[Senate Hearing 118-186]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 118-186


 CRYPTO CRASH: WHY FINANCIAL SYSTEM SAFEGUARDS ARE NEEDED FOR DIGITAL 
                                 ASSETS

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                                   ON

    EXAMINING THE CONCEPTS AND PRINCIPLES OF CONVENTIONAL FINANCIAL 
 SERVICES REGULATION THAT CAN BE APPLIED TO DIGITAL ASSETS AND RELATED 
                                MARKETS
                               __________

                           FEBRUARY 14, 2023
                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                

                Available at: https: //www.govinfo.gov /
                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
54-457 PDF                 WASHINGTON : 2024   

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                       SHERROD BROWN, Ohio, Chair

JACK REED, Rhode Island              TIM SCOTT, South Carolina
ROBERT MENENDEZ, New Jersey          MIKE CRAPO, Idaho
JON TESTER, Montana                  MIKE ROUNDS, South Dakota
MARK R. WARNER, Virginia             THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts      JOHN KENNEDY, Louisiana
CHRIS VAN HOLLEN, Maryland           BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada       CYNTHIA LUMMIS, Wyoming
TINA SMITH, Minnesota                J.D. VANCE, Ohio
KYRSTEN SINEMA, Arizona              KATIE BOYD BRITT, Alabama
RAPHAEL G. WARNOCK, Georgia          KEVIN CRAMER, North Dakota
JOHN FETTERMAN, Pennsylvania         STEVE DAINES, Montana

                     Laura Swanson, Staff Director

               Lila Nieves-Lee, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                  Amber Beck, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                       Pat Lally, Assistant Clerk

                                  (ii)


                            C O N T E N T S

                              ----------                              

                       TUESDAY, FEBRUARY 14, 2023

                                                                   Page

Opening statement of Chair Brown.................................     1
        Prepared statement.......................................    31

Opening statements, comments, or prepared statements of:
    Senator Scott................................................     3
        Prepared statement.......................................    32

                               WITNESSES

Lee Reiners, Policy Director, Duke Financial Economics Center....     5
    Prepared statement...........................................    34
    Responses to written questions of:
        Chair Brown..............................................    99
        Senator Fetterman........................................   110
Linda Jeng, Visiting Scholar on Financial Technology, Georgetown 
  Institute of International Economic Law, and Adjunct Professor 
  of Law.........................................................     7
    Prepared statement...........................................    67
    Responses to written questions of:
        Senator Fetterman........................................   113
        Senator Lummis...........................................   116
Yesha Yadav, Vanderbilt University Law School....................     8
    Prepared statement...........................................    88
    Responses to written questions of:
        Chair Brown..............................................   119
        Senator Lummis...........................................   122

              Additional Material Supplied for the Record

Letter submitted by NAFCU........................................   127
Statement submitted by Chamber of Progress.......................   128
Statement submitted by ICBA......................................   131
Statement submitted by Prometheum................................   134
GWU Legal Studies Research Paper, Arthur E. Wilmarth, Jr.........   137

                                 (iii)

 
 CRYPTO CRASH: WHY FINANCIAL SYSTEM SAFEGUARDS ARE NEEDED FOR DIGITAL 
                                 ASSETS

                              ----------                              


                       TUESDAY, FEBRUARY 14, 2023

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:34 a.m., via Webex and in room 538, 
Dirksen Senate Office Building, Hon. Sherrod Brown, Chair of 
the Committee, presiding.

            OPENING STATEMENT OF CHAIR SHERROD BROWN

    Chair Brown. The Committee on Banking, Housing, and Urban 
Affairs will come to order.
    I apologize to the witnesses and to the observers today, 
both in person and the Committee room and those watching 
remote, for the delay. Senator Scott and I were at a briefing 
we will not talk about any more than that, on what has happened 
with China and what has happened with the balloons that the 
military and others have protected us from, if you will. So we 
needed to stay and at least hear the generals make their 
remarks to us.
    What a difference a year makes. Go back to last year's 
Super Bowl. The cryptocurrency industry spent a whopping $54 
million on eight ads promising Americans untold riches and the 
chance to make history. Of course, they did not tell us about 
the high fees, the risk of loss, the outright theft that 
plagued the crypto industry. But if you watched the Super Bowl 
2 nights ago, you did not see a single ad for crypto.
    The cryptocurrency industry has imploded. In 2022, the 
crypto market lost $1.46 trillion. That is 1.46 million, I am 
sorry, thousand billion in value. Hackers and fraudsters, often 
tied to the regimes in Pyongyang and Moscow, have stolen over 
$3 billion. Crypto firms have slashed over 1,600 jobs. And as 
crypto vanishes, crypto values crashed last year, platforms 
began collapsing, creating more losses across the rest of the 
crypto ecosystem. The crypto firms that are left have had to 
halt customer withdrawals, freezing people out from their own 
money.
    While crypto contagion did not infect the broader financial 
system, thank God, we saw glimpses of the damage it could have 
done if crypto migrated into the banking system. The handful of 
banks with close ties to the crypto industry have needed 
liquidity lifelines after they suffered large withdrawals.
    This crypto nightmare is not over yet. We are still 
learning the full extent of the fallout from the FTX collapse. 
In December, this Committee heard about the excessive risk-
taking and misconduct at FTX. The customers who lost money are 
only now understanding the reality of the products they were 
sold.
    As these crypto firms filed for bankruptcy, regulators and 
policymakers have also learned how out of control some of those 
businesses were. They were overleveraged. They were 
undercapitalized. They had no internal risk controls. They were 
careless with customers' money. In the case of FTX, they used 
it to line their own pockets. Now the money of millions of 
Americans is trapped, and they might never get it back.
    Last year, I warned that the splashy Super Bowl ads left 
out key details. A year ago, I said, as Chair of this 
Committee, big crypto companies are looking to make big 
profits, are desperate to reach as many Americans as they can, 
hence, the $54 million in ads in the Super Bowl. They brought 
in celebrities and gimmicks to make crypto sound exciting and 
daring and profitable, immensely profitable.
    These ads left a few things out. They did not mention the 
fraud. They did not mention the scams. They did not mention the 
outright theft. The ads did not point out that you can lose big 
in crypto's huge price swings. They did not tell you about the 
high fees pocketed by the crypto companies, and they sure did 
not explain that crypto markets lack basic investor protections 
and oversight.
    The results were as predictable as they are tragic. 
Contrary to crypto evangelists' claims of democratizing 
finance, it is not the early adopters or the big money 
investors left holding the bag. When it comes to crypto, turns 
out fortune does not favor the brave; it favors wealthy 
insiders.
    It is not just about a few bad actors that did not do 
things quite the right way. These crypto catastrophes have 
exposed what many of us already knew; digital assets, 
cryptocurrencies, stablecoins, investment tokens are 
speculative products run by reckless companies--we know that is 
true--that put Americans' hard-earned money at risk, not 
surprising from an industry that was created to skirt the 
rules.
    Whether it is Facebook Libra or the explosion of crypto, I 
have always been concerned about shiny new products that really 
just offer another way to profit off the backs of working 
Americans and, at the same time, threaten the real economy. It 
is time now to consider how to protect consumers from 
unregulated digital assets and, ultimately, whom we want our 
financial system to serve.
    Last Congress, this Committee examined the risks of crypto 
to our economy, explored the mechanics behind stablecoin 
companies, looked at how regulators in Congress can protect 
consumers. We learned how crypto can be used to commit crimes 
like drug running and human trafficking, which threaten our 
national security and help fund terrorists and rogue regimes. 
We looked at how fraud and speculation in the crypto market 
hurt investors and savers.
    Recent crypto meltdowns have made clear we need a 
comprehensive framework to regulate crypto products to protect 
consumers and our financial system.
    Today, we will examine how time-tested financial safeguards 
can help protect against the harms and the risks of crypto 
products. We will start by taking a closer look at these basic 
principles of regulation:
    Clear disclosures and transparency essential so retail 
customers and investors can understand how a token or crypto 
platform works.
    Prohibitions on conflicts of interest and self-dealing by 
insiders is fundamental. Our markets only work when they work 
for everyone.
    Protecting consumer funds by separating them from company 
assets. Investor dollars cannot be a slush fund for the 
executives' benefit.
    Internal governance and risk management to make sure if a 
platform takes customer funds it acts prudently.
    Strong consumer and investor rights and protections that 
are foundation of trust in any financial system and central to 
a functioning market.
    Anti-money laundering and fraud prevention to make sure 
that malign actors and evil Nation States cannot fund 
themselves and evade law enforcement.
    Oversight and supervision to hold companies accountable 
because access to our financial markets is a privilege, not a 
right that can be abused.
    These are basic, commonsense principles that have developed 
over centuries of financial system regulation--the wildcat 
money of the 1800s, the repeated banking panics of the Gilded 
Age, the 1929 stock market crash, the savings and loan crisis 
in our lifetime, the dot-com bubble, the Great Financial 
Crisis.
    These crises are the story of speculative bubbles fueled by 
investor euphoria and the promise that ``this time it is 
different'' even though it really never is. The lessons learned 
are the product of hard-earned experience--experience born of 
real people losing real money and of real dreams shattered.
    Crypto is not special. We can start with these commonsense 
principles as we consider a regulatory framework for digital 
assets that puts consumers first and, above all, keeps our 
financial system safe. I trust this Committee, as the Ranking 
Member often says, can find common ground and work together to 
protect investors from crypto risks.
    Ranking Member Scott.

