both publicly pre- and post-
trade transparency, as well as reporting to regulators. Risk 
management, cybersecurity, and that is a big one, because there 
could be a hack of a platform that has consequential collateral 
damage to other parts of our financial system. And also just 
making sure they do a good job on know-your-customer and money 
laundering because that is important for preventing illicit 
activity.
    Ms. Budzinski. Thank you. Thank you. Thank you, Mr. 
Chairman. I yield back.
    The Chairman. Let's go to Mr. Rose and then Ms. Salinas.
    Mr. Rose. Thank you, Chairman Johnson and Ranking Member 
Caraveo, for holding this hearing, and thank you to our 
witnesses for being with us today and taking time.
    Mr. Massad, given the uncertainty created by the 
regulators, I think it is important that Congress helps clarify 
the line between digital assets that are commodities and those 
that are securities. However, it seems there is a third bucket 
of digital assets like digital collectibles, so-called non-
fungible tokens I guess we might say, or digital sports cards 
that are unique and not like traditional CFTC-regulated 
commodity products. How would you suggest Congress approach 
this group of digital assets?
    Mr. Massad. It is an excellent question, Congressman. I 
have focused on the fungible tokens, as have many of the pieces 
of legislation. You are right that there are issues on the non-
fungible tokens, too. I would consider those separately. You 
could consider having the CFPB issue rules on that because they 
don't create quite the same issues that we have with kind of 
the securities/commodities world. But I think it is important 
that we do create a framework, and generally, those are sort of 
traded on different platforms. They are not the coin bases of 
the world so much. They are other platforms. So that would be 
my view, but I agree with you that that is an area that needs 
examination also.
    Mr. Rose. Thank you. An article published in Forbes late 
last year and written by George Calhoun, who is the 
quantitative finance program director at the Stevens Institute 
of Technology, noted that, according to a report by the 
European Union Institute for Security Studies, the Chinese 
Government has leveraged the traceability and immutability 
offered by blockchain technology in the field of policing, has 
explored the use of blockchain for the dissemination of 
propaganda, and is already using blockchain to gather evidence 
against dissidents. As Congress considers clarifying the 
regulatory scope of the SEC and CFTC's jurisdiction over 
digital assets, I would like to ask each of you if you feel 
that Congress should use this opportunity to consider 
guardrails to ensure that bad actors like the Chinese Communist 
Party can't utilize digital assets that are developed and/or 
supported in the United States to assist in repression of their 
citizens? And I will let any of you that would like to comment.
    Mr. Davis. I will just say I think everyone recognizes that 
privacy is something that we all value, that it is important to 
us. It is part of our culture. And certainly, when I think in 
terms of CFTC regulation and the way that the CFTC regulates, 
you think about core principles, right? So you can imagine a 
world where one of the core principles an exchange or a 
regulated entity has to wrestle with and figure out how to 
implement is how to have proper privacy protections for the way 
it operates and the way the digital assets that trade under it 
operate. And so I think it is an important concept, and I think 
it is one that we are perfectly capable of looking into and 
figuring out and make sure that we are properly factoring into 
the way that this industry continues to develop.
    Ms. Maniar. I would say certainly. I would reference back 
to my earlier point, too, about the fact that this is why it is 
crucial for the U.S. to be leading on the development of this 
technology so that we can set the standards for what it should 
look like.
    Mrs. Rubin. I would agree, yes. We absolutely need to take 
this opportunity to put up guardrails against repression. And I 
would add only that the U.S. leadership vacuum gives China an 
opportunity for influence, and we need to fill it.
    Mr. Massad. And I would just add that I think that is 
another reason why it is important for us to be a leader in 
regulation, not just obviously of cryptocurrencies but of 
things like stablecoins and looking into a CBDC, not that we 
should decide to have one. We may not need one. But we need to 
be at the table as some of these issues are talked about so 
that we make sure payment systems develop in ways that are 
consistent with western values, protection of privacy.
    Mr. Hall. And I would just add that the lack of a clear 
regulatory framework at the moment means that we don't have the 
kind of corporate and institutional investment in this sector 
that would allow our country and entrepreneurs and brilliant 
people in our country to be developing and exploring the kinds 
of use-cases that, frankly, other governments, including 
repressive governments, are doing right now. So I think we are 
hamstringing ourselves by not providing clear rules of the road 
for American businesses to try to solve problems.
