[Senate Hearing 118-410]
[From the U.S. Government Publishing Office]
S. Hrg. 118-410
OVERSIGHT OF DIGITAL COMMODITIES
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HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
July 10, 2024
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available on http://www.govinfo.gov/
__________
U.S. GOVERNMENT PUBLISHING OFFICE
56-754 PDF WASHINGTON : 2025
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
DEBBIE STABENOW, Michigan, Chairwoman
SHERROD BROWN, Ohio JOHN BOOZMAN, Arkansas
AMY KLOBUCHAR, Minnesota MITCH McCONNELL, Kentucky
MICHAEL F. BENNET, Colorado JOHN HOEVEN, North Dakota
KIRSTEN E. GILLIBRAND, New York JONI ERNST, Iowa
TINA SMITH, Minnesota CINDY HYDE-SMITH, Mississippi
RICHARD J. DURBIN, Illinois ROGER MARSHALL, Kansas
CORY BOOKER, New Jersey TOMMY TUBERVILLE, Alabama
BEN RAY LUJAN, New Mexico MIKE BRAUN, Indiana
RAPHAEL WARNOCK, Georgia CHARLES GRASSLEY, Iowa
PETER WELCH, Vermont JOHN THUNE, South Dakota
JOHN FETTERMAN, Pennsylvania DEB FISCHER, Nebraska
Erica Chabot, Majority Staff Director
Chu-Yuan Hwang, Majority Chief Counsel
Jessica L. Williams, Chief Clerk
Fitzhugh Elder IV, Minority Staff Director
Jackie Barber, Minority Chief Counsel
C O N T E N T S
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Wednesday, July 10, 2024
Page
Hearing:
Oversight of Digital Commodities................................. 1
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STATEMENTS PRESENTED BY SENATORS
Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan... 1
Boozman, Hon. John, U.S. Senator from the State of Arkansas...... 3
WITNESS
Behnam, Hon. Rostin, Chairman, Commodity Futures Trading
Commission, Washington, DC..................................... 4
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APPENDIX
Prepared Statements:
Behnam, Hon. Rostin.......................................... 36
Question and Answer:
Behnam, Hon. Rostin:
Written response to questions from Hon. Kirsten E. Gillibrand 42
Written response to questions from Hon. Raphael Warnock...... 44
Written response to questions from Hon. John Thune........... 46
OVERSIGHT OF DIGITAL COMMODITIES
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Wednesday, July 10, 2024
U.S. Senate
Committee on Agriculture, Nutrition, and Forestry
Washington, DC.
The committee met, pursuant to notice, at 10 a.m., in room
328A, Russell Senate Office Building, Hon. Debbie Stabenow,
Chairwoman of the Committee, presiding.
Present: Senators Stabenow [presiding], Brown, Klobuchar,
Bennet, Gillibrand, Booker, Lujan, Warnock, Welch, Boozman,
Ernst, Marshall, Tuberville, Braun, Grassley, and Fischer.
STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
OF MICHIGAN, CHAIRWOMAN, U.S. COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
Chairwoman Stabenow. Good morning. I call this hearing of
the U.S. Senate Committee on Agriculture, Nutrition, and
Forestry to order.
The last time this Committee gathered to discuss digital
assets, in December 2022, we were closing out a year in which
investors lost $2 trillion in the crypto market. Losses from
hacking were at an all-time high and some of the most
recognizable crypto firms had not only gone bankrupt but had
stolen customer funds in brazen fashion.
At the end of last year, the largest crypto exchange in the
world and its CEO were found guilty of willfully evading anti-
money laundering laws and enabling the financing of terrorism.
Meanwhile, the public seems undeterred. The crypto market
has rebounded to nearly record highs. Bitcoin is trading at
nearly $60,000.
As institutional investors pile into Bitcoin and Ether
derivatives and exchange-traded products, the interconnection
between crypto and traditional financial markets is increasing.
The trading of spot digital commodities like Bitcoin and
Ether are not overseen by any Federal regulator. These and
other digital assets that are not securities account for most
of the value traded in crypto markets, as we know.
If recent history is any guide, we cannot afford to wait
any longer to regulate these assets. The time to act is now,
and that is why I am so glad we are having this hearing. This
is why I have been working so closely with Senator Boozman to
advance bipartisan legislation that would give the Commodity
Futures Trading Commission (CFTC) regulatory authority over
digital commodities. We are working to have specific language
to members by the end of the week for your review.
We have a lot of important work to do this year in the
Committee, and I am committed to building the bipartisan
coalitions both here and on bipartisan farm bill so that
together, we can make supporting America's farmers and families
and rural communities a top priority for this Senate and for
this Congress.
In terms of today, we must have clear, commonsense rules of
the road that allow good actors to innovate and grow.
Blockchain technology can help us manage data and move money in
more efficient and transparent ways, but these goals cannot be
realized without comprehensive Federal legislation. Our
counterparts around the globe recognize this, and the U.S. must
as well.
Most importantly, we owe it to the American public to
protect them from bad actors exploiting digital assets for
personal gain at the expense of their customers. It is not
enough to bring enforcement actions after the money is gone.
Financial regulators need the tools to stop abusive conduct
before it happens.
I believe any legislation that advances through this
Committee should focus on three key pillars.
The first pillar is similar rules for similar risks. Crypto
firms must safeguard customer assets, hold sufficient capital
reserves, and abide by rigorous cybersecurity standards, just
like traditional financial market participants.
The second pillar is protecting retail customers. Customers
should have access to accurate information about their
investments, presented in a way that is appropriate for their
level of experience. Financial markets must be fair for all
participants; free of conflicts of interest that give the few
an unfair advantage over the many.
The third pillar is adequate, permanent funding for the
CFTC to oversee the digital commodity market. Without it, we
not only handicap the Agency's work in this evolving market but
we imperil the essential work it is doing in overseeing our
Nation's derivatives markets.
Our colleagues in the House have recognized that protecting
customers and providing clear rules of the road is not a
partisan issue--I very much appreciate the conversations I have
had with leaders in the House--and they have passed crypto
market legislation out of their chamber. While our bill takes a
somewhat different approach and focuses on filling the
regulatory gap that exists for digital commodities, I am
confident we can come together to pass legislation that brings
greater integrity to the crypto market.
Today, we will hear from Chairman Behnam about how the CFTC
has been on the front lines, policing the crypto markets for
fraud and abuse. We will also hear about the limit of his
agency's authority and the challenges this poses to protecting
customers and our markets. I appreciate his testimony and his
expertise, and I welcome him back to the Committee.
Now I would like to turn to our Ranking Member, Senator
Boozman for his opening remarks.
STATEMENT OF HON. JOHN BOOZMAN, U.S. SENATOR FROM THE STATE OF
ARKANSAS
Senator Boozman. Well, thank you, Madam Chair, very, very
much, and welcome to my colleagues and, again, thank you for
calling today's hearing on the current state of digital
commodities. I would also like to welcome CFTC Chair, Chairman
Behnam. We appreciate your hard work. As the Chair said, you
are certainly not a stranger to this Committee. We appreciate
your willingness to come over and visit with us as we request.
As the Ranking Member of this Committee, I have
consistently said in the past that I believe the CFTC is the
right agency to regulate spot digital commodities. I still
believe that to be true. The CFTC's principle-based approach
has proven to effectively protect consumers in the derivatives
market, and I believe with the appropriate authorities this
same approach will protect consumers in the digital commodities
space. At the same time, as policymakers we must also protect
innovation and provide regulatory certainty businesses need to
maintain their operations in the United States.
The Chair has been drafting legislation that would give the
CFTC the authority to regulate spot digital commodity trading.
We have had many, many conversations, and my staff have been
working closely with hers on her proposal for the last several
weeks. I am committed to continue to work in good faith on
legislation to give the CFTC the authorities it needs.
Digital commodities and the regulatory issues they raise
are complex and not well understood. I believe as a committee
we have a responsibility to help educate our colleagues and the
public on these issues, and I would like to see us do more to
better understand what policies are needed and why. Hopefully
today's hearing will begin to fill that gap.
Additionally, as we proceed as a committee, it is vital
that we limit our policy proposals to the agencies that we have
jurisdiction over, in this case the CFTC. We do not have
authority over the Securities and Exchange Commission, the
Treasury Department, the Federal Reserve. The oversight of
those agencies is clearly outside the jurisdiction of this
Committee. Any legislation reported out of this Committee
should not direct or require anything of agencies not under our
authority.
Finally, I believe that we must have broad support within
the community we wish to regulate if we ultimately want to
protect consumers and innovation. I and my staff have had
numerous meetings with those who would be covered by the
proposed legislation. The frank and honest feedback we have
received from these discussions does not lead me to believe the
necessary level of support for this proposal to be successful
currently exists among stakeholders and people are working very
hard to try and rectify that.
Again, I am committed to working with the Chair to regulate
digital commodities. Today's hearing is a good start. I look
forward to hearing the thoughts of Chairman Behnam and the
questions posed by our colleagues.
With that I yield back.
Chairwoman Stabenow. Thank you very much. Again, welcome.
Rostin Behnam is the Chairman of the CFTC, as we know,
following his unanimous confirmation by the U.S. Senate in
January 2022. Chairman Behnam had previously served as CFTC
Acting Chairman, beginning in January 2021, and a CFTC
Commissioner since September 2017. His arrival at the CFTC
followed extensive experience in financial markets as Senior
Counsel on this Committee, among other roles.
Chairman Behnam, we are so pleased that you are back with
us, and we recognize you for five minutes of testimony and any
other information you would like to put in the record.
Welcome.
STATEMENT OF HON. ROSTIN BEHNAM, CHAIRMAN, COMMODITY FUTURES
TRADING COMMISSION, WASHINGTON, DC
Mr. Behnam. Thank you Chairwoman Stabenow, Ranking Member
Boozman, and members of the Committee. Thanks for the
opportunity to appear before you today to discuss the state of
the digital commodity market.
During my almost seven years at the CFTC as both a
Commissioner and as Chairman I have observed the digital asset
market evolve significantly, expanding and collapsing and at
times with periods of high volatility. It has also facilitated
countless scandals and fraudulent activity, some very small and
typical in criminal form, others massive in scale and profile.
I have watched the market has it has piqued the interest of
both novice and sophisticated investors and have seen some of
our Nation's most established financial institutions build
businesses driven by digital assets.
