[Congressional Record Volume 168, Number 195 (Thursday, December 15, 2022)]
[House]
[Pages H9896-H9899]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
BANNING AMERICAN INVESTMENTS IN CRYPTOCURRENCY
The SPEAKER pro tempore. Under the Speaker's announced policy of
January 4, 2021, the Chair recognizes the gentleman from California
(Mr. Sherman) for 30 minutes.
Mr. SHERMAN. Mr. Speaker, for 5 years, I have been trying to ban
American investments in cryptocurrency. I am the only Member of this
House to get an F grade from the only crypto-promoting organization
that rates Members of Congress.
My fear is that we will view Sam Bankman-Fried as just one big snake
in the crypto garden of Eden. The fact is, crypto is a garden of
snakes.
Now, from the outside, crypto just looks like a token, an electronic
pet rock for the 21st century, something that might be good to invest
in--though it has no apparent value--because you might get somebody
else to buy it from you for more than you paid for it.
But in reality, crypto aspires to be a currency and compete with the
U.S. dollar. It is not a currency yet, but if it has any long-term
value, it is because its promoters are successful in turning it into a
currency.
Now, the U.S. dollar is an excellent currency. It is a medium of
exchange that will be used billions of times today for people to buy
this or that. It is a medium of exchange. It is a measure of value.
So how can a cryptocurrency compete with the U.S. dollar and other
established currencies?
Whenever you come up with a new product, you find an advantage that
you think you have--at least for part of the market--of your product
over the incumbent products, and then you name your product after that
advantage.
{time} 1545
The advantage that crypto hopes to be its ticket to become a currency
is right there in the name: Cryptocurrency literally means hidden
money.
Well, is there a big market for hidden money? Well, there are the
drug dealers, the human traffickers, the sanctions evaders who will
find that to be a good feature. As Sam Bankman-Fried would tell you
today, there is a hell of a market for those who need a currency that
will help them hide assets from the bankruptcy courts. But the true big
market for a hidden currency is tax evasion.
Now, I know there are some on the other side who are kind of happy
every time the IRS is defeated. It is said that anytime a billionaire
successfully cheats on his taxes, a member of the Freedom Caucus earns
his wings.
The other announced purpose of cryptocurrency design is not just to
be a currency available to those who want hidden money, but to compete
with the U.S. dollar as a world reserve currency. This would enrich the
crypto oligarchs beyond measure and take thousands of dollars a year of
advantage away from every American family because every American
benefits from the fact that the U.S. dollar is the established world
currency.
Now, Sam Bankman-Fried, or should I say inmate 14372, had one purpose
in his efforts in Congress. And he was well known in Congress. The only
one wearing shorts walking around. His one purpose was to keep the SEC,
the Securities and Exchange Commission, out of the crypto world to
provide a patina of regulation, baby regulation by assigning crypto to
the Commodity Futures Trading Commission, an organization a little
laxer and a lot smaller than the SEC.
I have one admonition for my colleagues. Don't trash Sam Bankman-
Fried and then pass his bill. I fear this could happen because Sam was
not the only crypto oligarch with PACs and lobbyists and all the
pressure and all the money coming from the pro-crypto side. There is no
PAC in Washington, there is no lobbyist here getting paid millions of
dollars to work for efficient law enforcement or investor protection or
sanctions enforcement.
Now, I have heard some criticize the SEC, and I will do a little bit
of that later in this speech. In July, I chaired a hearing of our
subcommittee, the Investor Protection, Entrepreneurship, and Capital
Markets Subcommittee, and pushed the SEC's head of enforcement for not
doing what should have been done, and that is to go after every crypto
exchange because the SEC has taken the position in court that virtually
every cryptocurrency is, in fact, an unregistered security. That means
that every crypto exchange is an illegal exchange. But the SEC has been
unwilling to act on that conclusion because they are under intense
pressure from a few in Congress.
Mr. Speaker, I include in the Record a letter signed by 19 Members of
Congress that was designed as a push-back
[[Page H9897]]
pitch, if you know baseball, to push the SEC out of enforcement of
crypto.
Congress of the United States,
Washington, DC, July 15, 2022.
Hon. Gary Gensler,
Chair, U.S. Securities and Exchange Commission, Washington,
DC.
Dear Chair Gensler: We are writing to you today to express
our concerns regarding the Securities and Exchange Commission
(SEC) staff's issuance of Staff Accounting Bulletin 121
(Bulletin or SAB 121). The Bulletin provides interpretive
staff guidance from the Division of Corporation Finance and
the Office of the Chief Accountant (OCA) regarding the
accounting of, and associated disclosures relating to,
entities holding digital assets on behalf of consumers. In
this emerging market, consumer protection is important.