    Mr. Rose. Thank you. I see my time has expired. I yield 
back, Chairman Johnson.
    The Chairman. Ms. Salinas will be recognized for 5 minutes, 
and next up on deck would be Mr. Rouzer.
    Ms. Salinas. Thank you, Chairman Johnson and Ranking Member 
Caraveo, for this really important discussion today.
    As the country grapples with questions on how to regulate 
cryptocurrency and what role it plays in our financial markets 
or otherwise, the states have really had to step up in the 
interim to try to protect consumers and identify some paths 
forward. My own State of Oregon was the first state to give 
control of digital assets to a fiduciary. And currently, Oregon 
law requires companies that transfer digital currency from one 
person to another to be licensed as money transmitters. 
However, Oregon law does not have any requirement on companies 
that only take cash and turn it into digital currency.
    And this is for anyone on the panel who wishes to respond. 
From your individual perspectives, does licensing money 
transmitters help protect consumers, and what are the 
shortfalls in doing so?
    Mr. Massad. Certainly, the money transmitter laws do help 
protect consumers, but I think for this sector, for this 
industry, they are simply woefully inadequate as a regulatory 
framework. They basically impose very minimal net worth 
requirements, very minimal security like posted bond 
requirements, and some of them have permitted investment 
requirements. They don't create the kind of framework that we 
need to regulate this sector and protect the public.
    It is kind of like, if you imagine that after the 1929 
crash, Roosevelt had said, you know what, I think the states 
can take care of this, we don't need a securities law. The blue 
sky laws we had would not have been adequate. So the same is 
true here. Now, some states have tried to build on that, and 
that is great. I encourage that kind of activity.
    And one of the things that should be done at the state 
level is to clarify, essentially, property rights and transfers 
of digital assets, the Uniform Commercial Code issues, and some 
states are working on that. That is extremely important for 
states to take up.
    Ms. Salinas. Thank you. Does anyone else wish to respond? 
All right. I will move on.
    So, Mr. Massad, during your tenure as chair of the CFTC, 
were there instances in which the CFTC worked with the SEC to 
actually resolve regulatory disagreements, and what were the 
results in those instances? And would it be helpful to 
establish a clear process by which Federal agencies regulating 
digital assets could actually work in tandem?
    Mr. Massad. Yes, we did. Mary Jo White was the chair then, 
and we worked very closely together on the implementation of 
the Dodd-Frank requirements for over-the-counter swaps. And 
that was critical because both agencies did have 
responsibilities. And that type of cooperation dates back to 
the founding of the SEC. The Shad-Johnson accord was one of the 
main examples. It doesn't come easily sometimes. It does depend 
sometimes on people's personalities and the time and so forth. 
But, I think if Congress sets an expectation that they expect 
the agencies to do that, that it can happen, and clearly it is 
needed in this space.
    Ms. Salinas. Thank you. Mr. Davis, despite their limited 
authorities, the CFTC has brought at least 70 enforcement 
actions involving digital asset commodities, as you note in 
your testimony. Are there some common themes within those 
enforcement actions?
    Mr. Davis. I mean, I remember one person telling me, it 
doesn't matter the asset class, fraud and schemes to get people 
separated from their money are always the same right?
    Ms. Salinas. Right.
    Mr. Davis. And so you have the same types of fraudulent 
schemes that you get with other asset classes. You have a 
classic pump-and-dump scheme, right? You tout the benefits of a 
particular cryptocurrency, you didn't tell people that you own 
it, you pump up the price, and then you sell out from 
underneath it. As the former Chairman has referred to, wash 
sales is active in a host of markets where you are acting on 
both sides of the ledger to beef up what appears to be the 
activity in a particular asset, right? And so that the types of 
activities that are fraudulent aren't unique to digital assets, 
right, but they are also occurring in the digital asset market. 
And to the CFTC's credit, during my tenure there, there was an 
active engagement to learn more about how the digital asset 
space operated, how those markets work, how fraudsters were 
taking the tools that they would use elsewhere and how they 
were applying it to digital assets. And so I think the CFTC has 
really done an excellent job through its enforcement actions 
and other activities that it is doing to really get a better 
understanding of how these underlying digital asset markets 
work because it is very important for them with the role that 
they have with futures and derivatives to understand how those 
spot markets work.
    Ms. Salinas. Thank you all for your time today. I yield 
back.
