[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.

                          ____________________