[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
COINCIDENCE OR COORDINATED? THE
ADMINISTRATION'S ATTACK ON THE
DIGITAL ASSET ECOSYSTEM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON DIGITAL ASSETS,
FINANCIAL TECHNOLOGY,
AND INCLUSION
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
MARCH 9, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-9
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
52-364 WASHINGTON : 2023
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio JUAN VARGAS, California
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California SYLVIA GARCIA, Texas
BYRON DONALDS, Florida NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
MIKE LAWLER, New York BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
SUBCOMMITTEE ON DIGITAL ASSETS,
FINANCIAL TECHNOLOGY, AND INCLUSION
FRENCH HILL, Arkansas, Chairman
FRANK D. LUCAS, Oklahoma STEPHEN F. LYNCH, Massachusetts,
TOM EMMER, Minnesota Ranking Member
WARREN DAVIDSON, Ohio, Vice BILL FOSTER, Illinois
Chairman JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee RITCHIE TORRES, New York
BRYAN STEIL, Wisconsin BRAD SHERMAN, California
WILLIAM TIMMONS, South Carolina AL GREEN, Texas
BYRON DONALDS, Florida SEAN CASTEN, Illinois
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
ERIN HOUCHIN, Indiana
C O N T E N T S
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Page
Hearing held on:
March 9, 2023................................................ 1
Appendix:
March 9, 2023................................................ 45
WITNESSES
Thursday, March 9, 2023
Belshe, Mike, CEO and Co-Founder, BitGo.......................... 5
Evans, Tonya M., Professor, Penn State Dickinson Law............. 7
Gould, Jonathan V., Partner, Jones Day........................... 8
Grewal, Paul, Chief Legal Officer, Coinbase Global, Inc.......... 10
Reiners, Lee, Policy Director, Duke Financial Economics Center,
Duke University................................................ 12
APPENDIX
Prepared statements:
Belshe, Mike................................................. 46
Evans, Tonya M............................................... 50
Gould, Jonathan V............................................ 60
Grewal, Paul................................................. 65
Reiners, Lee................................................. 124
Additional Material Submitted for the Record
McHenry, Hon. Patrick:
Written statement of the American Bankers Association (ABA).. 158
Written statement of the Chamber of Progress................. 163
Written statement of the USDF Consortium..................... 166
Davidson, Hon. Warren:
Written statement of the Chamber of Digital Commerce......... 176
Written statement of the Club for Growth..................... 178
Written statement of the Crypto Council for Innovation....... 182
Written statement of the National Association of Federally-
Insured Credit Unions (NAFCU).............................. 186
Waters, Hon. Maxine:
Joint written statement of Americans for Financial Reform and
Demand Progress............................................ 188
Written statement of the Blockchain Association.............. 200
Written statement of the Credit Union National Association
(CUNA)..................................................... 205
Written statement of the National Consumer Law Center (NCLC). 210
Written statement of Public Citizen.......................... 218
Written responses to questions for the record submitted to
Jonathan V. Gould.......................................... 242
Written responses to questions for the record submitted to
Lee Reiners................................................ 243
Slide, ``The SEC Has Issued Approximately 130 Enforcement
Actions on Crypto Assets''................................. 247
Letter from Dr. Nicholas Weaver, dated March 7, 2023......... 248
COINCIDENCE OR COORDINATED?
THE ADMINISTRATION'S ATTACK
ON THE DIGITAL ASSET ECOSYSTEM
----------
Thursday, March 9, 2023
U.S. House of Representatives,
Subcommittee on Digital Assets,
Financial Technology,
and Inclusion,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2128, Rayburn House Office Building, Hon. French Hill
[chairman of the subcommittee] presiding.
Members present: Representatives Hill, Lucas, Emmer,
Davidson, Rose, Steil, Timmons, Donalds, Flood, Houchin; Lynch,
Foster, Gottheimer, Torres, Sherman, Green, Casten, and Nickel.
Ex officio present: Representative Waters.
Also present: Representative Nunn.
Chairman Hill. The Subcommittee on Digital Assets,
Financial Technology, and Inclusion will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
I want to thank our witnesses for being here today. It is
an outstanding panel, and I now recognize myself for 4 minutes
to give an opening statement.
Today, I am very excited to hold the inaugural meeting of
the new Subcommittee on Digital Assets, Financial Technology,
and Inclusion. To start, I want to thank Full Committee
Chairman McHenry for asking me to lead this new subcommittee
and for his leadership in recognizing the important need to
comprehensively address the topic of digital assets. I also
want to thank Full Committee Ranking Member Waters for her
foresight in holding that first Libra hearing back in 2019, and
for creating the Task Forces on Fintech and Artificial
Intelligence, and for her continued engagement and willingness
to work in a bipartisan manner.