    The Chairman. Mr. Rouzer is recognized for 5 minutes, and 
he will be followed thereafter by Mr. Jackson.
    Mr. Rouzer. Well, thank you, Mr. Chairman. I appreciate our 
panelists being here today. This is an incredibly important 
topic.
    My experience is Congress either over-prescribes or under-
prescribes. It is kind of hard to get it right. So my question 
to each of you, I will give you an opportunity to share with 
the Subcommittee, what does over-regulation look like? What are 
you worried that we are going to do? I always like to know what 
not to do first, that way it helps get me on the right path, 
whoever wants to start.
    Mr. Massad. I am happy to answer that. I am actually 
worried that you will try too hard to clarify this issue about 
what is a security, what is a commodity. I respect the intent. 
I respect the desire to do so. But when you look at the 
legislation out there, there has been several proposals made. 
They all do it differently. They all will provoke a lot of 
questions. I can find problems and loopholes in each one of 
them. I think any of those things are going to lead to a lot of 
questions of interpretation, potential litigation. I just don't 
think we know enough in part it is because we don't have enough 
disclosure about these tokens, and that is why I am kind of 
suggesting something incremental. Require the two agencies to 
set some standards for the platforms that elevate investor 
protection, that provide a little more disclosure, and then 
come back and look at how should we really define this 
permanently. That is the essence of what I am suggesting.
    Mr. Hall. I would be concerned about that approach. I 
understand some of the practical reasons why former Chairman 
Massad is proposing it, but I would be concerned about an 
approach where Congress simply acted on Bitcoin and Ether and 
didn't address the other 23,000 assets that are out there. And 
I don't think that there is a way for Congress, frankly, to 
avoid this very difficult question of drawing the line between 
securities and commodities because the agencies are at 
loggerheads right now, and the SEC, I believe, is at 
loggerheads with the industry right now about what these things 
are. And so from my perspective, as somebody who advises a lot 
of different clients in the industry, I think we do need 
Congress to come in and give us some basic line drawing, some 
basic boxes that we can put these different assets in.
    Now, I don't think all digital assets are the same. I think 
that they are endlessly mutable, but I think that there are 
some basic categories that we could begin to work with. I have 
read a lot of the legislation and the drafts that have been out 
there so far. I am not entirely sure that any of them kind of 
gets this question just right yet. But I think that hard work 
does need to be done by Congress. And I, unfortunately, don't 
have a lot of confidence that if it is left to the regulators 
to sort out amongst themselves, that we will be in any 
different situation from the situation that we are in today, 
which I don't believe is tenable for the industry.
    Mr. Massad. Can I just clarify? I am not suggesting that we 
act only on Bitcoin or Ether. What I was suggesting was that 
Congress pass a law which mandates that any platform trading 
Bitcoin or Ether be subject to these principles, but that would 
be for everything that trades. That is just a definitional way 
of defining which platforms you want. There is no platform out 
there of any relevance that is not trading Bitcoin or Ether. 
They are 70 percent of the market, and often, trading is in 
pairs. So you are going to capture the whole market, and you 
are going to set standards that then apply to all of the 
tokens. The fact is 23,000 are not listed. If you take the four 
largest exchanges, they list a total of about 400. And what is 
quite interesting, actually, is they don't list the same 
securities. So if it is so clear to them--or the same tokens, I 
should say. If it is so clear to them that they are only 
listing commodities, why are they all different?
    Mr. Rouzer. I got 22 seconds real quick.
    Mrs. Rubin. I would briefly add that one thing that 
Congress could do wrong is to think about regulating the 
technology. Instead, think about regulating the activity, and 
that is what we are seeing in other jurisdictions around the 
world.
    Mr. Rouzer. Yes, ma'am?
    Ms. Maniar. I would just add that this is a very 
entrepreneurial space, so I would like to see principles-based 
regulation that allows that innovation to continue to grow.
    Mr. Davis. I would say don't let the perfect be the enemy 
of the good. Adding better guardrails about the line between 
securities and commodities will greatly enhance the ability of 
us to give advice and for businesses to know what to do.
    Mr. Rouzer. You all are incredible, 5 seconds left, 
amazing.
    Mr. Chairman, I yield back.
    The Chairman. And there is a lot of good stuff there at the 
end, really, really good stuff.
    All right. We will go Mr. Jackson, and that will be 
followed by Mr. Nunn. Mr. Jackson, you are recognized for 5 
minutes.