What has concerned me the most throughout the expansion of
this digital asset class is that while everyday Americans fall
victim to one digital asset scam after another, there remains
no completed legislative response. I have repeatedly been asked
by Members of Congress what am I doing to protect their
constituents, and I believe the single most important thing I
have done, and continue to do, is advocate to this body to fill
the regulatory gap.
I am not alone in my concerns. In 2022, the Financial
Stability Oversight Council, a report from the FSOC highlighted
that there is a gap in regulation of the spot market for
digital assets that are not securities. This gap for non-
security tokens continues to constitute a majority of the
digital asset market, measured by market capitalization.
As the digital asset market continues to integrate into
traditional financial institutions, concerns regarding broader
market resiliency and perhaps even financial stability will
ripen. In short, our current trajectory is not sustainable.
It has been almost nine years since the CFTC brought its
first enforcement action in connection with an illegal Bitcoin
operation. Since that time, the Agency has been aggressive in
using its powerful but limited anti-fraud and anti-manipulation
authority. In total, the CFTC has brought over 135 digital
commodity cases, resulting in billions in penalties and
restitution.
Just last week, a district court in the Northern District
of Illinois entered summary judgment in favor of the CFTC in a
case involving fraud by an unregistered entity that promised
steady returns in digital asset commodities such as Bitcoin and
Ether. In its decision, the court reaffirmed that both Bitcoin
and Ether are commodities under the Commodity Exchange Act. In
Fiscal Year 2023, actions involving digital asset allegations
comprised almost half of our enforcement docket.
Ultimately, the CFTC, whose primary responsibility is
overseeing the multi-trillion-dollar derivatives markets is
committing nearly half its enforcement resources to a market it
does not have the authority or appropriated resources to
regulate.
Nearly a decade of digital asset experience has given CFTC
staff a deep understanding of the market and underlying
technology that supports it. Market regulators like the CFTC
were built precisely for situations we find ourselves in today.
The flawed notion that regulating an asset class legitimizes it
misses the point of our responsibilities.
As this Committee continues to consider legislation to fill
the regulatory gap, I would like to focus your attention on the
components of what I believe is a successful framework.
First, the principles-based oversight model has served the
CFTC and its regulated markets well, striking an appropriate
balance between clear outcomes-based requirements and measured
flexibility.
Second, appropriate funding is necessary to meet the
mandate of any legislatively enacted regulatory program.
Third, given the retail-oriented nature of the digital
asset market, authority for the CFTC to require registrants to
provide a comprehensive disclosure regime to ensure investors
have access to material information.
Fourth, it is essential that legislation provide
comprehensive authority for anti-money laundering, know your
customer, and customer identification programs.
Fifth, given the important role the Securities and Exchange
Commission plays in the oversight of security-based digital
tokens, the Committee should consider a disciplined, balanced
framework for the determination of tokens as commodities or
securities.
Finally, given the broad adoption of digital assets by a
significant portion of the American population, a comprehensive
education and outreach program will enable the investing public
to understand both the risks and opportunities of this
technology.
I am encouraged by this Committee's continued efforts,
dating back to 2022, to fill the gap in regulation,
prioritizing customer protections and, of course, market
stability. We need to act thoughtfully but with urgency to fill
this harmful regulatory gap in order to give American investors
the protection they deserve.
I thank the Committee for your focus in this area and look
forward to answering your questions.
[The prepared statement of Mr. Behnam can be found on page
36 in the appendix.]
Chairwoman Stabenow. Well thank you so much. First, of
course, everyone will have five minutes this morning to ask
questions of our witness.
First let me talk further, Mr. Chairman. You mentioned in
your testimony that the single most important thing Congress
must do amid the increasing popularity of crypto is to pass
legislation that establishes Federal oversight of non-security
tokens. If Congress does not act to fill this regulatory gap,
does any Federal regulator have the authority to regulate the
market for crypto assets like Bitcoin that are not securities?
Mr. Behnam. Senator, thanks for the question. The short
answer to the question is no. I mean, this is really the reason
we are here. The problem is, and as you mentioned in your
opening statement, if you measure the Bitcoin economy by market
capitalization, upwards of 70 to 80 percent of the market are
non-securities, which means there is no direct Federal
regulatory oversight.
Despite what I think some may believe, this leaves this
giant gap, this vacuum, and ultimately customers at risk for
loss of money, and I think our enforcement record demonstrates
that over the past better part of 10 years.
As you pointed out also in your statement, the problem with
our enforcement authority, although powerful, it is reactive.
We are never able to be on our front foot in the situation. We
are always being responsive to tips, complaints from
individuals who typically have been defrauded. Our typical
regulatory framework involves registration and compliance with
an existing set of rules, which gives the CFTC, or any market
authority, the ability to look through a registered entity,
whether it is a broker, an exchange, a custodian, or an
individual participant. Those are the types of regulatory tools
that enable us to really eliminate, if not reduce,
significantly market fraud and manipulation. Anything else,
which is the current state of play with crypto, again is only
reactive.
We have a very successful enforcement record and one that I
am very proud of, and this Committee should be too, but
ultimately we are only coming in after the fact, which means
money is typically lost, we are not able to get money back to
customers, and we are really not having that same deterrent
effect that we should have if we had a robust, comprehensive
regulatory regime.
Chairwoman Stabenow. Thank you. Could you talk a little bit
more about the CFTC's experience protecting retail customers?
Mr. Behnam. Sure. You know, we actually have, despite, I
think, a little bit of a narrative that we do not have much of
a retail-oriented market. Certainly a huge part of our market
is institutional and wholesale, as many of you know,
significantly on the agriculture side and the energy side and
the large financial institutions side for interest rate and
credit. We do have a growing participant pool of retail
investors in both futures. Many on this Committee are familiar
with prediction markets, which is a very retail-oriented
market, as well.
We do have a pretty robust pool of retail investors, and
have so for many years.
I would also mention, from an enforcement standpoint,
despite some big-ticket enforcement cases against large
institutions, which typically involve manipulation of markets
or non-compliance, our entire fraud pool of enforcement, or at
least a significant portion of it, is very much focused on
retail investors. Unfortunately, retail investors fall prey to
fraud around metals, gold and silver, which I am sure on the
Committee are familiar with. You see these in commercials or
radio advertisements. FOREX, which is foreign exchange, a very
typical area where retail fraud occurs.
If you look at the CFTC's record in enforcement, the fraud
is very much focused on retail, and that has enabled us to
build a very strong office of customer education and outreach
and a very comprehensive program to get information to retail
investors through the internet, social media, conferences or
other events, to make sure they are aware of the risks
associated with retail fraud in commodity market.
Chairwoman Stabenow. Thank you. Finally, if we give the
CFTC new authority to oversee the spot digital commodity market
we know that we need to ensure you have adequate funding and
the resources to be able to do it, to be able to do what we are
asking you to do. That is part of what we are working on. Any
fees will not be collected until the Agency finalizes its rules
and begins registering these platforms.
During the interim how much do you anticipate would be
needed in resources, in terms of annual appropriations, for you
to set up the regulatory regime?
Mr. Behnam. Thanks, Senator. Actually, and you alluded to
this, there have been a number of efforts in Congress, both
here in the Senate, including this Committee, and in the House
more recently, to produce bills around legislating authority
for the CFTC. In light of those efforts, over the course of two
to three years, we have actually done a bit of analysis at the
Agency regarding what we would need.
Essentially, responding to your question, with some
assumptions, of course, assumptions based on how many
registrants we would have in the broker-dealer space and the
exchange space and the custodian space, but with those
assumptions, which I think is fair and informed, based on what
we see in the unregulated market, we have largely estimated
that we would need somewhere between $50 to $60 million in a
first year and then $30 to $35 million in a second year, with a
correlated number of full-time equivalent employees, ranging
from 100 to 50 to 75 in the first and the second year.
We also have estimates for the third year, but we do have
fairly thorough analysis of what we would need in an interim,
whether it is one, two, or three years, and we are happy to
share that with the Committee as it considers legislation.
Chairwoman Stabenow. Thank you so much. Senator Boozman.
Senator Boozman. Like so many of us, Senator Grassley needs
to be at another hearing, at Finance, so if it is okay we would
like to go ahead and bypass me and go down to Senator Grassley.
Chairwoman Stabenow. Senator Grassley.
Senator Grassley. Thanks to both of you for your courtesy.
I have a non-crypto question that you probably would expect me
to ask. Before I ask that question, last Congress I led a
temporary fix that ensure the CFTC whistleblower program
continues to operate and make whistleblower awards. At the end
of this Fiscal Year the fix expires, putting the program at
risk. That is why I introduced a permanent bill with several of
my colleagues, including Senators Hassan, Boozman, Warnock,
Collins, and Fetterman. Our CFTC Whistleblower Fund Improvement
Act aims to make the administrative fix permanent and allow the
CFTC to hold as much in fines as we allow the Securities and
Exchange Commission to do. Without a fix, the program could
become a victim of its own success through accounting snags,
even as it continues to bring in fines.
You know how important it is to listen to whistleblowers
because even though you may have a relatively small agency
compared to others, you cannot know what is going on. Outside
of your agency you cannot know.
Chairman Behnam, what would happen to the CFTC
Whistleblower Office of Congress fails to act before October?
Mr. Behnam. Senator Grassley, thanks for the question, and
before I respond I just want to thank you for your leadership
on this particular area. It is extremely important. As much as
you say, it is not necessarily crypto-related. It is, in many
respects, because so many of the enforcement cases that we are
seeing in this space are driven through, or could originate
from, the Whistleblower Office.
Ultimately, if this fix is not made permanent, and I hope
it is, in fact, made permanent as soon as possible, this will
have a very negative impact on our ability to both staff the
Whistleblower Office, to ultimately fund it, and to be able to
get word out to the general public about what the whistleblower
process is, the awards that can be awarded, essentially, and
the protections that are also afforded.
Writ large, across all of our regulated markets, as you
pointed out, our success has been really the detriment of this
program itself. The past 10 to 15 years, since Dodd-Frank,
after the financial crisis, has demonstrated the Whistleblower
Office's outstanding success. I think there is a lot of trust
from the Agency with industry stakeholders and market
participants. We have seen $100 million-dollar whistleblower
awards be paid out, which is really the issue and the reason
why we are talking about this right now.