             OPENING STATEMENT OF SENATOR TIM SCOTT

    Senator Scott. Thank you, Mr. Chairman, and before I dig 
into my opening comments, I want to address the elephant in the 
room. If Chairman Gensler is going to take action, enforcement 
action, Congress needs to hear from him very soon. The Chairman 
had lots of time to do the rounds on the morning talk shows. If 
he has time for that, he should be here testifying with us this 
morning, and I hope that we see him here very soon. Thank you, 
Chairman Brown.
    The free market economy was formed by financial innovation. 
It is the engine that continues to drive our economy today, but 
every engine needs fuel. And, in order to advance as a country, 
we must continue to grow and innovate, but we must do so in a 
safe and sound manner.
    Innovation can increase access to traditional financial 
services and may foster new, emergent technologies that promote 
financial independence, access to credit, and capital 
formation. We all know and understand how technology can 
improve our daily lives, from using our iPhones or our phones 
to open bank accounts to opening a digital marketplace. If we 
foreclose financial innovation, we limit future generations 
from growth and opportunity.
    That said, financial innovation must be done so in a safe 
and sound manner, which, unfortunately, has not been the case 
with a number of actors in the digital asset space. For 
example, for some time, FTX was considered the darling of the 
crypto industry. Unfortunately, instead of protecting 
customers' interest and using customer funds in the manner 
intended, Sam Bankman-Fried, FTX's owner, stole millions of 
dollars of customers' funds and used them to finance risky bets 
and to pay for luxury penthouses in the Bahamas.
    When I consider this massive failure, I wonder whether our 
regulators, when they supposedly already had the authority, 
were they using those authorities?
    In recent statements, the regulators, the SEC specifically, 
have noted that it is the responsibility of crypto firms to 
comply with existing regulations, but it is also the 
responsibility of regulators to enforce existing regulations 
and to conduct appropriate, effective supervision.
    The American people deserve to know why no action was taken 
prior to FTX's collapse and how millions of dollars of 
Americans' hard-earned money just vanished into nothing. And it 
was not just FTX. If the SEC had provided even the slightest 
bit of guidance, I wonder if we would have been able to protect 
investors from the collapse of Terra and Luna in May, Celsius 
in June, Voyager in July, and BlockFi in November.
    This is particularly alarming when we see the reports that 
44 percent of Americans who own and trade digital assets are 
new investors or people of color, which means when there is a 
$2 trillion drop in the market cap our most vulnerable citizens 
bear the significant brunt.
    We must hold companies that harm consumers accountable, but 
we must empower consumers through financial education so that 
they can more accurately understand the risk posed by different 
assets classes. Whether it starts in the classroom or in the 
boardroom, financial literacy provides an avenue for 
individuals to make better decisions and climb the economic 
ladder. Nonetheless, regulators have put their misplaced focus 
on progressive social issues.
    So we have to ask ourselves, where do we go from here?
    To date, the SEC has failed to take any meaningful, 
preemptive action to ensure this type of catastrophic failure 
does not happen again. If they have the tools they need, were 
they just asleep at the wheel? If they do not, why aren't they 
here to tell us what they need? We would be happy to have 
Chairman Gensler testify sooner, much sooner, than later.
    Moving forward, we must take a thoughtful, bipartisan, and 
balanced approach that protects consumers and promotes 
innovation and opportunity. I look forward to hearing our 
witnesses' perspectives on how we can continue to drive 
innovation and opportunity while ensuring consumers are 
protected.
    Thank you, Chairman.
    Chair Brown. Thank you, Senator Scott.
    I will introduce today's three witnesses. We will hear from 
Lee Reiners, Policy Director at the Duke Financial Economics 
Center and a lecturing fellow at Duke University School of Law. 
Welcome, Mr. Reiners.
    Professor Linda Jeng is the Chief Global Regulatory Officer 
and General Counsel of the Crypto Council for Innovation. She 
is also the Visiting Scholar on Financial Technology and 
Adjunct Professor of Law at Georgetown University Law Center's 
Institute for International Economic Law and a senior lecturing 
fellow also at Duke Law School.
    Professor Yesha Yadav is the Milton Underwood Chair 
Professor of Law and Associate Dean at Vanderbilt Law School. 
Professor Yadav, welcome you.
    Mr. Reiners, if you would begin.

   STATEMENT OF LEE REINERS, POLICY DIRECTOR, DUKE FINANCIAL 
                        ECONOMICS CENTER

    Mr. Reiners. Chairman Brown, Ranking Member Scott, and 
Members of the Committee. Thank you for inviting me to testify 
at today's hearing.
    My name is Lee Reiners, and I am the Policy Director at the 
Duke Financial Economics Center and a lecturing fellow at Duke 
University School of Law. At Duke, I teach courses in 
cryptocurrency law and financial regulation, and prior to 
entering academia, I spent 5 years examining systemically 
important financial institutions at the Federal Reserve Bank of 
New York.
    Satoshi Nakamoto introduced the first cryptocurrency, 
Bitcoin, to the world in a 9-page white paper posted on 
Halloween 2008, and the first Bitcoin transaction occurred in 
January 2009. Fourteen years, thousands of cryptocurrencies, 
and trillions of investor losses later, crypto scarcely 
resembles the ``purely peer-to-peer version of electronic 
cash'' first envisioned by Satoshi.
    By technology standards, crypto is not new. For comparison, 
the iPhone was introduced in 2007. Anyone who held a smartphone 
in their hand for the first time immediately recognized its 
transformative potential. More recently, OpenAI made the 
artificial intelligence chatbot, ChatGPT, available to the 
public last November. Two months later, ChatGPT had 100 million 
monthly active users, making it the fastest growing consumer 
application in history.
    After 14 years and countless claims that crypto represents 
the future of money, finance, or something else, we have yet to 
see crypto's killer use case. In fact, only 16 percent of U.S. 
adults have invested in, traded, or used crypto. The data is 
clear; most people invested in crypto simply because they 
thought they could sell it to someone at a higher price in the 
future. Sadly, these people were wrong.
    Fourteen years have provided ample evidence of the dire 
harm cryptocurrency inflicts throughout our society. Beyond the 
billions in investor losses due to frauds, hacks, and scams, 
crypto undermines our national security by facilitating 
terrorists' financing and sanctions evasion. It undermines our 
economic security by fueling a surge in ransomware attacks that 
have crippled American businesses, health care systems, and 
municipal governments. And, it jeopardizes our climate goals by 
needlessly consuming massive amounts of energy that contribute 
to carbon emissions and electronic waste.
    I ask, what benefits do we have to show for these costs?
    Even as we stand in the ashes of the FTX implosion, the 
crypto industry is spinning new narratives to deflect and 
obfuscate the damage that they have wrought. One such line goes 
that Sam Bankman-Fried was just a bad apple and that the 
problem lies not with crypto's underlying technology but with 
centralized crypto intermediaries, but FTX was not an isolated 
incident--Terra (LUNA), Celsius, Voyager, BlockFi, Axie 
Infinity, Genesis, Mango Markets. How many more must fail 
before we conclude that the entire barrel is rotten?
    Another self-serving line spun by crypto boosters is that 
policymakers must embrace innovation or else the crypto 
industry will migrate to other jurisdictions with a more 
favorable regulatory climate. Well, this implies that 
innovation is an unmitigated good. The truth is that innovation 
is value-neutral. It could be used for good or bad. Instagram 
for kids is technically innovative, but does anyone think it is 
a good idea?
    Looking at crypto, it is clear that the costs outweigh the 
benefits. So why would we want to embrace it?
    The millions of Americans who invested in crypto only to 
see their hard-earned money evaporate do not care whether 
crypto is classified as a commodity or a security. They do not 
care whether the industry is regulated by the SEC, CFTC, or 
some other agency. They only care about having the same basic 
safeguards they have come to know and expect from the 
traditional financial system. Unfortunately, we have let them 
down.
    The time has come for action--action that only Congress can 
provide. While I agree with SEC Chairman Gary Gensler that most 
cryptocurrencies are securities subject to SEC registration and 
disclosure requirements, some cryptocurrencies, like Bitcoin, 
are commodities. While the CFTC regulates commodity 
derivatives, they do not regulate commodity spot markets. The 
practical effect of this structure is that cryptocurrency 
exchanges in the U.S. are presently not regulated at the 
Federal level.
    In my written testimony, I provide a detailed roadmap for 
how Congress can close this gap. I urge Congress to carve out 
cryptocurrency from the definition of commodity in the 
Commodity Exchange Act and recognize cryptocurrencies as 
securities under a special definition to the securities laws. 
This would give the SEC exclusive authority to regulate all 
aspects of the crypto industry. The SEC simply has more 
expertise, more resources, and more appetite for enforcement in 
the crypto realm than the CFTC does. Most importantly, unlike 
the CFTC, the SEC has a statutory mandate to protect investors.
    Whatever Congress decides to do, the status quo is simply 
untenable. I look forward to discussing the way forward with 
you. Thank you.
    Chair Brown. Thank you, Professor Reiners.
    Professor Jeng, welcome.

    STATEMENT OF LINDA JENG, VISITING SCHOLAR ON FINANCIAL 
TECHNOLOGY, GEORGETOWN INSTITUTE OF INTERNATIONAL ECONOMIC LAW, 
                  AND ADJUNCT PROFESSOR OF LAW

    Ms. Jeng. Chairman Brown, Ranking Member Scott, and Members 
of the Committee, it is a pleasure to be here with you today. 
Thank you for the opportunity to testify.
    The Banking Committee was where I cut my teeth on financial 
policy, working on the response to the global financial crisis. 
I have been impressed by, and am thankful for, the 
bipartisanship this Committee has long embraced. Today's 
hearing is yet another example of its leadership.
    With inflationary pressures not seen since the 1970s, 
market volatility, and changes to the Fed's longstanding 
monetary policies, I have been asked to discuss how best to 
strategically think about the regulatory future of our digital 
economy. As a former regulator myself, I am particularly 
concerned about this area of our shared digital future and how 
we can all ensure the best outcomes for American consumers 
while promoting innovative.
    In this light, I am testifying in my personal capacity as 
an academic and researcher. I am a visiting scholar on 
financial technology and adjunct professor at the Institute of 
International Economic Law at Georgetown and a senior lecturing 
fellow at Duke Law. In addition, I am the Chief Global 
Regulatory Officer of the Crypto Council for Innovation, a 
global industry alliance of companies operating in the digital 
assets ecosystem.
    Technological innovation enhances people's lives in 
meaningful ways. As someone who has spent years working on 
financial regulation in a number of roles, I know that in the 
financial sector policies should focus on a number of key 
areas: empowering consumers, ensuring open markets, increasing 
efficiency, and lowering costs for consumers. In short, 
technological innovation should be harnessed to improve access, 
efficiency, and equity for digital consumers.
    To facilitate the growth of a resilient and sustainable 
digital future, policymakers should be intentional in their 
choice of building blocks. In my experience, these blocks must 
address a range of issues, including consumer and investor 
protection, digital money, digital identity, decentralized 
finance, private commercial law, bankruptcy, accounting, tax, 
technology standards, energy, illicit finance, and national 
security.
    The development of a flourishing digital ecosystem 
ultimately relies upon innovators as well as laws, regulations, 
and policies that guide policymakers, investors, and businesses 
to facilitate long-term value. Currently, companies operating 
in the digital asset space in the U.S. are subject to a 
patchwork of State and Federal regulatory requirements.
    For example, crypto exchanges typically must secure a State 
money transmission license or obtain a license through a 
tailored regime such as the New York Department of Financial 
Services BitLicense, and importantly, at the Federal level, 
companies are required to be registered as money service 
businesses with the U.S. Treasury's FinCEN and comply with AML/
CFT rules. But the absence of a transparent and consistent 
Federal regulatory framework, coupled with successful State 
regulatory regimes, causes uncertainty for businesses and 
innovators while often failing to protect consumers and 
investors.
    In the past year, we have seen legitimate projects fail and 
outright fraud committed against customers transacting in 
digital assets. Both have caused significant harm. These losses 
underscore the urgent need to establish formal Federal 
regulatory oversight and demonstrate the inadequacy in 
regulating solely by enforcement.
    To date, and for the purposes of this Committee's 
jurisdiction, the SEC has not initiated any formal rulemaking 
process to update securities laws that are decades-old to 
account for the unique attributes of digital assets that are 
determined to be securities. Given this unusual departure from 
the normal and well-established process of public rulemaking, 
Congress urgently needs to pass thoughtful, comprehensive 
legislation that establishes a Federal regulatory framework for 
digital assets addressing both securities and nonsecurities. In 
this complex and nuanced space, the details matter.
    Failure to enact rules, even through rulemaking or 
legislation, that protect investors and allow digital assets to 
develop in the U.S. would risk offshoring innovation and 
putting American business, consumers, and the economy at a 
competitive disadvantage with our foreign peers. It could also 
jeopardize an important national security lever of the U.S. 
Government, the preeminence of our financial system.
    Thank you again for the opportunity to testify today. I 
look forward to answering your questions.
    Chair Brown. Thank you, Professor Jeng.
    Professor Yadav, welcome.