    Mr. Jackson of Illinois. Thank you, Mr. Johnson. Thank you 
for your participation today.
    I think to follow up on my colleague's question on defining 
this as the commodity versus the stock, I am very familiar with 
it. But in simple layman's term for those that are watching us, 
stock is a piece of ownership in the actual corporation, and 
this commodity can be an asset before it has actually been 
delivered, evolved, or even planted. So in your honest and 
humble opinion, shall I say, what would you like to see it 
described as? I do not believe the regulators know your 
business better than you, and I am concerned that we are behind 
the ball as to--we can see an implosion. We saw something with 
a hard asset stock if you will in the SVB that were the assets 
and the balance sheet and swollen, then contracted from 
macroeconomic circumstances beyond their control, raising of 
the interest rates. They couldn't rein it in, and I take it 
most of you up there are old enough like me to know of long-
term capital and other things. So where is this? Is it a stock 
as an asset or is it a commodity or an asset to be realized in 
the future that is in its creation? And that is open to the 
panel.
    Mr. Davis. Now, I will go to my testimony. If you look at 
what the Commissions themselves have said, right, not a 
Chairman, not a Commissioner, if you look at what the CFTC as a 
Commission have said and what the SEC as a Commission have 
said, the CFTC has identified seven of the top traded digital 
assets as securities, and that is 76 percent of the market. The 
Securities and Exchange Commission has identified one of the 
top 15 digital assets as a security, and that is two percent of 
the market, right? And so you can look at those seven that the 
CFTC have identified through enforcement actions, and you can 
see some characteristics about them. They tend to be 
decentralized, people tend to use them for consumptive purpose 
and not for an investment purpose, so there are some 
characteristics there.
    And so, I agree that each digital asset is a bit different, 
but certainly, the actions at the Commission level with the 
most heavily traded digital assets is at least giving us some 
additional clarity--there can always be more; there definitely 
needs to be more--but they have given us some level of clarity 
about where some of the lines might be between security and 
commodity.
    And the other thing that I would note is that, over time, 
one would expect that a digital asset becomes more of a 
commodity than a security because, in theory, with most digital 
assets the idea it is going to be widely accepted, widely used, 
widely dispersed, those are much more the characteristics of a 
commodity than a security.
    Mr. Hall. And, Mr. Jackson, I think you have put your 
finger right on it. An asset that represents a claim on the 
assets or revenues or properties of a business or a business 
enterprise, that is a security. And even if it is issued on a 
blockchain, it should be regulated like a security. And so if I 
were going to draw lines and create boxes for these things, I 
would put those in a category by themselves.
    But then I would go to the things like Mr. Davis is talking 
about and say, okay, this particular asset doesn't represent a 
claim on a business or a promise from a business. This is an 
asset that I can use to send a payment or an asset that I can 
use to purchase file storage space or something like that.
    I do believe that users need good information about it, and 
this goes back to one of the questions that came earlier about 
why should a retail person, why should an ordinary person 
trading these things, why should they have that information? I 
think it is different from a commodity. People have an 
intuitive idea about what an orange is, but they are not 
necessarily going to have an intuitive idea about what a 
digital asset is. So I do think we should have standards and 
information that needs to be provided and back that up with 
liability for the person providing that information.
    And that is where a digital asset is just different from 
what we customarily think of as a security and what we 
customarily think of as a commodity. And again, the reason why 
I think Congress needs to come in and begin to draw these lines 
and begin to say how we want these assets to be regulated 
rather than this tired debate over whether it is a commodity or 
a security.
    Mr. Jackson of Illinois. And let me ask just one follow-up 
on that, and please take it, it is an opaque industry, so at 
what point do you declare this asset, this commodity to be 
decentralized?
    Mr. Hall. Well, I wouldn't have decentralization as being 
all that important because I think whether the asset is 
decentralized or not, consumers still need the information 
about it. And I also think that we still want to have strong 
market oversight and market regulation. So I personally would 
not focus on decentralization because I think we need to be 
able to cover decentralized assets as well.
    Mr. Massad. The decentralized point also goes to the fact 
that we don't have enough information about a lot of these 
tokens. We don't even know sometimes is there a foundation 
behind it? Are there people with administrative keys? And that 
is why, again, I am pushing for more information, more 
disclosure, more consumer protection first, and then come back 
and define exactly where the lines are drawn because we are 
talking about thousands and thousands of digital assets.