Ultimately it is our enforcement program, the size of our
markets, and the ability to receive these tips and complaints,
and to have incentives for whistleblowers to bring this
information to us, because without that, as you point out,
given our size and regardless of Federal agencies, small or
large, there is only so much we can see in the marketplace. We
only have so many tools. Having this public-private
partnership, in a sense, is extremely important to ensure
transparent and fair markets.
I would ask you and the Committee to continue thinking
about this. We are here at any moment to help with technical
assistance. In order for the CFTC to continue to be successful
and the whistleblower program to be successful, this fix is
extremely important, because ultimately the payouts continue to
grow, and if they do it is going to put the office in jeopardy
from a staffing and a resource perspective.
Senator Grassley. I thank you for your very firm statement
on the urgency of this legislation. I am glad to have this
opportunity that you are here to draw attention to the CFTC's
Whistleblower Fund Improvement Act. This is something that we
have got to work on and get passed by September 30th.
Mr. Behnam. Thank you, Senator.
Senator Grassley. Thank you. I yield back my time, and I
thank Senator Boozman.
Chairwoman Stabenow. Thank you very much. First let me say,
Senator Grassley, I could not agree more, and thank you so much
for your leadership. This is something I want very much to work
with you on, to get done. It has got to get done. I thank you
very much.
I know that Senator Brown just walked in and said he had to
walk out in two minutes, so I am wondering, Senator Lujan, if
you would be willing--we are sort of jumping around today, but
giving the other committees going on, if you would not mind we
will move to Senator Brown.
Senator Brown. Mic on. Thanks. They did.
As you know, there is concern of everybody on this
Committee about crypto and what we do and making sure that
consumers are protected. Some in this town are less interested
in protecting consumers and investors than others.
Big institutions usually dominate, as you know, the complex
derivatives market that CFTC currently oversees. If Congress
expands the CFTC's jurisdiction, how will the Agency look out
for consumers?
Mr. Behnam. Senator, thanks for the question. I think there
are two components which I think are important, and I
understand, appreciate, and I have heard the same concerns
about the CFTC's jurisdiction, who our sort of main
constituency is, and how this would challenge us to sort of be
a more retail-oriented agency.
I will challenge that point in two ways, first on
enforcement and then just generally on regulation. I mentioned
this earlier, but on enforcement, if you look at our
enforcement record, really over decades, it is split into two
major buckets. One is manipulation of markets, and then the
other is fraud. You could put non-compliance on the
manipulation side.
On the manipulation side, that is typically what you are
talking about--large financial institutions. This is, as you
recall, and I am sure Senator Grassley does, as well, the
Committee writ large, manipulation of large benchmarks. This is
the LIBOR cases, which actually originated at the CFTC almost
15 years ago. Other off-channel or offline communications, big
cases against large financial institutions.
On the fraud side of the ledger of enforcement, the fraud
cases we bring are very typically retail-oriented, and I
mentioned this to the Chairwoman. Typically FOREX, which is
foreign exchange fraud, is very retail-oriented, and also
physical commodity fraud around metals, so specifically gold
and silver. If you look at our fraud docket, most of it is
retail-oriented. These are pump-and-dumps, Ponzi schemes, very
typical boiler-room type of fraud, and it is very typically
directed at vulnerable retail investors.
Over the course of decades, because of this very typical
fraudulent activity, directed toward retail investors, we built
a very robust Office of Consumer Education and Outreach and we
have a very vast network of partners at the State and local
level, other regulators and law enforcement, to reach out to
these local individuals who are vulnerable.
As much as I appreciate, if we do get authority we are
going to have to perhaps change the way we send word out,
through social media, the internet, and interact with retail. I
actually do think, on the enforcement side, we have a very
strong record of retail enforcement, in respect to the fraud
cases that we have brought over many years.
Senator Brown. Thank you. Let me talk a little bit about
hacks on some crypto platforms. We have seen hundreds of
millions of dollars lost. There is no question. We need to
protect consumers. What lessons have you learned, Mr. Chairman,
what lessons has CFTC learned from past breaches and hacks in
crypto markets?
Mr. Behnam. Senator, thanks for the question. I think in
many respects these asset classes trade very similarly to other
asset classes--stocks, bonds, and other futures contracts. In
many respects--and I think this really gets to the point of
your question, the technology is very unique and different and
forces us to ask very different questions around cybersecurity
and operational resilience.
As we see these hacks which enable fraudsters and
ransomware attacks to hold collateral or hold fiat money and
use Bitcoin or cryptocurrency as ransom, we are doing
everything we can to ensure that we, both at the Agency level,
but as we work with market participants, think about
cybersecurity and operational resilience as a priority in this
space.
Senator Brown. Thank you. Thank you, Madam Chair, and
Senator from New Mexico, thank you very much.
Chairwoman Stabenow. Absolutely. Thank you. Senator Ernst.
Senator Ernst. Thank you, Madam Chair, and of course,
Ranking Member Boozman. It is nice to see you again, Chairman
Behnam. Thanks so much for being with us.
The last couple of weeks I have been able to visit all
across Iowa and hear from my folks as I continue my River-to-
River Tour, and as I have mentioned here before, one question
that continues to come to me is when will Congress come
together and pass a farm bill. I hope we get around to that.
Our farmers and rural communities really deserve a five-year
piece of legislation that will provide us with some certainty
and addresses the needs of rural America.
I do applaud the House for coming together in a bipartisan
way. Chairman G.T. Thompson did a great job there in the House
Ag Committee. I do hope that we can come together here in the
Senate and have a bipartisan bill, as well.
Since we are here we will get back to the subject at hand.
Chairman Behnam, as you know, the Supreme Court recently ended
its term, and it handed down a number of decisions potentially
impacting your agency's functions. The Loper Bright v. Raimondo
ruling rightfully overruled the doctrine of Chevron deference,
while SEC v. Jarkesy said the Seventh Amendment entitles the
defendant to a jury trial when the SEC seeks civil penalties
for securities fraud.
How does the Agency plan to apply the Supreme Court's
decision reversing Chevron?
Mr. Behnam. Thanks, Senator, for the question. Certainly we
continue to look at the decision and understand the importance
of it, and we will certainly do everything to comply with the
decision.
I would say, you know, if you look at the Commodity
Exchange Act and the rule of this Committee and Congress
overall, vis-a-vis the Agency, there is a fair amount of
discretion given to the Agency in certain areas. There are
certainly other areas that are more prescriptive, that the
Agency needs to do something very clearly and directly.
We will review our rules. We will make sure that it is
letter-of-the-law interpretation where it demands that, but
also if there is discretion, which in many circumstances it is
important that an agency like the CFTC have some discretion
because markets evolve. Markets change, and it is important, I
think, an agency be able to be nimble, to an extent, evolve
with markets at a quicker clip than perhaps Congress.
We are going to review our rules, we are going to review
the decision, and we are going to ensure compliance with the
decision.
Senator Ernst. Do you know, Chairman, approximately how
many rulemakings would be impacted by that ruling?
Mr. Behnam. Not at this moment, given the sort of recent
decision of Loper. We are continuing to review the decision,
see how it applies to us, but certainly after we review it I am
happy to get back to you and your staff and let you know if
there is any direct impact or indirect impact, for that matter.
Senator Ernst. Yes. Then are there rulemakings that were
subject to litigation, where you used Chevron deference as an
argument?
Mr. Behnam. Well, we do have, and I do not want to get too
far into it right now, but we do have open litigation on one
matter in two different courts, and I do think the defendant
did file a motion citing the Loper decision as a reason why it
should be dismissed. Again, in that particular case there is a
fair amount of discretion that we think would allow us to move
forward with that.
Senator Ernst. Okay. That one is being revisited.
Mr. Behnam. Of course.
Senator Ernst. Okay. Very good. I appreciate that.
In the testimony that you had shared with us you mentioned
that the CFTC has brought over 135 digital commodity cases,
resulting in billions in penalties and restitution. With the
Jarkesy ruling are you then, as well, conducting a review of
the ongoing civil enforcement?
Mr. Behnam. Yes. The Jarkesy decision, obviously, has an
impact. There are multiple elements to that decision around
administrative law judges but also administrative proceedings.
The administrative law judge, better known as an ALJ, does not
necessarily apply to us. We have not really instituted an ALJ
at the Agency for quite some time. In terms of administrative
proceedings we are reviewing the ruling right now and the
decision, and making sure that as we move forward with our
enforcement docket it complies with the decision.
Senator Ernst. Sure. I know it only applied to the SEC, but
will you commit to proactively giving defendants before the
CFTC then a jury trial when you are seeking civil penalties and
restitution?
Mr. Behnam. Absolutely.
Senator Ernst. Okay. Well, I really appreciate it. I am
running out of time, I guess. I appreciate your forthright
leadership, as well, on these issues. I truly appreciate you
coming in front of us today. Thank you, Chairman.
Mr. Behnam. Thank you.
Senator Ernst. Thank you, Chairwoman.
Chairwoman Stabenow. Thank you very much. Let me also
mention, I am anxious to get a bipartisan farm bill done and
would certainly welcome anything Senator Boozman wants to say.
We have a section-by-section bill that I have put out that is
the English language version of the text that will be given to
CBO. It is a full section-by-section bill. I would welcome your
engagement and involvement, because we need to be negotiating
this and getting it done.
While I met with the Chairman as early as this week in the
House and appreciate his work and so on, I did indicate that
his bill shortchanges our commodities in the Midwest, which I
have also shared with you. We have got some work to do together
to be able to do something that will more accurately reflect
the interests and States of members of the Committee, and I am
anxious to do that as soon as possible. Thank you.
Senator Boozman. Again, we certainly do need to get a farm
bill done, and we just have a real difference of opinion as to
how we get that done and what we need to be doing. The good
news is, as I talk to members, every member I talk to wants to
get a farm bill done. I think there is a path forward, and
certainly everyone is negotiating in good faith.
Chairwoman Stabenow. Thank you. Let's do it.
All right, Senator Lujan, thank you for being so patient
before Senator Brown. Thank you.
Senator Lujan. Thank you, Madam Chair, and thank you to
both you and the Ranking Member for this important hearing.
Chairman, thank you for being here today.
Now I have a question about a concern that I have that
exists, I think, in the U.S. financial system and sector, from
a rules perspective. Because this hearing is focusing on crypto
my question is pointed toward cryptocurrencies.
If a cartel was laundering money from illicit drug sales at
the border using cryptocurrency, are there any Federal
regulations that would require exchanges to report that
activity to law enforcement?
