[Senate Hearing 119-115]
[From the U.S. Government Publishing Office]
S. Hrg. 119-115
STAKEHOLDER PERSPECTIVES ON FEDERAL
OVERSIGHT OF DIGITAL COMMODITIES
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HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED NINETEENTH CONGRESS
FIRST SESSION
__________
July 15, 2025
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Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available on http://www.govinfo.gov/
__________
U.S. GOVERNMENT PUBLISHING OFFICE
61-175 PDF WASHINGTON : 2025
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COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
JOHN BOOZMAN, Arkansas, Chairman
MITCH McCONNELL, Kentucky AMY KLOBUCHAR, Minnesota
JOHN HOEVEN, North Dakota MICHAEL F. BENNET, Colorado
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
JAMES C. JUSTICE, West Virginia RAPHAEL WARNOCK, Georgia
CHARLES GRASSLEY, Iowa PETER WELCH, Vermont
JOHN THUNE, South Dakota JOHN FETTERMAN, Pennsylvania
DEB FISCHER, Nebraska ADAM SCHIFF, California
JERRY MORAN, Kansas ELISSA SLOTKIN, Michigan
Fitzhugh Elder IV, Majority Staff Director
Jessica L. Williams, Chief Clerk
Lauren Santabar, Minority Staff Director
Chu-Yuan Hwang, Minority Chief Counsel
C O N T E N T S
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Tuesday, July 15, 2025
Page
Hearing:
Stakeholder Perspectives on Federal Oversight of Digital
Commodities.................................................... 1
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STATEMENTS PRESENTED BY SENATORS
Boozman, Hon. John, U.S. Senator from the State of Arkansas...... 1
Klobuchar, Hon. Amy, U.S. Senator from the State of Minnesota.... 2
WITNESS
Kim, Ji, Chief Executive Officer, Crypto Council for Innovation,
New York, NY................................................... 4
Behnam, Rostin, Distinguished Fellow, Psaros Center, Georgetown
University, Washington, DC..................................... 6
Massad, Timothy, Research Fellow and Director of Digital Assets
Policy Project of the Mossavar-Rahmani, Center for Business and
Government, Kennedy School of Government, Harvard University,
Washington, DC................................................. 8
Sexton, Tom, President and Chief Executive Officer, National
Futures Association, Chicago, IL............................... 10
Lukken, Walt, President and Chief Executive Officer, Futures
Industry Association, Washington, DC........................... 11
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APPENDIX
Prepared Statements:
Kim, Ji...................................................... 38
Behnam, Rostin............................................... 50
Massad, Timothy.............................................. 55
Sexton, Thomas............................................... 80
Lukken, Walt................................................. 86
Question and Answer:
Behnam, Rostin:
Written response to questions from Hon. Amy Klobuchar........ 94
Massad, Timothy:
Written response to questions from Hon. Amy Klobuchar........ 96
Written response to questions from Hon. Michael Bennet....... 97
Lukken, Walt:
Written response to questions from Hon. Amy Klobuchar........ 101
Written response to questions from Hon. John Hoeven.......... 102
Written response to questions from Hon. Raphael Warnock...... 103
STAKEHOLDER PERSPECTIVES ON FEDERAL OVERSIGHT OF DIGITAL COMMODITIES
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TUESDAY, JULY 15, 2025
U.S. Senate
Committee on Agriculture, Nutrition, and Forestry
Washington, DC.
The Committee met, pursuant to notice, at 3:33 p.m., in
Room 106, Dirksen Senate Office Building, Hon. John Boozman,
Chairman of the Committee, presiding.
Present: Senators Boozman [presiding], Hoeven, Ernst,
Marshall, Tuberville, Hyde-Smith, Justice, Klobuchar, Smith,
Lujan, Fetterman, Durbin, Booker, Bennet, Schiff, and Warnock.
STATEMENT OF HON. BOOZMAN, U.S. SENATOR FROM THE STATE OF
ARKANSAS, CHAIRMAN, U.S. COMMITTEE ON AGRICULTURE, NUTRITION,
AND FORESTRY
Chairman Boozman. Good afternoon. It is my privilege to
call this hearing to order. I thank my colleagues for joining
us today. We are here to talk about digital commodities and
hear from a range of stakeholders on what this Committee needs
to do with respect to legislation.
It has been reported that the current market cap for the
digital asset market exceeds $3.5 trillion. Approximately 70
percent of digital assets are traded digital commodities, and
roughly 55 million Americans own or use crypto. The U.S.
currently lacks comprehensive federal regulation of the digital
commodity markets, which means a significant percentage of
Americans trade with crypto with very limited federal customer
and market risk protections. This has been referred to as the
digital commodity regulatory gap. While the regulatory gap has
not stifled consumer interest in crypto, we know from past
experiences what can happen when crypto intermediaries operate
outside of a regulated framework. Without clear and
comprehensive digital commodity market regulation, Americans'
economic interests are at risk.
The lack of comprehensive federal regulation in the U.S.
has created significant regulatory uncertainty among
innovators, developers, and market participants. Not knowing
the rules of the road, U.S. businesses have moved overseas,
leaving U.S. consumers vulnerable. This is why we must act on
digital assets legislation to protect customers and ensure
innovation and growth remain in the U.S.
I have said it before but will say it again. The CFTC and
only the CFTC should regulate the spot trading of digital
commodities. The CFTC currently has enforcement authority over
these markets. We should build upon that authority, not
distribute it among different regulators. Let me be clear.
Entities that list or facilitate the trading of digital
commodities should not be exempted from CFTC regulation simply
because they are registered with another federal agency.
The U.S. financial capital markets stand as the deepest and
most liquid in the world. It is largely a byproduct of the
Federal Government's bifurcated approach to regulating those
markets, with the SEC regulating the securities market and the
CFTC regulating the commodity derivatives market. This
longstanding American approach to financial market regulation
was at the core of the Dodd-Frank Act's regulation of the swaps
and security-based swaps market and should be the foundation
upon which we build a comprehensive regulatory framework for
digital assets markets.
This is not to pit regulators against one another. It is
the opposite. We draw inspiration from the agency's past
regulation of the swaps market as we entrust the CFTC and the
SEC with the authority to collaboratively regulate the digital
asset markets. We must act expeditiously to develop a
comprehensive regulatory framework for the trading of digital
commodities, but we must ensure we get this right. We must also
support our colleagues in the Banking Committee as they work on
a regulatory framework for the trading of digital assets in
securities transactions. As with the CFTC and the SEC, while
there are clear lines of jurisdictions between our Committees,
we are committed to working collaboratively on a comprehensive
bill for the digital asset marketplace.
I, alongside Ranking Member Klobuchar and all Members of
the Committee, will work in a transparent and bipartisan manner
to develop this regulatory framework. This task requires
hearing from everyone who wants to be heard and for all
Committee Members to work together to create a framework that
allows for liquid and resilient spot digital commodity markets,
strong retail protections, and rules that give American
businesses confidence to continue to innovate and grow in the
United States.
Today, we will hear from former CFTC Chairman, the head of
the derivative self-regulatory organization, and the head of an
association representing a diverse group of crypto
stakeholders. I look forward to hearing their thoughts as we
contemplate legislation.
With that, I now turn to our Ranking Member, Senator
Klobuchar, for her opening statement.
STATEMENT OF HON. KLOBUCHAR, U.S. SENATOR FROM THE STATE OF
MINNESOTA
Senator Klobuchar. Well, thank you so much, Chairman, and
thank you to all our witnesses for being here today.
Over the past decade and a half, as the Chairman just
noted, we have seen the increasing use of and investment in
digital commodities like Bitcoin. What was once a niche market
for early adopters and cryptography enthusiasts is now a
swiftly growing market that is increasingly interconnected with
traditional financial markets and institutions.
When we met in July of last year, I noted that the market
capitalization of digital assets was over $2 trillion. It is
now more than $3 trillion. The price of Bitcoin then was
$73,000. It is now more than $100,000. Yet oversight and
regulation of this market has not evolved to keep up with the
growth.
The Commodity Futures Trading Commission has long played a
vital role in ensuring the integrity of our financial and
agricultural derivative markets. That includes protecting
market participants from fraud and manipulation; maintaining
orderly markets; and enabling farmers, ranchers, manufacturers,
and small businesses to hedge against risk. We are honored to
have two former Chairs here with us today.
As early as 2015, the CFTC determined that digital assets
could be commodities and found that Bitcoin, the largest such
asset, was a commodity. Derivatives on Bitcoin and other
digital commodities have been listed on CFTC-regulated
exchanges, and the CFTC has full regulatory authority over
these products. It has only anti-fraud and anti-manipulation
authority over the underlying spot markets, a regulatory gap
that has resulted in untold losses to customers and the
increasing risk of contagion to traditional financial markets
as digital commodity markets grow in size and are integrated
into the existing financial system.
If Congress gives the CFTC the authority and the resources
to step in and oversee these spot markets, it would be well
positioned to do so, given its existing role. That role is
overseeing the digital commodity derivative markets and the
enforcement authority it has exercised over the underlying spot
markets. Providing regulatory certainty and oversight to these
markets can encourage responsible innovation and the adoption
of new technologies.
At the same time, we have to ensure a level regulatory
playing field so that crypto market participants are subject to
standards as rigorous as those applied to traditional financial
institutions. If Congress is to do this, it must do so without
compromising on crucial customer protections with safeguards to
prevent illicit finance and with provisions to address market
integrity concerns. It also means putting in place guardrails
to address conflicts of interest in the digital assets sector,
preventing exchanges and issuers from using their position to
favor affiliated actors or exploit customers. If Congress is
going to establish a new financial regulatory framework, it
must strengthen our system, not weaken it, by putting
safeguards in place to prevent corruption or self-dealing by
federal officials, including those in positions of power who
might sponsor, issue, or profit from digital tokens.
I look forward to hearing from our witnesses on how they
believe regulation of the digital commodities spot market can
responsibly encourage innovation while ensuring our financial
markets continue to be the safest in the world for market
participants. This is a big job we have, but I look forward to
hearing your testimony and working with you. Thank you.
Chairman Boozman. Thank you. We will now introduce our
panel of witnesses. I am pleased to introduce Mr. Ji Kim. Mr.
Kim currently serves as President and Acting Chief Executive
Officer of the Crypto Council for Innovation. Mr. Kim has over
15 years of experience in the digital assets sector, and before
being named CEO, served as Chief Legal and Policy Officer for
CCI. Mr. Kim, thank you very much for being here today.
I think Senator Klobuchar is going to introduce Russ.
Senator Klobuchar. Thank you very much. We are pleased to
welcome back Russ Behnam. Many of you know him from his years
of service on the Committee staff and most recently as both
Commissioner and Chairman of the CFTC.
Mr. Behnam is a distinguished fellow at the Psaros Center
for Financial Markets and Policy at Georgetown University's
McDonough School of Business. From 2021 to 2025, he served as
Chairman of the CFTC following his service as a Commissioner.
Before joining the Commission, he was Senior Counsel on this
Committee to then-Chairwoman Debbie Stabenow.
During his tenure at the CFTC, Mr. Behnam oversaw the
significant expansion of digital commodity derivative markets
and led the agency's enforcement activity in spot markets for
digital assets. We welcome you back to the Committee.
Chairman Boozman. Mr. Massad.
Senator Klobuchar. We are also pleased to welcome back
Timothy Massad. Mr. Massad is a research fellow at the
Mossavar-Rahmani Center for Business and Government at the
Harvard Kennedy School of Government where he directs the
center's Digital Assets Policy Project.
From 2014 to 2017, he served as Chairman of the CFTC.
During his tenure, he oversaw the implementation of Dodd-Frank
reforms in the over-the-counter swaps market, worked to
harmonize cross-border regulation, and led the CFTC in becoming
the first U.S. regulator to take action on cryptocurrencies.