    Mr. Jackson of Illinois. Thank you. And I yield my time 
back, Mr. Johnson.
    The Chairman. Very good. Thank you, Mr. Jackson.
    We will go to the gentleman from Ohio. Mr. Nunn, you are 
recognized for 5 minutes. Thereafter, we will go to Mr. 
Molinaro.
    Mr. Nunn. Thank you, Mr. Chairman.
    And I want to compliment both the chairs of the digital 
asset on the Financial Services side, as well as the 
Agriculture Committee for working so well on this, both 
bipartisan, bicameral, and we are going to get into--for those 
folks at home playing the government bingo card on acronyms 
here, an SEC and a CFTC. Now under the SEC, we are talking 
about all things that are securities. Under the CFTC, we are 
talking about all things that would be commodities. In my home 
State of Iowa, we know commodities very well.
    But we do hear from Chair Gensler on the Financial Services 
Committee that all tokens are securities. And we heard here in 
the Agriculture Committee not only a month ago from the CFTC's 
Chairman Behnam who said pretty much the opposite, that all 
commodities are where they should be.
    So if we can, I do think, Mr. Hall, with respect, it is 
important that we provide some guidance for those who are in 
this space.
    Mr. Massad, you are former CFTC Chairman. Simple question, 
right? Ethereum, commodity, security?
    Mr. Massad. I don't have enough information. I think the 
concern about Ether, Ethereum was in the merge where they 
changed the system of validating transactions, there seemed to 
be a foundation, a group of people involved in that. Is that 
under the Howey Test, a common enterprise from which if I hold 
Ethereum, I am expecting to receive a return? I don't know. And 
that is the problem with all these. I don't have enough 
information.
    Mr. Nunn. And I think that there are a lot of Americans who 
are in the same situation. What is the challenge of having 
these conflicting messages out there coming from both the CFTC 
and the SEC?
    Mr. Massad. Well, it confuses people, obviously. And I 
think, obviously, we are in a stalemate where we are not 
improving investor protection because of it.
    Mr. Nunn. Right.
    Mr. Massad. And the risk is, if we try to rewrite it 
without having enough information, not only could we get it 
wrong, but there could be unintended consequences in our 
broader markets. That is why, again, I am not against coming up 
with a new definition. I am just saying take a little more 
time.
    Mr. Nunn. Well, let me push back on that just a moment.
    Mr. Massad. Sure.
    Mr. Nunn. I think Mrs. Rubin actually had a very good 
argument here from Hedera, which is an Air Force guy, Air Force 
creation. Compliments, by the way. Industries do want clarity 
in the law. And I am going to go to Ms. Maniar on this. We have 
seen the last few days a couple of other countries and other 
regions have moved out in this space. The European Union has 
moved forward with the markets and crypto asset, kind of a 
space in between the CFTC and SEC called MiCA. The United 
Kingdom is finalizing its own digital asset regulatory 
proposal.
    What I think was highlighted here is we don't necessarily 
want to regulate the commodity. We want to provide the 
framework, right? So could you speak to us from FalconX's 
perspective where you guys are seeing innovations thrive when 
there is a structure and where innovation is being stymied 
because there is no structure?
    Ms. Maniar. Absolutely. Thank you for your question. 
Certainty in any industry gives the ability for those who want 
to get involved, who want to build, who want to grow, want to 
create businesses to do so, right? And having no certainty 
makes it very hard to do. When you employ people, you can't 
employ people with the assumption that your company might be 
here today but may not be here tomorrow. You have an obligation 
to those employees. That certainty is necessary in the U.S. 
right now, and we are seeing that the jurisdictions where there 
is certainty--and I want to make clear, where there is 
certainty, not lack of regulation--is getting the benefit of 
those companies being founded there.
    Mr. Nunn. You are the first and only--if I have this 
correct--CFTC-registered cryptocurrency focus where you are a 
swap dealer, which is a great thing. How is the CFTC as a 
principle-based regulator in comparison to the SEC in this form 
of regulation? Do they have it right?
    Ms. Maniar. Yes, we have had a very robust and effective 
dialogue with the CFTC. It is nuanced. They have been very 
interested in learning about our space and understanding our 
business. There is certainly not an easy regulator, and that is 
okay. That is not what we are looking for. Nobody in the 
industry is looking for that, right? So they have been very 
eager to learn about our business, eager to learn about the 
space, eager to understand how the existing framework that they 
have is one that we have been able to comply with. And that has 
made it incredibly easy for us to be able to build in that 
space because of that certainty.
