[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
NEXT GENERATION INFRASTRUCTURE:
HOW TOKENIZATION OF REAL-WORLD ASSETS
WILL FACILITATE EFFICIENT MARKETS
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HEARING
BEFORE THE
SUBCOMMITTEE ON DIGITAL ASSETS,
FINANCIAL TECHNOLOGY,
AND INCLUSION
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
JUNE 5, 2024
__________
Serial No. 118-94
Printed for the use of the Committee on Financial Services
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
56-521 PDF WASHINGTON : 2026
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HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRENCH HILL, Arkansas, Vice MAXINE WATERS, California, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma SYLVIA R. GARCIA, Texas, Vice
PETE SESSIONS, Texas Ranking Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
TOM EMMER, Minnesota EMANUEL CLEAVER, Missouri
BARRY LOUDERMILK, Georgia JAMES A. HIMES, Connecticut
ALEXANDER X. MOONEY, West Virginia BILL FOSTER, Illinois
WARREN DAVIDSON, Ohio JOYCE BEATTY, Ohio
JOHN W. ROSE, Tennessee JUAN VARGAS, California
BRYAN STEIL, Wisconsin JOSH GOTTHEIMER, New Jersey
WILLIAM R. TIMMONS, IV, South VICENTE GONZALEZ, Texas
Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DANIEL MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW R. GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska BRITTANY PETTERSEN, Colorado
MICHAEL LAWLER, New York
ZACHARY NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDREW OGLES, Tennessee
Matthew Hoffmann, Staff Director
------
SUBCOMMITTEE ON DIGITAL ASSETS, FINANCIAL TECHNOLOGY AND INCLUSION
FRENCH HILL, Arkansas, Chairman
WARREN DAVIDSON, Ohio, Vice STEPHEN F. LYNCH, Massachusetts,
Chairman Ranking Member
FRANK D. LUCAS, Oklahoma JOSH GOTTHEIMER, New Jersey, Vice
TOM EMMER, Minnesota Ranking Member
JOHN W. ROSE, Tennessee BILL FOSTER, Illinois
BRYAN STEIL, Wisconsin RITCHIE TORRES, New York
WILLIAM R. TIMMONS, IV, South BRAD SHERMAN, California
Carolina AL GREEN, Texas
BYRON DONALDS, Florida SEAN CASTEN, Illinois
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
ERIN HOUCHIN, Indiana
C O N T E N T S
----------
Wednesday, June 5, 2024
OPENING STATEMENTS
Page
Hon. French Hill, Chairman of the Subcommittee on Digital Assets,
Financial Technology and Inclusion, a U.S. Representative from
Arkansas....................................................... 1
Hon. Stephen F. Lynch, Ranking Member of the Subcommittee on
Digital Assets, Financial Technology and Inclusion, a U.S.
Representative from Massachusetts.............................. 3
WITNESSES
Ms. Lilya Tessler, Partner, Sidley Austin LLP.................... 4
Prepared Statement........................................... 7
Mr. Robert Morgan, Chief Executive Officer, USDF Consortium...... 16
Prepared Statement........................................... 18
Ms. Nadine Chakar, Global Head of DTCC Digital Assets, Depository
Trust and Clearing Corporation................................. 33
Prepared Statement........................................... 35
Mr. Carlos Domingo, Co-Founder and CEO, Securitize............... 41
Prepared Statement........................................... 43
Professor Hilary Allen, Professor of Law, American University
Washington College of Law...................................... 49
Prepared Statement........................................... 51
APPENDIX
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Hon. Maxine Waters:
American Bankers Association (ABA)........................... 84
RESPONSES TO QUESTIONS FOR THE RECORD
Written responses to questions for the record from Representative
Maxine Waters
Ms. Lilya Tessler............................................ 87
Mr. Carlos Domingo........................................... 89
Professor Hilary Allen....................................... 90
LEGISLATION
H.R. ----, To require the Commodity Futures Trading Commission
and the Securities and Exchange Commission to conduct a study
to assess whether additional guidance or rules are necessary to
facilitate the development of tokenized securities and
derivatives products, and for other purposes................... 91
H.R. 8464, the "Tokenization Report Act of 2024"................. 93
NEXT GENERATION INFRASTRUCTURE:
HOW TOKENIZATION OF REAL-WORLD ASSETS
WILL FACILITATE EFFICIENT MARKETS
----------
Wednesday, June 5, 2024
U.S. House of Representatives,
Subcommittee on Digital Assets,
Financial Technology,
and Inclusion,
Committee on Financial Services
Washington, D.C.
The subcommittee met, pursuant to notice, at 9 a.m., in
room 2128, Rayburn House Office Building, Hon. French Hill
[chairman of the subcommittee] presiding.
Present: Representatives Hill, Davidson, Rose, Steil,
Donalds, Lynch, Gottheimer, Sherman, Casten, Nickel, and Himes.
Mr. Hill. The Subcommittee on Digital Assets, Financial
Technology and Inclusion will come to order. Without objection,
the chair is authorized to declare a recess at any time. This
hearing is entitled, ``Next Generation Infrastructure: How a
Tokenization of Real-World Assets Will Facilitate Efficient
Markets.''
Without objection, all members will have 5 legislative days
within which to submit extraneous materials to the chair for
inclusion in the record.
I now yield to myself 5 minutes for the purposes of an
opening statement.
OPENING STATEMENT OF HON. FRENCH HILL, CHAIRMAN OF THE
SUBCOMMITTEE ON DIGITAL ASSETS, FINANCIAL TECHNOLOGY AND
INCLUSION, A U.S. REPRESENTATIVE FROM ARKANSAS
Last month, the committee made history by ushering in
comprehensive digital asset market structure legislation across
the House floor with strong bipartisan support. This came on
the heels of strong bipartisan support to repeal Staff
Accounting Bulletin 121 so that regulated financial
institutions would be able to custody digital assets. Although
our work with digital assets is far from done, I am delighted
that the subcommittee's focus today will now shift to other
related topics.
The tokenization of real-world assets is one such area that
I am particularly interested in getting into today. Because
tokenizing real-world assets involves blockchains, or
distributed ledger technology, some might view tokenization as
a mere extension of the digital asset conversation that we have
been having in this committee for over a year. However, it
deserves its own distinct conversation and prioritization.
While digital assets are generally issued and managed on
blockchain networks, tokenization can bring traditional
finance, ``on chain.'' To put this in a different context,
tokenization can leverage the efficiency and transparency of
blockchains to help modernize U.S. markets.
Some components of our capital markets suffer from inflated
cost, stranded liquidity, siloed markets and high barriers to
entry. Unsurprisingly, some of these limitations are also
present in the banking system as well where it can take time to
transfer funds, reconcile ledgers between two different
financial institutions. With the help of blockchain,
tokenization can help to automate some of the critical
processes within a financial transaction bringing along
streamline settlement, lower costs. Lower agency cost is such
an important component of benefiting consumers in financial
services. Because of the transparency immutability, compliance
programming blockchains can offer a secure and transparent
record of ownership for tokenized assets which reduces the risk
of fraud, errors, and increases trust and visibility into
transactions. Many markets could stand to gain from these
benefits.
We have seen some positive steps in States' adaptation of
new amendments to the uniformed commercial code. This provides
updated rules for commercial transactions regarding digital
assets. Unfortunately, we have also seen regulators hinder
innovative progress through guidance.
Banking institutions, for example, are now required to
obtain nonobjection or some sort of similar approval process
from a Federal regulator before conducting any pilot program
touching blockchain technology, such as the idea of tokenizing
deposits.
The private sector should not have to pursue a financial
regulator's endorsement prior to exploring the latest
innovation in technologies for a possible way to save the
company and consumers' money and have a more effective product,
just like evaluating any other operating system enhancement in
a financial institution.
We need to ensure our regulators are welcoming this kind of
innovation to modernize our markets. Today, we are hearing from
individuals actively leveraging tokenization to improve and
enhance both our capital markets and our banking system. Our
witnesses are helping usher in the next age of financial
services into the United States, and I am excited to learn more
about the enhancements that they are actively working on, both
here and abroad. I hope that we can use this hearing to
understand where it makes sense for the consideration of
tokenization to be utilized and the necessary regulatory and
legal considerations that have to be amended or considered in
order to make that more of a reality.
I am also interested to see how tokenization efforts in the
U.S. compare to what we are seeing in other capital markets
outside the United States. I am grateful for the witnesses for
being here today and sharing their wealth and experience.
I yield to my friend, the ranking member of our
subcommittee, Mr. Lynch of Massachusetts, for 5 minutes for an
opening statement.