Previously, he served as Assistant Secretary for Financial
Stability at the U.S. Treasury Department, and that was from
2010 to 2014.
Mr. Massad, welcome back to the Committee. I am sure you
remember many happy moments here before this Committee. Thank
you for your testimony.
Chairman Boozman. I am happy to introduce Mr. Tom Sexton.
Mr. Sexton is the President and Chief Executive Officer of the
National Futures Association, the self-regulatory organization
for the U.S. derivatives market. Mr. Sexton joined NFA in 1991
and is on the Commodity Futures Trading Commission Global
Markets Advisory Committee and is a board member of Futures
Fundamentals.
Mr. Sexton, thanks again very much for being here.
I would also like to introduce the Honorable Walt Lukken,
former Acting Chairman and Commissioner of the U.S. Commodities
Futures Trading Commission from 2002 through 2010. Mr. Lukken
currently serves as the President and Chief Executive Officer
of Futures Industry Association, a position he has held since
2012. Prior to his time at the CFTC, he served as counsel for
this Committee under Chairman Lugar.
Welcome back, Mr. Lukken, and thank you for being here.
Again, we appreciate all of you being here. This really is
a ``who's who'' of the industry, and we are very anxious to
hear from you. Let's start out with you, Mr. Kim.
STATEMENT OF JI KIM, CHIEF EXECUTIVE OFFICER, CRYPTO COUNCIL
FOR INNOVATION, NEW YORK, NY
Mr. Kim. Thank you, Chairman Boozman, Ranking Member
Klobuchar, and Members of the Committee for the opportunity to
testify today on how best to strengthen United States'
leadership in digital asset innovation. I believe this can best
be accomplished through comprehensive federal oversight of
digital commodities. I am pleased to represent the Crypto
Council for Innovation, a global alliance of industry leaders
across the digital asset space.
I respectfully submit that it is critical for Congress,
following this Committee's leadership, to urgently pass
legislation providing the CFTC with oversight over the trading
of digital commodities. This will provide necessary regulatory
clarity and certainty, protect consumers, and ensure continued
U.S. leadership over digital assets.
For years, the digital asset industry has requested clear
rules of the road and a coherent federal framework to operate
within the U.S. Such a framework, which is in the national
interest, will benefit users and consumers, foster industry
growth, and strengthen U.S. markets by preventing fragmentation
and regulatory ambiguity. Now is the time for Congress to act
to secure this future.
Today, roughly 28 percent of American adults, about 65
million Americans, own digital assets. The reasons and benefits
are many. Individuals and businesses use them to make
transactions more efficient. Humanitarian groups use them to
deliver aid in high-risk regions, setting their speed,
transparency, and reliability. Decentralized finance is
expanding access to economic services. Beyond payments,
tokenization of real-world assets, securities, real estate, and
even agricultural commodities has the potential to make markets
more liquid, accessible, and inclusive.
Given the many benefits and expanding real-world
applications of digital assets, we commend this Committee for
pursuing a legislative framework to guide further development.
From a consumer protection standpoint, clear federal
supervision of market activity is essential. The industry is
committed to building necessary guardrails so that consumers
can participate in marketplaces that are fair and secure.
With that backdrop, a significant portion of the digital
asset ecosystem, including widely used assets such as Bitcoin
and Ether, function like commodities rather than traditional
securities. These assets are not issued by centralized entities
to raise capital and lack profit-sharing rights. In fact,
courts and regulators, including the CFTC, have affirmed that
such assets fall under the Commodity Exchange Act, depending on
their structure and use.
Most digital asset trading volume occurs in secondary
markets, where participants treat these assets as store of
value, not as equity stakes. Recognizing the commodity-like
nature of these assets is essential to crafting a regulatory
framework. A comprehensive framework can provide essential
consumer protections, including business conduct standards,
disclosures, segregation of customer funds, minimum capital
requirements, trade surveillance, and more. Digital asset firms
in the U.S. are already subject to AML compliance, sanction
screening, and suspicious activity reporting, and these
requirements should be confirmed and codified in any new
comprehensive framework.
In addition to its oversight of the digital asset
derivatives market, the CFTC already has enforcement authority
over spot commodity markets, but this must be matched by a
broader federal framework that addresses how Americans use
digital assets today.
The CFTC is well-situated to play a central role in
overseeing the spot digital asset commodity market. It is a
principles-based regulator with a mandate to deter price
manipulation, ensure financial integrity, protect market
participants, and promote responsible innovation. The agency
has extensive experience in supervising large and complex
markets and maintains a robust enforcement capability.
The U.S. is in a global race for leadership in digital
asset innovation. It is a true race to the top. We have seen
other jurisdictions, including the EU, the U.K., Japan, and
Singapore, recognizing the importance of this technology by
actively engaging with industry to consider and implement
tailored regulatory regimes.
While many of the best minds, technology, and resources
still exist in the U.S., we can further establish U.S.
leadership by way of a comprehensive legislative framework.
Indeed, legislation is the most effective way to ensure long-
term stability and guard against future policy volatility that
may otherwise repeatedly shift the goalpost. This important
work, squarely within the domain of this institution, Congress,
and this Committee, will unleash powerful potential, enhance
clarity, ensure consistency, and best protect consumers.
Thank you again. I look forward to answering your
questions.
[The prepared statement of Mr. Kim can be found on pages
38-49 in the appendix.]
Chairman Boozman. Thank you. Mr. Behnam.
STATEMENT OF THE HONORABLE ROSTIN BEHNAM, DISTINGUISHED FELLOW,
PSAROS CENTER, GEORGETOWN UNIVERSITY, WASHINGTON, D.C.
Mr. Behnam. Chairman Boozman, Ranking Member Klobuchar,
Members of the Committee, thank you for the opportunity to
testify before you today on this important topic.
Between 2017 and 2025, I served first as CFTC Commissioner,
then Chairman. During that more than seven-year period, I
observed the significant growth of the digital asset market.
While I served at the CFTC, the digital asset market endured
multiple periods of dramatic volatility. Throughout this time,
I publicly stated one consistent message to Congress. Under
U.S. current law, there is a gap in regulation for the digital
commodity asset market. The regulatory gap remains today and
must be filled with targeted legislation. It has facilitated
countless scandals and fraudulent activity, some very small in
typical and criminal form, others massive in profile.
First and foremost, filling the regulatory gap will provide
the needed customer protections that American investors have
become accustomed to in traditional financial markets regulated
by the CFTC and the SEC. Further, I do not believe public
interest for digital assets will wane. Inaction will only
result in greater risk to our financial markets and investors
through lack of market transparency, fraud, market
manipulation, corruption, and conflicts of interest.
One common refrain in connection with past legislative
efforts to fill the digital commodity gap suggests that a U.S.
regulatory framework will legitimize the digital asset market,
creating regulatory loopholes. I believe this argument is the
loophole. It has only left for far too long the vast majority
of the digital asset market unregulated and American investors
vulnerable.
I believe the CFTC is the appropriate regulator to oversee
the digital commodity asset market because of its expertise
regulating commodity markets, including digital asset
derivatives since 2017, and its enforcement experience in the
underlying digital commodity market. Unique characteristics of
digital asset trading, including decentralized finance,
custody, and market structure, demand specific focus to ensure
broader policy outcomes, and all investors deserve access to
material information about a financial asset to ensure an
informed decision.
Market structure in traditional finance has evolved over
many decades. I urge the Committee to carefully examine how
current unregulated digital asset market structure differs from
traditional market structure and consider where there may be
opportunities for change and where existing market structure
requirements should be preserved.
The CFTC has a longstanding and productive partnership with
the SEC. In a situation where a regulated digital asset market
participant handles both security and non-security tokens in
the underlying market, separate and exclusive jurisdiction for
each agency is critical. Any regulatory system that includes
deference or exempted authority will be an incomplete effort.
Further, any framework where each agency does not retain its
exclusive licensing authority portends a future of blurred
jurisdiction across digital assets and possibly physical
commodities.
The CFTC's principles-based oversight model has served its
regulated markets well, striking an appropriate balance between
clear outcomes-based requirements and measured flexibility to
meet those outcomes. In light of the novel nature of digital
assets, market regulators, consistent with a legislative
mandate, could tailor rules to meet the risk and profile,
leaving flexibility to adapt with a changing market landscape
as the digital market itself evolves.
Second, regulations are only as strong as the agency and
personnel that enforce them. Appropriate funding is necessary
to meet the mandate of any regulatory program.
Third, a reliable self-regulatory organization has been
critical to the success of the CFTC. The National Futures
Association has served as an effective partner for the CFTC for
more than five decades. An effective legislative effort must
include a role for the NFA.
Fourth, it is essential that legislation provide
comprehensive authority for anti-money laundering, ``know your
customer,'' and customer identification program.
Finally, given the broad adoption of digital assets by the
American population, a comprehensive education and outreach
program is critical as well.
Domestically, federal law enforcement relies heavily on
state and local partners to identify and combat civil and
criminal misconduct, which often targets society's most
vulnerable. I encourage this Committee to ensure state and
local law enforcement remain a key partner.
The principles and regulatory foundations that make U.S.
capital markets and derivatives markets the deepest, most
liquid, and most resilient in the world provide an effective
model for digital asset market structure. We need to act
thoughtfully but with urgency to fill this gap. I am supportive
of recent steps the U.S. House Committee on Agriculture and
Financial Services have taken in a bipartisan manner to fill
this gap.
That said, there is more work to be done to ensure
congressional market structure legislation is comprehensive,
does not undermine existing law, and addresses the unique
characteristics of the ecosystem. Today's hearing is a critical
step to achieve that goal.
I thank the Chairman, Ranking Member, and Members of 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 pages
50-54 in the appendix.]
Chairman Boozman. Thank you. Mr. Massad.
STATEMENT OF THE HONORABLE TIMOTHY MASSAD, RESEARCH FELLOW AND
DIRECTOR OF DIGITAL ASSETS POLICY PROJECT OF THE MOSSAVAR-
RAHMANI, CENTER FOR BUSINESS AND GOVERNMENT, KENNEDY SCHOOL OF
GOVERNMENT, HARVARD UNIVERSITY, WASHINGTON, D.C.
Mr. Massad. Thank you. Mr. Chairman, Ranking Member
Klobuchar, Members of the Committee, and staff, thank you for
inviting me to testify. The views I express are my own and do
not represent the views of the Kennedy School of Government.
I hope this hearing gives us an opportunity to rethink how
we should regulate digital assets. The Clarity Act, like many
earlier proposals, has the right goals--address the regulatory
gap, provide clarity--but the wrong approach. We need to keep
in mind a few basic facts.
First, this is a technology; it is not an asset class. It
will be used in many ways, and the most valuable use cases may
be tokenizing securities.
Second, we cannot define whether something in digital form
is a security, a commodity, or neither with a few paragraphs in
a statute. Appropriate regulation depends on what the token
represents, whether there is an issuer, whether capital is
being raised, and other factors, and the technology is evolving
rapidly. Therefore, we should not lock in definitions that will
fail to bring clarity, nor should we tie regulators' hands.
Third, a principal reason for the lack of clarity is our
fragmented regulatory system. We have two market regulators,
neither of whom has jurisdiction to regulate the spot market
for digital assets that are not securities. I believe this
solution should bring the agencies closer together.
Finally, we are in a different place than the last few
years. The primary regulatory response to date, court cases
that sought to interpret the Howey test, was not sufficient,
but the SEC has already abandoned regulation by enforcement and
is actively working to provide necessary guidance. Congress
should not fight the last war.
All of these factors argue for a different approach, one
that establishes regulation over the spot market without
rewriting the securities laws and one that mandates the SEC and
CFTC work together, not just on a few rules, but overall
because both agencies have significant stakes and expertise in
these matters.