However, if SAB 121 is applied as currently written it could
have a chilling impact on all market participants that engage
in custodial services of digital assets and ultimately harm
consumers engaging in the market. We further believe that
adherence to a transparent process that allows for public
input would be beneficial to ensure complete understanding of
the guidance's impact to the industry.
As written, the Bulletin could be read to broadly obligate
entities, including banks, engaged in digital asset products
or services to adjust their accounting treatment of these
assets from off-balance sheet to on-balance sheet. This
potential interpretation would significantly alter, or
perhaps distort the accounting treatment of custodied digital
assets.
For example, custody of consumer assets is a core banking
function. As pointedly stated by Federal Reserve Chairman
Jerome Powell, ``Custody assets are off balance sheet, have
always been''. This function has an existing regulatory
infrastructure that keeps these consumer assets off the
bank's balance sheet and ensures consumers remain whole in
the event of bankruptcy or other activities that might harm
the consumer. Further, in 2021, the Office of the Comptroller
of the Currency (OCC) issued its Interpretive Letter 1170,
which provided banks guidance on the custody of digital
assets. Subsequently, the Board of Governors of the Federal
Reserve System, Federal Deposit Insurance Corporation, and
OCC engaged in a crypto-asset policy sprint initiative, which
identified custody as a key area where they intend to provide
greater clarity.
These efforts provided the opportunity for banks to
confidently be involved in the digital asset ecosystem
provided that the banks engage in a safe and sound manner.
Such confidence from clear guidance promotes banks to engage
in innovative digital asset use cases that leverage the
existing regulatory and accounting treatment of custodied
assets which will help bring the regulatory oversight and
controls desired by so many to the digital asset space.
Without amendment or clarification to the Bulletin, the
implication of digital assets held by custodial service
providers including banks, on-balance sheet would make
custody of digital assets economically infeasible.
We are also concerned about the SEC's approach to emerging
crypto activities and the broader market. Particularly, we
believe the SEC has not adhered to a proper process,
transparency, or public engagement. On the contrary, the SEC
has taken an enforcement-first approach and relied on staff
guidance, citing purported ``increased risks'' presented by
digital assets. Due to the emerging nature of digital assets
in the financial services ecosystem, the Bulletin functions
as de facto rulemaking to the industry that creates
enforceable obligations for firms. The creation of
enforceable obligations is beyond the remit of staff
guidance, and therefore should have been issued pursuant to a
formal notice of proposed rulemaking from the SEC in concert
with other agencies.
In closing, we request that you withdraw SAB 121 as written
and permit a comment period for such a significant accounting
change. Further, it is our belief that the SEC should
recognize the importance and benefit of the regulatory
environment that exists for industry participants that choose
to hold digital assets in their custody, as well as the
precedent in accounting treatment for traditionally custodied
assets.
Sincerely,
Trey Hollingsworth, Bill Huizenga, Warren Davidson, Ted
Budd, Andy Barr, William R. Timmons IV, Roger Williams, Ann
Wagner, Alexander X. Mooney, Lance Gooden, Tom Emmer, Anthony
Gonzales, Pete Sessions, J. French Hill, John W. Rose, Ralph
Norman, Van Taylor, Lee Zeldin, Bryan Steil.
Mr. SHERMAN. Now, this letter tells the SEC to back off, and here is
the quoted language, from dealing with the ``purported risk of digital
assets.''
Well, it is a few months after that letter was written, and there are
a lot of people who sent their money to the Bahamas who do not think
that the risk of digital assets is merely purported.
I would also include in the Record, there hopefully being no
objection, statements from eight members of the Financial Services
Committee on the Republican side that were designed to attack the SEC
from even trying to get involved in the regulation of cryptocurrency.
The SPEAKER pro tempore. The Chair cannot entertain that request.
Mr. SHERMAN. Now, the crypto industry knows that their arguments are
bad, and the advice given to anyone who has a bad public policy is when
you come to Washington, you better bring a lot of money. It is being
said that Sam Bankman-Fried showered money on Democrats, but what
actually happened is exemplified by his statements just last month. He
said he gave equal amounts to Democrats and Republicans. He gave the
money to Democrats above the table, and he gave the money to
Republicans to dark money organizations, super-secret super-PACs.
He explained his reasoning, and it actually makes sense. He says the
press is liberal. I know my colleagues on the Republican side agree
with that, and that the press would vilify him if he was giving money
to Republicans. So he gave the money to Democrats above the table, to
Republicans under the table, and according to him kept it about equal.
But, of course, Sam Bankman-Fried wasn't the only one involved in
FTX. We have also his co-CEO of one of the FTX organizations, Ryan
Salame, who gave many tens of millions of dollars exclusively to
Republicans.