OPENING STATEMENT OF HON. STEPHEN F. LYNCH, RANKING MEMBER OF
THE SUBCOMMITTEE ON DIGITAL ASSETS, FINANCIAL TECHNOLOGY AND
INCLUSION, A U.S. REPRESENTATIVE FROM MASSACHUSETTS
Mr. Lynch. Thank you, Mr. Chairman. I also want to thank
our witnesses for your willingness to help the committee with
its work.
As reported by the Financial Stability Oversight Council,
the overall value and impact of tokenized assets is still
somewhat limited in comparison to the traditional financial
system and the cryptocurrency asset market. However, the
tokenization market continues to expand, and the Boston
Consulting Group recently estimated that asset tokenization
could reach $16 trillion U.S. globally by the end of this
decade. Financial companies are increasingly relying on
tokenization to facilitate real-time settlement in payments,
and improve operational efficiency.
At the same time however, our financial regulators continue
to warn us that the growth of tokenization markets could also
present corresponding risk to consumer protection, privacy,
safety and soundness, and ultimately, financial stability and
market integrity. That is why it is, I think, entirely
appropriate that this subcommittee begins to examine use cases
and the potential benefits, risks, and regulatory
considerations associated with tokenization.
To the great detriment of our oversight function; however,
this committee has already, unwisely I believe, moved forward
with legislation that will directly hinder our ability to
mitigate much risk in this area. Just 2 weeks ago, the
Republican leadership put forward the so-called Financial
Innovation and Technology for the 21st Century Act. This
misguided bill explicitly exempts tokenized securities from
long-standing and proven investor protection laws, and it
undermines potential benefits that might otherwise accrue from
tokenization.
I am concerned that financial institutions will be
incentivized to simply tokenize basic securities that are
commonly exchanged, and in a way, to allow those products to
evade compliance with securities law. Indeed, some shareholders
might insist that company management used that approach to
avoid compliance costs.
My colleagues have also attached a bill that requires the
Securities and Exchange Commission (SEC) and the Commodity
Futures Trading Commission (CFTC) to study tokenization, which
I think is a wise move. However, this comes just after passing
a ban on a U.S. central bank digital currency which would
require studying tokenization.
A report by Oliver Wyman found that in 2020, it cost $120
billion--it cost $120 billion to move $23 trillion across
borders, and a multicurrency Central Bank Digital Currency
(CBDC) could cut costs by 80 percent; down to about $20
billion. As policymakers, we should consider these technologies
long before moving forward with legislation to implement those
within our financial system.
While it is important that we distinguish tokenization from
cryptocurrency, the two have become so interwoven and
synonymous that I am cautious about the risk such as fraud,
cybersecurity and illicit finance thus far. It seems the only
uptake has been by the crypto industry for tokenization whose
products are primarily used by gamblers and criminals.
Despite the warning signs from the crypto industry, major
financial institutions, including large banks and asset
managers are announcing their intention to offer tokenized
products. As financial institutions consider this pact,
policymakers should consider the various risks and legal
considerations around ownership and transfer of tokens,
investor protection, anti-money laundering concerns, and
privacy and consumer data protection.
Mr. Chairman, I thank you for holding this hearing and I
yield back.
Mr. Hill. I thank the ranking member. I appreciate his
opening statement.
Today, we welcome the testimony of Lilya Tessler. Ms.
Tessler is a partner at Sidley Austin where she leads the
fintech and blockchain group. Robert Morgan, Mr. Morgan is the
CEO of USDF Consortium, a network of banks working to integrate
tokenized bank deposits into the U.S. banking system. Nadine
Chakar, Ms. Chakar is the global head of DTCC's Digital Assets,
Depository Trust and Clearing Corporation. Carlos Domingo,
Carlos is the cofounder and CEO of Securitize. Securitize, or
through its subsidiaries, is a registered broker dealer operate
as well as operates and alternative trading system and transfer
agent, specializing in the tokenization of real-world assets.
Hilary Allen, Ms. Allen is a professor of law at the American
University Washington College of Law where she researches the
impact of new financial technologies. We thank each of you for
being here with us today. You will be recognized for 5 minutes
to give an oral presentation of your testimony. Without
objection, each of your written statements will be made part of
our record. Ms. Tessler we start with you, you are recognized
for 5 minutes.
STATEMENT OF LILYA TESSLER, PARTNER, SIDLEY AUSTIN LLP
Ms. Tessler. Thank you. Good morning, Chairman Hill,
Ranking Member Lynch, and members of the subcommittee. Thank
you for inviting me to testify. It is an honor to be here
today.
My name is Lilya Tessler, I am a partner at Sidley Austin
where I lead the fintech (financial technology) and blockchain
practice. I have over 15 years' experience advising financial
institutions and technology companies on the application of
securities laws to innovative technologies.
Eight years ago, I started representing clients on novel
legal issues in implementing blockchain, not only in financial
services, but across numerous industries. The views I share
today are my own and do not represent those of my colleagues,
my law firm, our clients, or any other personal organization.
Today, many real-world assets are digitally represented in
electronic data bases from manufacturing to retail. Most
companies manage the inventory, such as widgets, oranges,
handbags through electronic data bases. This is largely
uncontroversial and has long been true in the world of finance
and securities as well.
After the so-called Paperwork Crisis in the late 1960s and
early 1970s, Congress noted that securities markets quote, had
resisted industry modernization end quote, and directed the SEC
to end the physical movement of security certificates. We have
come a long way and now live in a digital world so we should
embrace blockchain as a tool to provide for more digital
capabilities.
As background, tokenization refers the process of digitally
representing and recording an assets using blockchain
technology. For our purposes how a blockchain works is less
important than what a blockchain is. It is simply a digital
ledger.
Tokenization can be a applied to a wide variety of assets,
such as securities, bank deposits, gold, food, pharmaceuticals
or real estate. The act of tokenization does not change the
essential nature or character of the asset, nor does it create
a new asset class. Rather, tokenization enables the asset to be
recorded and transferred using blockchain technology, which
offers certain capabilities. These capabilities include
improving efficiency, mitigating risk, enhancing distribution
channels, providing greater liquidity, and allowing for
programmability using smart contracts.
Let me share an example of how tokenization of securities
works under existing laws. The offer, sale, trading and custody
of these shares involves financial institutions that operate in
a highly regulated environment that does not currently provide
for an efficient market structure, at least with respect to
tokenized private securities.
For example, a hedge fund may issue and track its shares as
tokenized security, the method used to record securities is
generally a matter of State law and certain States have
expressly allowed the use of blockchain to record securities
ownership. However, these hedge fund shares are also sold as
private securities under exemptions from the Federal securities
laws.
Tokenized securities rely on the same exemptions as
traditional securities, but with the ability to program
compliance controls into the token's code. The blockchain
information can also be shared with securities market
participants in real time, which provides for efficiency and
enables a more liquid secondary market.
To fully realize a blockchain's capabilities, hinges on
whether all participants in the securities markets can interact
with the tokenized security on-chain. Although tokenized
securities can be issued under State law, the securities laws
require the use of intermediaries, which is broker-dealers,
custodians and transfer agents that may not have the regulatory
ability to use the blockchain as the official record of
ownership or to custody the tokenized securities on chain. This
limits a blockchain's capabilities and creates redundancies,
inefficiencies and risks in the trade flow.
The current regulatory guidance may not provide enough
clarity and flexibility from market participants to fully
leverage the capabilities offered by tokenization. For example,
the SEC issued a temporary no action relief for a new type of
broker-dealer called a special purpose broker-dealer to custody
tokenized security, but this broker-dealer cannot custody
traditional securities. This distinction creates confusion in
the market since a tokenized security is a traditional
security, but recorded on a blockchain ledger.
Tokenization does not change the essential nature of an
asset. Yet, the current market for tokenized real-world assets,
at least in the securities space, cannot fully develop until
regulations treat tokenized assets the same as the underlying
traditional asset. Collaborations among regulators and industry
is crucial to provide a clear and consistent path that allows
for innovation and competition while protecting investors and
market integrity.
I urge the committee to continue to learn about the
capabilities offered by blockchain and how tokenization of
real-world assets can support the United States in being a
leader in a digital world. I appreciate the committee's time
today and look forward to answering your questions.
[The prepared statement of Ms. Tessler follows:]
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Mr. Hill. Thank you.
Mr. Morgan, you are recognized for 5 minutes.
STATEMENT OF ROBERT MORGAN, CHIEF EXECUTIVE OFFICER, USDF
CONSORTIUM
Mr. Morgan. Chairman Hill, Ranking Member Lynch, and
members of the subcommittee, I appreciate the opportunity to
testify before you today.