Finally, I am looking forward to working with my good
friend from Massachusetts, the ranking member of this
subcommittee, Congressman Lynch. He is always a thoughtful
partner, and we are reprising our roles that we had together
leading the Fintech Task Force a few years ago.
To all of the members of this committee, no matter what
your views are about crypto, it is imperative that we recognize
the unique role of Congress to legislate, and that no amount of
enforcement actions or regulatory guidance can ever replace
that or be a substitute. As a legal matter, only Congress can
establish the regulatory framework for digital assets, and I
strongly believe that we need that in this country. That is why
this subcommittee is holding its first hearing to examine the
Administration's recent actions on digital assets.
But let me be very clear. This hearing is not a partisan
attack on the Securities and Exchange Commission or the banking
regulators. We will hold other hearings to discuss the
comprehensive policies as well as the fraud and failure of FTX
and Sam Bankman-Fried and the millions of people hurt by his
dishonesty and scam. But it is absolutely critical that we
first discuss the scope and significance of recent regulatory
pronouncements and supervisory failures of the past year. By
assessing the regulatory gaps, supervisory failures, and
enforcement actions, we can build a case for a shared
bipartisan vision of this regulatory framework.
The shared goal is to protect investors, foster innovation,
and ensure that America continues to lead rather than follow in
this space, but that means Congress has to do the hard work of
working across the aisle to reach a consensus and not just
posturing or sticking our heads in the sand. That is why I was
so glad to see Ranking Member Waters recently call on the
Treasury, the Fed, the CFTC, and the SEC to get together with
Congress and address digital asset regulation. We cannot have
the agencies trying to front-run the Legislative Branch.
Last Congress, this committee, under then-Chairwoman Waters
and Ranking Member McHenry, made good progress on payment
stablecoin legislation, and I believe we should work together
on a product that can pass out of this committee with
bipartisan support. The Treasury and the Fed were constructive
partners in that process, and we want that to continue.
That being said, payment stablecoins are just one part of
the broader digital economic system, and I hope we can bring in
customer protections that exist in the current financial
regulatory system to cover digital assets. I am a strong
proponent of the theory and the approach, same risks, same
activities, same rules, and I believe we should create a
functional framework that is tailored to the specific risks of
digital assets.
In fact, we need to support technological innovation. We
need to ensure appropriate controls and accountability. We need
to give no quarter to fraudsters, scammers, or criminals, and
we need to reinforce leadership in the global financial system
for U.S. competitiveness. These are the Administration's own
principles as outlined in their Executive Order for looking at
digital assets.
So, I look forward to hearing from our witnesses on the
impact of the Administration's approach and how Congress can
work together on that. With that, I yield back, and I yield to
my friend, Ranking Member Lynch, for an opening statement.
Mr. Lynch. Thank you very much, Mr. Chairman. Let me
congratulate you, as well as Congressman Warren Davidson as
Vice Chair, on your recent elevations. It was an honor to serve
with you as the Chair of the Task Force on Financial Technology
last Congress, and I hope that we might continue some of the
work that we began in that task force. We can play an important
role in shaping policy in the digital assets and fintech space,
and I believe there are areas in which we can immediately find
common ground. Innovation has the potential to increase the
accessibility and lower the costs of financial service
products. But I am also likely to exercise some caution about
the risk to consumer financial data, some of the hidden fees,
the lack of transparency, and the misleading marketing
practices that were heretofore exercised in this industry. I
plan to continue to voice those concerns in this Congress.
I do remain optimistic in the potential for great
innovation in financial services and the myriad possibilities
of blockchain technology. Given the collapse of much of the
crypto industry this year, including the recent news involving
Silvergate Bank and the scrutiny over Binance's practices, I
have some lingering concerns about the volatility and risks
that crypto assets pose to consumers, particularly low-income
and underrepresented communities.
The collapse of TerraUSD, Celsius, BlockFi, and FTX speak
to the larger regulatory gaps in this space, including lack of
corporate controls, inadequate liquidity or reserves,
commingling of assets, and irresponsible practices. I do worry
that these practices exist across the industries and are a
result of insufficient oversight and lack of regulatory
guidance. I commend the actions of our Administration, the
Biden Administration, through its reports, guidance, and
Executive Orders, to thoughtfully examine the benefits and
risks of crypto products.
I also have concerns about the exposure of crypto companies
to our traditional banking system. I am encouraged to see that
our prudential banking regulators are recommending caution.