Now, I want to discuss the role that crypto plays in light of our
capital markets. Our capital markets are designed to get people with
savings to be willing to take risks to use, what economists have called
for over a century, animal spirits, and to take the risk and invest as
equity capital, sometimes debt capital, in businesses that make America
great, that provide jobs, that create products, or invest in municipal
bonds and build a school, build a hospital, build a road.
And especially that risk capital, that equity capital, we encourage
by spending hundreds of billions of dollars a year through our tax
system to provide a capital gains allowance, a much lower tax for those
who make money by taking risks and investing their capital.
But what role does crypto play in this? It takes those animal
spirits, that limited supply of capital that people are willing to put
at risk, and diverts them into betting on crypto tokens, where the
investment does nothing to provide jobs or to build plants.
I think, though, I may have overstated because the crypto world does
create some jobs: Jobs in crypto mining, which is to say jobs in coal
mining. You see, the way you get crypto is you get a whole bank of
computers to do literally trillions of calculations, and if you do
those calculations, with a little luck you get a bitcoin. And so the
big cost is not the computers, believe it or not, it is the
electricity. So we have coal miners mining coal to fuel coal plants
that were previously mothballed and have been taken out of mothballs to
create the electricity to allow people to mine bitcoin.
Now, it has not always done with coal. Iran is subject to our
sanctions, as well they should be. In fact, I got involved in looking
at crypto by seeing what role crypto might play in undermining our
sanctions of Iran, which is working right now to develop a nuclear
weapon.
Iran, due to these sanctions, can't export all its oil. What do they
do with the oil? They burn it, create electricity, mine crypto, and
then they have a hidden currency that they can use to fund Hamas,
Hezbollah, the Houthi, and those are just the terrorist organizations
whose names begin with H that are funded by the Government of Iran,
which is engaged in crypto mining right now.
So one of the issues is, will crypto succeed? Not if we are
successful in imposing the Know Your Customer anti-money laundering
laws to the entire crypto ecosphere because if you take the hidden away
from the cryptocurrency, it has no advantage over the dollar as a
currency.
But we in Washington may fail to act. After all, the money and the
power is in the hands of the crypto billionaires. But the bigger threat
to crypto is crypto. I will explain that by talking a little bit about
the theory of currency.
How is it that any currency acquires value? Well, many millenia ago,
our species in various places all decided that gold was valuable. Hire
an anthropologist, maybe they can explain why,
[[Page H9898]]
but gold has had value as far back as history goes.
The U.S. Government then created a paper dollar tied to gold,
redeemable in gold, a fixed amount of gold, and then centuries later,
because people were used to the dollar itself being valuable--they had
forgotten how tied to gold it was--the currency was valuable in and of
itself, and the tie to gold was eliminated.
Now, of course, you don't even deal with paper dollars all that
often. It is an electronic representation of a paper dollar that used
to be a representation of solid gold.
So some smart guys who knew a lot about computer programming, et
cetera, decided, Well, why can't we do that? If the U.S. Government is
able to print money, why can't we print money? And since money isn't
actually printed on paper, but is electronic, why can't we create
electronic money? And so they did.
They argued one thing, that the amount of bitcoin, or whatever
cryptocurrency it was, was finite. Only a certain amount could be
mined. Now, they assured us there is no back door that would allow the
creators to create an unlimited amount of bitcoin and, after all, if
you can't trust the people in the crypto industry, who can you trust?
But even if there is a finite amount of this or that cryptocurrency,
there is an infinite number of cryptocurrencies. Compare that to fiat
currencies, to governmental currencies. There are a couple hundred
countries in the world. That is it. Those are the ones that can create
governmental currencies. But every day somebody creates a new
cryptocurrency, and we have a plethora of coins, so while there is a
finite number of each coin, there is an infinite number of coins.
Furthermore, there is no particular reason to think that one
cryptocurrency is more valuable than the other. Is bitcoin more
valuable than ethereum? Why? Why not? What about dogecoin? What about
hamster coin?
I asked this question in a hearing almost a year ago. One of my nice
staffers, I was about to say pesky staffers, tapped me on the shoulder
and said: Boss, there already is a hamster coin. So I said, well, gee,
what about cobra? There is already a cobra coin.
So I went into the next hearing and said there might be a mongoose
coin, and think of what a mongoose could do to a cobra. You know
mongooses are able to kill any cobras, and of course a mongoose could
really devour a hamster. I put that forward as a joke, identified it as
a joke, and 4 hours later somebody created mongoose coin, and a few
hours after that it allegedly had a value of hundreds of millions of
dollars.
This self-mocking competition for some coins by other coins
demonstrating there is an infinite number of coins, and any one of
those coins could be more valuable than the other coin, ultimately will
mean that crypto does not emerge as a currency. Compare that to
governmental currencies. I mean, certain cryptocurrencies, including
mongoose coin, today could be worth absolutely zero, whereas ethereum
could be more valuable than bitcoin or not. Could be zero. Whereas the
Uruguayan peso will always have a value because there will always be a
Uruguay.