For most Americans, money is already digital and exists
largely in the form of bank deposits. These are delivered
through an adverse and competitive banking system that ensures
individual protections and systemic soundness while supporting
credit creation that is the bedrock of a healthy economy.
Today, the advent of new technologies promises to reshape
the nature of money, how it powers our economy and shapes our
society. Tokenization refers to the use of novel, shared
ledgers to record, store and transfer traditional banking
assets and liabilities, including bank deposits.
Tokenization should not be confused with cryptocurrency,
despite similar technological underpinnings, unlike
cryptocurrencies which are generally bearer assets that exist
in novel markets. Tokenization refers to the use of distributed
ledger technology, or DLT, to improve the delivery of real-
world assets, such as bank deposits, bonds and other regulated
financial instruments.
Over the years, various ledger technologies have played a
central role in banking as a system of record. They have
evolved from paper system to on-premises servers, to the cloud.
We believe that DLT is the next evolution in ledger technology.
Today, financial infrastructure consists of a series of
siloed systems, separating banks and even products within an
individual bank. Tokenization has a unique ability to break
down these silos, facilitating real-time collaboration among
financial institutions. In particular, we believe the
tokenization can facilitate the following: First, faster,
cheaper payments, ensuring customers have real-time access to
their funds; second, programmable payments, automating complex
transaction flows that can reduce fraud and improve
transparency; third, atomic settlement. DLT can break down
silos between systems making it easier to buy and sell assets.
This added liquidity allows for new funding options that can
lower the cost of credit, expanding access to affordable
financial products.
Finally, collaboration among community banks, and this is
particularly important. By allowing groups of banks to work
together in real-time, they can punch above their weight and
compete with larger institutions.
This technology is not just about cost savings at banks, it
allows for the development of novel products that can benefit
the consumers and small businesses the bank serves. For
example, USDF's members are exploring how tokenization can
improve the construction lending process. By leveraging
programmable payments, we can directly tie loan disbursements
to the completion of certain milestones like pouring the
foundation of a new building, or receiving permitting
approvals. This can help contractors and their employees get
paid more quickly, reduce risk, and lower the cost of credit,
which together, could increase the availability of affordable
housing.
We are also exploring how tokenization can help facilitate
loan participations, allowing groups of community banks to
leverage strength in numbers. This collaboration allows a
community bank to maintain a relationship with a customer who
has grown and may otherwise need to find a relationship with a
larger bank.
USDF is also proud to participate in industry-wide
initiatives, such as the regulated settlement network proof of
concept. This project is a collaborative effort by large banks,
payments networks, and other regulated financial institutions
to explore how the creation of a shared ledger might improve
settlement infrastructure in the United States. USDF's
participation ensures the banks of all sizes have a seat at the
table as we explore these systems.
Despite these promises, at present, there is significant
regulatory uncertainty that limits banks' ability to adopt
these innovations. Any bank wishing to undertake a tokenization
project must receive formal regulatory approval. This is a
requirement that does not exist for any other technology.
We would encourage Congress to work with the banking
agencies to help provide regulatory clarity, who will allow
banks to responsibly explore tokenization. We would recommend
eliminating technology-specific approval requirements for
engaging in tokenization, providing clear guidance on the
regulatory requirements for DLT infrastructure, clarifying that
tokenization does not change the underlying nature of deposits,
and promoting public-private partnerships to explore the
opportunities for tokenization in financial services.
Bank deposits are a cornerstone of our monetary and
financial systems that support the dominance of U.S. dollar
around the world. Tokenization promises to upgrade bank
deposits, lowering the cost of offering financial services,
allowing banks to reach more Americans with safe, affordable
and inclusive products, while maintaining the critical
protections that banking regulation ensures.
We look forward to working with Congress to provide
regulatory clarity that can help banks safely and responsibly
deliver these innovations. Thank you and I would be happy to
take any questions you might have.
[The prepared statement of Mr. Morgan follows:]
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Mr. Hill. Thank you, Mr. Morgan.
Ms. Chakar, you are recognized for 5 minutes.
STATEMENT OF NADINE CHAKAR, GLOBAL HEAD OF DTCC DIGITAL ASSETS,
DEPOSITORY TRUST AND CLEARING CORPORATION
Ms. Chakar. Chairman Hill, Ranking Member Lynch, and
members of the subcommittee, good morning. My name is Nadine
Chakar and it is my privilege to testify before the Financial
Services Subcommittee on Digital Assets, Financial Technology
and Inclusion. I serve as managing director and global head of
Depository Trust & Clearing Corporation (DTCC) digital assets,
and I am happy to be here today to discuss our role in driving
innovation in the U.S. financial markets through the
development of digital technology and tokenization solutions.
On behalf of DTCC, thank you for this opportunity. DTCC
owns and operates three clearing agencies that have been
designated systemically important financial market utilities.
National Securities Clearing Corporation (NSCC) which clears
broker-to-broker transactions, in stocks bonds and other
products, provides clearing and settlement services for
approximately 200 million transactions a day and our central
securities depository manages lifecycle events such as
dividends and corporate actions for over 1.4 million eligible
securities.
DTCC is literally the heart of the post trade processing in
the United States securities industry so not surprisingly we
are subject to strict risk management standards and heightened
oversight by U.S. regulators, primarily, the SEC and the
Federal Reserve. DTCC's industry is owned and governed and we
have a long history of innovating purposefully. More
specifically, to the topic of today's hearing, we have been
developing digital asset solutions since 2016.
DTCC recently acquired Securrency which now operates within
the company as DTCC digital assets. DTCC digital assets provide
institutional grade blockchain infrastructure to facilitate
end-to-end lifecycle processing for tokenized real-world
assets. Our goal is to develop technology that could ultimately
underpin the evolution of an enterprise-wide digital asset
infrastructure. So, in other words, we are working to align the
company's existing infrastructure with new tokenization
capabilities, to realize the benefits of post trade processing
of real-world assets in digital form on blockchain.
These efforts will allow market participants to unlock the
opportunities presented by tokenization including increased
deficiencies in clearing, settlement collateral management and
payments.
I have assumed my role that DTCC, Securrency, the company
where I had the privilege of serving as CEO as required. The
founders of the company and I were gratified that DTCC viewed
our technology as offering them the potential to integrate
tokenization technology with their legacy systems for
traditional securities transaction, processing, and lifecycle
management.
I must also say we have learned a few things since joining
DTCC. We have become deeply involved in efforts to harden the
Securrency technology to ensure that it satisfies the
incredibly robust requirements for operational resiliency. That
applies to systemically important Financial Market
Infrastructures (FMIs). We have also learned a great deal about
the complexity of processes that exist in the industry. Perhaps
the greatest lesson of all, is that technology on its own will
not change the capital markets. It will require collaboration
and coordination among all stakeholders, and it needs to be
measured and thoughtful.
In terms of scale, the benefits of tokenization to mature
markets like U.S. equities and fixed income markets is a
tremendous opportunity, but it will take time. This work must
be undertaken with due care with the important objective of the
existing regulatory framework, including efficiency,
resilience, robust financial risk management, transparency,
most importantly, investor protection.
The gold standard for tokenization, in our view, remains a
regulatory framework that largely aligns to, and is derived
from current financial regulations following the principle of
same activity, same risk, same regulation while recognizing
that there may be areas that need a refinement and/or
clarification.
By virtually any measure the United States has the most
liquid, efficient, and cost-effective financial market in the
world. The critical role that DTCC plays in the U.S. securities
market may not be well-understood outside of our industry.
However, the services we provide benefits all participants in
our capital markets, from Wall Street firms to Main Street
investors rely on markets to save for retirement, raise
capital, start a business, or obtain a loan to purchase a house
or a car. Time and time again the global financial markets have
leaned on financial market infrastructure to drive change. We
believe the general securities and tokenization will be no
different. FMIs like DTCC have a critical role to play. We
applaud the committee for this timely discussion and we will
continue to engage with Congress and our regulators as they
explore these important topics.
Thank you and I look forward to answering your questions.
[The prepared statement of Ms. Chakar follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Hill. Thank you, ma'am.
Mr. Domingo, you are recognized for 5 minutes.
STATEMENT OF CARLOS DOMINGO, CO-FOUNDER AND CEO, SECURITIZE
Mr. Domingo. Thank you esteemed members of the
subcommittee.
Thank you for the opportunity to testify today. It is an
honor to be here. I am Carlos Domingo, the co-founder and the
chief executive officer of Securitize. I co-founded Securitize
7 years with a vision to provide a regulated path for companies
to tokenize their financial assets and issue, sell, and trade
securities on the blockchain for the broader capital markets.