Mr. Behnam. Senator, thanks for the question. The exchanges
that currently operate right now, as I pointed out to the
Chairwoman, are not subject to regulation by a Federal
regulator for non-security tokens. That said, the exchanges
that do participate in the space that are not regulated again
do comply with various requirements by FinCEN and then money
transmitter requirements at the State level.
If there was, in your hypothetical, the cartel intersected
with an exchange to, again, to move the money, to launder the
money, to move it into a different form of currency, then I do
believe there would be a requirement at the State level, and
they by virtue of the FinCEN requirements, to report it.
Again, that, I think, exposes----
Senator Lujan. Report it to who, Chairman?
Mr. Behnam. At the Federal level it would be the Treasury
Department's FinCEN, I believe.
Senator Lujan. To the Treasury. In the same way that a SARS
report is held at Treasury if a financial institution is found
of wrongdoing or a financial institution is caught laundering
money for a cartel or someone else, the current system requires
that financial institution to appoint somebody to be approved
by Treasury to be the watcher from inside. It sounds like a
pretty good gig. It is the internal person to watch over the
alleged wrongdoing and come up with a report for that financial
institution to correct its behavior. Then Treasury keeps that
report, and Treasury keeps that report in a vault somewhere,
apparently. I do not know who gets to see them. No one that I
am aware of.
Is it that same reporting that goes to Treasury is what
would happen today?
Mr. Behnam. Senator, I cannot speak to the SARS process and
necessarily where it goes and who sees it. Again, that is a
question probably for Treasury. Knowing the FinCEN
requirements, the Crime Enforcement Network at Treasury, and
then also the State-level money transmitter requirements, again
if there was an intersection with a cartel with one of these
exchanges I do believe, through either the FinCEN requirements
or the State-level requirements there would be a requirement to
report any activity like that.
Senator Lujan. For some yes, for some no.
Mr. Behnam. It depends how--again, this is really the
problem that I think you are rightfully exposing, is that there
are gaps all along this chain.
Senator Lujan. Let me ask the question this way. Why is it
important to have Federal requirements to report suspicious
activity to law enforcement?
Mr. Behnam. Not unlike the question that Senator Grassley
provided around whistleblowers, SARS reports, which, as you
pointed out, are suspicious activity reports, are extremely
important for regulators because we are utilizing the
information that institutions have on the inside as they
identify suspicious activity, whether it is a transaction or
payment or anything like that.
As much as we have a lot of tools in the regulated space,
they are limited, and when we reach that limitation we do rely
on the regulated market to report things to us. Which is,
again, not unlike the Whistleblower Program or the Complaints
and Tips.
SARS reports are extremely important. They certainly come
into play with some of our regulated institutions, which are
regulated by multiple regulators, but they are certainly, I
think, more prevalent within the banking space and prudential
supervisors and regulators.
Senator Lujan. I believe Suspicious Activity Reports are a
tool to help stop illicit financing. I do not believe there is
enough attention brought in the United States to illicit
financing. While I supported the legislation that would have
provided more support to changing asylum rules in the country
and changing investments for border security, no one wants to
talk about illicit financing because it is a bunch of folks
that wear the nicest suits and the nicest ties and wear the
nicest jewelry, that get reported for something, maybe even get
charged with something. They do not go to jail. They get to go
swim in their swimming pool in whatever country they choose to
go to that weekend. There is not enough attention brought here.
The reason I am raising this is there have been reports
coming out of China that Chinese crime syndicates are using
cryptocurrencies to launder billions of dollars, including
money raised from fentanyl sales in America. Other countries
are cracking down, The United States is not doing a darn thing
about this. I think that this exists across every sector of the
false rules that exist within holding people accountable in the
United States.
With that, Madam Chair, I will reserve the rest of my
questioning. I hope we can do something about this, to be
included in this legislation, so that we can really get our
hands around one of the causes of so many deaths, 100,000
deaths from fentanyl alone in America, because someone was able
to make a buck off of it. It is not going to stop until we can
shut that valve off.
I appreciate that. Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much, Senator Lujan. I
know you have raised this to me before, and this is something
we really need to be focused on, and to what extent that is
something we can focus on here in the Committee. It is
certainly a huge issue. Thank you very, very much.
Senator Fischer.
Senator Fischer. Thank you, Madam Chairman, and thank you,
Mr. Benham, for being here.
As we discussed the last time that you were before the
Committee, Nebraska has played a leading role in the regulation
of digital assets at the State level. In 2021, Nebraska passed
legislation permitting the creation of banks or creations of
divisions within existing banks for the purpose of trading in
cryptocurrencies. Additionally, Nebraska's Department of
Banking and Finance has used State laws and authorities from
the Federal Commodities Exchange Act to provide robust
oversight while, at the same time, fostering fair digital asset
markets.
State regulators are the closest to the people, and they
serve a key role in preventing fraud and abuse in digital asset
markets. Do you have any concerns about Federal legislation
preempting strong and effective State laws regarding digital
assets, and is the CFTC equipped to fill any gaps that might
exist there?
Mr. Behnam. Thanks, Senator Fischer, and I appreciate the
question and certainly remember very clearly that back-and-
forth we had a few years ago. As I mentioned back then, and I
will repeat it because it is important, our State partners are
some of our most important partners and ones that we take that
relationship very seriously, because as you mentioned, they are
the boots on the ground, for retail investors, for investors
across the country, including Nebraska, in making sure that we
are getting to every component of a local community to make
sure folks are not being defrauded.
Ultimately, and answering your question more directly, I
think with markets--and this has been something we have learned
over decades in the U.S. and globally--having a national market
system is a more efficient and effective means to bringing
liquidity in trading to a single point, as opposed to having
scattershot or a State-by-State national market system.
That said, putting the market element aside, I do think
States should preserve rights around fraud, custody, which
goes, to an extent, the point I was making with Senator Lujan,
about States preserving their rights for money transmission
across State borders and inside State borders, as well. Then
ultimately, and I will just point out again the extreme
importance of the State attorneys general being able to
preserve fraud authority and not be preempted.
I think there is a balance between creating some Federal
system because there are efficiencies in having a single
marketplace, but also preserving that we are ensuring certain
elements of States' rights, whether it is in the fraud space,
custody and payment space, so that the State will preserve the
opportunities to protect its investors.
Since we discussed this a few years ago my office has
reached out to Nebraska. We are certainly very aware of the
success they have had and the leadership they have played. We
will continue to do that.
Senator Fischer. I was just going to ask if you have
reached out. I know you have been in contact with Nebraska,
with the department there. Have you reached out to other
States? Do you see action increasing at the State level with
State laws being implemented and put in force? Because I think
any time you talk preemption it is because probably the Federal
Government has moved too slowly.
Mr. Behnam. Yes.
Senator Fischer. States, as they should, step up. They are
the laboratories that we have in our system. It makes it then
more difficult, I think, especially when you have States that
have stricter laws in place than other States, to try and
thread that needle at the Federal level.
Mr. Behnam. Yes. We have not necessarily spoken to every
State in the union, but we have spoken to many. We are a part
of multiple multilateral organizations, which include national-
level State securities regulators, and we work closely with
State security regulators on enforcement.
To your question, yes, I think States, many of them have
been frustrated, and there are two components to it. There is
the enforcement and customer protection side, which I think is
really driving Nebraskans' efforts, because there is a lot of
fraud out there, and there is a lot of opportunity to take
advantage of vulnerable individuals in many different ways. I
think those individuals at the State level feel like they need
to step up if the Federal Government is not moving in that
direction.
The other element--and I think to the extent Senator
Gillibrand certainly knows this--different States that may have
more robust and well built-out financial systems, like New
York, you are seeing those regulators build out compliance
programs and regulatory programs.
Senator Fischer. You point out in your testimony the need
for appropriate funding to meet the mandate of new regulatory
authorities for the CFTC, and you recommend a permanent fee-
for-service model. As an appropriator I am curious what this
funding level would be. Would it just be administrative
funding? Would it be hiring additional staff? Would it be IT?
What is your thinking on that?
Mr. Behnam. All of the above, and as I mentioned to the
Chair-- and I do want to correct the record. I mentioned $50
million in the first year and $30 million in the second. It is
actually the opposite, 30 and 50 in the first and second year,
respectively.
We have done a fair amount of work in this area because
there have been multiple efforts to legislate around the space.
We have done analysis with different assumptions about how many
individuals or entities would register with us. We are happy to
share it with your office.
Ultimately the funding would come from users, so it would
be a fee-for-service model, and it would be for personnel, but
also hardware itself, so data hardware, cyber hardware, any
type of hardware we would need for surveillance, and typical
regulatory tools. A mix of both.
Again, a lot of assumptions. We would see how many would
come in and register with us over time. We would certainly look
to appropriators to help set a level, based on a request we
made, and then offset that request by assessing the fees to the
market participants.
Senator Fischer. Okay. Thank you.
Mr. Behnam. Thank you.
Senator Fischer. Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much. I think Senator
Booker just came in the room, to talk about just in time supply
chain. Senator Booker.
Senator Booker. I appreciate that. I am a little upset that
the microphone did not capture Senator Tuberville's kind words
about my tie today. I just want to enter that for the record,
if I can.
It is really good to see everybody here, and this is an
exciting moment. I am really grateful for a lot of the
bipartisan work, especially that of our Chairwoman, and her
wingman, Senator Boozman. Thank you very much for your
leadership on this issue, and this hearing.
When I joined a bipartisan group of Senators about two
years ago working on this, to really find thoughtful, impactful
legislation to strengthen regulatory oversight, we saw the
urgency in this space. Since we did not get something done yet
we have really not only failed to make progress on the
legislation but we have seen a host of crypto issues, as we
have seen in the newspapers and heard from our constituents,
that has really left consumers, businesses, and our financial
system at risk. Instead of acting we have left it up to the SEC
and the CFTC to try to do our job for us, resulting in a
marketplace that continues to be rife with fraud, manipulation,
and abuse.
Although the SEC, CFTC, and DOJ continue to be our first
responders in going after bad actors, which we are
appreciative--they have done actions like a $4 billion
settlement with Binance last year--we have heard again and
again that the CFTC and the SEC lack the resources and tools
they need to conduct oversight in this huge market.
I appreciate that the CFTC takes its role in combatting
fraud and manipulation in this space seriously. I have been
grateful to meet with our witness today, just taking a look at
the CFTC's enforcement docket, with nearly half of the cases
are related, really, to crypto enforcement. It is
extraordinary.