Regulation of the spot market needs to draw on the
expertise of both agencies. Classification issues can best be
addressed by the agencies working together to implement general
principles, not prescriptive rules provided by Congress.
Customization of rules to make sure they work for digital
technology in recordkeeping, custody, clearance, and
settlement, or otherwise, must be as consistent as possible
between the agencies.
Former SEC Chair Jay Clayton, who was appointed by
President Trump, and I proposed essentially this approach two
years ago. We said Congress should mandate that the SEC and
CFTC work together to develop joint rules that would apply to
every intermediary that trades or handles Bitcoin or ETH. That
approach establishes jurisdiction over the market without, as
we said, ``debating classification of each token or Congress
pursuing tortured rewriting of existing definitions of
securities and commodities.'' We added that ``Rewriting
existing law might fail to bring clarity and inadvertently
undermine decades of regulation and jurisprudence as they apply
to traditional markets.''
Unfortunately, the Clarity Act does the things we warned
against. It will not provide clarity, but it will undermine
regulation. Let me briefly note a few of its weaknesses.
It addresses classification with a tortured definition that
rewrites existing law.
It provides exemptions from securities laws such as for
raising funds if one has the intent to build a mature
blockchain system that are unnecessary and will be misused.
It creates a broad exemption for decentralized finance
activities, which will lead to migration of regulated activity
into an unregulated sphere. Indeed, a large intermediary like
Robinhood or Goldman Sachs could operate a software protocol
for the trading of tokenized securities that would then be
exempt from the Securities Exchange Act.
It will not require crypto trading platforms to own the
digital assets their customers purchase, and it will permit
them to engage in their own proprietary trading and have other
conflicts of interest.
Finally, it will provide many opportunities for smart
lawyers to find ways to manipulate its provisions to achieve
lesser compliance burdens for their clients. I was a corporate
lawyer for 25 years with one of the best firms in the world,
and I know how that works. We can and must do better, and I
describe how in my written testimony.
Finally, I just wish to agree with and underscore the
Ranking Member's comments about the importance of addressing
the activities of government officials in this sector.
Thank you again for inviting me. I look forward to your
questions.
[The prepared statement of Mr. Massad can be found on pages
55-79 in the appendix.]
Chairman Boozman. Thank you. Mr. Sexton.
STATEMENT OF TOM SEXTON, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
NATIONAL FUTURES ASSOCIATION, CHICAGO, IL
Mr. Sexton. Good afternoon, Chairman Boozman, Ranking
Member Klobuchar, and Members of the Committee. Thank you for
the opportunity to testify at this important hearing to explore
a legislative framework for the federal oversight of digital
commodities.
Over 50 years ago, Congress enabled the creation of a
Registered Futures Association, or RFA, to support the CFTC's
oversight of the commodity futures markets. NFA is the
industry-wide independent self-regulatory organization for the
derivatives industry and is an RFA. NFA is solely a regulatory
body. We do not operate a market, and we are not an industry
trade association.
NFA's and the CFTC over 40-year public-private partnership
overseeing the derivatives industry has been a tremendous
success, and we recognize the CFTC's commitment and significant
efforts in promoting the integrity, resilience, and vibrancy of
the derivatives markets. Today, I would like to address three
main points that may be helpful as this Committee continues to
work on market structure legislation for the federal oversight
of digital commodities.
The first point is to introduce NFA and its critical role
in protecting customers and ensuring the integrity of the
derivatives markets. NFA has a clearly defined mission:
Safeguard the integrity of the derivatives markets, protect
investors, and ensure that NFA members meet their regulatory
responsibilities. We optimize the self in self-regulation. Our
board is primarily composed of representatives from NFA member
firms, and we leverage industry expertise in every aspect of
our work.
Our activities are closely overseen by the CFTC. The CFTC
provides frontline regulatory oversight of exchanges,
clearinghouses, and swap execution facilities. NFA provides
frontline oversight of our global membership of CFTC-registered
market participants, including FCMs, swap dealers, IBs, RFEDs,
CPOs, and CTAs.
NFA's primary responsibilities include registering all
firms and professionals on behalf of the CFTC, developing rules
for fair dealing with customers and counterparties, monitoring
members' compliance with those rules, taking enforcement
actions when members violate those rules, offering an
arbitration forum to resolve customer disputes, and providing
investor protection and educational resources.
The second point is to discuss some key principles for the
effective oversight of digital commodities. NFA firmly believes
that the CFTC is well-equipped to take on the oversight of
digital commodities, given its core principles, regulatory
approach, experience over the years integrating new asset
classes into its oversight framework, and its current
experience gained from having anti-fraud jurisdiction over spot
digital commodities and supervisory oversight of related
derivatives products, including Bitcoin and Ether futures.
In establishing a federal oversight framework, we recommend
the Committee focus on the following: Number one, clear lines
of jurisdiction. We recommend that Congress provide the CFTC
with exclusive authority over digital commodities and the SEC
with authority over digital securities. We should avoid a
framework in which jurisdictional lines become blurred, and we
have two market regulators writing rules for the same activity.
This will be confusing for market participants, create blind
spots in the oversight of this market, and lead to regulatory
arbitrage.
Number two, strong customer protections. We advise Congress
to look to the time-tested robust customer protections that
have served the derivatives industry extremely well, which
include customer fund safeguards, customer disclosures,
business conduct standards, and anti-money laundering
protections.
Number three, flexibility to keep pace with innovation. We
encourage Congress to rely upon the CFTC's significant
experience with innovative products and retain its core
principles, regulatory approach.
The last point is to underscore that self-regulation
provides many benefits to customers and the industry. As the
derivatives markets have evolved over the years, Congress and
the CFTC have entrusted NFA with additional responsibilities.
Our coordination with the CFTC has resulted in a strong track
record of protecting retail customers and prosecuting retail
trading abuses and fraud. Today, customer complaints and
single-event customer arbitrations followed at NFA, as well as
the CFTC's reparation cases remain at all-time lows.
Importantly, NFA is adaptive and proactive. We currently
have numerous NFA member firms engaged in spot digital
commodity activities. To enhance oversight of these firms, we
adopted a rule in early 2023 that imposed its anti-fraud, just
and equitable principal trade, and supervision requirements on
them.
Fifty years ago, Congress had the wisdom to establish a
public-private oversight framework, which the CFTC and NFA have
effectuated to form a strong oversight partnership. We strongly
recommend that Congress, in any market structure legislation,
retain a significant role for an RFA to partner with the CFTC.
Thank you again, and I am happy to take any questions.
[The prepared statement of Mr. Sexton can be found on pages
80-85 in the appendix.]
Chairman Boozman. Thank you. Mr. Lukken.
STATEMENT OF THE HONORABLE WALT LUKKEN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, FUTURES INDUSTRY ASSOCIATION, WASHINGTON,
D.C.
Mr. Lukken. Chairman Boozman, Ranking Member Klobuchar, and
Members of the Committee, I appreciate this opportunity to
testify. I am President and CEO of the Futures Industry
Association, which represents the futures, options, and cleared
derivatives markets globally. As was mentioned, I had the honor
of working for this Committee during the passage of the
Commodity Futures Modernization Act of 2000 and was able to go
on to serve as Commissioner and Acting Chair of the agency for
seven years, which included leading the agency during the
financial crisis of 2008.
The digital asset industry and, importantly, its customers
deserve a proper regulatory framework that will keep these
markets safe, innovating, and growing. The U.S. has two strong
market regulators in the CFTC and the SEC. Collectively; they
can bring digital commodities and digital securities into a
proper regulatory framework. Given my background, I want to
share my views on the Commodity Exchange Act and the CFTC and
why this agency is well suited for the oversight of digital
commodities.
The CFTC's regulatory framework has five strengths worth
highlighting. The first involves the agency's principles-based
regulation, which ensures the CFTC can keep pace with
technological changes and advancements in market dynamics. This
will be key for the evolving digital commodity markets.
The second strength is the agency's support of innovation.
The CEA explicitly and uniquely requires the CFTC to promote
responsible innovation in fulfilling its duties. The agency has
done this for 50 years, allowing innovative new asset classes
to be listed, including futures on cryptocurrencies eight years
ago. Today, more than 60 cryptocurrency futures and options
trade on seven CFTC-registered exchanges.
A third strength is the agency's customer protections,
which have safeguarded investors for years. These require
futures commission merchants, or FCMs, to segregate and confirm
customer balances every day. FCMs, those intermediaries who
serve as agents for their customers, also provide a guaranty
against customer shortfalls. FCMs contribute to a ``break-the-
glass'' default fund at every clearinghouse should a single
clearing member not be able to cover losses. This FCM model of
protections has provided critical resilience and risk
management over the years.
A fourth strength is enforcement. Strong enforcement in
combination with robust customer protections has shown to be a
powerful one-two punch for the agency. The CFTC has
aggressively used this enforcement authority from LIBOR to
retail forex to energy market manipulation to bring actions
against those who seek to swindle investors or manipulate
prices.
The last item I will mention is the CFTC's approach to
cross-border trading, given the global nature of traditional
commodities as well as digital assets. The CFTC's cross-border
recognition framework, which it pioneered in the 1990s, strikes
the right balance of protecting U.S. participants while
providing access to markets globally. These five strengths will
enable the CFTC to take on increased responsibilities in
digital commodities and provide these innovative markets with a
sound regulatory framework.
I also want to highlight a couple of other key stakeholder
recommendations for your consideration. The first involves
recognizing the risk-reducing positions of customers for margin
and capital. Farmers and other end users utilize our markets to
hedge the price risk of assets, whether it is corn, oil, or
financial products. When these offsetting products are
regulated by different agencies, customers may be forced to pay
double margins because of a lack of recognition of these
offsetting trades. FIA supports statutory language that
instructs the CFTC and SEC to allow for cross-margining between
offsetting positions in these respective markets.
FIA also supports legislative language that instructs
prudential regulators to recognize these offsetting risk
positions through cross-product netting. These two actions will
free up capacity for these growing markets and incentivize
strong risk management.
The last item I will mention relates to the need for clear
rules around managing conflicts of interest. We support
legislative language that requires the CFTC to conduct a
rulemaking on managing conflicts of interest when entities
combine exchanges, clearinghouses, FCMs, and trading arms all
within the same legal structure. We believe the development of
consistent rules around conflicts will ensure customers can
utilize innovative new structures without facing differing
customer protections due to market structure design.
Again, thank you for the opportunity to testify, and I look
forward to your questions.
[The prepared statement of Mr. Lukken can be found on pages
86-91 in the appendix.]
Chairman Boozman. Thank you. Let's go ahead and start with
our questions. Mr. Behnam, Mr. Lukken, as former CFTC Chairmen,
can you describe why you believe the CFTC and only the CFTC is
the right regulator for spot digital commodity trading? Can you
also speak to concerns with allowing entities to list or
facilitate trading in digital commodities without having to
fully register with the CFTC?
Mr. Behnam. Thanks, Mr. Chairman. I would say the number
one thing--and there are a few reasons why I have stated this
in the past. You and I have had this conversation. I will start
first with the experience, and this goes back to Chairman
Massad's time in the mid-2010s when we had a determination of
Bitcoin as a commodity, and you started to see enforcement
actions coming out of the CFTC around digital assets. That is a
long time ago, and over that 10-year period, the CFTC has been
at the forefront of enforcement both on the fraud and
manipulation side of crypto.
Enforcement does not just mean an enforcement action. There
are staff within the agency that are conducting research. They
are doing surveillance of both the derivatives markets and the
underlying physical market itself. The agency has developed,
over this course of time, a really distinct and unique
expertise in the digital asset market.