Yesterday's announcement about the liquidation of Silvergate
Bank illustrates why we need a separation between crypto assets
and the traditional banking system, and why guidance from the
Fed, the OCC, and the FDIC is needed.
Prior to the collapse of the crypto industry, the hype was
astounding. From celebrity endorsements to Super Bowl ads,
companies sold crypto assets as revolutionary products that
would transform our financial ecosystem. Crypto companies
deliberately misled consumers about the risks of their
products, some even going so far as to falsely claim that their
products were FDIC-insured. It is clear that Congress must play
a role in reining in some of these crypto companies.
While I am confident that my colleagues across the aisle
agree that we need a legislative solution to the digital asset
space, how we get there may pose a challenge. There appear to
be conflicts between the crypto industry and the SEC
surrounding how crypto assets should be regulated. SEC Chair
Gensler has stated that the vast majority of crypto assets are
indeed securities, as illustrated and just defined by the Howey
test, and should be regulated as such.
Crypto companies must come in compliance with existing
security laws which ensure that investors and markets are
protected. The crypto industry and many of my Republican
colleagues have spun a false narrative that the SEC regulates
through enforcement, and makes it impossible for the industry
to come into compliance, when in reality, the SEC is enforcing
the law and has provided appropriate direction. These arguments
also conflict with the accusation that the SEC did not go far
enough in taking actions to prevent the FTX collapse. This
attack on the SEC is a tactic employed by the crypto industry
to evade compliance with the laws because the industry knows
that it would not meet the justifiably-high standards that make
our financial system the envy of the world.
In closing, I am disappointed that the consumers' voice has
been missing from all of these conversations, and I am
disturbed by the way in which crypto companies, specifically in
the past, have targeted low-income and minority communities.
Many have made misleading claims about the promises of their
products, such as faster payments, lower-cost remittances, and
wealth-building vehicles. This type of predatory inclusion is
not unique to the crypto industry; it is common in fintech, and
is reminiscent of the 2008 financial crisis and prior events.
So, I plan to explore these issues more this year.
I urge my colleagues to look beyond industry talking points
about regulatory overreach, and instead I ask that we direct
our attention to thoughtfully addressing the risks of the
crypto industry as well as its potential. Thank you. I yield
back.
Chairman Hill. I thank the gentleman from Massachusetts. I
look forward to working with him. And now, I will turn to the
Vice Chair of the subcommittee, the gentleman from Ohio, Mr.
Davidson, who is also the Chair of our Housing and Insurance
Subcommittee, for 1 minute.
Mr. Davidson. Thank you, Mr. Chairman. The regulatory
environment for the digital asset ecosystem has come to a
critical inflection point. Because there are no clear rules of
the road for centralized digital asset trading platforms that
list non-security digital assets, American users, our
constituents and consumers, are not adequately protected while
participating in these markets.
It is our job in Congress to craft an appropriate, fit-for-
purpose legal framework for these assets and this space. It is
our job. It is our duty. It is long-overdue. We must establish
clear rules for trading platforms that provide Americans with
the necessary protections and ensure market integrity. However,
these rules must provide a clear framework that is flexible
enough to accommodate innovation. These rules must also
preserve Americans' ability to self-custody their digital
assets.
Congress must do everything in its power to ensure that
American citizens can access this transformational technology
and have the right to possess their stake and ownership right--
private property--in the technology. Preserving self-custody is
a critical step in this effort. Because of this, I am working
on a reintroduction of the Keep Your Coins Act, to protect
Americans' ability to manage their own digital assets and to
make permissionless peer-to-peer transactions.
Thank you for your attention, and I look forward to diving
into these critical issues with our witnesses today.
Chairman Hill. Thank you, Mr. Davidson. We now welcome the
testimony of our witnesses. First, Mr. Mike Belshe. Mr. Belshe
is a 30-year Silicon Valley veteran, and co-founded BitGo, a
digital asset financial services provider, where he currently
serves as CEO.
Second, Dr. Tonya Evans. Dr. Evans is a full tenured
professor at the Pennsylvania State University Dickinson School
of Law, specializing in entrepreneurship, innovation,
intellectual property, and new technologies such as blockchain
and digital assets.
Third, Mr.Jonathan Gould. Mr. Gould is a partner at Jones
Day law firm where he specializes in bank and financial
regulatory strategy. Before Jones Day, he served as the Senior
Deputy Comptroller and Chief Counsel for the Office of the
Comptroller of the Currency.