There are things that Congress has to do today to build the
capacity for regulators, particularly for the CFTC, within the
narrow scope of the spot market, to create a system that work
better for customers, entrepreneurs, and the industry as like,
as well as holding the United States as an important center for
this activity.
Despite the enforcement actions they are taking, the known
risks of this emerging space and a Crypto Winter, if we can
call it that, of 2022, millions of retail customers continue to
engage with our financial sector through digital assets,
exposing a lot of ordinary folks to a lot of risk. I know that
you see people of African American descent, people who are
working class overrepresented in this space and often victim to
this fraud.
We have got to prioritize the needs of these retail
consumers through robust customer protections. We have got to
strengthen the CFTC's oversight authorities by funding agencies
at appropriate levels.
I am grateful that their energy in the work doing this--and
again, I want to thank the Chairman and Senator Boozman for
their extraordinary leadership in trying to drive this forward.
Chairman, again, I have said this before but love your
haircut, the CFTC is already conducting some oversight of
digital assets alongside other financial regulators. I just
want to point it to you and hopefully you can speak to the gaps
that the CFTC still faces and why legislation along the
principles of the DCCPA is so important, if not urgent.
Mr. Behnam. Thanks, Senator, for your comment and your
compliment. You pointed it out exactly. We have brought 135
enforcement cases over the better part of 10 years. In our last
fiscal year, as you pointed out, half of our enforcement docket
was crypto related, which I did not use this word in my
statement but it is a staggering statistic for an agency that
oversees trillion-dollar markets, to have to allocate half of
its resources to a market it does not regulate or does not get
appropriated funds for. It puts both markets at risk, and
really exposes the fact that there is so much fraud in the
crypto space.
Senator Booker. Therefore there is a stunning urgency by--
--
Mr. Behnam. Yes. Yes.
Senator Booker. Okay.
Mr. Behnam. The other point that really, I think, dovetails
to your comment is, yes, we have had success in the enforcement
space, but ultimately it is using a very powerful but limited
authority. I used this phrase with the Chairwoman earlier. That
authority allows us to bring enforcement cases, but only in the
context of being reactionary and responsive to customer
complaints and tips, as opposed to having a comprehensive
regulatory regime where we can register exchanges, register
individuals, and have typical, very fundamental compliance
programs, which would if not eliminate, significantly reduce
the fraud that we see every day in the marketplace, and allow
us to be proactive as opposed to reactive.
Senator Booker. Can you be a little specific for me and lay
out some of the tools that you think that you could use to
better enable and oversee the industry?
Mr. Behnam. Very similar to the tools we have in our
traditional regulated markets, registration authority to
register exchanges, to register custodians, to register broker-
dealer. Within that registration scheme are a whole number of
core principles around compliance with governance, compliance
with a board of directors, financial resources, eliminating
conflicts of interest. All of these very typical things that
have been built and evolved over decades in the financial
regulatory space that have really enabled U.S. markets to be
the most robust, the strongest, and most desirable in the
world.
It is really not rocket science, and a lot of it is built
off the DCCPA, with some modifications certainly. Ultimately we
are not trying to recreate anything. We want to model what is
needed based on what has been successful.
Senator Booker. Just give me one--my time is up--one
realistic consequence for us not getting this done in the
coming months. What is something that you are concerned about.
Mr. Behnam. Senator, put aside the resources and the
challenges that we have in allocating half of our resources to
enforcement. Our No. 1 priority and responsibility is to
protect customers. If we do not have this authority, we will
continue to see fraud and manipulation, and individuals in New
Jersey and across the country lose money.
Senator Booker. Chairwoman and Ranking Member, there is an
urgency here. I am grateful for both of your leadership. I just
ask us to move with some haste. Because if we do not move and
get something done in this Congress, more and more people will
be taken advantage of. More and more people will lose their
money.
There is bipartisan unity, I think, in this, on both sides
of the Capitol. The only real division I see at this table is
the Senators with hair versus the Senators with not. Otherwise,
we are together on this.
Chairwoman Stabenow. We will debate that separately.
Senator Booker. They also have the nicest ties.
Chairwoman Stabenow. Yes, exactly. We are debating ties
today.
Well, on a serious note Senator Booker, thank you for that.
Thank you for being part of the bipartisan group in the last
couple of years who we have been working so hard to move
something forward. Thank you so much for doing that.
Now we will turn to Senator Tuberville, for the hair
rebuttal.
Senator Tuberville. We are not opposition. Thank you, Lady
Chairwoman.
You know, as Senator Booker just said, digital assets are
our future, and for us to lead on this entity we have got to
encourage innovation. If we do not, we are not going to make
it. The legislation has got to be there, and I think we all
agree with that.
I have just got a few questions here about this. You know,
we all know there are good actors and there are bad actors. If
we do not get legislation, the bad actors are going to take
over, and we have seen some of that. Mr. Chairman, thanks for
being here today.
A lot of my constituents use event contracts to hedge risk.
Can you assure us that the CFTC's even contract rule will
encourage innovation and not attempt to prohibit or limit event
contracts?
Mr. Behnam. Senator, thanks for the question. In short yes,
I will ensure that we support innovation in any rule that we
finalize in the future.
Senator Tuberville. Thank you. Two of your Democratic
colleagues on the Commission are being considered by the Senate
for new roles. Should them recuse themselves from ongoing CFTC
rulemaking as they go through this confirmation process?
Mr. Behnam. Senator, thanks for the question. It is an
important question and certainly one that we have looked at
very carefully since they have been considered for these new
positions, respectively at the FDIC and Treasury. Based on the
legal analysis that we have done and the fact, ultimately, that
they are going to other government agencies, they do not have
to recuse themselves. We are----
Senator Tuberville. Don't you think this is a conflict of
interest?
Mr. Behnam. Well, ultimately, recusals should be done in a
situation where there is, in fact, a conflict. It is most
typically done if a public official is going to the private
sector and you do not want that individual, while they are in
their public office, to make decisions that would benefit a
future employer.
In this case, since both are going to another public
agency, another government agency, we have not been able to
identify any, quote/unquote, ``conflict of interest'' that
would require recusal. We are happy to look at the issue again
and speak with your office, hear your concerns, and have a
conversation about it.
Senator Tuberville. Thank you. You know, I have a got a
bipartisan bill with Senator Gillibrand to prohibit Chinese
entities from acquiring U.S. digital asset broker-dealer,
custodian, or exchange. Do you think that is the sort of
legislation we need?
Mr. Behnam. Senator, you know, it is often dismissed or
forgotten that financial markets and the institutions that
comprise financial markets, whether it is a broker, an
exchange, a clearinghouse, are critical infrastructure. They
are not necessarily critical infrastructure in the sense that
we would think in terms of national security, but they really
are.
If we were attacked by an adversary and one of our core
critical financial infrastructures was attacked through cyber
and held up or stopped trading, this would have a huge impact
on agriculture, on energy, and any number of things that impact
our economy directly.
I appreciate the bill that you have filed and understand
what you are looking to accomplish, and I do think it is very
important, given the nature of financial markets and what our
adversaries are willing to do, and making sure that we are
preserving national interests and national security through
financial infrastructure.
Senator Tuberville. Thank you. You know, I want your
thoughts on how mined crypto assets should be taxed. Take
Bitcoin, for instance. The IRS is all over people that are
mining Bitcoin. If you grow corn you do not pay tax on it until
you sell it, but Bitcoin, if you mine it, even before you sell
it you have to pay taxes on it. Do you think that is fair?
Mr. Behnam. Senator----
Senator Tuberville. Have you thought about this?
Mr. Behnam. Actually, I have not thought about it until
now. Principally speaking, and based on the way you articulate
the analogy, you know, it does not sound fair, or there is not
a clear sort of analogous policy around it. Thinking through
some of the issue around mining and the efforts that are
required through energy and otherwise to mine tokens, perhaps
there is a policy reason that the IRS is looking at it through
their lens. I am happy to look at it more deeply and have a
conversation with you. I otherwise do not focus too much on the
tax code.
Senator Tuberville. Well, please do. You know, if you buy
stock you do not pay tax on it until you sell it.
Mr. Behnam. Correct.
Senator Tuberville. If you buy gold you do not pay tax on
it until you sell it. If you mine Bitcoin, or any kind of
crypto, you know, the IRS wants their money now, whether you
are going to make or lose money at the end of the day. I think
if we are going to encourage people to get involved in crypto
we need to address this issue pretty quickly, because a lot of
people are being really harassed by the IRS, and they should
not be. It should be like any other entity of where they have
the opportunity to invest, and when they make a profit they pay
taxes on it at that time. I appreciate your thoughts on it,
when you can sit down and really think about it and talk to
your people.
Mr. Behnam. I would be happy to.
Senator Tuberville. Thank you.
Chairwoman Stabenow. Thank you very much. Senator Warnock.
Senator Warnock. Thank you very much, Madam Chair, and
thanks to you and Ranking Member Boozman and others for your
leadership on such an important issue. These cryptocurrencies
and digital commodities are relatively new, but basic consumer
and investor protections are not. They are still the pillars of
a sound financial system. I am glad to see bicameral and
bipartisan work taking place on this. As Senator Booker has
already pointed out, it is difficult to overstate the urgency.
The questions that I will ask when evaluating any potential
legislation are will this bill better protect families and
investors in Georgia and across our country? Will it help grow
our economy, and all of that with respect to all of the
geopolitical challenges that we face? Basically will it help
prevent folks from being taken advantage of? Will we be
effective? Is it effective? Or will we just be able to check
and the box and say we did something?
Chairman Behnam, critics of proposals to expand the CFTC's
authority into regulating certain cryptocurrencies note that as
a financial regulator the CFTC has not needed to focus on
protecting retail investors, and the Commission lacks the staff
experience and the expertise to properly protect consumers.
Around this question of whether what we do will be
effective, what can you say to reassure critics that the CFTC
is up to this task that we all agree is so very important?
Mr. Behnam. Thanks, Senator Warnock. I am going to go back
to something that I think I have said, because it is extremely
important and I think very responsive to your question. There
is, in fact, what I believe is a misnomer, a
mischaracterization of what the CFTC's constituency is. It
certainly is large commercial end users--farmers, ranchers,
energy providers. It certainly is large financial institutions.
We do have, and have had for a number of years, with a sort of
growing demand, a fairly large retail investor community. They
invest in futures, which are our main bread and butter
contract, and also Senator Tuberville mentioned event
contracts, a very retail-oriented marketplace.