   STATEMENT OF YESHA YADAV, VANDERBILT UNIVERSITY LAW SCHOOL

    Ms. Yadav. Chairman Brown, Ranking Member Scott, 
distinguished Members of this Committee, thank you so very much 
for the opportunity to be here today. It is an extraordinary 
honor and a privilege for me. I hope that my testimony today 
can be of some help to this Committee as you progress your 
review into thinking about the causes of this crypto and the 
steps that we need to take to shore up this financial system as 
well as, most importantly, to protect those who use it.
    Now we have been asked today to consider why financial 
system safeguards are needed for the cryptocurrency market, and 
I think the evidence is becoming clear for all of us to see. 
The digital assets market today is big. It is becoming popular. 
It is sophisticated, and it is becoming increasingly 
financialized. And the cost of being late to regulation is 
becoming obvious to all of us.
    Now as we have seen in the case of FTX, for example, a case 
that I imagine we will talk about extensively during this 
hearing, the bankruptcy court in Delaware is having to deal 
with the consequences. We are talking about approximately 9 
million estimated creditors, 134 entities, everyday customers, 
both retail as well as institutional, that are now clamoring to 
get their money outside of the bankruptcy system.
    At the same time, these legal processes are extremely 
expensive. They are long, and the outcomes are extremely 
unclear. But what is becoming straightforward here is that 
these customers are likely to become unsecured creditors of the 
estate and very likely to be last in line to be paid out when 
the recoveries do come.
    Now, Senators, this entire episode obviously casts enormous 
doubt, reduces trust and confidence, of course, in the 
cryptocurrency exchanges as well as the cryptocurrency 
industry.
    But, Senators, it also casts a lot of doubt on the trust 
and confidence of the regulatory system. It is unfortunate that 
expert technical determinations about very important matters, 
such as how assets in cryptocurrency--for cryptocurrency assets 
should be custodied, how those custody arrangements should 
work, are now having to be taken--are now getting to be taken 
not by our extremely expert, our extremely talented regulatory 
agencies but, instead, by the bankruptcy court. Now the 
bankruptcy court is, of course, extremely talented and 
extremely expert, but it is an expert in distributing scarce 
assets across hurt and distressed creditors.
    Now, Senators, what I would like to propose to you today is 
to create a solution that can help to get a regulatory 
framework up and running quickly, one that is useful for, and 
able to, integrate quickly into the larger, comprehensive, 
Federal oversight system that we have today.
    What I am proposing is the creation of a self-regulatory 
regime where cryptocurrency exchanges are tasked with oversight 
of the market as a whole. This would bring cryptocurrency 
exchanges in line with traditional commodities and securities 
exchanges where self-regulation by exchanges has been the norm, 
essentially, for centuries. What this proposal would do would 
essentially task cryptocurrency exchanges with writing rules, 
with monitoring the market, and with exercising discipline.
    But, really, the goal of this proposal, Senators, is 
threefold:
    Firstly, it seeks to bring cryptocurrency exchanges within 
a framework for Federal oversight. Our agencies would be tasked 
with vetting and carefully overseeing these exchanges to make 
sure that they are doing their job. They would have to make 
sure that these exchanges have the organizational capacity that 
they need to do their job.
    Second of all, it would seek to make cryptocurrency 
exchanges accountable. What that would mean is that if they 
fall in their ability to do oversight then they would have to 
pay. They would have to pay financial penalties. In addition, 
of course, they would suffer loss of reputational damages.
    Now third of all, it would make sure that cryptocurrency 
exchanges are in fact paying to look after their market. This 
means using their resources, using their expertise, using their 
knowledge, using their proximity to the technology to make 
their marketplace, as well as themselves, much more honest, 
much more stable, and much more driven toward protecting 
customers.
    Now, Senators, to be very, very clear with you, this is not 
in any way a substitute for public regulation. Rather, it is 
designed to be a complement. This is a solution that is 
supposed to integrate seamlessly into a larger Federal 
oversight framework, and it is one that we have seen working in 
the traditional market for a very long time indeed.
    Senators, this is also not a proposal that is without its 
faults. There are certainly enormous faults to be had in this 
market. Now certainly, in the traditional marketplace, we have 
seen exchange oversight by exchanges suffer from various 
conflicts of interest.
    So this is a really a proposal, Senators, which is designed 
to get a market up and running quickly. It seeks to make 
agencies--it seeks to make the exchanges responsible. It seeks 
to make the exchanges accountable. And, it seeks to force these 
exchanges, which are anchor pieces, central parts of this 
entire ecosystem--responsible much more formally for bringing 
safety, stability, and consumer protection to the heart of the 
cryptocurrency market.
    Senators, the adage goes that we should not let the crisis 
go to waste, and I would urge you to not let that happen here 
so that we are not left wondering how we could prevent another 
FTX from happening. Thank you so very much, and I look forward 
to your questions.
    Chair Brown. Thank you, Professor Yadav.
    Professor Reiners, start with you. Some in the crypto 
industry have complained about recent SEC enforcement actions 
against crypto firms for offering unregistered investment 
products. Some of these companies entice consumers to put their 
crypto to work to earn double-digit returns. Shouldn't a 
financial product that takes in billions of dollars in retail 
consumer money operate with basic consumer protections?
    Mr. Reiners. Yes, it should, Senator, and I would point out 
that the crypto industry is very fond of criticizing SEC for 
regulation by enforcement, but the truth is that it is just a 
catchphrase that the industry uses to deflect from the fact 
that they have willingly chosen to operate outside the 
regulatory perimeter.
    And the SEC has been quite clear, going back to the 
chairmanship of Jay Clayton, most cryptocurrencies are 
securities that need to be registered with the Commission. And 
the SEC has filed over 125 enforcement actions, and they have 
not lost a single case related to cryptocurrency, so the judges 
think it is quite clear as well. The only people who seem to be 
confused about this is the crypto industry.
    Chair Brown. Thank you.
    Professor Yadav, your testimony discussed how stock 
exchanges are regulated, how to extend similar safeguards to 
crypto exchanges. What are the established safeguards that can 
benefit consumers, that can increase market transparency and 
prohibit conflicts?
    Ms. Yadav. So, Senator, thank you so much for that 
question. Stock exchanges have been providing self-regulation 
of this market for a long time, and I think it is important to 
consider the counterfactual here, which is that these extremely 
powerful, extremely central, extremely important parts of the 
institution, what would happen if they were not required to do 
so.
    And what we have here is essentially a marketplace in which 
we are using the private self-interest of these exchanges to 
provide a public good. Now in the context of the exchanges 
themselves, what they do provide is having extremely sort of--
is having expertise within the marketplace to surveil trading 
from a very proximate standpoint. They are responsible for 
enforcing, under Section 6 of the Securities and Exchange Act, 
standards of preventing fraud, manipulation, and to create a 
fair and equitable marketplace. Now certainly this oversight is 
not perfect, Senator, but at the same time it is better than 
what we would have if we did not have it.
    And so in this context--you know, there have been various 
steps taken in the context of preventing these conflicts of 
interest, so for example, entity separations within these 
exchanges. FINRA is another organization that is there to 
prevent potential conflicts from occurring. And so overall this 
is a system that provides a complement to public oversight 
rather than necessarily being any kind of substitute for it.
    Chair Brown. Thank you.
    Mr. Reiners, again, the collapse of FTX has focused 
attention on basic protections like safeguarding customer money 
so companies cannot use it for their own personal benefit. 
Explain briefly the urgency to us, the urgency to develop 
better standards for the custody of consumer assets.
    Mr. Reiners. Yes, Senator. So unfortunately, millions of 
Americans have found out that if they have used a crypto 
exchange and that exchange has failed they are now unsecured 
creditors in that bankruptcy estate, so they do not have 
control or access to those assets. Of course, that is very 
different than the situation we have with banks, which are 
FDIC-insured, or with traditional broker-dealers, which are 
subject to SIPC insurance.
    So if there was going to be one change that I would 
recommend Congress focus on, it would be requiring these crypto 
platforms to segregate customer assets from firm assets so that 
if these firms do get into trouble customers will still have 
access to their funds.
    Chair Brown. Thank you.
    Last question I would ask all three of you to answer. There 
are many ways to protect consumers in the crypto market. One 
thing is clear, that customers deserve to understand better the 
investment they are making. My question for the panel: Without 
debating the ways cryptocurrencies are different from stocks or 
bonds, is it reasonable to start the conversation with the 
investment disclosures that we are familiar with?
    So, Professor Yadav, start with her--with you. Let us go 
down the line. Each of you briefly explain how we can use 
existing disclosure principles for crypto.
    Ms. Yadav. Senator, I am so glad you asked that question. 
This is an essential part of the process, which is to have 
disclosures reveal insight about what exactly are the 
governances of the issuers that are providing this technology, 
in addition about the blockchains as well as, obviously, the 
underlying technologies that are animating these offerings.
    Now what we have here today is a disclosure system that 
needs to work. As Ranking Member Scott discussed earlier, this 
is a technology that has been popularized and is being used by 
increasingly younger people, folks in minority communities, and 
so it is extremely important not just to focus on disclosure 
but also literacy, making sure that these disclosures work.
    I have a terrific coauthor that has done work in making 
sure that disclosures are readable, making sure that 
disclosures are usable, you know, encouraging people in 
different ways to engage with the actual information they are 
seeing. Otherwise, just having a thick bundle of information 
does no good whatsoever if it is not something that is able to 
communicate these risks and opportunities effectively.
    Chair Brown. Thank you.
    Professor Jeng.
    Ms. Jeng. This is a very important question. One of the 
very interesting issues about this is that it is transparent in 
code. Right? But as a former regulator who worked with 
blockchain engineers, and I do not code, I need the engineers 
to actually explain to me how the product was actually 
designed. So white papers that clearly explain how it is 
designed, what the risks are, who holds the private keys, the 
governance, the voting rights, and then more importantly, where 
are the funds held, these are the important issues that need to 
be included in the disclosures.
    Chair Brown. Thank you.
    Mr. Reiners.
    Mr. Reiners. Senator, we have had a basic bargain in our 
capital markets since the 1930s, and that is that companies 
that want to raise money from the public have to disclose the 
risk involved in that and then investors are free to choose 
what risks they want to take. And so I see no reason why that 
principle should not apply to crypto although I will agree with 
Professor Yadav's point that maybe the specifics of what gets 
disclosed can be debated.
    And I think the SEC does have the authority, and I think 
Congress should give them the authority, to draft customized 
disclosure regimes for certain decentralized crypto products, 
and the EU is moving in that direction. But disclosure is 
necessary.
    Chair Brown. Thank you. I guess the $54 million of Super 
Bowl ads a year ago and zero ads this year sort of underscore 
that.
    Ranking Member Scott.
    Senator Scott. Thank you, Mr. Chairman. Just to finish 
Professor Yadav's point on disclosures, having sold mutual 
funds in a past life, I will say that having a prospectus that 
the average person can understand would be really helpful. The 
truth of the matter is disclosure sounds great until you try to 
read a prospectus and you cannot figure out what in the world 
it says. So I think plain English would be very helpful for the 
vast majority of our folks who are first-time investors to 
understand what it is that they are investing in. I would say, 
without any question, this is an area where that is really 
important because of the complexity of the actual underlying 
asset itself.
    Right now, the United States has the strongest and most 
enviable capital markets in the world. The reason for this is a 
very simple reason; the sun never sets on American innovation. 
Over decades, we have fostered a financial environment that has 
decreased poverty, increased home ownership, and made the 
American Dream a reality for more and more of our citizens.
    Our goal should not be any different when it comes to 
digital assets. Our aim should be to provide rules of the road 
that are clear, consistent, and most importantly, foster an 
environment that rewards opportunity while ensuring consumers 
are informed and protected against fraud and deception. As we 