Fourth, Mr. Paul Grewal. Mr. Grewal has served as chief
legal officer at Coinbase since August of 2020. Mr. Grewal can
provide perspective on how digital asset products, services,
and firms can be incorporated in the U.S. framework.
And our final witness is Mr. Lee Reiners. Mr. Reiners is
the policy director at the Duke Financial Economics Center at
Duke University.
We thank each of you for taking the time to be here. Each
of you will be recognized for 5 minutes to give an oral
presentation of your testimony.
And without objection, each of your written statements will
be made a part of the record.
We will start with Mr. Belshe. You are now recognized for 5
minutes for your oral remarks.
STATEMENT OF MIKE BELSHE, CEO AND CO-FOUNDER, BITGO
Mr. Belshe. Chairman Hill, Ranking Member Lynch, and
members of the subcommittee, thank you for the opportunity to
offer testimony today about the digital asset regulatory
environment in America. I am co-founder and CEO of BitGo, an
institutionally-focused digital assets company based in Palo
Alto, California. We have been building regulated products and
platforms for digital assets and are regulated by numerous
State and Federal regulators, including the New York Department
of Financial Services, the South Dakota Division of Banking,
the SEC, and the Financial Crimes Enforcement Network (FinCEN).
We are primarily known for our role as the first purpose-built
digital asset custodian. Trust companies are different than
banks in that we are not depositories. We do not lend assets.
We are solely focused on the technology and compliance related
to the safekeeping of our clients' assets in segregated
accounts.
I hope it is clear that BitGo and all of the regulated
firms building digital asset technologies and services in
America are absolutely and unequivocally committed to
preventing financial crime, providing the utmost investor
protections, abiding by sanctions controls, building safety and
soundness in our custodians and banks, and building stable
market structure. We are not seeking to avoid regulatory
oversight. We are not here for the purpose of building
speculative assets in markets. We are here to make the
financial services system better.
It has been over 10 years now since the invention of
bitcoin and the blockchain unlocked the creation of digital
property and the ability to transfer digital property in a
peer-to-peer fashion. This seemingly-simple technology has a
profound effect: It enables the instant transfer of value
between anyone across the globe. It also creates smart
contracts which have the potential to replace much of modern
finance in a more transparent and fair manner. Stockbrokers,
money managers, and market makers can all be implemented as
transparent code.
Innovation is what I want to talk about today. Software has
a tendency that once it enters an industry, it pushes
innovation and change faster than that industry has ever
experienced before, and that is what has happened to our
financial industry in recent years. Software is changing it
fast. But unlike other industries which software has upended,
American finance is highly-regulated. It is not enough for our
businesses to move quickly. Our regulators need to move
quickly, too, and if they do not, we will all be surpassed by
other nations who will.
When BitGo decided to pursue a trust company charter back
in 2017, we first reached out to the OCC for Federal oversight
of our safekeeping activity. At the time, the OCC clearly
stated that it would not allow a charter for any business in
the digital asset space, so instead, we pursued a State-
chartered trust company. This left us with a question as to
whether our fiduciary safekeeping powers will be considered a
qualified custodian in the eyes of the SEC.
To answer this very basic question of how to provide
custody of assets to regulated firms under the Investment
Advisers Act, BitGo proactively and voluntarily approached the
SEC back in 2018 and submitted a formal no-action letter to the
SEC. Ultimately, the SEC declined to opine on our letter. With
the OCC closed for business, and the SEC unwilling to answer,
the question remains how to custody digital assets under the
Advisers Act. That question has lingered for years until just a
few weeks ago when the SEC issued a draft amendment to the
custody rule. While we are happy that the amendment affirms
that BitGo's State-chartered fiduciary trust company is indeed
a qualified custodian, it took over 4 years to answer that
single question. If it takes that long to answer the most basic
of questions, how can we expect to answer the myriad of other
questions that will follow without falling behind global
competing markets?
The year 2022 was an undeniably miserable year for digital
assets, with a number of dramatic failures in the system. This
has led opponents of digital assets to wrongly proclaim, ``I
told you so. Digital assets are unsafe for banks and the
financial system.'' But the underlying problem is not caused by
including digital assets in our markets. The problem is caused
by excluding digital assets from our markets. Our regulatory
failure to keep pace with innovation has created a regulatory
exclusion, which is directly responsible for harming the very
investors that we are supposed to protect.
In 2020, the OCC briefly opened its doors to digital assets
and encouraged OCC-chartered custodians to participate in the
market. This was short-lived, however, and the door was closed
less than a year later with no plan for regulators as to what
the right approach should be.