From a regulated market we do see a lot of retail
investors, and we see that growing. We see growing investor
demand and enthusiasm for all types of financial contracts,
something I know that this Committee should care about very
deeply.
The second element that I think really is more responsive
is around enforcement, and I mentioned this earlier. If you
look at our enforcement docket, historically, not just in the
past year or two years, five years, but historically, the fraud
cases that the CFTC brings are very much related and oriented
toward retail fraud. A significant amount of the fraud, as
opposed to manipulation of markets, are oriented toward retail
investor. That is because they involve something that is called
FOREX, foreign exchange, and also physical commodity fraud,
which is typically gold and silver, so metals. You see this in
commercials and other types of advertisement.
If you look at our enforcement docket around fraud it is
very much mom-and-pop, Ponzi scheme, pump-and-dump fraud that
has occurred for decades in financial markets. Because of that,
because of that record, we have actually built a very robust
and deep Office of Customer Education and Outreach and a vast
network of partners at the local, State, and Federal level, in
terms of law enforcement, to get--and I will reference what
Senator Fischer said--sort of boots on the ground at the local
level.
I do not want to dismiss. I mean, we will have work to do.
This is a new market. We will have to buildup with resources
and personnel. What I do want to just recharacterize is this
notion, this fallacy, that we are not a retail-oriented
regulator. We have a big history on the enforcement side, and
we have a growing constituency on the investment side, and I
think we can build off of both to be successful in the digital
asset space.
Senator Warnock. Sure. One of the things that will have to
be addressed in any legislation that is proposed, because there
are multiple financial regulators involved, is the dividing
line between what the SEC should regulate versus the CFTC. You
know, that is something we will be taking a look at.
With respect to this issue of capacity to do what we are
asking you to do, you requested $399 million for the CFTC's
Fiscal Year 2025 budget. That funding level would support 725
full-time staffer, to effectively operate and support the
agency in fulfilling its mission. Comparatively, the SEC
requested $2.5, almost $2.6 billion for 5,703 full-time
staffers.
Is this budget request sufficient for the Commission to
take on the potential new role of protecting consumers and
investors who are trading digital assets, and if not, what
funds and staff levels are necessary?
Mr. Behnam. Thanks, Senator. As it stands that budget
request, the $399 million for 725 FTE is specifically for our
existing required and mandated regulatory responsibilities, so
not digital assets. This is for futures, options, and swaps.
We have done a fair amount of analysis, and I am happy to
share it with you, that if we were to see legislation pass that
would create authority for the CFTC to police digital assets,
we would have an additional budget request around certainly
resources, for personnel, and for security hardware, IT
hardware, cyber hardware.
We have been thinking about it, but certainly it would be
above the 399, which you would expect to be commensurate with
the requirements that Congress applies to us.
Senator Warnock. Well, thank you. We look forward to seeing
that analysis and what is necessary as we move forward.
Mr. Behnam. Happy to.
Senator Warnock. Thank you.
Mr. Behnam. Thank you.
Chairwoman Stabenow. Thank you very much. Senator Marshall.
Senator Marshall. Thank you, Madam Chair. Chairman, welcome
back to the Committee. It was great to see you in Kansas City
in the spring, and I appreciate you and your team coming there
for a commodity futures conference.
Thanks to a wide-open southern border we have seen an
explosion of fentanyl poisoning deaths, human trafficking. We
have seen a large amount of illegal marijuana now being grown
on farms, marijuana farms, in States bordering Kansas.
At the end of the day, all of this organized crime is
resulting in money laundering, for the most part with crypto.
The Chinese Triad, the Chinese organized crime, manages this
crypto. Why is crypto the currency of choice for criminals?
Mr. Behnam. Senator, thanks for the question. I would say
twofold not an exhaustive response, certainly, but one, there
really are not borders to crypto. You obviously can transfer
money globally, fiat money globally, but in terms of
cryptocurrencies, stablecoins, actual digital assets, Bitcoin,
Ether, it is, in some respects, a borderless type of currency,
so it is easy to move across borders.
Other than that, or in addition to that, excuse me, I would
say it is the reason we are here today. There is largely a
vacuum in the regulatory space on both the digital asset market
side, which is what this Committee needs to consider as it
relates to the CFTC, but also the stablecoin side, which deals
with other agencies and other committees.
The larger picture is there is some State level regulation
around money transmission. There is some Federal regulation
around FinCEN and AML, KYC, and a lot is missing.
Senator Marshall. If I could, do you feel it is just as
important for the crypto industry to know their customer as a
bank does to know their customer?
Mr. Behnam. One hundred percent.
Senator Marshall. Okay. As we go forward, I am fearful that
the SEC would have an outsized role in determining if something
is digital commodity or not, and I am equally concerned that
your agency could be sued if it does not comply.
Two questions here. I think it is the same answer. Do you
support the SEC making decision on what it is under the CFTC's
jurisdiction? Two, do you think it is a good use of Federal
Government's time to have two agencies fighting over the
designation of a digital commodity?
Mr. Behnam. Senator, short answer is no, but it is
important that as we have, as two agencies, done in the past,
work together to make determinations around certain assets
that, I will call it a gray area, exist in a gray area around
what a security and a commodity is. That has happened for the
better part of five decades.
Senator Marshall. You are not worried that the SEC says
this is a commodity, and the CFTC says it is not, and you get
sued over it, you are not concerned that that is going to
happen?
Mr. Behnam. I cannot say that it is not going to happen. I
think in this particular area, this digital asset space, there
are a lot of legal questions of first impression. In our
traditional commodity markets we have been dealing with
determining what is a commodity and a security for decades, so
it becomes a little bit customary and rote.
At this particular moment I think it is important that we
preserve, as I said in my opening statement, a core principal
model, a self-certification model, as well, which has worked
quite well for the agency for the better part of two decades.
Also I do think given the size of the market, the number of
tokens, and some of the novel legal questions, it is important,
as the agencies have done historically, work closely together
to find consensus around whether or not a token is a security
or a commodity.
Senator Marshall. What I am concerned about is we are
writing legislation that sets up a system for this fight in the
courts, when instead we need to make sure that we are writing
legislation that creates total clarity of the SEC's versus the
CFTC's jurisdiction over digital assets. Do you share that
concern?
Mr. Behnam. I share that concern to the extent or in regard
to the fact that whatever this Committee considers in the
future I do believe there should be a system of listing
contract, that is both similar and typical to what we have done
at the CFTC in the past, but also does contemplate, to an
extent, a relationship between the two agencies that we can
work efficiently together.
The last thing I will say is I do think there is a way to
build a system of listing contracts that does not prolong or
delay the listing of contracts in a regulated market. We want
to get these contracts, these tokens, on regulated markets as
soon as possible so that we can eliminate or reduce the risk of
customer loss and enhance customer protections.
Senator Marshall. I am a person who always believe that the
government makes the simple complicated, and what leaders do is
make the complicated simple. Wouldn't it be simpler if we just
put this all under the CFTC's jurisdiction and then being the
primary regulator, and maybe there are some offshoots for the
SEC. Truly designating this is the CFTC's baby.
Mr. Behnam. Senator, I speak for myself. I would be happy
to do that. I think we have the capacity to do that, the
expertise, and the experience. There may need to be some
definitional changes to what a security is and what a commodity
is to accomplish that outcome.
Senator Marshall. Thank you. I yield back.
Chairwoman Stabenow. All right. Thank you so much. Senator
Welch.
Senator Welch. Thank you very much. I appreciate you and
Senator Boozman having this hearing. It is an incredibly
important topic. Thank you.
You have got a hard job. It is kind of a mystery, all this
Bitcoin and these tokens, and I appreciate you doing the job
that you are doing, and doing it so well.
I have really two questions. As I understand it, in your
testimony you said that CFTC lacks the authority to regulate
the cash spot markets for Bitcoin. Is that right?
Mr. Behnam. That is right. Correct.
Senator Welch. Okay. That is one of the few investment
tools available for investor to invest in cryptocurrency.
Should Congress expand the CFTC's authority to include cash
spot markets, the CFTC's enforcement authorities would likely
need to increase beyond anti-fraud, right? Do you believe that
the disclosure process for digital commodities should be the
same as the current requirements for physical commodities?
Mr. Behnam. Senator, thanks for the question, and it is a
really important one because I think a lot of the debate around
the two agencies and the historical record of the CFTC and what
it is oriented toward really misses some of the point around
what we are trying to accomplish and what gap we are trying to
fill.
This is exclusive what I have called for, for several years
now, legislation around commodity tokens. If you look at
commodity tokens--and this really goes to your question--or
commodity assets, whether it is corn, soybeans, natural gas, or
oil, the disclosure regime that is built around commodities is
really market and risk based. It is not actually about the
commodity.
I think the best way to think about it is if you think
about wheat, for example. What would you disclose about what on
a periodic or a constant basis, on a quarterly or annual basis?
Wheat is a decentralized commodity. It is grown all across the
world. You would not be able to disclose to an investor of a
wheat futures contract what exactly the risks are associated
with investing in the commodity itself.
I think that is very important to juxtapose against the
Securities and Exchange Commission and corporate disclosure
around centralized entities that have executive teams, boards
of directors, audited financial statements, material risks to
their business. That is the information that bridges a gap
between a company that is issuing stock and an investor. You
want that investor to know as much information about all of
that corporate issuance so that they can make the best informed
decision. That does not exist on the commodity side.
I would think, as it relates to digital tokens, we would
have to be consistent around disclosures as they relate to
market risk and material risk as it relates to the token
itself. Some very characteristic driven disclosures around the
token and what an investor might need to know before they make
an investment.
Senator Welch. Thank you very much. Another question, but I
think we are under surveillance here. Representative French
Hill just came in.
Chairwoman Stabenow. I was going to mention that, Senator
Welch. We do have one of the leaders in the House on the Hill--
--
Senator Welch. We have all got to be on our best behavior.
Welcome.
Second question is about the energy consumption. I mean,
this is not necessarily in the regulatory space but there is
some question, I think, about what disclosures have to be made.
It is an astonishing amount of energy use in this new domain.
What I understand is crypto mining accounted for 2.3 percent of
domestic electricity demand, as much electricity as the entire
State of West Virginia or Utah combined last year.