    Mr. Nunn. So let's go back to our bingo card. On the SEC 
and the CFTC, let's take this away from the unelected 
bureaucrats and put it squarely in the court where I have \3/4\ 
million bosses back home. What can we be doing in Congress to 
make this space a better frame for businesses like yours?
    Ms. Maniar. Certainty, taking Congressional action to 
create some certainty in this space so that we can keep doing 
this here in the U.S.
    Mr. Nunn. I am going to push you one deeper. What does 
certainty look like to you?
    Ms. Maniar. To me, it looks like a system where there are 
rules of the road, there is a framework that you know that you 
can operate in, that you know will be the same tomorrow so that 
you can invest in this space and build a company in this space.
    Mr. Nunn. Nothing worse than D.C. whiplash. I get it. Copy.
    Mr. Chairman, thank you very much. I yield back my time.
    The Chairman. As much as it may pain me to say it, I think 
Mr. Nunn hit it out of the park with his description of the 
need to close the gap here, well said.
    Mr. Molinaro, you are recognized for 5 minutes.
    Mr. Molinaro. Is that now the standard, Mr. Chairman? Are 
you are going to grade our lines of questioning?
    The Chairman. Yes, sure. Yes. You are either better than 
Nunn or not quite as good as Nunn.
    Mr. Molinaro. Well, bingo. Mr. Chairman, thank you.
    I am excited to be in Congress in this moment in time. And 
I have said this many times. I represent a rural part of 
upstate New York. Digital assets provide I think one of the 
greatest opportunities to harness innovation but also to 
provide access to capital in places and to people where the 
traditional banking institutions frankly, I don't want to say 
fail them but are outside of their reach at times.
    And so, interestingly enough, right, this is an entire 
industry that is seeking to be regulated to a degree. The 
golden question for us, what are the guiderails that we think 
are appropriate to both harness but also support the innovation 
while establishing the basic tenets of regulation to protect 
people and the industry? And that is the challenge, right? What 
is the right mix?
    Many of my colleagues often speak about American regulation 
if we were to impose, how would that compare to China or the EU 
or Great Britain? I often go back to local because, right now, 
absent Federal action, states are filling the field. And that 
worries me to a degree. But for better or worse, New York State 
has been one of the states that has taken sort of initial 
action to develop a regulatory structure. There are good points 
and bad points in the state's regulatory structure.
    And I think only because, Mr. Hall, you are somewhat a New 
Yorker--are you a New Yorker? I thought I would start with you. 
And perhaps just for our benefit, could you just speak to what 
perhaps are the strengths and weaknesses of a New York system 
and, if you would like, some of those other tenets that other 
states have imposed?
    Mr. Hall. Sure, and thank you very much. New York has an 
excellent regulator. DFS is an excellent regulator. They were 
out well ahead of the Federal Government and well ahead of many 
other governments in terms of coming up with a bit license back 
in, now 2016 or 2017, that a lot of our clients have obtained, 
and I think it works quite well for what it does. I will say 
that I am aware of businesses that have deliberately avoided 
serving New York customers because of it.
    But look, I think with anything that operates over the 
internet, honestly, while there is a huge room for the state 
regulators to play, particularly in anti-fraud enforcement and 
payment services, money transmission, and things like that, I 
think when you have a business in the United States that is 
operating a storefront on the internet, we need Federal 
legislation. We need legislation that is going to apply 
consistently across the country and not have a situation where 
somebody who is a New York resident, maybe using a VPN to get 
around firewalls so that they can trade with somebody who maybe 
hasn't obtained that----
    Mr. Molinaro. So I agree with you. The question that I have 
is can we, should we have a system that has--obviously not--I 
mean, not obviously, but perhaps not Federal supremacy, but 
rather sort of the dual banking model that exists now, Fed 
guiderails, state structure as well or----
    Mr. Hall. Yes, I think we should, and I think you have to 
look at different kinds of digital assets in order to see where 
that works and where that is actually an improvement. For 
example, if you are a stablecoin issuer, I think that you ought 
to be able to elect whether to have a Federal charter or a 
state charter. I think there is definitely room for state 
regulation like that.