The capitalized value of all outstanding Uruguayan pesos will always
be considerably less than the U.S. dollar because the United States
will always be more important than Uruguay. So you know what the
different currencies are tied to. You know the pecking order. You know
the size of the United States economy, you know the size of the
Uruguayan economy, and if you make up a country and print a currency,
it is going to be worthless. You make up a cryptocurrency, could be as
valuable as mongoose coin.
So crypto has no apparent value, and yet one cryptocoin competes with
the other. I think this is a house of cards that collapses, but not
right away. FTX was not the end of the story.
But let's say you are looking for a crypto exchange, God forbid. If
you saw FTX, they had no audit at all, and I speak as I believe the
only Democratic CPA returning to the next Congress.
{time} 1600
I am an old auditor. No audit. You go to a Binance, which right now
has had $3 billion withdrawn in the last 24 hours, and they have no
audit, but they did have a proof of reserves done by an auditing firm,
but a proof of reserves is not an audit.
Or you could go to Coinbase. They have an audit, but no internal
control report on the audit. And if you listen to the testimony of John
Ray before the Committee on Financial Services, he is the bankruptcy
trustee for what's left of FTX, the focus of his problem or the problem
he identified was no internal control.
So you look at the major exchanges, you don't have a true audit with
an internal control audit on any of the ones I identified. You have to
wonder, why would you want to play in that world.
Now, as I said, the SEC is acting way too slowly. And they need to be
aggressive and go after every crypto exchange, if any of the crypto
assets being exchanged is a security, and most of them in the opinion
of the SEC, is a security.
I wish I could tell you it was cut and dry which cryptocurrencies
were securities and which were not. Believe it or not, it all depends
upon a statute passed in the 1930s and a court case decided in the
1940s; the Howey case.
And so it is probable but not certain that the vast majority but
perhaps not all cryptocurrencies are subject to SEC jurisdiction. That
is why Sam Bankman-Fried was here in Washington to try to get us to
pass a statute that would reduce or eliminate the likelihood of success
that the SEC would have in courts to show that cryptocurrencies are a
security, and the crypto exchanges are securities exchanges.
I would hope that emboldened by recent events, that the SEC would
shut down these exchanges. They are exchanging unregistered securities.
Now, I would hope that Congress would pass a law at least defining
all cryptocurrencies as subject to SEC jurisdiction, but I think given
the money and power of people who make money, literally--crypto
billionaires, they make money by making money. They have a lot of it.
Now, I know that crypto is down about 60 percent from earlier this
year. It is still a lot of money. In every other business, in order to
make money, you have to make a product, provide a service. They have
made money without doing any of that. It is a very profitable business.
And so they will continue to press Congress, I fear successfully, into
not passing legislation that undermines the SEC. But for God's sake, I
don't think we will be able to pass this legislation making clear that
the SEC has jurisdiction. They are going to have to win that one in the
courts; I think they will. But for God's sake, let's make sure that we
don't pass legislation that undermines the likelihood of the SEC
winning in the courts.
Now, I would like to address a cousin of cryptocurrency, stablecoin.
Talk about an oxymoron. Some stablecoins have absolutely collapsed. But
a well-regulated stablecoin tied to the dollar is really just a money
market fund but hipper. Because your grandfather invested in money
market funds, coin sounds like cryptocurrency, and your grandfather
doesn't understand that. I am not sure anybody understands it.
So stablecoin, if well regulated, is simply a money market fund, but
invariably, it is a money market fund tied to crypto investing. If you
have an account with a stockbroker, you no doubt have a money market
fund where your cash is stored until you decide which stocks to buy, or
which bonds to buy. So the money in that money market fund is awaiting
deployment in investments that build the American economy.
Stablecoin is just another name for money market fund, but it will be
tied to an account with a crypto broker awaiting deployment in dogecoin
or mongoose coin or bitcoin, or ethereum, or any one of the
cryptocurrencies.
So you can put me down as a skeptic of cryptocurrency. I think I have
covered the reasons why it will not succeed, why investment in it is
subject to a very substantial risk of theft. And why if, God forbid,
and in the unlikely event that it does succeed, it will undermine the
power of the U.S. Government to enforce our fiscal and white-collar
laws.
I look forward to working with my colleagues to at least make sure
that
[[Page H9899]]
we do not undercut the possibility of effective regulation of
cryptocurrency, that perhaps we provide for the regulation and tough
regulation of cryptocurrency with the Know Your Customer and the anti-
money laundering statutes and that at least we do no harm.
Mr. Speaker, I yield back the balance of my time.
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