That is going to go up, and especially as there is more
mining related to it. There are real implications, not just the
increase in the amount of energy but an impact on rate payers
in Vermont and elsewhere. I am concerned about that. You know,
what are the side consequences. Folks who have nothing to do
with the whole market, are not in it, does not affect their
lives, but it does affect their electricity bill, or it could.
My question is, with the energy demand from crypto placing
a heavy burden on our electric grid and consequent potential
price increases for everyday consumers, particularly with the
demands that are imposed by the extreme weather, is there any
room for the CFTC to consider requiring climate risk
disclosures for crypto mining operations?
Mr. Behnam. Thanks, Senator. Again that would fall within
the remit of legislation. If that is something you want to
consider, my team is happy to work with you and your staff to
figure out a way to accomplish that. I am certainly aware of
this issue and the consumption of energy as it relates to
mining of tokens.
We have observed this over a number of years, and it has
ebbed and flowed, and I think, to credit some in the industry,
there have been efforts to shift toward renewable energy
sources as opposed to traditional fossil fuel-based sources.
Again, the numbers are staggering in some instances, and in
this moment where we have high energy costs, huge new demands
from artificial intelligence, it is certainly something that we
need to think about.
I think in previous efforts to create authority there have
been provisions and potential bills around studying this issue
at the CFTC with our other Federal partners, Department of
Energy, FERC, and otherwise, to see what is actually happening
on the ground, how much energy is being used, where are the
pockets of demand, how it is affecting communities across the
country, and whether or not there are any solutions to both
reduce that demand or potentially to shift it to less intensive
renewable sources.
An issue we are thinking about but certainly would welcome
the opportunity to work with you.
Senator Welch. Thank you very much. I yield back.
Chairwoman Stabenow. Thank you very much. Senator
Gillibrand, let me first thank you for all of your wonderful
work, in a broader sense. We know that our jurisdiction is
commodities and the CFTC, but I very much appreciate your
efforts in this area.
Senator Gillibrand. Thank you, Madam Chairwoman. Chairman
Behnam, thank you for being here. I really appreciate your
agency's leadership in the digital commodity space. As a member
of this Committee I encourage congressional progress on digital
commodities. The CFTC's continued partnership is essential to
developing robust legislation.
The decision of regulation between the SEC and the CFTC is
an ongoing discussion in the digital asset space. In your
testimony before this Committee in September 2022, you stated
that the CFTC is the right regulator for the digital asset
commodities market. Legislative efforts in the Senate and the
House seek to determine pathways to bring crypto into the
regulatory perimeter.
Many of these efforts empower the CFTC to lead regulation
of digital commodities. When Congress acts, is the CFTC
prepared to take this regulatory role?
Mr. Behnam. Thanks, Senator, for the question and your
support. I will answer that in two ways. First in terms of
experience and expertise. I cannot think of another regulator--
and you suggested this--that has been on the front line of
crypto for the better part of 10 years, both from an
enforcement side, and then we do have regulated futures
contracts on Bitcoin and Ether. We are familiar with the
constituency. We are familiar with the market, and its sort of
ebbs and flows over the period of time, and then obviously from
an enforcement standpoint we have been a frontline regulator
across the country, and globally, as well.
Second part is can we handle this. I often point to what
the Agency was able to accomplish after the financial crisis,
and previously before the financial crisis you had the over-
the-counter derivatives markets, more commonly known as the
swaps market, moving into the jurisdiction of the CFTC. This is
a multi-trillion-dollar global market that the CFTC, from 2010
when President Obama signed Dodd-Frank through the course of a
few years, was able to implement a global regulatory regime
over the swaps market.
We have done it before. I think we can do it again. Many
similarities between the two, and I think the Agency has proven
itself very capable in bringing in markets within the fold.
Senator Gillibrand. Can you tell us some of the risks of
inaction in this space and how could legislation be helpful to
provide additional regulatory and jurisdictional clarity?
Second, how does the CFTC coordinate with the SEC in
regulation, registration, rulemaking, and enforcement in the
current regulatory vacuum?
Mr. Behnam. Thanks, Senator. On the inaction question,
taking that first, the No. 1 priority for me is customer
protections, and I know that it is for you, as well. Ultimately
if we do not take action, if Congress is not able to fill this
gap, we are going to continue to see enforcement cases build,
and ultimately, as I have said to some of your colleagues, we
are always being reactive in our current posture. We are never
able to regulate, register, and surveil markets like we
traditionally do. We always have to react to customer
complaints and tips, and the problem with that is the money is
often gone and the fraud has already occurred.
The other inaction--I think this is more for you and less
for me as a regulator--you pointed this out on numerous
occasions, there is a level of concern around regulatory
certainty. There are a lot of entrepreneurs and innovators that
are uncertain what the posture is going to be in the U.S.
I serve as the vice-chair of IOSCO, which is the
International Organization of Securities Commissions. We are
behind at this point. We have been behind for a number of
years, from a U.S. perspective, and I have seen that happen
over the course of two or three years as vice chair of the
organization, and I think it is important that we fill this gap
by moving ahead with our allies across the globe.
In terms of coordination with the SEC, I would focus
primarily on the coordination we have with the SEC from an
enforcement perspective over the course of many years,
including with the SEC but also the Justice Department. We have
brought cases together with them, both civil and criminal, and
our enforcement teams work very closely because we do have a
fair amount of overlap on the enforcement side.
On the regulatory side, it is much more limited because,
again, for the reason we are here today we do not really have
regulatory authority of the spot market. There is no
registration or these typical things that we would typically do
with a financial market participant that I am hoping that this
Congress and this Committee will work on.
Senator Gillibrand. Many of my colleagues are concerned
with safety and stability of digital commodities and digital
assets. How does the CFTC balance consumer safety when it comes
to digital commodities while allowing innovation, and how could
the core principles found in the Commodities Exchange Act be
applied to crypto markets and potential legislation to
encourage consumer protection and market integrity, moving
forward?
Mr. Behnam. Thanks, Senator. Taking the second question
first, the core principles, and I have said this a few times,
are really a very efficient and robust and well-worn system. It
is orderly and fair trading. It is making sure products are not
readily susceptible to fraud and manipulation, system
safeguards, which is cybersecurity and operational risk, making
sure entities have appropriate financial resources.
Off of these core principles the Agency then builds more
prescriptive rules. It is a good foundational system that has
worked in all financial markets and one that I think would work
in the crypto market, as well.
In terms of what the Agency is doing to foster innovation,
we have the Office of Technology Innovation, which I lead, and
the director reports to me. We have also had a number of
advisory committees that have been very engaged with the
industry, learning what they are doing, seeing and hearing what
their challenges are, and to the extent possible, working with
them to ensure that they have a sense of what our authority is,
what we can and cannot do.
Ultimately again, as I said earlier, very limited in scope
to just futures authority, which at this point is relatively
small market to other derivatives. This is why we are here, and
I think if we can provide this authority then we would
certainly, and to your point, do our best to engage with the
industry and support innovation.
Senator Gillibrand. Thank you, Chairman Behnam. Thank you,
Madam Chairwoman.
Chairwoman Stabenow. Thank you very much. Senator
Klobuchar, and then our cleanup hitter, Senator Boozman.
Senator Klobuchar. Always patient. Always patient. Thank
you, Chairwoman. Thank you, Senator Boozman, and thank you very
much for your work, Chairman.
The CFTC, we know, has very important work right now. I
think since we last talked, the digital asset market has grown
tremendously. The market capitalization of digital assets has
recovered to over $2 trillion, doubling from its recent low
point. Bitcoin alone recently hit a record high of over
$73,000.
Despite this, there is not really--you tell me, you believe
you need more statutory authority. Correct?
Mr. Behnam. Senator, yes. We have a big gap.
Senator Klobuchar. Okay. That is why we are having this
hearing, which I appreciate that Congress must work in a
bipartisan way to reinforce the CFTC's authority and ensure it
has the necessary resources to protect commodities and maintain
market stability. That includes considering legislation to
regulate digital assets, protecting consumers and market
participants while fostering innovation and ensuring a level
regulatory playing field. That is how I think about it.
I know that some of this has been asked. I was at a
hearing--we have a Federal judge nominee in Minnesota, and you
do not really want to leave the Senate Judiciary Committee
alone on its own when you have a nominee, so that is why I am a
little late here.
You have previously discussed how the CFTC has a rigorous
and deep disclosure regime for commodity market participants,
including what they must share with investors. That differs
from securities disclosures. It is also important to ensure
consumers have sufficient disclosures about the underlying
assets in addition to disclosures for market participants. Is
that right?
Mr. Behnam. Correct.
Senator Klobuchar. In other words, aren't disclosures about
these assets as important as those about the entities trading
them?
Mr. Behnam. Correct.
Senator Klobuchar. Okay. Good. AI is set to become one of
the most significant technological advances of our time. I
think it was David Brooks who said he has trouble writing about
it because he does not know if it is going to lead us to heaven
or hell, and a lot of that is in our hands. It is great
potential for innovation, but we have to put some rules in
place, something that a group of Senators have been working on
for months.
We are already seeking the risks of AI in financial
markets. In January, the CFTC issued an advisory warning
against the risk of AI-driven crypto scams. Can you talk about
the kinds of fraudulent activity you have seen with the use of
AI in digital asset markets?
Mr. Behnam. Thanks, Senator. It is an extremely important
issue, and quickly putting aside the AI customer advisory, we
have done a lot of work ourselves on soliciting comment from
the industry around how AI is being used in the market, and we
are taking and reviewing those comments now to ensure that we
potentially consider a rule or advisory or guidance ourselves.
With respect to your question, what we have observed is
really akin to a search engine, where artificial intelligence
is able to essentially track vulnerable investor, individuals
across the country, and where they put their resources, how
they invest their money, where they look on the internet, and
are able to use artificial intelligence to essentially capture
them at a vulnerable time.
There is something called ``romance scams,'' which you may
be familiar with, but this is really a very sad scam that has
been going on for a number of years. I think the FBI noted just
last year, in 2023, there was over $3 billion of romance scams.
This really is preying on the most vulnerable Americans who are
looking for partnership and friendship and essentially stealing
their life savings.
We are very focused on that. We are working with our
Federal partners. A lot of it, to your question, is driven by
artificial intelligence and seeing where users are located, who
has money, where they are banking, and then ultimately what
their patterns are, socially, so that they can ultimately be
taken advantage of. We are doing our best to prevent that.