Early in our journey, we recognized the need to establish
registering entities to provide those services lawfully. In
July 2019, we registered as a transfer agent with the SEC.
Subsequently, in September 2020, we acquired a broker-
dealer, and alternative trading system license to legally sell
and provide a regulated marketplace for trading tokenized
securities, and then subsequently acquired the requisite
approvals to operate.
To date, Securitize has been primarily focused on realizing
the efficiencies of tokenization in private and capital
markets. This large and growing part of our capital markets
lacks modern standardized digital infrastructure. It is
encumbered by inefficiencies, outdated intermediaries, lack of
accessibility to many investors, and liquidity. All issues this
technology potentially solves.
Today, Securitize is a leader in the compliance
organization of financial assets. We are the largest blockchain
based transfer agent in the U.S., and have pioneered
organizational securities in many respects. We have issued
dozens of organized securities valued at nearly $1 billion. We
work with several of the largest assets managers on
tokenization projects, including tokenized funds with Hamilton
Lane and Kohlberg Kravis Roberts & Co. (KKR), and most
recently, a tokenized private fund issued by BlackRock which is
now the industries largest-ever tokenized fund.
Legislative efforts in the U.S. have been primarily focused
on crypto digital assets and stablecoins. There has been less
focus on legislation enabling traditional financial services on
products to benefit from blockchain technology and
tokenization. Existing statutes and regulations were not
designed with blockchain in mind, and contain provisions that
can preclude or limit its use in issuing trading and settling
tokenized securities.
This has impeded market participants from using blockchain
technology and regulated financial markets and undermined U.S.
competitiveness, given greater progress in other jurisdictions,
including Europe, the U.K. and Asia.
I would like to share a few of my thoughts and
opportunities and solutions where new constructive legislation,
or clear SEC guidance would provide a path for applying
blockchain technology to our broad set of regulated financial
products.
First, we need clarity in the definition of these asset
securities, or tokenized securities to distinguish them from
other forms of digital assets. This lack of clarity is crucial
for today impeding regulators to really understand the unique
characteristics of compliance to connect securities and to
regulate them accordingly.
Second, today for broker dealers to be able to do custody
of tokenized securities they must become a so-called special
purpose broker dealers so SPBDs. The SPBD framework is
certainly difficult to achieve, limiting the scope and
temporarily. It is not clear which tokenized securities are
eligible for SPBD custody and their framework expires in
February 2026.
We also believe that SPBDs should be permitted to hold
payment of stablecoins to facilitate efficient on-chain
transactions between securities and cash. Today, this is not
possible.
Third, tokenized securities must be allowed to flourish on
public, permissionless blockchains, in addition to private
permission chains to realize the benefits of blockchain
technology. Any blockchains should be an acceptable marketing
infrastructure for tokenized securities as long as it issues
resilience and stability, risk mitigation and is subject to a
proper technical assessment.
Fourth, transfer agents and SEC-registered companies and
blockchain-based transfer agents are critical to the tokenized
system and must be recognized as such. We believe that
blockchain based transfer agents should be recognized as
primary providers of the organization and blockchain transfer
agent services after meeting our capitalization, insurance, and
technical standards.
Fifth, alternative trading systems must continue to be
eligible training platforms for tokenized securities. Peer-to-
peer transfers should be sanctioned for investors when wallets
however enlisted, and where regulatory transfer restrictions
are enforced by smart contracts.
Finally, registered alternative trading systems (ATS)
within a Special Purpose Broker-Dealer (SPBD) must be allowed
to facilitate both trading and settlement of transactions in
tokenized securities.
Organized securities can expedite and condense trading and
settlement to near real time and enable the merger of trading
and post-trading activities, eliminating the need for Social
Security depositories. This is currently the model chosen by
the European Commission for Europe and U.S. entities should be
able to realize similar efficiencies and capabilities.
These suggestions are critical aspects of what tokenized
securities framework should include. To realize this promise
and avoid falling behind Europe and other markets where
regulations for tokenized security is more established, I
encourage you to prioritize legislation, or encourage clear SEC
guidance to facilitate safe, responsible and compliant
tokenization of financial assets as soon as possible.
Thank you.
[The prepared statement of Mr. Domingo follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Hill. Thank you, sir.
Professor Allen, you are recognized for 5 minutes.
STATEMENT OF HILARY ALLEN, PROFESSOR OF LAW, AMERICAN
UNIVERSITY WASHINGTON COLLEGE OF LAW
Ms. Allen. Chairman Hill, Ranking Member Lynch, and members
of the committee, thank you for inviting me to testify at
today's hearing. My name is Hilary Allen, and I am a professor
of law at the American University, Washington College of Law,
and the author of the book, Driverless Finance.
The first thing I want to clear up today is some confusion
between tokenization and crypto. The main point I want to focus
on is that crypto runs on permissionless public blockchains and
tokenization does not need to. My fellow witnesses have
discussed tokenization's benefits of programmability,
composability and atomic settlement, and all of these can be
achieved using different kinds of ledgers and data bases. This
is important, because public permissionless blockchains suffer
from inescapable inefficiencies and operational fragilities
that make them unsuitable supporting infrastructure for real-
world financial assets.
Now I know that there is a strong narrative about this
being transformative technology. I fell into this trap when I
first started writing about bitcoin nearly a decade ago. I
would say things like, the underlying blockchain technology
could be revolutionary because that is what everybody else was
saying. Well, once I actually started to learn about the
technology from independent technologists, it became clear how
limited and problematic it really is. Like a square peg in a
round hole, permissionless public blockchain technology is a
poor fit for the vast majority of problems that people have
tried to make it solve.
First of all, the consensus mechanisms used to verify
transactions on these kinds of blockchains are inherently
inefficient and wasteful, they have to be by definition, or
else it would be far too easy for a bad actor to take over the
system that lets anyone participate.
So these kinds of blockchains cannot process large volumes
of transactions and the delays and fees can be significant to
these times. Industry experimentation to address these scaling
problems often focuses on recentralizing technological and
economic control of certain processes, so why use the public
permissionless blockchain in the first place?
For me, though, perhaps the most important concern is that
these public permissionless blockchains are software. Like any
software, they require constant monitoring and maintenance to
address bugs and cybersecurity issues, but who has the economic
incentive to invest time and effort in maintaining the
resilience of a public permissionless blockchain? Most such
blockchains rely on core software developers, a handful of them
funded by grants and donations but it is often unclear who they
are, what powers they have, who is funding them or how they are
chosen. They are certainly not regulated. Could they be bad
actors, or at least have conflicts of interest? Can they always
be counted on to get the blockchain up and running again in a
timely manner after an outage? What if their funding dries up?
What if they just give up on the blockchain? Could the assets
hosted on that blockchain be lost? We have heard how heavily
regulated most financial infrastructure is. Permissionless
public blockchains are just incompatible with that kind of
regulation and should not host real-world financial assets.
Tokenization should also not be used to integrate real-
world financial services with the crypto universe for reasons
that I have previously elaborated before this subcommittee but
when performed on other kinds of ledgers and data bases,
tokenization of real-world assets may be able to promote
significant efficiencies in some markets. There is particular
interest in tokenizing deposits to increase the speed of cross-
border payments, for example. Although, I do note that
achieving this may require central banks to issue wholesale
central bank digital currencies, something that would be
precluded if the House's CBDC Anti Surveillance State Act were
to become law.
There is also a particular interest in tokenizing
securities and physical assets like real estate and art, or
fractions thereof and it is hoped that this will increase
liquidity and create more investment opportunities.
The second major point I want to make today, though, is to
urge you not to pin your hopes on tokenization as a means of
improving financial inclusion. With so many Americans living
paycheck to paycheck, the problem is not a lack of investment
opportunities, but a lack of money to invest in the first
place. Furthermore, tokenized deposits may speed up payments
processing for the already banked, but tokenized deposits will
not bank the unbanked. Still, although it offers very limited
paths to financial inclusion, as we have heard, tokenization
can increase efficiencies in some markets, and that brings me
to my final point:
These efficiency gains may be useful, but they may also
come at the expense of increased fragilities in our financial
system. We should, therefore, be very thoughtful about where
tokenization is deployed. If we think back to 2020, we learned
the hard way that supply chains could become brittle in unusual
circumstances and now there is more and more interest in making
components closer to home which is often less efficient, but
more resilient. We should think the same way about
tokenization. When is something efficient enough such that
making it more efficient will introduce too many fragilities
and be counterproductive in the long run.