speak here, several countries across the globe are creating 
their own framework to address the rise of cryptocurrency.
    Unfortunately, our regulators have muddied the waters. We 
have been told everything from we need legislation to, more 
recently, that regulators have the tools they need to supervise 
this industry. That is quite a flip-flop.
    Once again, it is really important that we have Chair 
Gensler here before September. It is far too far in the future 
for us to wait that long before we hear from Chairman Gensler.
    The regulators have permitted activity in this space 
without providing clear rules of the area, which has 
unfortunately led to the multiple failures that bring us here 
today. Let us be clear. Had the SEC provided anything besides 
hostility to the crypto industry we may have been able to save 
investors from losing billions of dollars on FTX, Celsius, 
BlockFi, and the list goes on.
    So my question, Professor Jeng, what should Congress keep 
in mind when it considers developing an approach to the crypto 
industry? How do we strike a balance between appropriate and 
thoughtful regulation and the tool of innovation that it could 
be?
    Ms. Jeng. Thank you, Senator, for that very important 
question. We are at a pivotal moment in history where the 
decisions that you all make as policymakers will affect how our 
economy grows in the future, and currently, we are becoming a 
data-driven, digital economy. What does that mean? That means 
that our activities are increasingly based upon data and on 
blockchain technologies. So the kind of guardrails that you put 
in place now will affect generations to come.
    Many of the issues that you need to think about will 
include certainly consumer protection but also consumer rights 
and consumer empowerment. Currently, there are countries around 
the world who are also looking at how to take advantage of 
crypto technologies, China being a good example, but in that 
situation it is the Government that wants to actually control 
the personal data. Here is an opportunity for you all to create 
the framework for consumer empowerment, for consumer data 
rights, that serves as a foundation for a digital economy.
    Senator Scott. As I noted in my opening statement, 
innovation can be a positive driver in expanding access to 
traditional financial services and can foster new, additional 
technologies that promote financial independence, access to 
credit, and capital formation. It is astounding what financial 
innovation can do for people when they are given the ability to 
make their own choices and allowed the flexibility to innovate.
    While we have talked about cryptocurrency a lot, innovation 
in the technology space is not limited to crypto. Fintech is 
another classic example of things that are moving in a positive 
direction.
    Question for the whole panel: Can you speak to the benefits 
you see for everyday Americans in the digital asset space and 
the need to ensure that regulation does not stifle innovation? 
Professor.
    Ms. Yadav. Great. Thank you so much, Senator Scott, for 
that question. Innovation here is something that is moving 
extremely fast in terms of trying to improve the efficiency, 
for example, of the payment system. Now one thing that is very 
clear in the U.S. is that despite us having a state-of-the-art 
financial system, our payment system is lagging behind, and 
what we have seen, for example, in the context of fintech is 
the ability to try and make payments much more usable, for 
example, using smartphone technology, for example, trying to 
have contactless payments.
    The world that we inhabited 10 years ago in terms of 
payments is not the world that we inhabit today, and yet, there 
are still some problems. For example, you know, these are 
things that you have heard in this Committee before. It takes 
time, days in fact, for payments to settle. Checks take days in 
order to move. In addition, obviously, there are enormous costs 
involved with this.
    Now this obviously leaves out folks that do not necessarily 
have a bank account and do not have access to the full panoply 
of financial services. So the question is: How do we make 
innovation work for people so that we are able to bring 
everyone into the fold in a much more inclusive and cheap and 
efficient way?
    Now certainly some of the technologies that are being 
proposed, even in digital assets, are trying to do that, and so 
certainly that is something, a potential use case, that could 
be worth exploring provided that it is, you know, substantively 
and properly regulated.
    Senator Scott. Thank you.
    Professor Jeng.
    Chair Brown. Thank you, Senator Scott.
    Senator Scott. Let me hear from the professor real quick.
    Chair Brown. Oh, I am sorry. That is OK.
    Ms. Jeng. Thank you for the opportunity. So one of the very 
important issues to take into account is consumer rights and 
property rights. We need a clear set of rules.
    And what do I mean by that? My husband is from Ireland. 
When I am in Ireland, I have to drive on the left side of the 
road. If I am not told that, I would get into a car crash. 
Similarly here, we--as a professor looking at the system, there 
is an urgent need for a regulatory framework that clearly 
states what are the consumer rights and also what are the 
responsibilities of crypto participants.
    Senator Scott. Thank you. I am out of time.
    Chair Brown. Thank you, Ranking Member Scott.
    Senator Menendez from New Jersey is recognized.
    Senator Menendez. Thank you, Mr. Chairman. Last fall, the 
Financial Stability Oversight Council released its 2022 report 
on Digital Asset Financial Stability Risks and Regulations, and 
one of FSOC's recommendations was that Congress pass 
legislation providing rulemaking authority to financial 
regulators over the spot market for nonsecurity digital assets.
    Mr. Reiners, why is it important that Congress address this 
gap, and how would you propose that we do it?
    Mr. Reiners. So, Senator Menendez, for the past 10 years or 
so, the big debate when it comes to crypto regulation is, you 
know, are these things commodities or securities, and of 
course, the Howey Test is principally what is used to determine 
whether or not a given token is an investment contract and, 
therefore, a security. Now I happen to agree with Chair Gensler 
that most cryptocurrencies are securities, that they meet the 
Howey Test, but there are some cryptocurrencies--and I will 
just use Bitcoin as an example--that are decentralized enough 
that they are commodities.
    And the CFTC regulates commodity spot markets, but they do 
not--or, they do not regulate commodity spot markets. They only 
regulate commodity derivatives markets although they do have 
fraud and manipulation enforcement authority in commodity spot 
markets.
    So that is the gap that needs to be addressed, and so what 
I recommend--and I have this detailed in my written testimony--
is that Congress carve out cryptocurrency from the definition 
of commodity in the Commodity Exchange Act and include 
cryptocurrency as a new category of security under our 
securities laws so that it is clear to everyone, to the market 
and everyone else, that the SEC has exclusive rulemaking 
authority and jurisdiction over cryptocurrency.
    Senator Menendez. Professor Jeng and Professor Yadav, any 
views on this?
    Ms. Yadav. Thank you so much, Senator Menendez. I think one 
of the main things that we have to figure out how to do, at 
least in my proposal, is to make the private industry 
accountable and to make the private industry responsible. So as 
set out in my written testimony, some of the major--arguably, 
the most important institutions in this economy are the 
exchanges, and we have to find a way to make them play their 
part in making sure that this market becomes a safer and much 
consumer-protected market.
    Now in this context, what I propose is to create this 
framework for exchanges to become self-regulatory organizations 
very clearly under a framework of oversight that could be 
administered by agencies jointly. I think this is a gap here--
in other words, that we are allowing exchanges to become very 
big, we are allowing them to become sophisticated, we are 
allowing them to have governance structures that are extremely 
centralized and subject to conflicts of interest, and we need 
to bring that under control because exchanges are providing on-
ramps into the cryptocurrency market for really the vast swath 
of the population.
    Senator Menendez. Mm-hmm.
    Ms. Jeng. There are many different types of digital assets, 
some of which are like Bitcoin, native cryptocurrencies; others 
are like fiat-backed stablecoins which will act as digital 
money.
    And so for example, if I give you a green paper dollar 
bill, you know when you take it from me that nobody has an 
interest or title to that dollar bill. That is why it acts so 
well as a medium of exchange. To ensure that we will have a 
digital economy that can run on digital money, we need to make 
sure that fiat-backed stablecoins and other types of digital 
money--that could include CBDC as well--are also going to be 
free of interest or title.
    And hence, why putting it under the SEC framework was 
problematic? Because again, you know, I cannot pay you with a 
security.
    Senator Menendez. Mm-hmm. Well, we are trying to figure 
this out. The key element I will be looking for in digital 
asset legislation is a clear prioritization of transparency and 
investor protection, which is also providing for stability--
while also providing for stability and safe innovation. These 
are values that make our current financial system strong and 
effective and should equally apply, I believe, to the digital 
assets.
    Let me just ask you, Professor Jeng and Yadav, for decades, 
the United States has been a leader in the global financial 
system, which has had an immeasurable asset to American 
consumers and, in my role as the Chairman of the Foreign 
Relations Committee, our foreign policy goals as well. We 
should look to continue that leadership as we work to develop 
digital assets regulations.
    Can each of you talk about some of the global trends we are 
seeing on crypto regulation? Is the U.S. ahead or behind the 
curve?
    Ms. Yadav. Senator Menendez, unfortunately, the U.S. is 
extremely behind the curve at this point. One thing that we 
have done, as you mentioned, extraordinarily well over the last 
10 years is have leadership in standard setting. We have been 
incredibly powerful exporters of our financial markets 
regulation abroad, and this is so important because it means 
that other countries have adopted key principles that we use in 
our markets to make our markets work and make our markets safe. 
One example here would be the leverage ratio, for example, that 
we use in our banking system that has now become an export that 
is being used more broadly abroad.
    In the case of digital asset regulation, unfortunately, 
however, we really do not have anything to export at present. 
Unfortunately, other countries have taken a lead, and in 
particular, the EU here has set out a very comprehensive 
framework in the form of the market and the marketing crypto 
assets regulation. Now this likely to come in force in April, 
perhaps later this--you know, April or later this year, and 
this is a very comprehensive framework that has set the stage 
for the U.S. essentially to become a potential second there in 
terms of coming up with a plan for, and an agenda for, digital 
assets regulation.
    So here, it does not feel like we are leading. It feels 
like we are potentially following others where they have taken 
a lead and have set the standards and are using their framework 
to say what rules are good and what rules are bad.
    Ms. Jeng. To add to Professor Yesha's remarks, it is not 
just that other countries are adopting regulations; other 
countries are pursuing very thoughtful, national, digital 
strategies. And you look at the EU, which has in place not just 
MiCA but GDPR and other regulations, like the Digital Markets 
Act. It is all part of a comprehensive strategy that they are 
pursuing.
    The U.K. is in the process of consulting its proposal on 
regulating crypto assets. Australia has been pursuing a long-
term national data strategy and has just come out with its 
proposal on taxonomies of crypto assets. Hong Kong is about to 
come out with a consultation. Singapore just finished its 
consultation in December. As you can see, the list just goes on 
and on, and not to mention China, which has been pursuing a 
multiyear crypto strategy.
    Mr. Reiners. Senator Menendez----
    Chair Brown. Senator Menendez--oh, I am sorry. You wanted 
Mr. Reiners, too. OK.
    Mr. Reiners. So I do not think the U.S. is falling behind. 
I think the important thing is that we get regulation right, 
not that we necessarily be the first.
    And many other jurisdictions that Professor Jeng was 
mentioned, you know, they are embracing crypto because 
essentially they are gambling that it can help juice their 
economy. But look at the situation in the Bahamas, where they 
embraced crypto. They rolled out the red carpet for Sam 
Bankman-Fried, you know, and obviously it did not turn out so 
well.
    So as I said in my opening testimony, you know, crypto is 
doing more harm than good to our society. As you mentioned, it 
is undermining U.S. national security by facilitating sanctions 
of Asian terrorist financing. The dollar and New York status 
for dollar clearing is an instrument of foreign policy, and 
crypto undermines all of that. So we should not be embracing 
something that is undermining our sovereignty.
    And so I think the important thing is getting financial 
regulation right in this space with what I call a dual 
mandate--one, protecting investors, and two, preserving 
financial stability.
    And that is an upside to the most recent crypto winter--is 
that it has not spilled into the traditional financial system, 
and it is largely due to actions of the SEC and the Federal 
banking agencies who have had clear rules in place for the 
better part of a year that basically say, if you are a 
regulated bank and want to engage in crypto activity, you need 
to get permission from us first. And that really prevented a 
lot of banks from engaging more heavily in crypto activity, and 