The second thing I will say is the expertise in the
commodity market. The CFTC is over 100 years old, the CFTC as
an independent agency is 50 years old, and it understands
commodity markets, and these are very distinguishable from
securities markets, the way the markets are structured, and the
regulation over them.
Lastly, I will say it is extremely important the CFTC
become the primary regulator of any commodity asset. As you
have noted, two market regulators, it is important we have two
market regulators because they are independently very large,
unique markets that demand different sets of regulation. I
believe if there is any agency that starts to regulate
commodity tokens, it becomes and potentially creates a blurred
line of what is jurisdiction between the CFTC, commodity
markets, potentially physical commodities themselves, and other
regulators.
Chairman Boozman. Very good. Mr. Lukken.
Mr. Lukken. I would echo my colleague. I think, really,
three strengths that really give the CFTC unique ability to
oversee the digital commodity markets, as Russ mentioned,
expertise. I mean, the agency for 50 years has been, you know,
developing the ability to look at secondary markets for
commodities, and that expertise, you know, whether it is
surveillance, manipulation of those markets and how best to
ensure that those markets are not taken advantage by those
trying to manipulate prices.
Regarding cryptocurrencies, as was mentioned, the CFTC
already has experience in this. The CFTC regulates 60 products
currently, futures on those derivatives and all that goes with
it from, you know, all the core principles that go with that
regulatory expertise. They already have experience in the
digital commodity space.
The second is in their mission. In Section 3 of the
Commodity Change Act, it is unique in that it says that the
CFTC should be promoting responsible innovation as an agency.
That is something that Congress had the wisdom to put in in
1974. That allows these products, as they get listed for them,
to be thinking about ways that it can promote these new
innovative technologies that are coming in. I think that is an
important top-down mission of the agency. They are going to
help these products evolve and develop.
Then lastly, it is just flexibility. The agency has
principles-based regulation, as I mentioned, but other parts of
the act foresee authority that allows it to carve out certain
things that may not justly be in their jurisdiction, exemptive
authority. I think the CFTC has the tools to exclusively
oversee these markets, but also with some flexibility that will
allow these markets to evolve.
Chairman Boozman. Very good. Mr. Kim, can you talk about
the importance of avoiding applying centralized intermediary
regulatory requirements to decentralized software and
technology?
Mr. Kim. Thank you very much, Mr. Chairman. This is a very
important question. Decentralized finance in its purest form
allows individuals to transact with one another peer-to-peer by
the use of software and code without reliance on centralized
intermediaries. Notably, the software and code do not take
control or custody of the funds. Of course, we regulate
exchanges, not the matching engine. We regulate brokers, not
the trading screens. We regulate the centralized
intermediaries, which take control and custody of the funds,
Mr. Chairman. It is important to keep that in mind as we look
to establish a comprehensive framework for the United States to
keep innovation here in the U.S.
Very briefly, Mr. Chairman, of course, as Congress has been
contemplating a broader market structure framework, the focus
has been on centralized intermediaries that do take control or
custody of funds. Right now, as my colleagues have mentioned,
there is a regulatory gap. There is no federal framework for
the supervision of digital commodities. That means there is no
business conduct standards, no conflicts-of-interest
provisions, no consumer education. It is important, in order
for us to cement U.S. leadership and best protect consumers,
that we address this gap by providing the CFTC with
supervision, Mr. Chairman.
Chairman Boozman. Very good. Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chair.
I will start with you, Mr. Massad. You talked about the
CFTC having a role and a clear one with regulating digital
assets. Then you also talked about how you and the former Trump
Chair have suggested doing something where the SEC does some of
it and the CFTC does some of it. Mr. Sexton raised this issue
that he is concerned. I do not want to put words in your mouth,
right? That there would be vagary or two, you know, that are
regulating the same thing. Could you talk about how you think
this could work in today's environment in terms of making those
kinds of suggestions or including that in legislation? Because
I found that interesting.
Mr. Massad. Certainly. The first thing is that Mr. Clayton
and I were suggesting that if we were trying to establish
jurisdiction over this spot market without rewriting securities
laws, without rewriting the definition of security, that is why
we argued for joint rules.
Second, this is a different market, and I think we have to
recognize that. It is much more retail than what the CFTC has
regulated in the past. I have great respect for the agency's
abilities and expertise, but we need to keep that in mind.
We also need to keep in mind that this will be an
exception, a very big exception, in that the CFTC does not
regulate other spot markets, and we do not want that exception
to grow. I would not want to see other constituencies come and
say, well, why shouldn't the CFTC regulate this spot market?
Finally, it is an unusual technology in that you are going
to have things that start out as securities and then become
commodities. That is the reason why they have to work together.
How would it work? It would involve some joint rulemaking.
It would certainly involve one of the agencies taking the lead,
and I think in terms of implementing rules, enforcing rules,
that could certainly be the CFTC with respect to this digital
commodity spot market. I think it should also involve an SRO, a
self-regulatory organization. I have great respect for the work
of the NFA. I think that could be jointly supervised, as the
Lummis-Gillibrand proposal advocated.
I think it would be a combination of joint rulemaking,
perhaps a joint SRO. You could even have common Commissioners.
I realize that would be a big step. I have not advocated
merger. I am not advocating merger. I think this is an unusual
situation that we are in, and this is a technology that is
going to have multiple uses, and it is necessary that we
approach it in a way that we have consistency across the board.
Senator Klobuchar. Thank you.
Mr. Behnam, Mr. Massad just talked about that concern on
the retail and how uniquely retail this is in terms of all the
people that have purchased this, and it is part of their
savings. What specific approaches would you recommend to ensure
that innovation in crypto does not come at the expense of basic
safeguards and customer protections for the public? Would there
be specific marketing, disclosure rules? What would you see?
Mr. Behnam. Thanks, Senator. I think it is important to
note--and I have said this many times, probably before the
Committee--yes, in fact, Chairman Massad, I agree with him. A
lot of the market is retail-oriented, unlike the typical CFTC
market, which is more institutionally oriented. We have to look
really at the asset itself, as opposed to the constituency that
is investing.
Commodities versus securities are regulated in very
different ways. Securities are regulated in a way to bridge
information gaps between an issuer of security and investor
because you have centralized individuals and audited financial
statements that need to be disclosed to investors. That is not
the case with commodities. I do not think you are going to need
to build, and quite frankly, I do not think you can build an
investor disclosure regime at the CFTC like you have one at the
SEC, because you cannot simply disclose something about Bitcoin
that you can about a share of a stock.
Second, I advocated this. I said this in my testimony. Yes,
the CFTC will absolutely need to increase its ability to get
information out about the risk of loss associated with
investing in digital assets. The CFTC has a very well-built-out
customer education program, but I believe the Committee should
think about investing in----
Senator Klobuchar. Okay.
Mr. Behnam [continuing]. that program to further it.
Senator Klobuchar. Thank you. I will get more from you
personally, so thank you for your ideas.
Just one last question, Mr. Massad. In considering any
legislation to regulate these digital markets, we cannot ignore
the numerous ways that President Trump has sought to profit
from digital assets and influence. His Trump meme coin offers a
non-transparent backdoor for those seeking Presidential favors
or attention, including the recent crypto dinner he sponsored
that put money directly in his pocket. His World Liberty
Financial issued stablecoin, USD1, only recently entered the
market, but it has already skyrocketed to be one of the top
five stablecoins.
What effect do these activities have on the crypto industry
and on efforts to regulate it? If you and I seem to agree in my
opening and your comments that this has to be part of any
regulation.
Mr. Massad. I think it is a black eye for the industry, and
I know a number of people in the industry that have expressed
that but are afraid to speak out. I think it gives the wrong
impression of what this sector is about, and that is why it is
so important to address it through rules on conflicts,
divestment, and so forth. I hope also I can come back on the
disclosure point later.
Senator Klobuchar. Okay. Well, I am sure I will have a
second round or someone else----
Mr. Massad. Thank you.
Senator Klobuchar [continuing]. one of my colleagues will
ask you. Thank you.
Mr. Massad. Thank you.
Chairman Boozman. Senator Marshall.
Senator Marshall. Thank you, Mr. Chairman. It is great to
see everybody. Mr. Behnam, welcome back. You look great, so
life must be treating you well.
[Laughter.]
Senator Marshall. I will give you my first question. The
crypto industry seems to use a lot of synonyms. You know, since
the first time we met, I have been concerned about anti-money
laundering and know-your-customer rules, that the crypto
industry be held to the same standard as banks. How can we stop
these black markets from happening and using this type of
activity? How should we handle potential deficiencies moving
forward to address these issues?
Mr. Behnam. Thanks, Senator. It is great to see you as
well. You know, I do think, and as I have said in my written
testimony, as you and I have discussed over many years at this
point, whatever efforts the Committee makes around anti-money
laundering and know-your-customer should be grounded in
existing law and existing law around both of those things that
Treasury mostly implements, but the agencies will need to also
have increased authority around anti-money laundering and know-
your-customer.
Much of this industry is about anonymity. I think why we
are here today is to bring that anonymity into light, to bring
transparency around it, and regulation serves that purpose.
Comprehensive regulation around the entities, the
intermediaries, will provide the tools that Congress needs and
the law enforcement agencies to prevent anti-money laundering
and know-your-customer issues that, unfortunately, support a
lot of the illicit activity, potentially terrorist activity,
terrorist financing that I know has been a big issue that you
have addressed, but something that has to be addressed very
specifically----
Senator Marshall. Certainly, in your estimation, this
remains a little concern, it is a big concern. How concerned--
--
Mr. Behnam. I think this is a primary concern that needs to
be top of mind for all of you as you consider legislation, but
I do not think it is reinventing the wheel. I think a lot of
the AML/KYC law that has been developed over time is a good
framework to build off of for this industry.
Senator Marshall. Okay. Mr. Kim, I will come to you next.
It is kind of the same basic question. What specific guardrails
could be implemented to make sure that crypto markets are not a
haven for bad actors who want to use crypto for money
laundering and financing terrorism?
Mr. Kim. Thank you for your question, Senator. Countering
illicit finance is extremely important for the industry. No
amount of illicit finance is acceptable in any industry or
technology, including digital assets. As my colleague Mr.
Behnam mentioned, FinCEN starting from 2013 has required
digital asset exchanges to have SARS reporting, AML compliance,
sanction screening, and I believe that providing the CFTC with
oversight over the spot trading of digital commodities and
allowing the CFTC to come up with additional necessary rules
and guardrails to best protect the industry is something that
would benefit industry, consumers, and that will allow
innovation to grow in the United States because the only way
for our industry to keep on growing is to best protect
consumers.
Senator Marshall. Okay. All right. Thank you, Mr. Chairman.
I yield back.
Chairman Boozman. Senator Smith.
Senator Smith. Thank you, Mr. Chair, Ranking Member, and
welcome to the Committee, everyone.
I come at this from the basic perspective that people
should be able to invest their money in any way that they
choose, and they ought to also be able to count on free markets
and markets that work well because there is a regulatory
structure in place that protects them from unfair and rigged
environments.
I am going to just start with you, Mr. Massad, because I
could tell you wanted to follow up on this issue of sort of
CFTC versus SEC. I do not think it should be a versus or an
either/or. I do believe that there is an important role for
both agencies and also an important--our job here should be
figuring out how to fill the gaps that exist when it comes to
regulation regarding crypto assets. Would you just follow up
about this issue----
Mr. Massad. Sure.
Senator Smith [continuing]. of disclosure----
Mr. Massad. Yes.
Senator Smith [continuing]. that was raised?