I thank you very much for your time.
[The prepared statement of Ms. Allen follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Hill. Thank you very much, Professor.
We will now turn to member questions, and I recognize
myself for 5 minutes for questioning.
Our witnesses have testified about how tokenization can
reduce intermediaries, increase liquidity, in illiquid markets
and democratized access to investment opportunities. Today,
real-world assets, such as real estate commodities, music
rights and collectables like art, exist in silos where they are
illiquid and frequently disconnected, but tokenization could
bring them on-chain and benefit that.
I will start with you, Ms. Tessler. How does tokenization
allow assets to be traded more freely and efficiently across
these silos or wall gardens and can this help bring liquidity
and more marketability to something that is obviously illiquid
in a very over-the-counter topic like art for example?
Ms. Tessler. Yes, so tokenizing real-world assets offers
markets the opportunity to leverage the capabilities of the
blockchain that was discussed earlier. Tokenization generally
involves everyone in the market utilizing the shared ledger. If
everyone can look to the same ledger in real time to see the
information, this eliminates the need to reconcile across
multiple-siloed ledgers. Intermediaries can use the same shared
ledger to allow for two parties to transact with each other
instantaneously using programmable smart contracts. These
efficiencies can be realized without sacrificing regulatory
compliance, since transfer restrictions, verified identity, and
other requirements can be built in right into the smart
contract code.
Mr. Hill. Thank you.
Ms. Chakar, DTCC is the most important behind-the-scenes
company in the capital markets in the world probably and you
represent that. You are doing analysis about how tokenization
could reduce agency cost, increase reliability, accuracy,
reduce fraud, maybe speed, certainly lower costs, though. There
is also the issue of, like, margin, and you were very
involved--not you personally, but DTCC, very involved in the
GameStop mania, where Robinhood, a publicly traded broker-
dealer, woke up in the middle of the night trying to make
margin, trying to calculate margin of what they had to post
because of GameStop trading mania on their platform.
Could tokenization have made that analysis of determining
what the margin call was for them more straightforward, more
easier so that instead of working all night and trying to have
a conference call at 6 a.m. to post 9 or 10 a.m. eastern time
margin. Seems like there was a lot of mystery in that and a lot
of back and forth. Would having it on a ledger have made that
easier?
Ms. Chakar. Well, I cannot comment exactly on the specifics
that you have described, but yes, one of the attributes that
we----
Mr. Hill. So that would reduce fragility in that instance
potentially?
Ms. Chakar. One of the attributes we believe that
tokenization, along with smart contracts, would allow the
automation efficiency of margin calculation and margin
movement, so you will see an increase of velocity there. So we
do believe that is one of the efficiencies to be able to
deliver faster and more efficiently.
Mr. Hill. Mr. Domingo, recently, we heard from a mutual
fund company here in the United States that had taken its money
market fund, and tokenized it, and their cost was reduced so
much that they could now offer access to a world class, highly
regulated money market fund at a much lower deposit fund. Would
that increase inclusivity of access to that financial product?
Mr. Domingo. So tokenization obviously provides a much more
efficient way of managing the underlying securities of a fund.
In many respects it provides a better fractional ownership for
smaller amounts of investments, as you mentioned. It provides
automation for things like redemptions, dividend payouts, et
cetera, that can lower the cost of actually maintaining a fund,
and therefore, it should actually benefit investors by having
lower fees and being able to invest in more of an amount than
today most institutional investors invest on this alternative
asset.
Mr. Hill. Thank you.
Ms. Chakar, in the time I have remaining, these high agency
costs things, over the counter, like 144A debt that Mr. Morgan
talked about, bank loan participations, is not this the place
where this could be the most beneficial in the short run to
experiment, determine regulatory supervisory success accuracy?
Would you state that those are some of the markets where this
is the most able to be helpful in the short run?
Ms. Chakar. Yes, we believe we are and we are----
Mr. Hill. Mr. Morgan, do you want to comment about your
deposits or loan participation?
Mr. Morgan. Thank you, Chairman.
We think there is a tremendous opportunity for tokenized
deposits to help streamline particularly complex transactions,
cross-border transactions, other multiparty transactions, like
funding a mortgage. They can have real benefits for consumers
and small businesses.
Mr. Hill. Thank you. I appreciate the time. I yield back,
and I recognize the ranking member for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman.
Professor Allen, good to see you again. Thank you for your
testimony. You write in your written testimony that obviously
the tokenization we are talking about today is the tokenization
of physical assets, and you compare that, you say, compared to
real-world assets. Many crypto assets are Ponzi like in the
sense that they are not backed by real-world assets, and so,
their value is based entirely on whether another buyer can be
found for them, sort of the greater fool theory.
As a matter of fact, one of the only legitimate reasons to
buy crypto is to trade crypto. You need crypto to trade crypto,
sort of like a self-licking ice cream. Unless of course, you
want to avoid government sanctions or you want to launder money
or you are interested in getting paid for a denial of service
hack, then you do want to be paid in crypto.
Talk about some of the dangers here of--there are some
great ideas for tokenization. I have to admit that. I think
there are some great concepts for deposits and automatically
generated interest and removing all that back-office space--
back-office function. So there are some great efficiencies to
be had here, but talk about some of risk here, given the fact
that we have seen the vulnerabilities in the blockchain sort of
arrangement.
Ms. Allen. Thank you very much for that question. I mean, I
think there are several gradations of risk. So, the worst-case
scenario to my mind is that tokenization--and this was raised
by a Financial Times journalist, its primary function right now
is to integrate traditional finance with crypto finance,
because then we get all the volatility, all of the problems,
all of the hacks, everything having a direct way of influencing
our traditional financial markets. Then, if something goes
wrong, it is not just those who chose to invest in crypto, it
is everybody who suffers. If you take the blockchain out of it
and you keep this away from crypto, then as you say, there are
a lot of benefits in terms of efficiencies, but there are also
risks, you know. A lot of the preprogramming makes things very
efficient, but it also makes it rigid and it means in
unexpected circumstances things can blow up. No computer
programmer can think of all future stakes to the world. They
cannot cater for everything that could go wrong. Sometimes, it
is the thing that you expect that causes everything to blow up
so we should be mindful of that.
There are some parallels to 2008 and the lead up with
creating more and more financial products, making the markets
more liquid, but also associating all kinds of rigid
contractual rights that made it harder to bury things when the
world started going south.
Mr. Lynch. If we have--so let us just sort of think about
this. You have a bunch of different tokenization systems, and
you want--ideally you do want different countries, you want
global commerce, would you not need a central bank, sort of a
one central--not necessarily--well, sort of like a reserve
currency where everybody could exchange their tokenized assets
and trade them? Would that not require one central bank
currency to sort of settle all of that out, one that everybody
recognizes and respects?
Ms. Allen. Yes, I mean, I think a lot of the benefit of
tokenization depends on there being a settlement asset, right?
Mr. Lynch. Right.
Ms. Allen. Some people say that stablecoin should be a
settlement asset. I think that is a terrible reason because of
all the fragilities of stablecoin that I have testified about
before. So I really think that the settlement asset has to be
some kind of central bank money ultimately.
Mr. Lynch. All right.
Ms. Allen. If you want that on the ledger, it is probably
going to have to take the form of some kind of central bank
digital currency. Now this does not have to be a retail product
and I want to emphasize that, because I am not sure where I sit
on retail central bank digital currencies, but a wholesale, the
plumbing, central bank digital currency, something like that
would be needed for as----
Mr. Lynch. Obviously, if our own--if the Federal Reserve
Bank is not allowed to operate in that space, it is going to be
a central bank--some other central bank. It would not be ours,
it will be EU or China or some other central bank that will be
the settlement, the central bank currency of choice.
Ms. Allen. Yes, I am not sure how that works for being able
to issue----
Mr. Hill. The gentleman's time has expired. I recognize the
vice chairman of the subcommittee, Mr. Davidson of Ohio, for 5
minutes.
Mr. Davidson. I thank the chairman, and I thank the
chairman for specifically scheduling a hearing that is not
about cryptocurrency. It is not a standard debate between
bitcoin versus shitcoin and everything else in the
cryptocurrency world. It is certainly not a hearing about
central bank digital currency and what a terrible idea that is.
By all means Mr. Lynch, continue to study it, know and come to
the conclusion that it is a terrible idea to implement a
central bank digital currency, particularly the one currently
conceived.
In fact, this is a hearing about the rest of assets. What
are we going to do about the whole rest of digital assets and
how they might be tokenized to represent real-world assets.