this story would be very different if we had banks engaging in 
crypto activity.
    Chair Brown. Thank you.
    Senator Vance of Ohio is recognized.
    Senator Vance. Thank you, Mr. Chairman, and thanks to the 
witnesses here.
    I am going to pose this first question to all three of you 
but maybe give you some background where I am coming from. So I 
am probably one of the few Members of the Committee that 
actually owns cryptocurrency. I have been fascinated for it, or 
by it, for a long time. But I also, you know, recognize that 
there are downsides to it, that there are risks that come along 
with it.
    My basic bias here is that we do not really know what it is 
yet, meaning not just cryptocurrency but a lot of the other 
underlying related Web3 technologies and that our regulatory 
approach should basically be to protect consumers while 
ensuring that we do not destroy the dynamic upside of this.
    And here is what I mean by the dynamic upside. Mister--is 
it Reiners? What you just said is fascinating to me in that, 
you know, I can tell, you know, you are sort of skeptical of 
the role that crypto is playing in society right now, and look, 
after what happened with Sam Bankman-Fried, there obviously--
there is a lot of cause for skepticism.
    What I wonder is how people would have described the 
internet in the 1970s and the 1980s, before it was commercially 
available, before it was a major part of the way that we did 
commerce, and that if we had taken an overbearing approach then 
we might have destroyed a lot of the upsides that have come 
over the last three decades.
    So I want to put this question to each of you, maybe just 
going from left to right: How do you think about that, about 
regulating crypto not just in a way that protects consumers and 
also protects the upsides of the technology right now, in 
February of 2023, but ensures that the innovation that is going 
to happen on this platform, which is really how I think of it, 
actually happens in a way that is relatively free, relatively 
fair, and preserves, as Senator Menendez said, the fact that 
this could become a tool in America's foreign policy and 
economic arsenal?
    Mr. Reiners. Yeah, thank you for that question, Senator. So 
I respond by saying that crypto is not new. The first Bitcoin 
transaction was in 2009, so we have a 14-year track record to 
look back and assess this. It did not take the internet 14 
years to prove its worth.
    And so when you look at cryptocurrencies, I would just ask, 
what is the fundamental value? Why are they worth anything? 
Normal financial assets are someone else's liability. Right? 
There is an issuer. Otherwise, where would the returns come 
from?
    There is no reason to think that cryptocurrency is going to 
generate returns indefinitely into the future. It is clear that 
people are just buying it because they think they can sell it 
to someone else at a higher price in the future. There is no 
fundamentals.
    Now that does not mean necessarily that blockchain does not 
have value, and I think there is a way to regulate the risk 
associated with crypto and to the consumer protections point 
that you raise, while still allowing, you know, traditional 
financial services to experiment with blockchain as they are. 
And I think our existing financial regulatory framework is more 
than capable of keeping up with the traditional financial 
system using blockchain.
    But, unbacked crypto assets? There is no ``there'' there, 
and we have plenty of history to prove it.
    Senator Vance. Professor Jeng.
    Ms. Jeng. Thank you, Senator. I like very much your analogy 
to the internet. I was just speaking with a colleague of mine 
at Wharton who had begun his legal career at the FCC, and he 
told me, at that time--and I am dating his age very clearly, 
but he said one the big fights at the FCC was whether to 
license internet charters. I do not even know what that means, 
but the question was: Should internet providers have to 
register with the FCC? Should page providers, site providers, 
et cetera? And if they had decided yes, I think the internet 
would be very different today, and we may not even have 
blockchain technologies.
    So why am I bringing this up? It is extremely important 
that we have open interoperable standards, and what I--that is 
the spirit of blockchain technology. The idea is that these 
technologies produce stacks that are composable, almost like 
Legos. And so with the iPhone you can then build apps on top, 
GPS locators, and then be able to use Uber on top of that and 
then maybe your finances.
    Why we need to think in terms of pushing for open 
interoperable standards is to prevent monopolies of the future. 
So digital identity is going to be the cornerstone of the 
digital economy, and right now there are some companies--and I 
am not going to name them right now, but they are digitizing 
our driver's licenses in closed-wallet solutions. And that 
means these companies--and you can probably guess who they 
are--are going to have an advantage over who are using their 
wallets whenever they are trying to transact and are required 
to share their personal data, including their driver's license.
    And so down the road, you end up with digital transactions 
that are viewable only by these companies, and other companies 
are not allowed to actually build on top of the digital 
identities. So we have to actually set the guardrails in the 
right balance to allow for innovation but not have companies or 
bad players take advantage of that openness.
    Senator Vance. Great. Ms. Yadav.
    Ms. Yadav. Thank you so much, Senator, for that question. 
We have had innovation for as long as we can remember in this 
economy, so for example, from the ATM to all the financial 
engineering that we saw precrisis. We have had a ton of 
innovation that is, you know, constantly and consistently a 
part of the American financial system. The way in which we have 
tackled it is by having a dialogue amongst regulators to 
approach this in a smart way that includes, obviously, 
contributions from the industry.
    Now certainly, as Professor Reiners mentioned, Bitcoin has 
been there for 14 years, but what we have seen in the crypto 
economy, for example, is a real uptick in activity, 
particularly in the last 3 years. So for example, DeFi 
transactions have increased almost 900 percent in 2021. We have 
seen extraordinary transaction volumes in crypto exchanges, 
almost 689 percent gains from 2020 to 2021. So we have seen 
more people coming into this economy to sort of try out new 
products and so forth.
    Now that has obviously created risks, and it means that we 
need to understand them. It means that we need to use the tried 
and tested rules, the tools that we had to understand and 
regulate innovation, to think about innovation, and to 
encourage innovation through, for example, tools like 
disclosure as was discussed earlier in addition to making sure 
that the entities that are engaging in innovation are doing so 
safely, for example, keeping minimum capital buffers, for 
example, making sure that those people are providing products 
and taking money from other people are doing so in a way that 
has proper internal controls. These are things that we have 
used before, we have tried before, that have encouraged 
innovation before.
    I think the need for this now is urgent given the expansion 
and sophistication of the crypto framework, and I think we can 
continue to balance the need for market integrity and consumer 
protection, as well as making sure that we can do innovation 
but provided we can get regulators on board, as well that 
industry contributes to that dialogue in a systematic way.
    Senator Vance. Great. Thank you.
    Ms. Yadav. Thank you.
    Chair Brown. Thank you, Senator Vance.
    Senator Van Hollen of Maryland is recognized.
    Senator Van Hollen. Thank you, Mr. Chairman, and thank all 
of you for your testimony here today.
    Mr. Reiners, in your testimony, you argue that bank 
regulators should learn from previous incidents where crypto 
failures impacted the banks that they worked with, and I agree.
    Earlier, back in December in this Committee, we heard from 
Professor Hilary Allen, and she made a case for a Glass-
Steagall 2.0 model separating banking entirely from crypto 
asset activities.
    In your testimony, you indicate that that is probably 
beyond the agencies' power or authority to do even if they 
wanted to do it, and you urge that we look at other 
alternatives to develop a comprehensive framework that 
clarifies--and I am quoting from your testimony here now--
``comprehensive framework that clarifies the type of crypto 
asset activities banks can engage in and the prudential 
requirements, capital, and liquidity required to engage in such 
activity.'' Could you expand on that and provide a little more 
detail as to what you are thinking?
    Mr. Reiners. Yeah, thank you, Senator. I am a friend and 
admirer of Professor Allen's work, and I certainly agree with 
the sentiment that we should do everything we can to restrict 
crypto from entering the banking system. But as long as crypto 
is legal, you know, then these firms are entitled to banking 
services. So I think the challenge is: Where do you draw the 
line? What specific crypto activity can be done in a safe and 
sound manner?
    And so I think the banking agencies have started off on the 
right foot in having guidance in place that says, if you are a 
regulated bank--so this is the FDIC, OCC, and Fed all have 
guidance in place that says, if you are a regulated bank and 
you want to engage in crypto activity, you have to let us know 
first.
    But again I think more is needed, and so what I recommend 
is that banking agencies do a horizontal exercise where they 
understand all the different ways that banks are exposed to 
crypto and then release that information to the public so that 
not only bank customers but bank investors as well are aware of 
the risks because, you know, the guidance has not been perfect 
and we have seen a few banks that unbeknownst to regulators 
were more exposed to crypto than previously realized.
    And I would just point to Silvergate as a perfect example. 
Over 90 percent of their deposits were from crypto-related 
firms, and in the fourth quarter of last year they saw over $8 
billion in deposits leave. That was over 60 percent of their 
deposit base, and it looks likely that they would have failed 
if they did not get emergency liquidity from the Federal Home 
Loan Bank of San Francisco, which, of course, is not the reason 
that we have Federal Home Loan Banks. They exist to support 
home ownership, not to bail out banks that gamble on crypto.
    So you know, again I think the challenge is: Where do you 
draw the line? The Basel Committee finalized their guidance in 
2000--in December. You know, the U.S. has a history, of course, 
of gold plating, as they say, Basel Standards, and I think that 
is certainly warranted in this case as well because if crypto 
had been more integrated with the banking system the fallout of 
FTX would have been much, much worse.
    Senator Van Hollen. Right. No, I think that is a really 
important point. I guess, just to ask you to expand a little 
bit more on this, do you think our banking regulators are 
taking all the steps that they are authorized to do under 
current law to try to prevent crypto from sort of making its 
way into the banking system in a way that puts consumers at 
risk? Is there any additional measures that they should be 
taking? And, if they have exhausted their authorities, do you 
support legislation along the lines that Professor Allen 
suggested?
    Mr. Reiners. So banking agencies have a broad legal 
authority to prohibit banks from engaging in any activity that 
cannot be conducted in a safe and sound manner. So I do think 
that they can be--they can do more and be more prescriptive 
around what specific crypto-related activities can and cannot 
be done in a safe and sound manner.
    For instance, there is absolutely no reason why banks 
should hold cryptocurrency as a principal on their balance 
sheet. Now the joint statement that the banking agencies 
released at the beginning of January alludes to the fact that 
they would look--that the agencies would look very askance at 
banks that wanted to do that, but I think certainly clear 
guidance that just says, you cannot do this, is warranted.
    Senator Van Hollen. Got it. Thank you.
    Thank you, Mr. Chairman.
    Chair Brown. Thank you, Senator Van Hollen.
    Senator Britt is recognized, from Alabama. Welcome.
    Senator Britt. Thank you, Mr. Chairman. So countless 
Americans confidentially participate in our financial system 
and markets every day. They are informed of the risks 
associated with the decisions they make, and they choose what 
they want to pursue, for example, whether it is stocks or 
bonds, or whether we are talking about mutual funds or 
traditional savings accounts.
    However, what we have seen now is that our current laws and 
regulations do not speak to the recent innovations within our 
financial sector, and in fact Congress has a responsibility to 
act to establish rules of the road to ensure robust 
transparency and protection for consumers and investors. 
However, we have seen this past year alone show the 
consequences of what happens when Congress fails to do that.
    My question is for Ms. Jeng. Just like the rest of the 
financial sector, we must ensure that appropriate, commonsense 
guardrails are in place so consumers have transparency in the 
digital asset space. I have heard you talk about these 
commonsense guardrails. You have mentioned protecting 
consumers, their rights, and empowering them. Can you tell me 
from your perspective what Congress needs to keep in mind while 
developing these types of guardrails?
    Ms. Jeng. Thank you, Senator, for this opportunity to 
expound upon what I think are key foundational building blocks 
that Congress needs to consider. Consumer and investor 
protection, that is crucial, and having clear legal rights in 
the property that they purchase when part of the problem with 
the bankruptcies is that the bankruptcy court had really 
nothing to work with in terms of legal rights. And so here is 
an opportunity for Congress to make very clear that when 