Senator Klobuchar. Very good. Crypto operates in two areas,
correct, on-chain decentralized users and off-chain centralized
institutions, and most of the proposed legislation focuses on
centralized platforms, not on-chain. Are on-chain activities
and DeFi harder to regulate, and do you have any recs for how
we should approach DeFi----
Mr. Behnam. Senator, thanks. It is a really important
question, and I am going to use an example of what we are
observing. It is still very early days, but a lot of more
sophisticated, large financial institutions are looking at on-
chain technology as a means for payment processes and
settlement. Settlement, you could imagine in a financial
market, is extremely important, and a lot of financial
institutions are looking at blockchain and on-chain
transactions as a means to make settlement or payment processes
more efficient.
We are working with the industry, with other partners, in
seeing how, and in what way we intersect with that. There is
definitely a regulatory nexus. Is it more difficult? It is
certainly not centralized. The whole point of blockchain is to
be decentralized. It raises very interesting policy and legal
questions about what do we want to do, from an elected legal
perspective but also from a regulatory perspective, to properly
regulate it but not over-regulate it, because there could be
potential innovation and efficiencies developed from it.
Senator Klobuchar. Well, thank you. If I learned anything
around here it is do not use the Ranking Member's time. I will
maybe submit another question or two on record. I am very glad
that the Chairman and Ranking are working on legislation on
this. I think it is time to move, and I really, really
appreciate you appearing before us. Thank you.
Mr. Behnam. Thank you.
Chairwoman Stabenow. Well, thank you so much. Last and
certainly not least, Senator Boozman.
Senator Boozman. You are always welcome to use airtime, so
thank you for being here.
Chair Benham, as you know, multiple DCMs currently list
futures contract with an underlying digital asset, all of which
have been listed through the self-certification process without
CFTC intervention, so the underlying digital asset clearly did
not cause an issue.
Despite that, some think CFTC is too weak and ineffective
to handle spot digital commodity self-certification. Are they
right? Is the CFTC not equipped or are they not capable to
handle spot digital commodity self-certification?
Mr. Behnam. Senator, thanks for the question. I am going
not say we are certainly equipped, and we are certainly
capable. I would just reiterate what I have said multiple times
to your colleagues. If this Committee act and provides
additional authority to regulate these markets we would
certainly need additional funding to do it. Otherwise, from a
policy and expertise perspective, we are as well positioned as
anyone.
Senator Boozman. Very good. Thank you. Certainly that makes
sense that you need the resources if you are moving in that
direction.
Some have suggested the SEC should first determine whether
something is a security and then CFTC should followup with its
own determination. If the two disagree, the CFTC could sue the
SEC. A similar process exists for novel derivatives products,
but many in the industry would tell us it is an unworkable
process that has largely killed those markets. I am afraid such
a framework would also stifle crypto markets, which is a
terrible outcome.
As you well know, this Committee does not have jurisdiction
over SEC. Should Congress put the CFTC in the losing position
of having to sue the SEC every time they disagree?
Mr. Behnam. Senator, the short answer to that question is
that would be obviously a very difficult position and one,
practically speaking, that is unlikely. The self-certification
process, as you point out, is a well-worn process. It is about
24 years old right now. I did some work myself, when I was a
Commissioner, looking at listing of products prior to the self-
certification authority and after the self-certification
authority. The numbers are actually quite staggering, to use
that word again, in terms of listed products.
It is an efficient system. It is one that actually forces
both the market participant, the exchange, and the regulator to
be involved. It is not just driven by the market participant.
We do engage. It is checking boxes. It is making sure they are
complying with our rules and our regulations. It is an
efficient system, and I think that should be a model as you
consider legislation to use for digital assets, as well.
Senator Boozman. Good. Thank you. To my knowledge, Congress
has never held a hearing solely on decentralized finance, not
once. Yet some would want to regulate in such a way to make it
very difficult for the industry. The IRS just excluded DeFi
from their new broker rule and the E.U. has punted. The rest of
the world realizes the issue needs more studying. Instead of
having CFTC spend resources on something the Agency has no
expertise in, should we focus on regulating centralized
exchanges?
Mr. Behnam. Yes, I think at this point, Senator, given what
we have observed, what I have observed over the course of seven
years, the priority should be centralized exchanges. We have
brought a few enforcement cases around DeFi. We have engaged
with market participants. We have seen this area evolve,
certainly. I think the larger challenge right now, as it
relates to customer protections, fraud, manipulation, is around
these centralized exchanges. If I were to make a recommendation
is to focus on that particular area right now, because that gap
is the one that is really the one that is most concerning to
me.
DeFi is more challenging. We have heard our fair share of
complaints from the industry, but I am a firm believer that
there is a regulatory nexus for DeFi, but perhaps we have to
take a unique look at it, given the unique nature of DeFi. It
may not be exactly what we do with traditional centralized
exchanges, but the notion or idea that it should live in a
regulatory vacuum, I disagree with that.
All that to be said is I think it demands more thought,
consideration, and discussion between both the regulator and
this Committee before any further steps are taken.
Senator Boozman. Good. Thank you.
Congress was clear that the CFTC's jurisdiction to regulate
swaps outside the U.S. is limited to those that have direct and
significant connection with the U.S. That boundary is important
because unfettered regulatory overreach can lead to foreign
retaliation, which hurts U.S. market participants and users.
You have expressed today, and rightfully so, the CFTC's limited
resources. Why should it be the world's crypto police?
Mr. Behnam. Senator, we should certainly not be the world's
crypto police. I think I mentioned to Senator Gillibrand, I
believe, that I serve as vice chair of IOSCO. I put it in my
statement, as well. I have seen multiple jurisdictions across
the globe--Asia, Middle East, Europe, U.K., South America--in
the course of three years as vice chair, go from pilot programs
to well-built regulatory systems.
From an enforcement, customer protection side, this delta
between the U.S. and the rest of the world is not healthy, and
I think from your perspective, as we think about innovation and
economic development, it should be concerning that we are so
far behind. I think we have the benefit of being the largest
market in the world, and we do not necessarily have to move
first, but we do have to move, and I think this is good step
forward.
In terms of our nexus with non-U.S. participants and how
far our reach should go, you raise a very important point and
one that this Committee has thought about very deeply, just 10
or 15 years ago with the swaps market and the nexus test, which
is in our statute. It is challenging. Ultimately I think, at
its root, what we have to focus on is how are, if at all, U.S.
customers impacted or affected. If they are affected then I
think there is a clear nexus between what an entity,
individual, or organization is offering to a U.S. customer,
regardless of their location, whether it is in the U.S. or
obviously, to the point of your question, outside of the U.S.
We have to think about it. I think our consistent baseline
or foundation should be that nexus with U.S. customers and
whether or not they are being offered products, and ultimately
defrauded or manipulated. If we can find that nexus--and it is
not necessarily always black and white. There are some areas
that are gray, of where affiliates or subsidiaries are set. We
have done a good job, I think, by and large, over the past 10
years implementing Dodd-Frank and Title VII. We have done this
in other markets over the course of decades. I feel pretty
strongly we could do the same in this particular market.
Senator Boozman. Good. Well again, thank you very much for
being here. We appreciate your leadership. You have got a lot
of responsibility, and again, we just appreciate you stepping
up to the plate and providing the leadership that is needed.
Mr. Behnam. Thank you, Senator.
Chairwoman Stabenow. Thank you so much. I want to do one
followup question because Senator Boozman raised a really
important issue that we are struggling with here with SEC and
CFTC. Could you just speak a little about today, in this
moment, where you do not have regulatory authority, but today,
if the SEC thinks that an asset is a security, how does the
CFTC respond?
Mr. Behnam. Senator, you know, I mentioned this a few
times. This goes back decades with security futures, which
really the issue is the legal issues, the policy issues were in
the early 1980's, and then as you well know, with Title VII of
Dodd-Frank the difference or the delta, to use that word again,
between security-based swaps and commodity swaps.
The two agencies have a long history of working well
together, and I will focus on the word ``well.'' We understand
our missions. We understand the outcomes we want to achieve. We
understand that we are the two market conduct regulators in the
U.S. Federal financial system, and that our jobs are extremely
important. Our coordination in the efficiency is extremely
important.
As we do have products listed, and it typically, as you can
imagine, does not happen with physical commodities, it is
around narrow-based and broad-based indices typically comes up
these days. There have been some other products that have been
listed in the recent past that have raised legal questions
about what is a security, what is commodity. During this self-
certification process, which Senator Boozman raises, it is not
just a simple market registrant comes in and files a paper with
us and they start listening. There is a process. Sometimes it
takes months, and it is conforming a product with its
specifications to our rules and our regulations, and ensuring
there is compliance. If there are issues around whether or not
an asset is a commodity or a security, they will talk to us,
they will work with us.
I think what I want to emphasize to this Committee is we
certainly, at the CFTC, work very closely with the SEC. We talk
to them. We engage with them. We listen. We want to hear what
their legal analysis is. We challenge them, for sure. We
understand our domain, our jurisdiction, and we want to
preserve that. We want to be respectful and mindful of what our
sister agency believes, and we will deal with that, I think, in
turn, as it relates to new and novel products.
This idea or notion that we sort of hang out there in a
vacuum and the registrants just kind of self-certify on their
own is not entirely accurate. We work very closely with the
SEC, and I think as this Committee can considers a new model
for digital assets it needs to be a balanced approach. I put
this in my written statement. Efficient--we want to get
products regulated. We want to move this along quickly. We also
want to make sure both agencies are involved and consensus is
reached.
Chairwoman Stabenow. Thank you very much. This is the
dilemma. It is one thing to say that an industry can just pick
their regulator. You know, is that in the public interest, in
the customer interest, and so on? I would argue, in general,
no, that it is not. On the other hand, we do not want to see
something mired down where you cannot proceed in terms of
commodity, without jurisdiction as commodities, not securities.
Contrary to what the House did in looking at both of those, our
responsibility and authority is around commodities.
This is the challenge, I think, for us, in terms of making
sure it is efficient, focused, that we are achieving what we
want, in the public interest. As we move forward we are going
to look forward to working with you on this.
Mr. Behnam. Thank you, Senator. We are happy to help.
Chairwoman Stabenow. Thank you very much. I thank everyone
for their attendance today. I look forward to working with
everybody to move forward on this really important legislation.
The meeting is adjourned.
[Whereupon, at 11:46 a.m., the hearing was adjourned.]
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A P P E N D I X
July 10, 2024
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QUESTIONS AND ANSWERS
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