Thank you, Mr. Chairman, for having a hearing about the much
broader part of the market. I hope we can move on and have a
focus on this hearing topic and not the straw man that some of
our colleagues want to continue to pillage.
Tokenized securities are real-world assets, and several of
you addressed that as you spoke. The chairman mentioned short
squeezes, one in particular. If you think about the utility of
a tokenized security, people will say there is certainly
utility in custody, it is hard to claim multiple shares. That
is one of the problems in a short squeeze is there an imbalance
in the shares that are pledged. We have dealt with that on any
number of issues in a novel way with MMLTP but when you look at
the implications for securities, people, I think, are building
a fallacy that somehow high-frequency trading is going to move
to blockchain, and people will recognize there are some
limitations on certain structures for blockchain in terms of
execution.
So could some of our witnesses address tokenized securities
and some of the implications and opportunities there? Ms.
Chakar.
Ms. Chakar. Sure. Thank you, Congressman, for the question.
To your point, it does require building an infrastructure
that is interoperable which will allow these tokens to move on
different networks. It does require that it starts with
compliance as the underlying principle and build out from
there. So we do believe it will become a network of
blockchains. It is not one blockchain that will rule them all.
There is technology today that allows us to incorporate
compliance and rules and make a token a smart token that allows
us to actually ensure that a lot of the compliance, anti-money
laundering (AML), know-your-customer (KYC)----
Mr. Davidson. Fundamentally, it definitely prevents the
double-spend problem?
Ms. Chakar. Well, it does from a perspective that you need
a good control location, an entity like DTCC that is actually
ensuring that these assets are encumbered. They are not being
double-spent to ensure that the integrity in making sure people
have confidence in these tokens that are being--so that is why
we keep saying it is the same asset, same risk, same
principles, same regulation that will allow us to ensure
security and trust in the system.
Mr. Davidson. How do you see that in public versus private?
Ms. Chakar. Private assets?
Mr. Davidson. Yes.
Ms. Chakar. On the private side, the markets are a lot more
liquid, more mature. So what you are seeing there is more
efficiency, more speed. On the private side, as Chairman Hill
had asked, we do see that shorter settlement cycles. We can
take a lot more costs out of the process. We can increase
frequency of trading, which eventually would lead to more
liquidity. So there are benefits on both sides of the equation.
Mr. Davidson. Ms. Tessler, you talked about the important
challenges with the legal framework for the market to even
function properly. So if you use distributed ledger technology
to store official records of ownership, in Ohio, mortgages are
title to a property is one of the things that is under study.
As chairman of housing and insurance, we are paying a lot of
attention to that. If you look at the representation of a title
to a home or a car, a deed to a land or property what kinds of
things, as you look across the market, do we need it address
and where do we need to address them to provide functional
markets?
Ms. Tessler. So blockchain, as I mentioned, can be applied
across any industry. Certain use cases that we are already
seeing the application of tokenized assets are in the food and
drug industry, pharmaceuticals being recorded and food for
supply chain movement and tracking to help increase
transparency, reduce costs. We are seeing it applied to
ticketing, tokenized concert or sports tickets we record it and
transfer it on blockchain to protect authenticity and to build
in transfer restrictions. Certainly real estate is another use
case that we are seeing where you can record tokenized title,
leases, mortgages, all on blockchain to have the level of
transparency and----
Mr. Davidson. Thank you all for your expertise. My time has
expired.
I yield.
Mr. Hill. The gentleman yields back.
Votes have been called. It is the intention of the chair to
continue with the hearing through the vote until we are ready
to adjourn.
With that, I call on the gentleman from California, Mr.
Sherman, for 5 minutes.
Mr. Sherman. I have been on the committee for a long time.
This hearing harkens back to my first hearing when we focused
on the move from abacus to 10 key adding machine. At that time,
the advocates of the new technology did not advocate that they
somehow get around our laws designed to deal with money
laundering.
Professor Allen, in your testimony, you note that public
permissionless blockchains are efficient because you avoid all
that time-consuming and expensive regulatory requirements
dealing with anti-money laundering and the know-your-customer
requirements.
A lot of what we are being today is innovative is doing
things that we have already done very efficiently for a long
time, as some points out, the double-entry bookkeeping has been
invented even before the abacus, I believe.
We are told an innovation is wonderful, but then this
Congress passes a bill against even studying CDBC because we
now learn that innovation is wonderful only if it achieves two
objectives. First, the crypto bros have to be able to make a
profit, and the users of the system need a system that
efficiently allows them to engage in tax evasion, sanctions
evasion, and innovating a host of the other laws.
We--the Financial Innovation and Technology for the 21st
Century (FIT21) Act included an extremely dangerous title
dealing with investment contract assets. This would open the
door for existing publicly traded companies to avoid regulation
by tokenizing their securities and calling them investment
contracts.
Professor Allen, in your written testimony you mentioned
that this provision in FIT21 would be very attractive to
issuers who seek to avoid SEC oversight, especially those for
traditional securities. What would that mean for retail
investors?
Ms. Allen. Well, I think if you were a securities issuer
and you had the option of opting out of the expense of
complying with securities laws, you are going to consider it.
What you can do is slap a blockchain on your product, right?
Even if it is not a particularly useful piece of technology, as
you said, it can be quite useful in enabling you to get around
a lot of the regulations.
So, if the FIT21 were to become law, that new title 2 would
basically allow you to slap a blockchain on any kind of
investment contract, and therefore it becomes magically
exempted from the securities laws, and----
Mr. Sherman. As you point out in your technology, it seems
like the real intent here is not to increase efficiency, but to
reduce regulatory oversight.
Ms. Allen. Which, I guess is efficiency in some people's
minds, but it is not efficiency in--it should not be considered
beneficial for the public, and I do not think that Congress
should be facilitating it.
Mr. Sherman. Now, a couple of times in your testimony you
have harkened back to your prior testimony that I may not have
heard. I hope in your answer, you will summarize your prior
testimony. Are there any parts of your prior testimony that you
assume that we memorized that you think is important for this
hearing?
Ms. Allen. Apologies. Yes, no. I mean, a couple of things,
stablecoins as I alluded to in my answer to Ranking Member
Lynch, are not a good settlement asset because they are
imminently runnable, they also live on the same inefficient
blockchain which would have all kinds of problems. They can----
Mr. Sherman. These blockchains are not operable with each
other so you live on one blockchain or another, correct? Except
for the arbitragers can then move back and forth.
Ms. Allen. They can be made interoperable with something
called a bridge, but that bridge, again, has major operational
fragilities, and we have seen a ton of hacks of crypto bridges.
So, yes, I mean, long story short, stablecoins are not
currently used for making payments for a cup of coffee. That is
sort of a narrative that is incorrect.
Mr. Sherman. If you invest in stablecoin, you get no
interest. You invest in a money market fund, you get interest.
The real benefit of a stablecoin is if it ever became a payment
system it could be used to avoid all of our anti-money
laundering laws.
Ms. Allen. Well, right now they are helpful for gambling.
You can stake them or----
Mr. Sherman. Well, that is one of the laws you try to
evade.
Ms. Allen. Yes.
Mr. Hill. The gentleman's time has expired.
Mr. Rose of Tennessee recognized for 5 minutes.
Mr. Rose. Thank you, Chairman Hill and Ranking Member
Lynch, and thank you to our witnesses for taking time to be
with us here today.
Ms. Tessler, in your testimony you highlight food items as
something that could be tokenized to enhance supply chain
visibility. Could you explain how something like steak or eggs
could be represented by a digital token?
Ms. Tessler. As I mentioned earlier, any asset can be
tokenized, any real-world asset. So the location and
authenticity of any produce, so an egg, in your example, can be
recorded on a blockchain and then the movement of that produce
can be tracked using the blockchain across the supply chain. So
different participants on that supply chain can have access to
shared ledger of information to know at any point of time where
that asset is. That same information, assuming it is a
commodity that is tokenized, could then integrate into
commodities markets, and can trade and anyone could buy and
sell those assets. So a number of utilities exist for a
tokenized commodity.
Mr. Rose. Go a little bit deeper, if you will, what
benefits would that representation as digital tokens bring to
the agricultural industry as a whole, or to the consuming
public.
Ms. Tessler. Any type of information can be tracked and
traced on the blockchain location data, temperature, climate,
as well as a number of this information integrated anyone that
may need access to that information across the supply chain.
Then past--the efficiencies that blockchain can bring can be
passed on to the end consumer because the redundancies of
multiple records along the supply chain with unrelated parties
can potentially be eliminated if everyone is looking to the
same source of information.
Mr. Rose. Do you think current technology provides a robust
enough connection between these physical assets and the token?