consumers purchase digital assets that they have a property 
right in that digital asset, and then that will be respected in 
a bankruptcy proceeding.
    The other really important concern to keep in mind is that 
this kind of technology is about democratizing financial 
services, and that means when I, for example, moved back to the 
U.S. from Europe I had to pay $4,000 to my European bank to 
move my own savings back to the U.S. and then I also had no 
profit from the spread the bank made when it converted from 
Swiss francs to U.S. dollars.
    This is the type of opportunity that blockchain technology 
can help with. I look forward to that day when I will be able 
to transfer money cross-border to myself and actually also make 
part of that profit in the spread, and that kind of equitable 
interest in financial services is what makes Web3 different 
from, say, Web2.
    And so we have to think about how can we empower consumers, 
give them consumer data rights, while also protecting them 
through disclosures and legal protections in bankruptcy.
    Senator Britt. Staying on that same line of thought of 
empowering consumers, I was struck in your testimony here about 
who the actual purchasers of digital assets are. You have here 
55 percent do not have a college degree; 44 percent of crypto 
traders are not White; 41 percent of traders are women. And 
knowing that, do you believe that if we put in proper 
guidelines and guardrails that there is an opportunity for more 
people across this Nation to achieve the American Dream through 
the use of digital assets?
    Ms. Jeng. Currently, in the U.S., 4 percent are unbanked, 
14 percent are underbanked. I think that is a huge amount for a 
country as rich and advanced as ours. They feel that they are 
excluded from the traditional financial system. Here is an 
opportunity where we can lower the costs and improve access to 
financial services.
    Senator Britt. And as we work to do that, there is a lot of 
talk about overregulation, stifling the market, essentially 
taking jobs and innovation and offshoring them to places like 
China, to our adversaries. Do you share that line of thinking, 
that if commonsense guardrails move to overregulation that we 
may do just that?
    Ms. Jeng. Regulatory uncertainty causes market uncertainty, 
and when the market is uncertain they will go to where there is 
regulatory clarity. So if there are other countries with clear 
frameworks, that is where they are going to head or they will 
go into the shadow banking sector where our regulators would 
have very little insight and oversight.
    And so regardless, either way, we will end up bifurcating 
our U.S. financial system in ways that will have unintended 
consequences. A bifurcated system would in fact be part 
traditional banking and then one part that is in the shadows, 
if that is where crypto is going. I do not think that would 
help with our leadership in digital innovation. If anything, 
this will actually just drive our innovation to other countries 
that very much want to be the leadership in this space, and 
they are actually quite jealous of our ability right now of 
being the leader in coming up with the most innovative products 
and services in crypto.
    Senator Britt. Absolutely. Thank you.
    Chair Brown. Thank you, Senator Britt.
    Senator Smith from Minnesota is recognized online.
    Senator Smith. Thank you, Chair Brown, and thanks to our 
panelists for being with us today.
    My first question is for Mr. Reiners. So some people, I 
think, mistake crypto for sort of this niche, enthusiasm-driven 
market, and while that might have once been the case, it is 
important to realize that it is now--last year, $2 trillion in 
market value was lost. And I think that demonstrates how 
mainstream this has been, and I think it is also a good reason 
to be wary about the risks that this growth poses to consumers 
and to our economy.
    And this is why Senator Warner and I questioned Fidelity's 
decision to offer Bitcoin in 401(k) plans and we recently have 
been pressing regulators about banks' exposure to crypto risks.
    I start from the place that people are free, pretty much 
free, to invest their money or to bet wherever they want to, 
and that includes crypto, but I am really concerned about the 
potential for these highly volatile assets and risky assets to 
get into our financial system and what impact that might have 
if there is a collapse, for future crypto collapses.
    So, Mr. Reiners, in your written testimony, you said that 
``The failure of crypto to fully integrate into mainstream 
finance is due to a combination of luck and prudent action by a 
handful of regulatory agencies.'' Could you talk a bit more 
about that? Just how lucky were we, and what should we be doing 
as policymakers to avoid relying on luck as we look at future 
crises?
    Mr. Reiners. Yeah, thank you for that question, Senator, 
and before I address it, I want to quickly touch on the 
financial inclusion element that has been talked about in this 
hearing. There is no evidence whatsoever to suggest that crypto 
promotes financial inclusion, and in fact there is overwhelming 
evidence that suggests the exact opposite is happening. Most 
people who have invested in cryptocurrency have lost money. Of 
those people, a plurality are minorities and low-income 
Americans. OK? So this is an example of predatory inclusion.
    We saw the same thing with subprime loans leading up to the 
2008 financial crisis, where low-income and minority 
communities are being specifically targeted with very, very 
risky products, and unfortunately, they have lost in many cases 
everything.
    Now to your point, Senator Smith, about limiting the 
connections between crypto and the traditional financial 
system, you know, we did luck out to a certain extent.
    I would point back to the fall report from the Financial 
Stability Oversight Council and where they said, listen, the 
crypto market can be systemically risky given two things. One 
is size. Obviously, the bigger the market the bigger risk it 
poses to the rest of the economy. And then two is the 
connections between that sector and the traditional financial 
system. And crypto has been--the industry has been trying very, 
very hard to integrate into mainstream finance so that the two 
are essentially indistinguishable, which I find ironic given 
that the whole premise of cryptocurrency was to bypass banks 
and the traditional financial system.
    Now they are desperately trying to get access and make 
themselves seem as if they are legitimate, and they use the 
same terminology that we are accustomed to with traditional 
financial institutions. Right? So, broker, exchange, bank. But 
they are not. These things have meaning, and they are using 
these words intentionally because they want you to think that 
they are regulated and just as safe as these traditional 
institutions. OK?
    And in some cases, for instance, Voyager, they were lying 
about the fact that they were FDIC-insured, and then they had a 
cease and desist order sent to them by the Fed and FDIC.
    So I would just, you know, run through the list. You 
mentioned Fidelity attempting to put Bitcoin into 401(k)s. You 
know, would we think it is OK if they just let Powerball end up 
in our 401(k)s? Again, crypto is just gambling.
    So thankfully, the Department of Labor has sent out a 
letter saying that it would be a violation of fiduciary duty 
for plan administrators to offer--that they think it would be a 
violation of an administrator's fiduciary duty, and that again 
restricted, I am sure, a lot of employers from allowing their 
employees to invest in crypto.
    Look at FTX. They had an active proposal in front of the 
CFTC that would allow them to offer retail traders 24/7 access 
to crypto derivatives on margin, directly, without the need of 
going through a broker or futures commission merchant. Again, 
if the CFTC had granted that proposal, as it appeared likely 
that they would have, the FTX situation would have been very, 
very different.
    Again, multiple attempts to list an ETF that tracks 
Bitcoin, in fact, Grayscale has sued the SEC for not granting 
them that permission. Again, just think of how many investors 
would have lost money, more money, if there had been a Bitcoin 
spot ETF on the market.
    So we kind of lucked out here a little bit, Senator, 
because we had agencies, at least some agencies, that were 
willing to do the right thing even though in many cases it was 
not popular.
    And I think going forward we need to have a clear 
regulatory framework, as I address in my written testimony, to 
make sure that crypto does not integrate into the traditional 
financial system because they are continuing to try and they 
will not stop.
    Senator Smith. Well, you just laid out, I think, so many of 
the concerns that I have with this whole field. And as you say, 
there is sort of this imprimatur of reasonableness and 
trustworthiness because of the terms that are used and because 
of the ways--you know, as you say, the very typical financial 
terms that people are sort of familiar with.
    Yet, you take this thing that is supposedly--we have been 
calling it a digital asset, but it is not clear to me whether 
many of these so-called assets are not just a bet because this 
will just like go back to this for 1 minute. I mean, if there 
is no underlying value, then you are really just betting on 
whether it is going to go up or go down, whether you are going 
to win or you are going to lose. And that, I think, is my great 
concern.
    And I appreciate your comments on how it does seem to me 
that in this field there are people that are being--you know, a 
lot of people that are losing money and are being taken 
advantage of when they should be--know that in this category 
that there are some basic consumer protections that are going 
to protect them.
    Thank you, Mr. Chair.
    Chair Brown. Thank you, Senator Smith.
    Senator Tillis from North Carolina is recognized.
    Senator Tillis. Thank you, Mr. Chairman. Welcome to all of 
you for being here.
    If we take a look at this Congress, you have to kind of 
sort of out what the art of the possible is. Every Congress is 
a little bit different. We have a divided Government here. And 
while I hope we can look at some big things, I am really 
wanting to get down into some singles and doubles.
    Professor, I heard you talk about an idealized framework 
from your perspective. That is a big lift and not likely to 
occur. What I am also worried about is with the lack of 
information that we could overreach.
    And, Professor Jeng, you mentioned GDPR. I followed that 
fairly closely. It was a good, broad regulatory construct that 
has met with some challenges. They have to go back and refine 
it. So I think we need to get it right.
    So I tend to be more on the lean, singles and doubles 
approach to addressing some of the problems in building over 
time. I thought that Senator Vance's analogy on the internet 
was a good one.
    Now we have a hearing downstairs right now talking about 
protecting our children on the internet. We have got a lot of 
work to do in that space, but I think overreaching could have 
set us back by a decade or generation of innovation.
    So one of the things that we have looked at that I do not 
think would be particularly controversial but what I would put 
in the single or double category is a proof of reserves 
requirement. If we saw that in the FTX world, we could have 
avoided some of that.
    So, number one, what is your thought, if we can be quick? I 
want to at least get two questions in, but--you know. What are 
your thoughts on things like proof of reserves and other things 
that Congress can act on?
    I do not find a lot of comfort in knowing that Mr. Gensler 
thinks he has full authority to implement a regulatory regimen 
because I think he has been going a little bit too fast and a 
little bit too expansive on rulemaking, which is why I hope 
that Congress will act so that we get this right. So give me 
some ideas on singles and doubles.
    Mr. Reiners. Yeah, so I appreciate the question, Senator. 
You know, frankly, proof of reserves are not worth the paper 
that they are written on, and I would just point to the so-
called proof of reserves that Binance had for Mazars until 
Mazars pulled it off of their website and stopped doing any 
work for crypto.
    Senator Tillis. Is proof of reserves not a worthwhile 
pursuit or is----
    Mr. Reiners. So audits are a worthwhile--so I think--no. So 
I think audits are a worthwhile pursuit, and I think that is a 
single certainly that this Congress should look at. There is no 
reason that crypto intermediaries, exchanges, should not have 
full audits, but proof of reserves are not full audits.
    Senator Tillis. We were talking about an independent third 
party reporting to the Treasury, so I think that may address 
the point you were making about worth the paper that they are 
written on.
    Mr. Reiners. Yeah. Now I would say one other sort of single 
is requiring these crypto platforms to segregate firm assets 
from customer assets.
    Senator Tillis. Yep. Professor Jeng.
    Ms. Jeng. Proof of reserves can be defined a number of 
ways. At its simplest, it is like balancing your checkbook. And 
you could do that either through gap accounting disclosures or 
on-chain confirmations or supervisory exams, and so whatever 
method is chosen, it is just about verifying what is on-chain 
as well as what is off-chain.
    Senator Tillis. Yeah. And by the way, maybe we need to get 
your opinion, but on the proof of reserves bill that we are 
working on in our office, we are trying to deal with comingling 
of customer funds. I think the things that you are getting at, 
so really making it have teeth.
    But I will go to you, Ms. Yadav.
    Ms. Yadav. Thank you so much, Senator. Proof of reserves is 
something that is ones and twos here, to make sure that the 
methodology is clear, to make sure that the methodology is 
robust. What that means is that the liabilities are being fully 
disclosed. One of the problems right now is that it is not 
clear whether the liabilities that are being disclosed are in 
fact comprehensive, and so the ability to have third-party 
audits, as you suggest, that are robust and that are done 
systematically.
    In addition, also, we need to make sure that we have the 