Mr. Massad. Thank you, Senator. I agree with Mr. Behnam
that generally on commodities we do not worry about a
disclosure framework in the context of commodity futures. We
just worry about whether the contract is susceptible to
manipulation. This is different. It will be different. If you
look at the Clarity Act, if you look at Lummis-Gillibrand, if
you look at any of these proposals, they provide for disclosure
regarding so-called digital commodities. We will have to build
out some kind of disclosure framework. Again, I am fine with
the CFTC being the lead authority on overseeing these markets,
ideally with the work of an SRO. I think the development of the
rules is going to require cooperation.
Senator Smith. Thank you. I appreciate that. That is
helpful. You know, we do not have legislation here in the
Senate. As you know, we have the Clarity Act, which the House
will be taking up as soon as this week, so I want to dive into
some of the issues on the Clarity Act. We just had a chance to
speak about this last week in the Banking Committee as well.
Here is the first thing. Securities brokers are required to
get their customers the best possible trade, right? They have
to look across multiple exchanges. This is not happening for
crypto trading right now. At best, the law is unclear, as I am
understanding that. Would you agree with that? Would the
Clarity Act do anything to address that issue?
Mr. Massad. No, I do agree with your point, and no, it
would not. Again, I think Americans, you know, think that our
financial markets are well regulated because they are with
respect to securities and commodities, but this one is
different. There is no best-execution obligation. There is no
prevention of conflicts of interest on the part of brokers or
crypto exchanges.
Senator Smith. Is there any reason that a crypto broker
could not or should not be required to execute trades in the
best interest of their customers? Is there anything that is
intrinsic in the technology----
Mr. Massad. No.
Senator Smith [continuing]. or anything that would make
that not reasonable?
Mr. Massad. Not to my knowledge, Senator.
Senator Smith. Okay. It seems to me, I would agree with
you, that customers deserve to know that when they are buying
or selling an asset, that their broker is trying to get them
the best possible execution on their trade and not somehow
profiting without them knowing about it. I think this is a
place, colleagues, where we could look at how to improve the
Clarity Act as we go forward.
I want to ask you a bit about tokenized stocks, which I
think is another very challenging issue. The trading platform
Robinhood recently announced that it was going to start
offering tokenized stocks to European investors, I believe.
These are not actual shares in a company, but they are digital
assets that, at least in theory, derive their value from the
real thing, the real stock. They do not provide any ownership
stake in the company or any rights that would come with being a
shareholder, for example.
Mr. Massad, proponents of these tokens claim that they
would expand investment opportunities for folks, but I do not
know that that really tells the full story. I mean, could you
just address what risks these tokenized stocks would pose to
investors and to the broader market?
Mr. Massad. Yes, Senator. I think it will be a situation
where there could be a lot of confusion and a failure to
protect investors. It will not be clear exactly what this
tokenized thing is. Does it pass through all the rights, or
does it just represent trading on the price? There could be
fragmented disclosure. There could be less transparent trading.
There is a big risk with the decentralized finance exemptions
in things like the Clarity Act.
Senator Smith. You could own a tokenized stock, but you
would not have any of the protections that you would have if
you were purchasing a stock with all of the protections that
the SEC would provide.
Mr. Massad. It would depend, again, on what it meant.
Senator Smith. Right.
Mr. Massad. Again, that is why I think we need, you know,
some joint rulemaking and some coordination between the
agencies. It could represent something where it is a pass-
through, but it might not.
Senator Smith. It is open. Just in the seconds I have left,
how could the Clarity Act provide--I am concerned that there is
going to be sort of an incentive to move to one regulatory
structure versus another, which is going to be the best for the
company and not the best for the investor. Couldn't we address
that from a policy perspective if we chose to?
Mr. Massad. Oh, absolutely, we could. We would not have
exemptions that encourage that kind of migration of activity.
That is what we are seeing right now in the Clarity Act and
some of these other proposals.
Senator Smith. Thank you very much.
Mr. Massad. Thank you.
Chairman Boozman. Thank you. Senator Tuberville.
Senator Tuberville. Thank you. Mr. Kim, you touched on this
very briefly in your opening statement. The EU and U.K. are
moving quickly to attract, you know, blockchain-based
innovation. What risk are we at in the United States? What are
we going to face if we do not get more urgent about what is
going on? I recently talked to some exchanges, and they are
freaking out basically about, hey, we have got to do something
or we are going to have to move out of the country. What are
your thoughts?
Mr. Kim. Thank you very much for your question, Senator. As
I mentioned in my testimony, it is a global race to the top, so
other jurisdictions have not been waiting for the U.S. to lead.
You have the EU, Singapore, Japan, U.K. all looking to attract
technology resources. I see blockchain development and digital
assets as the plumbing and infrastructure for the second half
of the 21st century. We need the U.S. to lead.
That said, despite the progress in other jurisdictions,
everyone is watching the U.S. now. They are seeing the Senate
having passed GENIUS. They are seeing development of a market
structure bill, including in this Committee. Even the U.K. is
actually a really good example, Senator, where they have been
taking a very modular, patient approach, but recently, they
announced an all-at-once approach. I believe that there is an
opportunity for the U.S. to cement its leadership and make sure
this innovation stays here in the U.S., and that starts with a
comprehensive legislative framework, as I discussed, Senator.
Senator Tuberville. Thank you. Mr. Sexton, do you have a
follow-up on that? You got anything on that about us dragging
our feet?
Mr. Sexton. Senator, I encourage this Committee and the
House to continue to work on legislation in this area. I think
it is very important. I can tell you that from our perspective,
we have, as I indicated, member firms already engaged in this
activity. To the extent that the CFTC would be provided with
not only anti-fraud, but also regulatory oversight over digital
commodities, I think it would be very helpful as far as our own
regulatory structure here.
Senator Tuberville. Thank you. Mr. Behnam, the U.S. model
of having two regulators--and we touched on this briefly--only
works if they are clear jurisdictions. You are very familiar
with that. Can you talk about the need to clear up, you know,
this regulatory definition between the CFTC and the SEC?
Mr. Behnam. Senator, thanks for the question. It is the
first and most important step because, from that point, the two
agencies will be able to really start to develop rules either
distinctly and uniquely or in a joint fashion. This is
certainly a new asset that has a lot of characteristics that
are similar to other assets but also have a lot of
characteristics that are novel and new and are going to require
a different way of thinking about, so I do think it is
critically important.
I also think, putting myself in my old shoes, it is
important that the agencies get a bit of a steer from this
Committee and Congress because there are lines that I think
this Committee and the Congress can draw to help the agencies
start to really define the landscape of what tokens are
securities and what tokens are commodities.
Senator Tuberville. Thank you. I yield back.
Chairman Boozman. Senator Lujan.
Senator Lujan. Thank you, Mr. Chairman, and thank you for
holding this hearing and an opportunity to have this particular
discussion about digital asset market structure. One of the
concerns I think has been brought up today and that many have
had throughout the years is what happened with FTX, with
Celsius, with a few others like Terra Luna when there was a lot
of concern and devastation. What I have appreciated most
recently is everyone's willingness to come and have more
conversations and say, no, there needs to be rules. I
appreciate the bipartisan nature of how this has been taking
place as well, so just thank you so much for this particular
conversation.
Now, Mr. Massad, it is widely understood that Bitcoin is a
commodity, not a security. Now, if I wanted to buy or trade a
Bitcoin, a meme coin, or another commodity, I could log on to
an exchange to do that. However, I could also buy and trade
tokens that look much more like securities on the same platform
right next to each other. My question is, sir, what are some of
the differences in the protections for consumers between a
commodity like a meme coin versus a security like a stock?
Mr. Massad. Well, today, they are huge because we do not
have any regulation of this spot market for so-called digital
commodities. That is what we need to put into place. Your
question also really goes to the fact that, you know, when we
think about how to make that regime work, we are going to need
things that are unusual for commodity markets. We are going to
need disclosure rules, as well as trading rules, as well as
conflict rules, and so forth. That is why, again, I think we
are going to have to have some coordination between the
agencies.
Senator Lujan. With that being said, is it reasonable for
customers to be confused about the differences in their
protections when they are listed next to one another? Does it
increase the risk of something called rug pulls and pump-and-
dump schemes, things of that nature?
Mr. Massad. Absolutely. For example, under the Clarity Act,
it is not even clear that those meme coins would be regulated.
Now, I think they have recently put out a revision that maybe
they would be, but, you know, we should have a framework where
anything that is traded on these platforms is subject to the
regulatory framework. They cannot just list something else that
is not, and then those rules have to be very clear so that
customers are not confused. We should not have securities
trading on the same platform.
Senator Lujan. What are your thoughts, your expertise here
with what Congress needs to do to protect consumers from
fraudulent schemes while still allowing Americans to access and
benefit from cryptocurrencies?
Mr. Massad. Well, again, we need to put in a good
comprehensive framework. You know, the measures that are
proposed so far have some of those elements but not sufficient
ones. I think they are too lax in a lot of the requirements. I
think they, you know, do not address conflicts of interest
sufficiently. I think they undermine securities laws by
creating some exemptions from those laws. You know, it requires
a comprehensive framework that will create investor protection
standards that are comparable to what we have in the securities
markets today.
Senator Lujan. Appreciate that. Mr. Behnam, one issue here
is that the CFTC does not have clear regulatory authority over
spot crypto markets. As past CFTC Chair, how would you protect
consumers from fraud like those rug pulls that I just asked
about and pump and dumps and meme coins where there are clear
issuers, unlike other commodities like oil where there is no
central issuer?
Mr. Behnam. Senator, thanks for the question. I do think
before we get to a point where you are deciding which agency
has jurisdiction, if we can get lines drawn around definitions
between commodities and securities, the whole premise and
thesis behind the commodity tokens is that they are, in fact,
maybe an issuer at some point in the evolution of the token,
but when it is trading on a CFTC exchange, it is decentralized
enough or at some point where it is sufficiently decentralized
where there is no central institution, group of individuals, or
individual that is controlling or impacting the price of the
asset. If it is sufficiently decentralized, which works off of
a lot of the legal precedent that is built around our
securities laws and our commodities laws, you really would not
have that issue where you have individuals pulling off
manipulative trading activities that could hurt investors.
Senator Lujan. Is it fair to say that the definition
section of this legislation matters?
Mr. Behnam. The definition section of any legislation this
Committee puts out is arguably the most important part of the
legislation.
Senator Lujan. I appreciate that.
Mr. Chair, as my time expires, that is one of the issues
that I and my staff raised during the markups with the GENIUS
Act as well, and so, I certainly hope that we can pay
particular attention to the expertise from the staff that we
have around us and others coming in when we are looking at that
definition section and just highlight your testimony today.
Thank you for the time today, Mr. Chairman.
Chairman Boozman. Thank you. Senator Justice.
Senator Justice. Thank you, Mr. Chairman, Ranking Member.
Thank all you guys for being here.
Now, from my side, you know, I speak really plainly, okay?
I would say just this. For God's sakes a living, do we not have
enough smarts in the room to figure this out? I mean, when it
really boils right down to it, do we not have the smarts in the
room to figure it out? I really believe we do. I really believe
hands down, too, that the upside potential is off the chart.
Almost every country on the entire globe is scrambling like
crazy to get a piece of the puzzle. You know, that is all there
is to it. Why in the world are we so afraid of the dark? Why in
the world are we so afraid of something that has the potential
beyond belief, and do we not just figure it out?
Now, let me just tell you just this, just two or three
things. Today, Bitcoin is trading in its own little hemisphere,
you know, and it is trading at $117,000. Forty-five days ago,
at the summit in Las Vegas, it was trading at $110,000. For all
practical purposes, to make it real easy, 7 percent in 45 days.
Now, lots and lots and lots of folks, whether we want them to
or we do not want them to, lots of folks are saying, I want in.
Now, with all that being said, what we need to do is we
need to have a framework that allows innovation, period. Do we
not? Great big b-u-t with Jim Justice saying, great big, we
have got to have an enforcement arm that protects the consumer.