In other words, I use this as an example, my grandfather 30
years ago gave me a cane. That cane supposedly was given to him
by Cordell Hull, former Secretary of State, but I have no
provenance that other than my grandfather's naked claim to
that. How do you--how does that--in the real-world, how do you
connect that egg to the token that represents the egg?
Ms. Tessler. So authenticity and provenance can be tracked
and traced and connected to--the physical documentation that
you have in a traditional world would be linked to the
blockchain information.
Mr. Rose. But subject to the same----
Ms. Tessler. Same commercial laws and local State laws and
others that are already in existence. It does not change the
existing framework. It kind of adds an extra layer of place
where information can be stored and transferred.
Mr. Rose. Okay. Ms. Tessler, if a banking organization
subject to Staff Accounting Bulletin 121 tries to custody
tokenized risk-weighted assets, it has to hold additional
capital. However, if the same banking organization custodies a
regular nontokenized asset, it does not have to hold any
additional capital. In my view, having two different standards
when the risk of the underlying asset is the same, does not
make sense. Do you agree that under the current regulatory
regime created by Chair Gensler, we do not have the necessary
flexibility to fully realize the capability of blockchain
technologies?
Ms. Tessler. Yes.
So as Staff Accounting Bulletin 121 (SAB 121) is currently
written, the definition of crypto assets is very broad. So it
encompasses potentially tokenized securities, even if it is a
traditional security recorded on a blockchain ledger, which has
the impact that--a tokenized security has a different
accounting treatment under that guidance, different custody
requirements than a traditional security of that same asset.
Mr. Rose. Okay. Thank you.
Ms. Chakar, I know that tokenization is a popular topic for
foreign jurisdictions and international regulatory bodies.
Can you briefly describe how the U.S. regulators have
engaged with the Depository Trust & Clearing Corporation
compared to overseas jurisdictions that seem to be moving ahead
faster?
Ms. Chakar. Thank you, Congressman.
We are regulated by some 20 regulators around the world and
I do want to repeat my opening statement that we have one
homogenous market in the U.S., one post-trade. So we are a
little bit ahead from our foreign competitors, if you will,
that have a more fragmented environment.
We have been working with our regulators on a variety of
projects, and I am going to tell you it does not come without
its challenges but what we have been able to prove, that
constant dialog in working through the issues at a very
granular level eventually leads to success, but it does take
collaboration and cooperation on both ends.
Mr. Rose. Thank you.
Mr. Chairman, I yield back.
Chairman Hill. The gentleman yields back.
The gentleman from Illinois, Mr. Casten, is recognized for
5 minutes.
Mr. Casten. Thank you, Mr. Chair.
Thanks, all, for being here.
I want to just start by asking us all to be, like, very
precise about our language, because we use a lot of words in
talking about crypto and blockchain that sound like other words
but they are not really the same thing.
Calling blockchain a ledger is like calling a cup of flour
a cake; or, for that matter, like calling QuickBooks an
accounting software. It is a piece of it.
Just a list of owners does not tell you: Did you have
segregated approval rights and check-writing rights? Do you
have double-entry bookkeeping? Do you even know that all of the
owners on this blockchain are real individuals and not some
anonymous wallet or something that went through a mixer?
To call that a ledger is disrespectful to ledgers. It is
just a list of names and numbers. I say that because that is
innate to a permissionless public system.
Mr. Morgan, I am curious, because, if I understand what you
are doing, you are creating a permissioned private system. I am
assuming that is because your members could not actually have
sufficiently audited books with traditional blockchain
technology.
Can you talk briefly about what you are building into your
system that is not already in the permissionless public system?
Mr. Morgan. Yes. Thank you for the question.
USDF is building on private permission blockchain,
primarily because existing regulatory guidance effectively
prohibits banks from engaging in public permissionless
networks.
We believe that infrastructure exists in the same way that
any other back-end ledger infrastructure will exist. There are
a series of controls on top of that would exist in a
traditional payment made today that are applied in the same way
when it is done on a private permission ledger, as well.
Mr. Casten. So at the end of the day, will you have a fully
Generally Accepted Accounting Principles (GAAP)-compliant
system that would satisfy any Big Four auditor?
Mr. Morgan. That is right.
Mr. Casten. Okay.
Mr. Morgan. That is our belief.
Mr. Casten. Professor Allen, is there any way to do that on
a permissionless system and do the people who--the architects
of that plumbing--is there any compliance that they could
actually have to make sure that it had those kind of controls?
Ms. Allen. When you are using a permissionless public
blockchain system, you have to think of, like, the different
levels of the stack.
The level I was speaking about in my written testimony is
actually like the operation of the software on which the nodes
are running in order to support the blockchain.
Then, on top of that, you have the people who actually
validate the transactions. At each level, at both of those
levels, a permissionless public blockchain allows for anonymity
essentially.
With that anonymity it is really hard to get a handle on
who is doing what, where. Generally speaking, the Big Four
accounting firms will not touch anything associated with
permissionless public blockchains in terms of auditing.
Mr. Casten. Okay.
Mr. Domingo, earlier this year securitized, tokenized, and
distributed shares of a private money market fund issued by
BlackRock on the Ethereum blockchain, a public blockchain, my
understanding is that any wallet on Ethereum can accept tokens
from any other user on a network, right?
Mr. Domingo. That is not correct for the tokens which they
are only transferrable to listed wallets.
Mr. Casten. So you put controls to protect against what we
are talking about here?
Mr. Domingo. We do, correct, yes. This is totally possible
on a public distributed blockchain. Saying that providing AML
control to KYC, et cetera, on a public distributed blockchain
is not possible is like saying it is not possible to run
financial transactions----
Mr. Casten. Okay. Well, help me out then, because almost
immediately after that money market fund was deployed, internet
trolls found the wallet addresses. They sent meme coins, they
sent Non-fungible tokens (NFTs), tainted funds from Tornado
Cash, who, of course, has been sanctioned by the Treasury
Department for money laundering.
There were more than a hundred cryptocurrencies that were
mixed up in legitimate funds that BlackRock had to access that.
How is that possibly compliant?
Mr. Domingo. First, those meme coins on unsanctioned tokens
were not sent to a BlackRock wallet at all. They were sent to
some other wallet that was labeled with BlackRock. So it was a
misperception in the press about what happened.
Second, the fact that somebody can send you a meme coin to
your wallet, it does not mean that the token that represents
the unit of the money market fund, which is a security, can be
freely sent to some other wallet or transferrable----
Mr. Casten. Are you suggesting there is a technical
solution to this or that we will have to actually have
individuals----
Mr. Domingo. There are technical solutions, all the
blockchains that prevent assets to be sent to a wallet, unless
the asset has been preapproved, and that is something that
could be built on top of a public permissionless network
without no problem.
Mr. Casten. Well, I am fundamentally dubious that you can
take the human out of the loop.
I guess just in the 20 seconds I have left, do any of you
believe that a blockchain system that allows mixers and
anonymous wallets can provide a robust ledger of all the
transactions and block anti-money laundering?
Mr. Domingo. I do believe so, the same way the internet is
also used for legal things and illegal things and it is a
publicly used infrastructure.
Mr. Casten. I think the industry would be a lot more
credible if they were fighting harder before the enforcement
actions to protect against money laundering.
Yield back.
Chairman Hill. The gentleman's time has expired.
Just to remind our witnesses, the chairman, in consultation
with the ranking member, we will continue questioning until
about 200 votes remain and then we will adjourn. I thank the
witnesses again in advance for an outstanding participation.
With that, I yield to the gentleman from Wisconsin, the
chairman of the House Administration Committee, Mr. Steil, for
5 minutes.
Mr. Steil. Thank you very much, Mr. Chairman.
With any new technology, I think we are always good at
identifying potential risks, but I do not think we talk enough
about the potential benefits of new technology.
I want to dive in with you to start, Mr. Morgan, if I can.
I am thinking about community banks here in particular.
Historically, ledgers started with paper, moved on into
siloed digital formats. This is really an opportunity to, I
think, really transform, in particular for community banks, who
have a harder time playing in some of this space.
Sometimes you will hear people talk about how this new
technology will actually hinder community banks, will only help
the largest financial institutions.
Can you provide some clarity about how this might assist
some of the smaller financial institutions in our country which
are absolutely essential in particular for small businesses?
Mr. Morgan. Congressman, thank you for the question.
I think this is a critically important aspect of the
Distributed Ledger Technology (DLT) blockchain, is the ability
to help multiple institutions work together in real time to
punch above their weight.
Traditional technology applications have to be sort of
spread across a wide customer base so larger banks can have an
advantage in adoption.