internal controls that go into and underlie the proof of 
reserves. For example, it is not enough simply just to 
disclose. It is important that the actual exchange has internal 
controls that can make sure that these assets are properly 
segregated, that the valuation of these assets is done as mark-
to-market on a very regular basis, and that the proof of 
reserve disclosures are done regularly. Giving us a snapshot 
once every 3 months is not going to be enough. These are things 
that are changing every day.
    In addition, also, it is not just proof of reserves. It is 
proof of solvency. Now one of the things that is emerging in 
these different exchanges is that many of the balance sheets 
are made up of these, you know, coins that essentially they are 
minting themselves and the valuation there is not clear. In the 
case of FTX, for example, the FTT token has fallen 
precipitously in value. The exchanges' own tokens in the case 
of Binance and others are constantly volatile.
    And so making sure that we have not just the disclosure of 
the reserves but also making sure that the assets that are 
being held are liquid and tradable. One of the issues with 
these assets that is happening here, you know, is that the 
market for trading them is extremely thin, and so the ability 
for folks to cash out is, you know, is limited by the fact that 
the actual exit is much, much, much less liquid than a proof of 
reserve by itself might suggest. So that is another thing that 
would be important to take into consideration.
    Senator Tillis. Thank you all.
    Chair Brown. Thank you, Senator Tillis.
    Senator Warren of Massachusetts is recognized.
    Senator Warren. Thank you, Mr. Chairman. So big time 
financial criminals love crypto. Just last year, just in 1 
year, crypto was the payment method of choice for international 
drug traffickers who raked in over a billion dollars through 
crypto, North Korean hackers who stole $1.7 billion and 
funneled that money into their nuclear program, and ransomware 
attackers who took in almost $500 million. The crypto market 
took in $20 billion last year in illicit transactions, and that 
is only the part we know about. You know, that is a lot of 
fentanyl and heroin, a lot of help for Iran and Russia, and a 
lot of money leaking out to terrorists, and that is precisely 
what anti-money laundering rules are designed to stop.
    Now, Mr. Reiners, you have studied financial technologies, 
including crypto, for many years now, and before that you 
worked as a regulator. Why do drug lords and human traffickers 
and countries like North Korea and Iran use crypto instead of 
banks and credit unions or even Western Union?
    Mr. Reiners. Thank you, Senator. So crypto's pseudonymity 
makes it ideally suited for bad actors, and when you couple 
that with the fact that crypto transactions are not subject to 
the same AML and countering the financing of terrorism----
    Senator Warren. AML, meaning anti-money laundering.
    Mr. Reiners. Anti-money laundering and countering the 
financing of terrorism statutes that traditional financial 
transactions are subject to. Again, that just, you know, makes 
it ideally suited for people that want to do bad things.
    Senator Warren. So in other words, crypto helps those drug 
traffickers and rogue States launder money nearly 
instantaneously. Is that right?
    Mr. Reiners. That is correct.
    Senator Warren. All right. And if they could not use 
crypto, would ransomware gangs even exist?
    Mr. Reiners. No.
    Senator Warren. And why is that?
    Mr. Reiners. Because ransomware is the exclusive payment 
method of choice for ransomware hackers.
    Senator Warren. You mean crypto?
    Mr. Reiners. Sorry. Crypto is the exclusive payment method 
of choice for ransomware hackers.
    Senator Warren. A hundred percent. Wow. So we have money 
laundering rules that cover banks and credit unions and stock 
brokers and gold dealers and even Western Union, but the 
current rules do not cover big parts of the crypto industry, 
and crypto likes it that way. In fact, the crypto industry 
claims that applying anti-money laundering laws to the whole 
crypto industry is ``not only unnecessary, but it is all but 
impossible.''
    By the way, this is not a new claim. In 1970, Congress 
decided it was time for financial institutions to do their part 
to prevent money laundering, so it passed the Bank Secrecy Act 
or BSA. The banking industry objected, claiming that complying 
would be ``a tremendous expense as well as a pain the neck.'' 
The banks resisted. They brought legal challenges. They 
complained that it would be impossible to comply. And then 
after the law went into effect, they made it work.
    Now the crypto industry explains that they are amazingly 
innovative and creative, but they just could not possibly 
figure out a way to comply with the same anti-money laundering 
rules that everybody else follows.
    So, Mr. Reiners, do you buy the industry's argument that 
crypto is simply too special to follow anti-money laundering 
rules and that it would be too hard for them to even try?
    Mr. Reiners. I do not, Senator.
    Senator Warren. All right. Some in the crypto industry say 
that anti-money laundering rules can work so long as they 
exempt so-called decentralized entities--the crypto exchanges, 
lenders, and other financial intermediaries that run on code. 
In other words, they want a giant loophole for DeFi written 
into the law so they can launder money whenever a drug lord or 
a terrorist pays them to do so.
    Now that is exactly what Colorado-based crypto exchange 
ShapeShift did when it deliberately restructured itself as a 
DeFi platform, and here is what it told its customers: They 
said, we are making this shift ``to remove itself from 
regulated activity.'' Translation: Launder your money here.
    Mr. Reiners, should Congress be in the business of creating 
loopholes for money laundering?
    Mr. Reiners. They should not.
    Senator Warren. All right. Look, the rules should be 
simple. Same kind of transaction, same kind of risk means the 
same kind of rules. And that is why Senator Roger Marshall and 
I are reintroducing our anti-money laundering bill, to clamp 
down on crypto crime and to give regulators the tools they need 
to stop the flow of crypto to drug traffickers and places like 
North Korea and Iran.
    Chair Brown. Thank you, Senator Warren.
    Senator Hagerty of Tennessee is recognized.
    Senator Hagerty. Thank you, Mr. Chairman, and I want to 
thank our witnesses for being here today, including Professor 
Yadav, who is from my home State of Tennessee and also from my 
alma mater of Vanderbilt. Welcome to all of you.
    I think it is imperative that we continue to discuss 
digital assets because America's national and economic security 
are greatly enhanced by the preeminence of our financial 
system, and in order to maintain this immense competitive 
advantage, we have got to stay abreast of innovation. This 
involves embracing technological advancements, as unusual as 
they may seem, in order to preserve our economic strength and 
our strength as an ally and an enforcer on the global stage. 
Blockchain technology represents one of these areas of rapid 
innovation, and rather than incentivize their movement 
offshore, we should work to foster a safe and certain 
environment for them to flourish here in the United States.
    So, Professor Jeng, I would like to start with you. In your 
testimony, you highlighted the importance of payment tokens, 
like stablecoins, to the digital asset ecosystem. And I agree 
with this characterization as not only will these tokens help 
usher in faster and cheaper payments for Americans, but if 
allowed to develop they will also advance the role of the U.S. 
dollar abroad.
    However, as you also mentioned, trust in the assets backing 
such tokens is crucial. Unless users are confident in what is 
backing these tokens, their adoption will be severely 
constrained. That is why I introduced a straightforward and 
light-touch bill last year to set the standards for assets 
backing stablecoins and to require their issuers to publish 
audited reports of their reserves.
    So, Professor Jeng, do you believe, like many of those who 
are hostile to the technology, that only a Central Bank Digital 
Currency issued by the Fed can serve the function of a payment 
token?
    Ms. Jeng. Thank you, Senator, for this important question 
because there are certainly different types of ways to transfer 
value. CBDCs definitely could be one of them.
    Senator Hagerty. But not exclusively then.
    Ms. Jeng. But not exclusively. What is----
    Senator Hagerty. I agree. I want to keep moving because I 
have a lot to cover today. What kind of legal clarity would be 
necessary to help encourage the adoption of stablecoins other 
than the one that we just spoke about issued by the Fed?
    Ms. Jeng. I think it is very important that we have a clear 
regulatory framework that utilizes public feedback. What we 
have been missing has been rulemakings through the public 
process, and we need public input. Regulators need to better 
understand the technology and also gather the best ideas out 
there on how to oversee the industry.
    Senator Hagerty. Yes. No, you made this clear when you 
cited the fact that there have only been two sort of minor 
rulemaking activities by each of the SEC and the CFTC while 
there have been 30 of these retroactive litigation cases at the 
SEC and 18 at the CFTC. That is not the way to run things--in a 
hindward-looking, piecemeal basis.
    Let us turn on now to something that is concerning me very 
much. In the past few weeks, there has been a coordinated 
chorus of regulators talking about severing crypto from our 
financial system. To me, this really feels reminiscent of 
Operation Choke Point, an exercise under the Obama 
administration that I strongly, strongly disagreed with. In 
Operation Choke Point, politically disfavored entities, 
although legal, were cutoff from banking services in order to 
achieve partisan gains.
    At the same time, I have heard from some of my colleagues, 
particularly on the other side of the aisle, that they are fine 
with not regulating crypto, just let it go overseas, and not 
legitimize it.
    But to that, I say, what happens to the hundreds of 
thousands of users from Tennessee that are already transacting 
in crypto? Are we simply not going to create safeguards to 
protect these consumers? And, where do U.S.-based crypto 
innovators go?
    To that end, Congress needs to write legislation to 
properly regulate this industry so we can protect consumers and 
remain at the cutting edge of a rapidly evolving space. It is 
becoming increasingly apparent that the SEC is not going to do 
its job. So it is on us, now more than ever, to make sure that 
we have proper safeguards in place and to make certain that 
another FTX-like event never happens again.
    So, Professor Jeng, what effect would a wholesale debanking 
of the crypto industry have on the industry's activity here in 
the United States and globally?
    Chair Brown. Professor Jeng, please be brief in your 
answers. We have one more witness, and Senator Scott and I are 
late to vote. So that is our fault, not yours, but be brief 
with your answer if you could. Thank you.
    Ms. Jeng. The crypto industry is an industry that needs 
access to banking services. If it does not have access to 
banking, it will either go offshore or into shadow banking, 
again bifurcating the U.S. financial system, to which our own 
U.S. regulators would not be able to see and monitor and 
regulate those parts of that system where they have fled to, 
and then if it were to be offshored to other countries, those 
countries would end up having leadership in digital innovation.
    Senator Hagerty. Just like Binance, and Binance will laugh 
all the way to the bank. Thank you.
    Chair Brown. Thank you, Senator Hagerty. I apologize for 
doing that.
    Senators who wish to--thank the witnesses.
    Senators who wish to submit questions, those questions are 
due 1 week from today, Tuesday the 21st. Witnesses will have 45 
days to respond to any questions.
    Thank you again. The hearing is adjourned.
    [Whereupon, at 12:05 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIR SHERROD BROWN
    What a difference a year makes.
    Go back to last year's Super Bowl. The cryptocurrency industry 
spent a whopping $54 million on eight ads, promising Americans untold 
riches and the chance to make history. Of course, they didn't tell us 
about the high fees, risk of loss, and outright theft that plagued the 
crypto industry.
    But if you watched the Super Bowl 2 nights ago, you didn't see a 
single ad for crypto.
    The cryptocurrency industry has imploded. In 2022, the crypto 
market lost $1.46 trillion in value. Hackers and fraudsters--often tied 
to the regimes in Pyongyang and Moscow--have stolen over $3 billion. 
Crypto firms have slashed over 1,600 jobs.
    And as crypto values crashed last year, platforms began collapsing, 
creating more losses across the rest of the crypto ecosystem. The 
crypto firms that are left have had to halt customer withdrawals, 
freezing people out from their own money.
    While crypto contagion didn't infect the broader financial system, 
we saw glimpses of the damage it could have done if crypto migrated 
into the banking system. And the handful of banks with close ties to 
the crypto industry have needed liquidity lifelines after they suffered 
large withdrawals.
    This nightmare isn't over yet--we are still learning the full 
extent of the fallout from the FTX collapse. In December, this 
Committee heard about the excessive risk taking and misconduct at FTX. 
The customers who lost money are only now understanding the reality of 
the products they were sold.
    As these crypto firms filed for bankruptcy, regulators, and 
policymakers have also learned how out-of-control some of those 
businesses were.
    They were over-leveraged and undercapitalized. They had no internal 
risk controls. They were careless with customers' money. In the case of 
FTX, they used it to line their own pockets. Now the money of millions 
of Americans is trapped and they might never get it back.
    Last year I warned that the splashy Super Bowl ads left out key 
details. A year ago, I said:

    Big crypto companies are looking to make big profits and 
        are desperate to reach as many Americans as they can. They 
        brought in celebrities and gimmicks to make crypto sound 
        exciting and daring . . . and profitable.

    But the ads left a few things out.

    They didn't mention the fraud, scams, and outright theft.

    The ads didn't point out that you can lose big in crypto's 
        huge price swings. They didn't tell you about the high fees 
        pocketed by the crypto companies.

    And they sure didn't explain that crypto markets lack basic 
        investor protections and oversight.

    The results were as predictable as they are tragic. And contrary to 
crypto evangelists' claims of democratizing finance, it's not the early 
adopters or big money investors who are left holding the bag. When it 
comes to crypto, it turns out fortune doesn't favor the brave--it 
favors wealthy insiders.
    This isn't just about a few bad actors that didn't do things the 
right way.
    These crypto catastrophes have exposed what many of us already 
knew: digital assets--cryptocurrencies, stablecoins, and investment 
tokens--are speculative products run by reckless companies that put 
Americans' hard-earned money at risk. Not surprising from an industry 
that was created to skirt the rules.
    Whether it's Facebook Libra or the explosion of crypto, I've always 
been concerned about shiny new products that really just offer another 
way to profit off the backs of working Americans while threatening the 
real economy.
    It's time now to consider how to protect consumers from unregulated 
digital assets, and ultimately, who we want our financial system to 
serve.
    Last Congress, this Committee examined the risks of 
cryptocurrencies to our economy, explored the mechanics behind 
stablecoin companies, and looked at how regulators and Congress can 
protect consumers.
    We learned how crypto can be used to commit crimes like drug 
running and human trafficking, which threaten our national security and 
help fund terrorists and rogue regimes. We looked at how fraud and 
speculation in the crypto market hurt investors and savers.
    Recent crypto meltdowns have made clear that we need a 
comprehensive framework to regulate crypto products to protect 
consumers and our financial system.
    Today, we'll examine how time-tested financial safeguards can help 
protect against the harms and risks of crypto products.
    And we'll start by taking a closer look at these basic principles 
of regulation:

    Clear disclosures and transparency that are essential so 
        retail customers and investors can understand how a token or 
        crypto platform works.

    Prohibitions on conflicts of interest and self-dealing by 
        insiders is fundamental. Our markets only work when they work 
        for everyone.

    Protecting customer funds by separating them from company 
        assets. Investor dollars cannot be a slush fund for the 
        executives' benefit.

    Internal governance and risk management to make sure that 
        if a platform takes customer funds it acts prudently.

    Strong consumer and investor rights and protections that 
        are foundation of trust in any financial system and central to 
        a functioning market.

    Anti-money laundering and fraud prevention to make sure 
        malign actors and evil Nation States can't fund themselves and 
        evade law enforcement.

    Oversight and supervision to hold companies accountable, 
        because access to our financial markets is a privilege not a 
        right that can be abused.

    These are basic, commonsense principles that have developed over 
centuries of financial system regulation--the wildcat money of the 
1800s, the repeated banking panics of the Gilded Age, the 1929 stock 
market crash, the savings and loan crisis, the dot-com bubble, the 
Great Financial Crisis.
    These crises are the story of speculative bubbles--fueled by 
investor euphoria and the promise that ``this time is different''--even 
though it never is. The lessons learned here are the product of hard-
earned experience--experience that is born of real people losing real 
money and of dreams shattered.
    Crypto isn't special. We can start with these commonsense 
principles as we consider a regulatory framework for digital assets 
that puts consumers first and keeps our financial system safe.
    I trust this Committee can find common ground and work together to 
protect investors from crypto risks.
                                 ______
                                 
                PREPARED STATEMENT OF SENATOR TIM SCOTT
    Before I dig into my opening comments, I want to address the 
elephant in the room. If Chairman Gensler is going to take enforcement 
action, Congress needs to hear from him very soon. The Chairman had 
lots of time to do the rounds on the morning talk shows. If he has time 
for that, he should be here testifying with us this morning. I hope 
that we see him here very soon.
    The free market economy was formed by financial innovation. It's 
the engine that continues to drive our economy today. But every engine 
needs fuel, and in order to advance as a country, we must continue to 
grow and innovate in a safe and sound manner.
    Innovation can increase access to traditional financial services 
and may foster new, emergent technologies that promote financial 
independence, access to credit, and capital formation. We all know and 
understand how technology can improve our daily lives, from using our 
phones to open a bank account to opening a digital marketplace. If we 
foreclose financial innovation, we limit future generations from growth 
and opportunity.
    That said, financial innovation must be done so in a safe and sound 
manner, which, unfortunately, has not been the case with a number of 
actors in the digital asset space. Unfortunately, instead of protecting 
customers' interests and using customer funds in the manner intended, 
Sam Bankman-Fried, FTX's owner, stole millions of customer funds and 
used them to finance risky bets and to pay for luxury penthouses in the 
Bahamas.
    When I consider this massive failure, I wonder, where were our 
regulators when they supposedly already had these authorities?
    In recent statements, the regulators, the SEC specifically, have 
noted that it is the responsibility of crypto firms to comply with 
existing regulations, but it is also the responsibility of regulators 
to enforce existing regulations and to conduct appropriate, effective 
supervision.
    The American people deserve to know why no action was taken prior 
to FTX's collapse and how millions of dollars of Americans' hard-earned 
money just vanished into nothing. And it was not just FTX. If the SEC 
had provided even the slightest bit of guidance, I wonder if we could 
have protected more investors from the collapses of Terra and Luna in 
May, Celsius in June, Voyager in July, and BlockFi in November.
    This is particularly alarming when we see reports that 44 percent 
of Americans who own and trade digital assets are new investors or 
people of color. Which means when there is a $2 trillion drop in market 
cap, our most vulnerable citizens bear the significant brunt.
    We must hold companies that harm consumers accountable, but we must 
empower consumers through financial education so that they can more 
accurately understand the risk posed by different asset classes. 
Whether it starts in the classroom or in the boardroom, financial 
literacy provides an avenue for individuals to make better decisions 
and climb the economic ladder.
    Nonetheless, regulators have put their misplaced focus on 
progressive social issues. So, we have to ask ourselves, where do we go 
from here?
    To date, the SEC has failed to take any meaningful, preemptive 
action to ensure this type of catastrophic failure does not happen 
again. If they have the tools they need, were they just asleep at the 
wheel? If they don't, why aren't they here to tell us? We'd be happy to 
have Chairman Gensler testify sooner than later.
    Moving forward, we must take a thoughtful bipartisan and balanced 
approach that protects consumers and promotes innovation and 
opportunity.
    I look forward to hearing our witnesses' perspectives on how we can 
continue to drive innovation and opportunity while ensuring consumers 
are protected.
    Thank you, Mr. Chairman.
                                 ______
                                 
                   PREPARED STATEMENT OF LEE REINERS
            Policy Director, Duke Financial Economics Center
                           February 14, 2023

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                    PREPARED STATEMENT OF LINDA JENG
   Visiting Scholar on Financial Technology, Georgetown Institute of 
        International Economic Law, and Adjunct Professor of Law
                           February 14, 2023

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                   PREPARED STATEMENT OF YESHA YADAV
                    Vanderbilt University Law School
                           February 14, 2023

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              Additional Material Supplied for the Record
                       LETTER SUBMITTED BY NAFCU

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       GWU LEGAL STUDIES RESEARCH PAPER, ARTHUR E. WILMARTH, JR.

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