Without any question, we have got to protect Toby and Edith.
Now, I always call Toby and Edith the voters, but Toby and
Edith want in, but they do not have any idea how to understand
this. You know what they do? They ask us to protect them. That
is what they do.
They do not ask us to do this to--and I have said this a
bunch of times, but in my world, I can remember my dad saying,
just count the egg-sucking cows. You do not need to count the
legs and divide by four because they are moving their legs all
the time. You cannot ever, ever figure out how many cows are in
the field.
Now, come on. We are really smart, and we are a country
that ought to be leading the way in every way. What are we
doing? Why are we so scared of the dark? Why are we so
committed to counting the legs and dividing by four?
Listen, we passed GENIUS. It is good. Now, we have to some
way acknowledge legitimacy, market structure. We have to have
regulated clarity. We have to have clarity. We have got to
protect Toby and Edith all the time, 100 percent. We have got
to have real live enforcement that absolutely eliminates your
bad actors.
You are really smart people, super smart people. You have
got some really smart people here on this Committee. Maybe not
me, but you have got some really smart people. I am here to
tell you, we need to move and move now. Now, we are going to
sit around and twiddle our thumbs, and a lot of people are
going to have a leg up on us like we cannot imagine. That is
not doing Toby and Edith right. Toby and Edith want to play the
game. They want to be involved. They want to be the next
innovation. They ask us one simple thing, protect them.
I am almost out of time. You have got to go real fast, 10
seconds a piece. Tell me, how can we pull it off? How can we
pull the innovation off? How can we protect them? Real simple.
Mr. Kim. I believe that when the U.S. puts its mind to
something, that we can accomplish great things. I think, like
you said, Senator, we do need a comprehensive legislative
framework to allow for responsible innovation, a principles-
based approach, while best protecting consumers, and I think
now is the time to do so, Senator.
Mr. Behnam. Senator, I think, number one, just we have
great capital markets and derivatives markets. Start with that
as a foundation, and then we can figure it out.
Mr. Massad. I would say, keep a couple principles in mind.
Do no harm to the existing markets. Keep it relatively simple
in the legislation and rely on the expertise of our regulators.
They do have expertise, and we should draw on it and not fight
the last war when they were not doing enough, perhaps, to
customize rules.
Senator Justice. Thank you.
Mr. Sexton. Use the time-tested structure that has already
been in place and has been in place for years. The CFTC
regulates commodities. The SEC regulates securities. Use that
structure. Congress gives some definitional support to what is
a security, what is a commodity, and you go from there. It has
worked in the past. It is simple. It will work again. There are
SROs underneath that that support the SEC and the CFTC in their
work.
Senator Justice. Thank you.
Mr. Lukken. Senator, your description of the volatility of
Bitcoin reminded me of other commodities like oil, gold,
production crops that farmers that talk to you all the time are
dealing with. The CFTC is a natural home for these types of
commodities that are dealing with volatility, the fact that
they can trade the derivatives to help to hedge that
volatility.
My advice to this Committee is to give exclusive
jurisdiction over digital commodities to this agency and to
give digital securities to the SEC and to give clear lines of
jurisdiction to both agencies.
Senator Justice. I want to thank all of you and thank you,
Mr. Chairman, because you have led the charge and everything,
and I am right with you, sir.
Chairman Boozman. Thank you. Senator Durbin.
Senator Durbin. Thank you, Mr. Chairman. We have said over
and over again we have securities and commodities, and we have
got to make careful definition, but I think there is more to
the story. In the Clarity Act, which will receive a vote in the
House this week, they created a loophole for crypto tokens
known as collectibles. That means those crypto tokens will not
have to register with financial regulators and would benefit
from a lighter-touch regime. In fact, collectibles are not even
considered digital commodities in the bill and are basically
exempt from most requirements.
When Coinbase, one of the largest crypto exchanges, went to
court with the SEC, Coinbase--I believe he is a member of your
organization, Mr. Kim. Coinbase argued that the tokens listed
in the SEC's complaint were neither securities nor commodities.
Coinbase's lawyer argued in court these tokens were like Beanie
Babies, meaning just trading collectibles. These collectibles
can involve multi-millions of dollars. Just ask President
Donald Trump, who listed his own meme coin on exchanges like
Coinbase and Kraken, two exchanges that are part of the Crypto
Council for Innovation.
President Trump's meme coin has no real use and trades its
values basically on popularity and hype, just like a Beanie
Baby. That did not stop President Trump from auctioning off his
meme coin and giving top investors--get this--access to a face-
to-face dinner with the President of the United States. Not
only did President Trump make $315 million in fees by selling
his meme coin--get this now, too--764,000 unique wallets lost
money to the President's scheme. Talk about Toby and Edith. All
the while, crypto exchanges like Coinbase and Kraken claim they
had a robust listing process and continue to perform due
diligence, on and on.
Mr. Massad, let's start with you. What concerns, if any, do
you have about a huge exception for collectibles in any crypto
market structure legislation, number one? Number two, you
talked about a black eye to the industry, this transaction
involving the President. I think it is more than a black eye. I
think it is evidence of corruption. The question, the bottom
line, as far as I am concerned is, what does the industry do if
they are afraid of the President when it comes to regulation?
Mr. Massad. Thank you for the question, Senator. First, on
the collectibles, I agree with you. The Clarity Act does
exclude those as commodities, and I think the rule should be
that digital commodity exchanges cannot trade anything unless
they are covered by these rules. What I would suggest to you,
Senator, is why don't you write all the big platforms,
Coinbase, Kraken, Gemini, if it is so clear--if the Clarity Act
is so clear as to what is a digital commodity, ask them to tell
you of the hundreds of things they list which ones are digital
commodities and see what answers you get.
Senator Durbin. Mr. Sexton, what do you think?
Mr. Sexton. Senator, with regard to those types of tokens,
coins, I can tell you that we approach it from a slightly
different angle, and that is, we regulate the conflicts that
may be embedded within our members.
Senator Durbin. I will have to ask you to make a brief
conclusion to your answer so I can ask one other question.
Mr. Sexton. Go ahead.
Senator Durbin. In 2024, the FBI reported that Americans
lost $16.6 billion to crypto schemes, 33 percent increase over
the previous year. The type of scam I am concerned about
involves a machine called a crypto ATM. Mr. Sexton, do you know
how many we have in our state of crypto ATM machines?
Mr. Sexton. I could tell you I do not know the exact
number, Senator, but quite a few.
Senator Durbin. I can tell you. It is 1,600. What happens
with a crypto ATM? They put them in grocery stores and shops.
They are basically the way they victimize senior citizens and
people in minority communities. Once a victim places their
hard-earned cash in one of these machines, it disappears into a
criminal's wallet, almost impossible to get back. Here is how
it works. Scammers call an unsuspecting victim, tell them they
owe taxes to the IRS or a penalty for failure to appear for
jury duty. Not to worry, they can pay it off at a crypto ATM.
They direct them to the nearest crypto ATM. These people put
their life savings, in some instances, into the criminal's
digital wallet. In 2024 alone, scammers stole nearly $250
million from Americans, and the stories are heartbreaking.
This industry ought to wake up to this reality. There is a
misuse of one of their operative machines to scam people over
and over again with huge sums of money. Want to be known as a
reputable industry? Do something reputable like protecting
consumers. About 15 states have done it. All of them should,
and we should put something in the federal bill. When the
GENIUS Act came before the Congress, I wanted to offer this
amendment. No amendments. Take it or leave it on the GENIUS
bill. Well, if we have a second chance, whether it was clarity
or GENIUS returning, let's at least think about the consumers
for a few minutes.
Thanks, Mr. Chairman.
Chairman Boozman. Thank you. Senator Booker.
Senator Booker. I am grateful. I think, if anything, we are
hearing in this Committee is the urgency for a market structure
bill that provides the appropriate regulation. I want to jump
in right away, though.
Mr. Massad, you said something that to me maybe was an
understatement. I never imagined in my life I would see the
President of the United States create a digital asset that is
open to being purchased, a meme coin that could be purchased by
anybody, anywhere, from our adversaries, our rivals, from
people trying to curry favor with the United States, from
people who are looking for military deals, and to literally
sell seats to a dinner at the White House, at one of America's
more sacred civic spaces. To me, this amounts to a level of
galling corruption never, ever before imagined that could
happen in our country, and we are normalizing it.
It is corrupt, it is dangerous, it is an attack on our
democracy, it is a violation of the Emoluments Clause, and it
is undermining this industry as a whole. Would you agree with
me that my language is perhaps more appropriate?
Mr. Massad. I would totally agree with you, and I have said
similar things. The meme coins are a perfect bribery tool
because they are out there, someone can buy them and,
therefore, you know, provide essentially money to the
President, yet still claim, well, I am just speculating on a
meme coin.
Senator Booker. Would you agree that the way our
Constitution was designed, the legislative branch is supposed
to provide checks and balances and oversight, and the fact that
the United States Senate has not had one oversight hearing of
this corruption is a surrendering of our obligations and duties
under the Constitution?
Mr. Massad. It is shocking to me. I mean, he is making
billions of dollars, not just from the meme coin, but from his
own stablecoin. Even the meme coins have been called by the
creator of Ethereum--the creator of Ethereum has called them a
bribery tool.
Senator Booker. I think it is appalling that Congress has
laid down. I think it is extraordinarily dangerous----
Mr. Massad. I would agree.
Senator Booker [continuing]. and I am beyond frustrated
that we are normalizing this level of corruption in America and
have the most corrupt President imaginable, who is making
hundreds and hundreds of millions, if not billions of dollars,
profiting off of the Presidency at the very national security
risk that it poses to our country when he can make decisions
that affect truly the safety and security of our country, as
many of these countries are trying to curry favor and have
deals. That does not even begin to mention the Trump hotels and
all the other things that he is doing that truly undermine any
idea of what it means to operate in the Presidency with
integrity.
I want to jump really quick, Mr. Behnam, because I am very
deeply engaged and involved in trying to make sure that we land
something that could deal with a lot of the challenges. The one
thing that has not been discussed, as you and I talked about
this ad nauseum, is the CFTC's capacity to regulate this area.
Right now, we have seen budget requests for a 2.9 percent
decrease in funds from its 2024 request and a 5.1 percent
decrease in personnel, which is on top of cuts made earlier
this year by DOGE that threatens the CFTC's ability to oversee
the $120 trillion equity and debt markets it is already
responsible for, without even adding the growing crypto market
into the equation as is envisioned. The House's Clarity Act
would expand the CFTC's jurisdiction without a single
additional dollar. It will create chaos for retail consumers in
our markets, I believe both crypto and in traditional finance.
Am I right to be outraged that this is how we are starting,
without understanding the resources that would be necessary to
do what a lot of us are envisioning?
Mr. Behnam. Senator, short answer is yes. I mean, the
number one priority, if we are going to authorize new authority
for an agency, the CFTC here, is funding and resources so that
it can execute those responsibilities.
Senator Booker. Well, I will tell you this right now. I
want to lean in in a bipartisan way and craft market
regulation. This is what I see right now. I see Senators and
Congresspeople trading stocks and bonds, people who are
involved in the crypto world. Again, I have legislation with a
number of other Senators that really say very clearly that we
should be doing everything we can as a matter of integrity to
stop corruption, that we should introduce and pass the End
Crypto Corruption Act, which would make sure the President,
Vice President, Senior Executive Branch Members of Congress and
immediate families, that stops them from financially benefiting
from issuing, endorsing, or sponsoring crypto assets such as
meme coins.
We have this air of corruption that undermines the
integrity of Congress and the Presidency at a level of
corruption we have never seen before. The very regulatory
bodies that should be overseeing these massive markets is being
starved of resources to even do the jobs they are doing right
now. Any serious effort to engage in the kind of market
structure bill we are having without putting the resources that
we have discussed in the past, in the bill that we had in the
last Congress, a bipartisan bill, we had a way of addressing
this.