What is unique about DLT is it is that shared
infrastructure that can allow for real-time collaboration. So a
group of four or five community banks might be able to band
together to make a loan they otherwise would not.
Mr. Steil. Is that also true in particular as we think
about some of these smaller businesses that may be exporting a
product, a business in southeast Wisconsin, in Janesville, and
they export a product, say, to Italy and they are looking to
receive payments?
In the current structure, if they bank with a community
bank, there is a delay before that payment would make it all
the way through to their account, right?
Mr. Morgan. That is right and we think----
Mr. Steil. Then, how does this transform with the
tokenization? It could be instantaneous, correct?
Mr. Morgan. That is right. What DLT can do is bring all of
those parties to that multiparty transaction together on the
same ledger, provide real-time transparency through the
transaction so that customer can have real-time insight into
how quickly the funds will move, what it will cost, and then
when it is received.
Mr. Steil. They can do that even if it is bank holiday in
Italy or if it is a holiday in the United States of America,
365 days a year, 24/7. Is that correct?
Mr. Morgan. That is right.
Mr. Steil. Under the current system, they could not do
that, correct?
Mr. Morgan. That is correct.
Mr. Steil. Thank you very much.
I want to shift to you, Ms. Tessler, if I can. In
particular, I am thinking about the Uniform Commercial Code
that governs a lot of contracts in our 50 different States.
Some States have begun the process of amending the The
Uniform Commercial Code (UCC) in ways to address this. In
others, there are concerns that there might be Federal law that
is conflicting in this space.
You are an expert in it. Could you walk us through what UCC
changes may be required and whether or not there is any Federal
law that needs to be adjusted to facilitate this continued
development of technology?
Ms. Tessler. Thank you for that question.
The UCC does not the address Federal or State regulations.
Instead, the UCC provides a default set of rules to govern
commercial transactions and the two can work hand in hand.
So the 2022 amendments, referred to as Article 12, are now
being adopted by various States to respond to market concerns
about the lack of definitive commercial law rules involving
digital assets.
And in Article 12, it applies to controllable electronic
records, which specifically excludes the scope of any digital
assets that meet the definition covered elsewhere in this UCC,
such as deposit accounts, electronic money, and investment
property.
The nature of the real-world asset does not change when it
is tokenized. So the applicable commercial laws that underline
real-world assets still apply even if it is a tokenized asset.
So I think that is important.
Mr. Steil. Appreciate your feedback.
Let me come back to you, Mr. Domingo, if I can, because
under the previous question we heard some discussion about some
of the potential risks to BlackRock. Obviously, there was a
little back and forth there.
I would like to discuss kind of the benefit that BlackRock
is seeing, in particular as it relates to the tokenization of
money market funds. Could you comment on the benefit side of
it?
Mr. Domingo. Yes, I cannot speak on behalf of BlackRock,
but I can talk generally what the benefits of a tokenized fund
is.
First, it is fully transparent in terms of the holdings of
the fund. It is transferrable peer-to-peer in the case of the
tokenized fund that we have done with BlackRock. It is also
fully transferable into USDC, which is one of the existing
stablecoins. So you get 24/7 instant kind of----
Mr. Steil. So you have all those benefits.
Just real quick, because I think you were going to explain
more further or you were explaining how you can actually put in
place the controls that we all want, know your customer, et
cetera.
Mr. Domingo. Correct.
Mr. Steil. Could you just comment in the final 20 seconds
here?
Mr. Domingo. Yes, I think saying that a publicly
distributed blockchain, permission is one. You cannot control
KYC, AML, or transjurisdictions. It is a misunderstanding of
how the technology works.
We are a regulated entity, as I said in my statement, and
we do control KYC for the wallets. We list them on chain. We
control transjurisdictions using smart contracts, et cetera.
Mr. Steil. Thank you very much. I think that is really
important to have on the record.
Mr. Chairman, I yield back.
Chairman Hill. The gentleman yields back.
The gentleman from North Carolina, Mr. Nickel, is
recognized for 5 minutes.
Mr. Nickel. Thank you, Mr. Chairman.
Thanks to our witnesses. Happy Wednesday.
This is the first time the Digital Asset Subcommittee has
met since the landmark bipartisan vote on FIT21. So I wanted to
take note of that important bipartisan vote in Congress. It is
the first time we have ever addressed this issue in the U.S.
Congress.
Thank Chairman Hill and everyone else who worked so hard on
this legislation. Very optimistic about the message we are
sending to the Senate with 71 Democrats on this legislation.
Today's hearing on the tokenization of real-world assets is
important. This technology has the potential to truly advance
our financial markets. Additionally, bringing tokenized assets
into the U.S. financial system will allow greater access to the
rapidly growing crypto capital markets.
Unfortunately, the SEC's misguided SAB 121 uses an overly
broad definition of the term crypto asset, which is defined as
a digital asset that is issued and/or transferred using
distributed ledger or blockchain technology.
This definition fails to differentiate the types of digital
assets and leaves consumers to rely on lightly regulated
foreign custodians.
It is unfortunate that Gary Gensler is holding back
tokenization technology with SAB 121 and I would like to use
this moment briefly to call on Gary Gensler to withdraw SBA
121. I believe he is putting President Biden in a very
difficult position on this issue. We have a tremendous
executive order and continuous statements from the
administration, wanting to work with Congress on this issue in
a bipartisan manner.
And if Gary Gensler were to withdraw SAB 121, we could work
in a bipartisan way on the custodial banking piece and these
definitions that I think are so important. So that is my hope
here.
But on to the subject at hand.
The first question is to you, Ms. Tessler. What are the
challenges this definition creates with the adoption of
tokenized assets in traditional finance?
Ms. Tessler. So, as mentioned earlier, SAB 121 is very
broad, the definition of crypto assets. So tokenized securities
are recorded on blockchains. They are no different than
traditional securities, a tokenized stock or a tokenized bond.
It is still a bond or a stock when it is--whether it is in a
traditional ledger or a blockchain ledger but the crypto asset
definition potentially encompasses the tokenized security.
And so this presents challenges from an accounting
perspective and a custody perspective for market participants
that would need to comply with SAB 121 until some change is
effected on that front.
And I think it is important to remember tokenization does
not change the nature of the asset.
Mr. Nickel. Thanks so much.
Mr. Domingo, next question to you.
The tokenization of real-world assets will improve market
efficiency. I think everyone agrees on that.
Can you please boil down how this will impact my
constituents in North Carolina? Give us some of the use cases
that are helpful for folks trying to make sense of this issue
as they are following what is happening.
Mr. Domingo. I think capital markets have a lot of
inefficiencies that people are not aware of it. A very simple
one that I can mention that could benefit your constituents is
how dividends are paid out today in the U.S. because there is
no ledger where you actually know who the beneficial owners of
securities are. Typically dividends are delayed into reaching
the hands of the investors after the company has basically
transferred those to the transfer agent, and transfer agents
tend to hold the dividends for as long as they can to try to
monetize on the asset not being transferred to investors.
I think this technology can improve how money flows from
companies to investors so investors can really bring their
assets and get better returns.
Mr. Nickel. Thanks so much.
Last question, Ms. Chakar, to you.
Like with any new financial device, the tokenization of
real-world assets has risks. Can you explain how Congress and
Federal regulators should address these issues to ensure
consumers are protected?
Ms. Chakar. Congressman, we have been advocating over and
over again that the same principles for same activity, same
risk, same regulation should apply.
We do believe that the entire community should continue to
work on the guidelines that we have around good hygiene around
cybersecurity, risk management, resiliency, and ultimately
financial individual protection at the end of the day.
We believe the technology can support automating a lot of
these functions, and there are no additional risks, if you
will, that the technology provides that we do not face in
today's environment. We just need to continue to work to
monitor and hedge against them.
Mr. Nickel. Thank you so much.
I am going to scurry to votes, and I am going to yield back
the balance of my time.
Chairman Hill. The gentleman yields back.
I want to thank all of our witnesses for an excellent
discussion with our members today. We are grateful for your
time.
As we leave Capitol Hill today, I hope everybody remembers
the 80th anniversary of D-Day and remembers the service and
sacrifice of the men and women who preserved freedom in Europe
80 years ago.
Without objection, all members will have 5 legislative days
within which to submit additional written questions for the
witnesses to the chair. Those will be forwarded to the
witnesses for your response. I ask our witnesses to please
respond as promptly as you are able.
This hearing is adjourned.
[Whereupon, at 10:16 a.m., the subcommittee was adjourned.]
A P P E N D I X
June 5, 2024
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