    Mr. Molinaro. Okay. So one of the challenges in creating 
the structure for digital assets is that, as we understand, 
many tokens vary widely in function and underlying value. In 
New York, there is a trust that offers what essentially is 
tokenized gold. It is a digital asset that has value. It is 
pinned to real allocated underlying gold bars in London vault, 
which was of interest to me, not ETFs or futures. So purchasing 
the token is equivalent of buying an ounce of physical gold.
    To any of you, perhaps could you speak to the tenets that 
would help in balancing a regulatory structure that is clear 
and defined but also flexible enough to consider the actual 
underlying value of tokens? Anyone jump in my last 30 seconds. 
But I heard the Chairman say he would give you 20 extra.
    Mr. Davis. So, I mean, CFTC background, the CFTC deals with 
those types of things, right, where you have an underlying 
commodity, then you do something on top of it, right? The way 
you do the something-on-top-of-it impacts from a CFTC 
perspective under current law how it is regulated, right? I 
think the same principle applies, right? When you are engaging 
in that type of asset, you want the same type of protections, 
and so you need a regime that allows you to define that asset 
in a way that people can understand and then you know what 
regulatory regime applies to it.
    Mr. Molinaro. Well, my time----
    Ms. Maniar. If I may just add----
    Mr. Molinaro. I am not sure. Mr. Chairman? Okay. Go ahead.
    Ms. Maniar. Very quickly. This is where the principles 
versus prescriptive method I think really comes in. It allows 
the principles to apply to the technology without restricting 
what the technology can do.
    Mr. Molinaro. Thank you. And, Mr. Chairman, I appreciate--
not for your benefit, but the leadership of this Subcommittee 
and the relationship with Financial Services. This is truly an 
exciting time if this country embraces the innovation. Thanks.
    The Chairman. Thank you.
    If the Ranking Member has any closing comments, we will 
turn to her at this time.
    Ms. Caraveo. Thank you again, Mr. Chairman, and thank you 
to the panel for really what was a fascinating and enlightening 
discussion.
    I think it has been very clear, there has been a lot of 
evolution since the start of Bitcoin in 2009. There is 
volatility in part because of this lack of a Federal regulatory 
regime, and it has caused harm to customers because we haven't 
had appropriate regulation and oversight. Since 2014, the CFTC 
has played a role and should continue to play a role to ensure 
the safety, soundness, and orderly operation of these markets, 
but it is clear that Congress needs to enact appropriate 
legislative solutions.
    First, we need to address this regulatory gap that exists 
in digital commodity spot markets. Second, we need strong 
customer protections that involve disclosures that are clear 
and material to the products in which customers are investing. 
And third, any legislative solution cannot succeed without 
providing these agencies with the sufficient funding resources 
that they need.
    I think this is a little bit of a simplistic summary, and 
no doubt there is going to need to be many, complicated 
decisions as part of a legislative solution that are going to 
take significant effort and focus and additional conversations, 
but I think that this is a great start for this Committee, and 
I appreciate the Majority's convening of the hearing today.
    Thank you so much, once again, for your expertise and your 
valuable insights, and I look forward to future conversations. 
Thank you, Mr. Chairman, and I yield back.
    The Chairman. Very well said, Ms. Caraveo. I agree about 
the importance of closing the regulatory gap. You said that 
very well. The importance of disclosure being a part of that, 
you are exactly right.
    And I just want to thank the panelists. Each of you brought 
forth some real wisdom today. I agree, we can't let the perfect 
be the enemy of good. I agree that principles-based regulation 
will allow innovation to flourish. We certainly don't want to 
stifle the marketplace as we work to protect consumers.
    Mr. Hall, though, I think you really nailed it in your 
testimony. You mentioned that the lack of certainty, which is 
in no small part Congress' fault, has had real costs in 
consumer confidence and protection. It has caused foregone 
investment, lost economic activity, and it has reduced our 
ability to compete with foreign markets.
    This is why we have to do our work, ladies and gentlemen. 
It will not be easy. There will be bickering over the contours 
of what actual legislation will look like. But I think the time 
is ripe for us to find something that strikes the right 
balance, and I look forward to doing this in a bipartisan and 
bi-subcommittee way. And I think we are headed in the right 
direction.
    With that, the record of this hearing will be open for 10 
days as Members and our panelists are able to submit additional 
information. And unless anyone has anything else for the good 
of the order, this Subcommittee will stand adjourned.
    [Whereupon, at 3:45 p.m., the Subcommittee was adjourned.]