There are a lot of structural problems I have right now.
The level and possibility of corruption, of scams, of people
that could get hurt if we do not do this right, is stunning to
me, not to mention the very foundations of our democratic
system so that we do not become some corrupt banana republic
where Presidents and Senators and Congresspeople can bilk the
American people by bending the rules, corrupting the rules for
their own benefit. We have got to do things different.
Chairman Boozman. Thank you. Senator Bennet.
Senator Bennet. Thank you, Mr. Chairman. Thank you for
holding this hearing. Thank you to the witnesses for being
here.
Mr. Massad, President Trump earned about $57 million from
his stake in World Liberty Financial last year, according to
the most recent disclosure forms. In the last few months, World
Liberty Financial launched a stablecoin, which was used by an
Abu Dhabi-backed investment company for a $2 billion investment
in finance. Just before the inauguration, President Trump
issued a meme coin, which surged in price in May. President
Trump hosted a dinner, as has been said, for the 220 biggest
holders of his Trump coin, further juicing the value of that
coin. About 80 percent of the tokens are held by Trump-
affiliated entities.
I do not think we should have to wonder if the President of
the United States is favoring the interests of a foreign nation
or a private crypto exchange like Binance because he stands to
personally profit.
That is why, last month, I took over the Senate Floor to
directly add an amendment to a piece of crypto legislation that
we were considering, the so-called GENIUS Act, which was on the
Floor of the Senate. My amendment, the only Democratic
amendment that was pending, would have prevented the President
and the Vice President from issuing stablecoins. I would be
surprised to know that there are a smaller percentage than 95
percent of the American people who would not have agreed with
my amendment. Yet it was thrown out of the bill, and Democrats
and Republicans voted for that bill without demanding that the
President and the Vice President, and Members of Congress, not
issue these currencies.
Today's conversation does not only address stablecoins, but
the entire ecosystem of digital assets, and it is really
important for us to get it right. I believe, really strongly,
that the--and I believe, again, 95 percent of the American
people, if not 98 percent of the American people, would agree
that the President, the Vice President, a Member of Congress,
high-ranking officials of our government, should not be in the
business of issuing any cryptocurrency.
Mr. Massad, as a former federal regulator, should federal
elected officials be prohibited from issuing or endorsing
digital assets while they are in office?
Mr. Massad. Absolutely, Senator.
Senator Bennet. What kind of market manipulation might
result from that? We have had some discussions today about why
these are like other commodities, like wheat or like--but how
is it maybe different in this case?
Mr. Massad. The meme coins are a perfect example. They have
been called a classic pump-and-dump scheme by a number of
commentators. They were issued. People rushed to buy them. He
made a lot of money off of that, and then the price fell, and a
lot of people then had losses. You know, he is investing in not
just a stablecoin. They are now doing things with Bitcoin
mining and other business ventures. I agree with you totally.
You should be prohibited from doing those things and required
to divest.
Senator Bennet. Can you imagine any benefit to the American
people of allowing the President or Vice President to
speculate----
Mr. Massad. None.
Senator Bennet [continuing]. in this currency?
Mr. Massad. None whatsoever, Senator.
Senator Bennet. Yet the U.S. Senate has passed a bill that
allows them to do it. I offered an--I had an amendment pending
that said the President or Vice President should not do it. I
would be shocked if I lived long enough to have an amendment
pending that would be more popular with the American people
than the one that I had in there, and yet the Senate threw it
out before they blithely passed the legislation.
Mr. Massad. We have never imagined that a President would
do these kinds of things, and therefore, you know, we do not
have the rules in place to prevent it, but we need them now.
Senator Bennet. I would think the industry would want these
rules in place.
Mr. Massad. I think they do. They are just afraid to say
it. I have had a----
Senator Bennet. Why are they afraid to say it?
Mr. Massad. Because they are afraid that it might hurt
their business interest. I have had so many people in the
crypto industry come up and tell me that.
Senator Bennet. Well, we are going to have to figure out as
the elected leadership of this Nation to do better than that
somehow.
Mr. Massad. I would agree, Senator. If you do not do it,
who will?
Senator Bennet. Exactly.
Mr. Chairman, thank you very much. I will submit my other
questions for the record, but I appreciate--I think you shed
some important light here.
Chairman Boozman. Thank you.
Senator Bennet. Thank you.
Chairman Boozman. Thank you, Senator Bennet. Senator
Schiff.
Senator Schiff. Thank you, Mr. Chairman, and thank you all
for being here to testify.
I think it is very important that we have good, strong, and
sound regulation of this whole industry to protect consumers,
to make sure that there are clear and understandable rules of
the road, that there is some certainty for investors, for
consumers, that there are protections in case of bankruptcy or
fraud.
I am also deeply concerned, as Senator Bennet just alluded
to, to the prospect of high Administration officials
manipulating digital currencies or their ability to influence
enforcement actions and being very interested in your thoughts
about how to address these conflicts, potential and real
conflicts of interest when you have people who are in positions
of dominant influence like the President or others issuing,
endorsing, sponsoring their own digital currencies, how we can
ensure that we either prohibit such actions completely or that
we make sure that people who are engaging in them are subject
to laws against market manipulation and self-dealing.
Let me start, if I can, Mr. Behnam--good to see you again--
by asking you, I know you have spoken directly about the need
to maintain public confidence and integrity in these markets.
Do you think public officials that have any kind of supervisory
or influential role should be permitted to issue their own
currencies or endorse their own currencies or would it be the
most basic and fundamental provision that that should simply be
banned?
Mr. Behnam. Senator, thanks for the question. Short answer
is yes, it should be banned. I will say as a former regulator,
you know, just five or six months removed for seven years at
the Commission, I took that responsibility very seriously, the
weight of the responsibility as a regulator over markets and
ensuring there was no conflict of interest or exposure that me
or my family had to the markets I regulated.
Senator Schiff. Does anyone testifying here today think it
is okay, good practice, nothing to see here for high
Administration officials who have influence over these markets
to be able to issue or promote their own personal stablecoins,
digital currencies of any kind?
Mr. Massad. Just to be clear, Senator, I agree that it
should be banned, should be prohibited.
Senator Schiff. I would go further, the Administration
officials, I would say ban all those actions from any Members
of the House or Senate. Anyone disagree with that proposition?
Mr. Kim. Senator, I know this has been a discussion among
policymakers. I just wanted to note that for myself, this is
admittedly outside my area of expertise, and I see this as a
decision for Congress. I just wanted to say that respectfully,
Senator.
Senator Schiff. Well, I appreciate that. I hope we will
make that very decision because I think it is vitally important
that we regulate this area. I think the current unregulated or
regulation-by-litigation posture we are in is undesirable for
everyone, does not protect consumers, does not help legitimate
actors in the industry, does not provide any certainty or
ability to plan or predict or invest. At the same time, the
most basic protections we might put in place to protect
consumers will be undermined if those that can influence the
whole market are in business themselves and able to enrich
themselves.
Let me move on from the problems that have been documented
by the First Family's involvement in this business. In what
other respects--and I open this up to any of our participants--
can we help ensure that consumers are protected? Obviously,
there have been some catastrophic failures of companies in this
space engaged in fraud. What is the best way to protect
consumers so that in the event of a catastrophic failure, they
are protected?
Mr. Lukken. Maybe I will start off. I think the first is
acting. I think the Congress needs to act to fill this
regulatory gap. This Committee is starting that process of
doing that. We are going to have to, as was mentioned, make
sure that we have strong, clear lines between the CFTC and SEC
on how you think the jurisdiction should go. Importantly, each
agency brings unique customer protections and important market
integrity issues that are going to help fix the problems that
you are identifying. I think you are preaching the choir here.
Everybody on this panel wants to fill this gap right now, and
it is up to Congress to act quickly.
Mr. Behnam. Senator, I will add in December 2022, I
testified before this Committee shortly after FTX failed. FTX
had one entity that was registered with the CFTC. It had a
number of entities globally, over 125. I said to this
Committee, of the 125-plus entities, about two or three, two I
think in Asia and one here in the U.S., LedgerX, which was
registered and regulated by the CFTC, was viable, well-managed,
and had value after that bankruptcy. After that fantastic
bankruptcy, this entity that had regulation, that had
supervision, that had oversight, had a future because of
regulation. That is the point that I think is most important
for this Committee to take away. As much as there are many
issues to resolve and discuss and deliberate, regulation works,
and it ultimately will protect customers.
Mr. Massad. I would agree with what former Chair Behnam
said. I think the other entity of the FTX family was one in
Japan that was also subject to pretty good regulation.
Mr. Kim. If I may very briefly, Senator, I agree with the
need to address the regulatory gap, as I mentioned, by
providing the CFTC with comprehensive oversight over digital
commodities. It is just taking us on a slightly different
angle. I know for CCI, a lot of what we do is consumer
education, Senator, so we would love to be a resource to you
and your office. We have different workshops making sure that
there is scam awareness campaigns. A lot of our members do that
as well because even though we are here to talk about the need
for market structure, there is a need to just educate a lot of
consumers about the fraud and scam out there, and CCI is
committed to coming up with policy solutions, Senator.
Mr. Sexton. Last, to keep it short, Senator, and thank you
for the question, I agree with all my panelists. Look, this is
not difficult. There are longstanding safeguards in place to
protect retail customers. The CFTC and NFA have adopted them
over the years with regard to derivatives. Those should be
applied also to the digital commodity markets to protect retail
customers, safeguarding customer funds, market practice rules,
business conduct rules, disclosures. There is a whole litany of
them. I think it is extremely important that this Committee
look to those time-tested requirements and safeguards, and they
go a long way to accomplishing what we are trying to do, and
that is protect retail customers with regard to digital
commodities.
Senator Schiff. Thank you. Thank you, Chairman.
Chairman Boozman. Thank you. Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chairman. I
just have a few questions as promised at the end.
I hope that the world watching here sees that we are not
going to be rolled here on this bill, on the Clarity Act, and
that you have a lot of Members who want to see a piece of
legislation that truly protects consumers, people who have
worked with the industry in the past on our side that are
interested in working on this but really want to see some
serious changes and are concerned both about the conflicts
issue, are concerned, as Senator Booker--I am going to ask my
first question on this--about the funding issue of how the CFTC
should do this, and are certainly concerned about the consumer
welfare and what safeguards should be in place, and there is
not loopholes that could, you know, drive a truck through here.
That is kind of where--it is not consensus. We have Members
with different views on this, but I do think that people should
take home from this that we are going to want to see some major
changes.
Mr. Behnam, you previously called for additional funding
and staff for the CFTC to write rules for and oversee these
markets. How important is it that Congress provide for durable,
sufficient funding when it comes to these brand-new markets?
I think just to combine my questions then with you, Mr.
Lukken, one of the concerns is we have got derivative markets,
we have got an economy that is on a roller coaster right now
because of tariffs and other things. We do not want to
disadvantage existing markets and market participants in how we
do this, so it is a little bit the same question, but go ahead.
Mr. Behnam. Senator, very quickly, thank you for the
question. Short answer, it is an absolute priority. If you
authorize a regulatory program but do not have the funding,
there is no teeth there. I did a number of estimates internally
when I was Chair. We came up with about $130 million over the
first few years to staff up both on the tech side and the
personnel side.
To your last point, and I think this should resonate with
everyone on the panel and on the Committee, I cannot tell you
how much personnel time was taken in the last few years of my
Chairmanship on crypto-related matters. I do not mean that in a
negative way, but it is zero sum. When you have those people
working on crypto matters, which are novel, unique, and do not
have legal precedent, it leads them away from traditional
markets, which I think we all agree are the core of what the
CFTC does and the core of what this Committee cares about on
the ag side, the energy side, the metals, and financials.
Senator Klobuchar. Okay, thanks. Then Mr. Lukken.
Mr. Lukken. The question is around the funding and impact--
--
Senator Klobuchar. It is pretty much funding because what
is going to happen if resources are pulled too thin because of
this major, major challenge coming in----
Mr. Lukken. Sure.
Senator Klobuchar [continuing]. in a good and bad way, but
something that is going to have to be accomplished. Then you
have these other things going on that you have always done at
the CFTC.
Mr. Lukken. Right. No, I think the agency certainly
deserves full funding, and especially if they are taking on the
new responsibility of digital commodities, they are going to
need more funding to make sure that they can administer the
act. You know, that is something that has traditionally been
through an appropriations process. I think the Clarity Act
gives the ability, a transitional fee that happens for four
years. That, to me, makes some sense. I think if you start to
put in a permanent tax on the industry, the concern is that you
may start to impact hedgers, the people who are trying to
utilize the markets and taxing them instead of appropriating
that through the appropriations process, so I do have concerns
with putting in a transaction tax permanently. I think it is
better suited through the appropriations process.
Senator Klobuchar. Mr. Kim, I am just only smiling because
I am not going to get into the rescissions and what this means
to many of us when we look at that process, what is before us
now, and if we can ever trust it. Mr. Kim, so Senator Marshall
was talking about the need to make sure we protect against
terrorist use of these commodities. I thought that was a good
line of questioning, and I just have one thing to add. Are
digital commodity market participants technologically capable
of complying with these financial laws? Should Congress tailor
the laws in any ways to account for unique features of these
markets or this technology?
Mr. Kim. Thank you, Senator. I think the U.S. already has a
robust AML/CFT program through FinCEN, as I mentioned earlier.
That said, I believe it is appropriate for the CFTC to be the
regulator for digital commodities, and once that framework is
established, Senator, I think there could be additional
protections as need be. What has been missing, as I mentioned,
is that regulatory gap right now where the CFTC does not have
that statutory authority to take a look at centralized
intermediaries. My testimony has been about the need to address
that gap to ensure U.S. leadership, Senator.
Senator Klobuchar. Some mention has been made of the
collapse of firms like MF Global and FTX, and it truly revealed
how customer assets can evaporate when we do not have the
adequate safeguards. In both cases, customer funds were
commingled and ultimately lost in cascading failures that shook
public confidence in financial markets.
I will start with you, Mr. Behnam. What mechanisms would
best guarantee that these assets are safe even if prices of
collateralized digital assets collapse? How should Congress
address these practices where firms reuse customer assets for
their own purposes?
Mr. Behnam. Thanks, Senator. Just very briefly, it really
goes to the core principles and the rules that the CFTC applies
in regulated institutions. MF Global was unique in the sense
that it was a regulated entity, and those funds were commingled
outside and in violation of the segregation rules. Some changes
were made afterwards, but segregation rules, I think everyone
would agree with on this panel, are sacrosanct to the CFTC,
making sure customer money is protected and prioritized among
house money and other customer money. I think if you replicate
what rules around customer seg are used for traditional CFTC
markets in the digital asset market, we will be able to
accomplish our goals around protecting customer money and
digital assets.
Senator Klobuchar. Okay, thanks. Another question. We know
that DeFi, decentralized finance, raises novel regulatory
challenges. How should Congress approach decentralized finance
platforms in regulatory frameworks?
Mr. Behnam. Thanks, Senator. At the CFTC, when I was Chair,
we had a couple enforcement actions against DeFi protocols. I
do think there should be and needs to be a unique look at how
DeFi platforms function relative to centralized platforms, but
I am a firm believer that there needs to be some mechanism of
regulation and oversight. DeFi platforms cannot live in a
regulatory vacuum. There has to be some intersection with a
regulator and a decentralized platform in order to have
effective regulation. Otherwise, there will be a race to the
bottom, essentially a race to DeFi to circumvent regulations.
Senator Klobuchar. Mr. Sexton, does the Clarity Act's DeFi
exception, the exemption that is in there, concern you at all?
Is it too broad?
Mr. Sexton. Senator, thank you. I know that there are
concerns expressed about the DeFi exception in the Clarity Act.
I believe that Congress should give some instruction to the
CFTC as to how to deal with these platforms going forward in
legislation. Also, I think that the CFTC and the SEC should
carefully examine together DeFi protocols and determine, as
Chair Behnam just indicated, how best to look at these
protocols in the future and possibly come up with some type of
regulatory oversight over them.
Senator Klobuchar. Okay. Do you want to add anything, Mr.
Massad?
Mr. Massad. I think the DeFi exemption that is in the
Clarity Act is one of its worst features. I think the first
thing is we have to define what we mean. People use the term
DeFi. It is not just an autonomous protocol. They are typically
talking about, you know, situations where you have a business
that is actually the front end of that or managing that, so
there are lots of touchpoints for regulation. DeFi should not
get a regulatory pass. We may need different rules, but we need
to achieve the same regulatory objectives.
One simple way to think about this is if we had a protocol
that was for the Treasury market and that suddenly became the
main way Treasurys were traded, we would not say, oh, well, we
do not need to regulate it. We do not need to worry about it. I
think the key things are define what we mean, look at the
touchpoints for regulation because there are typically
centralized actors acting in that space and develop different
rules if we need them, but achieve the same regulatory
objectives.
Senator Klobuchar. Okay. Mr. Behnam, the collapse, again,
of offshore exchanges underscored how quickly gaps in the
international monetary regulatory frameworks can put U.S.
customers at risk with trading activity flowing across borders,
outside the reach of domestic agencies. The challenge, in
addition to the other ones we laid out here, becomes ensuring
robust protections for customer funds that are in this truly
international market. How can the U.S. ensure that customer
funds are protected in a global market where trading often
occurs on offshore exchanges beyond U.S. oversight?
Mr. Behnam. Thanks, Senator. You know, we have been a bit
behind other regulators across the globe, and I think that has
created arbitrage opportunities. Also, these international
platforms who do not feel like they have a path to registration
in the U.S. for a variety of reasons are circumventing,
essentially, what are called VPNs or virtual private networks
to get access to U.S. customers.
I firmly believe that, as the Committee moves forward and
the Congress moves forward with a market structure bill, if
drafted correctly and comprehensively, this will bring the
market within the regulatory fold, and that will provide the
customers that you are talking about the protections that they
deserve and that we need to have on a sort of outcomes basis,
as Chairman Massad said. Regulation, as we take steps, will
resolve these issues in part and hopefully comprehensively with
other global regulators.
Senator Klobuchar. Okay. Thank you. I will go to something
else. I see Senator Warnock is here. I want to thank you, Mr.
Chairman, for having this bipartisan hearing and so everyone
could listen to the witnesses' ideas, and we look forward to
working with you and with the rest of the Committee going
forward.
Thank you very much, and consider my last comments my
closing.
Chairman Boozman. Very good, thank you. Senator Warnock.
Senator Warnock. Thank you, Chair Boozman.
Mr. Behnam, last Congress, when we were considering
legislation that would provide the CFTC with the authority to
regulate the spot market for digital commodities, you testified
before this Committee that the CFTC would need $120 million to
properly staff up and prepare to supervise and regulate an
entirely new industry. Do you still agree with your previous
testimony, yes or no?
Mr. Behnam. Yes.
Senator Warnock. The President's nominee to replace you,
Mr. Brian Quintenz, could not confirm that number, but he did
indicate in his testimony before this Committee that more funds
would be needed to implement the new authorities for the CFTC.
Chair Behnam, to your knowledge, has the Trump Administration
requested additional funding or additional staffing at our
financial regulators to properly support additional regulatory
responsibilities?
Mr. Behnam. No, it has not.
Senator Warnock. In six months, we have seen hiring
freezes. We have seen staff reductions at the SEC, at the FDIC,
at the OCC, all while refusing to nominate Democratic
Commissioners for historically bipartisan boards like the CFTC.
Chair Behnam, last year, you were consistent that new funding
would be needed for new staff, staff training, and
technological upgrades.
Let's say a new crypto market structure bill that gives the
CFTC new regulatory responsibilities is signed into law. Could
you share what are the risks associated with Congress failing
to provide the CFTC with sufficient resources to properly
supervise the digital asset industry?
Mr. Behnam. Thanks, Senator. In short, the answer is
without the tools, which become the resources behind the
authorization for the program, the program becomes essentially
useless. There is obviously a lot of talented staff at the
CFTC, and I know they will work hard to implement the program,
but we absolutely need resources at the agency to properly
implement the program.
Senator Warnock. Absolutely, I agree with that. Clearly,
investors of all sizes, if we are going to create a situation
where capital markets can thrive, investors of all sizes, we
need to have confidence that regulators are upholding the law,
protecting consumers, that they have the capacity to do so. I
look forward to working with my Republican colleagues to ensure
that the CFTC is properly resourced.
Regulatory certainty for the digital asset industry limits
unnecessary risk, and it can help prevent the collapse of
another cryptocurrency exchange firm. One thinks of FTX, a few
years ago. I am concerned that today, a handful of centralized
firms have come to control multiple stages of the trading
process. All of that concentrates the risk, creates conflicts
of interest in my mind.
Mr. Massad, good to see you again. Is it routine for
centralized exchanges to also serve as the custodian of
customer funds and be responsible for listing, trading,
clearing, and settling trades? Is this typically what we see?
Mr. Massad. Yes, it is. They even have more vertical
integration than that. Of course, most trading is through those
intermediaries, not on chain.
Senator Warnock. What sorts of risks and inefficiencies or
conflicts of interest may exist when exchanges are vertically
integrated like this?
Mr. Massad. There are all sorts of conflicts that can
arise. For example, today, these trading platforms can do their
own proprietary trading, so they can front-run customer orders
or misuse customer information. They can have interest in the
tokens that they list. That is not prohibited either. They can
have other business ventures. With respect to custody, they can
be charging separate fees and may not, you know, adhere to good
custody rules. Even the Clarity Act does not even require these
platforms to hold the Bitcoin that they say their customers
own. It does not require that.
Senator Warnock. This vertical integration creating
additional unnecessary risks for customers, we saw this with
FTX with customers being unable to access their money months
after the collapse of FTX. I am especially concerned that
customers may not be getting the best prices on trades, that
they may be paying higher fees, and more consolidation will
lead to less competition in the market and create more systemic
risk like we saw in the case of FTX.
Mr. Massad, what provisions do you see in a Senate bill to
limit the risk that large, centralized firms may have on the
digital asset market?
Mr. Massad. Sure. We need a comprehensive regulatory
framework that prohibits these kinds of conflicts of interest,
so no proprietary trading, no interest in the tokens they list,
no other business ventures that can pose conflicts. We need to
impose best execution requirements on brokers. We need to
impose strict custody rules and, you know, either consider
separate custodians or at least have rules that ensure that
they really are holding the Bitcoin that they claim or the
other assets that they claim their customers own, and they are
segregating it properly, and they are not charging fees for
that.
Senator Warnock. Thank you so very much for your testimony.
I look forward to working with my Republican colleagues to
create a Senate bill that contains strong conflict-of-interest
language so we can safeguard the financial system and protect
consumers.
Thank you very much, Mr. Chairman.
Chairman Boozman. Thank you, Senator Warnock.
With that, thank you again to all of our witnesses, our
Committee Members, for their participation in today's important
hearing.
The record will remain open for five business days. Today's
hearing is now adjourned.
[Whereupon, at 5:28 p.m., the Committee was adjourned.]
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A P P E N D I X
July 15, 2025
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QUESTIONS AND ANSWERS
July 15, 2025
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