At some point, we have to ask ourselves the question, why
do Americans flock to weak digital asset opportunities that are
managed offshore? The reason is not because they want to. It is
hard to do and risky. The reason is because we have failed to
keep pace and to create safe paths to invest under the safety
of American regulatory supervision. Thank you very much.
[The prepared statement of Mr. Belshe can be found on page
46 of the appendix.]
Chairman Hill. Thank you, sir. Dr. Evans, you are
recognized for 5 minutes.
STATEMENT OF TONYA M. EVANS, PROFESSOR, PENN STATE DICKINSON
LAW
Ms. Evans. Chairman Hill, Ranking Member Lynch, and
distinguished members of the subcommittee, thank you for the
opportunity to testify today about the current U.S. regulatory
landscape as applied to emerging crypto asset ecosystems. I
view today's hearing through a nonpartisan academic lens, and I
accepted the invitation to help inform and calibrate the
conversation about the current regulatory environment in this
latest wave of financial and technological innovation in a $1-
trillion emerging market.
I also wish to express concerns about the future of
America's leadership in innovation in this area when a powerful
agency uses its broad discretionary powers on a piecemeal basis
without also providing commensurate clarity for regulated
parties or a fair opportunity for good-faith actors to
understand the rules and the consequences that apply in an
entire industry.
And I intend to also highlight the tremendous loss of
wealth accumulation opportunities for communities of color,
especially the Black community, if investment and innovation
opportunities in the crypto asset ecosystem are driven
offshore. Accordingly, as Congress considers how best to
reevaluate its delegation of powers to the SEC, and whether to
empower the CFTC further in some capacity, I offer three points
to consider.
One, given that the heads of the SEC and the CFTC do not
actually agree on the character and nature of whether and under
what circumstances certain crypto assets, especially Ether, or
commodities, or securities, reconsider bipartisan legislation
across oversight committees that would clarify the taxonomy of
crypto assets, limit unpredictable and incongruous executive
agency actions, and consider empowering the CFTC to regulate
spot crypto asset markets.
Two, ensure that all citizens, especially those who have
been systemically marginalized, have equal access and
opportunity to thrive safely, legally, and confidently in the
future of wealth and innovation.
And three, request the SEC Chair to appear before
congressional oversight committees to explain how its current
practice of an aggressive piecemeal approach to regulation of
crypto assets comports with the efficient and effective
regulation, and how this practice aligns or doesn't align with
the legislative mandate to protect investors; to maintain fair,
orderly, and efficient markets; and to facilitate capital
formation.
I want to punctuate briefly my concerns that in this latest
economic boom, systemically-marginalized populations will
continue to be left behind under the well-intentioned guise of
investor and consumer protections, as well as not so well-
intentioned streams of fear, uncertainty, and doubt from legacy
financial institutions and other parties with a vested interest
in seeing the crypto economy fail, that wealthy early adopters
and legacy institutions protecting their high-net-worth
clientele will again reap the upside risk and reward of early
adoption, leaving another generation of systemically-
marginalized people behind.
For example, legacy financial institutions have seized the
early mover opportunity among their peers to innovate in
delivering products and services in the digital future by
leveraging blockchain technology or offering direct or indirect
exposure. Despite public comments, injecting misguided
narratives about crypto assets, major banking and financial
institutions, like Deutsche Bank, Morgan Stanley, and even
longtime bitcoin skeptic, JPMorgan Chase, have all recognized
the value proposition of crypto and blockchain.
In conclusion, the technology provides an opportunity to
include crypto assets taxed as capital assets in a portfolio,
build new and innovative products for the decentralized web,
re-skill to bring a legacy company into the future of
innovation, prepare students for the future of work and
industry, or to sit before this esteemed body today with a seat
at the table to inform and influence the direction of
legislation and the regulation of digital money. With every
country, including the United States, working on its own
protected sandbox of digital asset innovation, private markets
deserve the same, to innovate safely, legally, and with clarity
right here in the United States.
Again, thank you for this opportunity, and I look forward
to your questions.
[The prepared statement of Dr. Evans can be found on page
50 of the appendix.]
Chairman Hill. Thank you, Dr. Evans.
Mr. Gould, you are now recognized for 5 minutes.
STATEMENT OF JONATHAN V. GOULD, PARTNER, JONES DAY
Mr. Gould. Chairman Hill, Ranking Member Lynch, and members
of the subcommittee, thank you for the opportunity to discuss
the Administration's actions with respect to the digital asset
ecosystem. I am speaking today solely in my personal capacity.
I am not speaking on behalf of any clients or of my law firm.
My testimony is my own.
Over the last 18 months, the Federal banking agencies have
issued a number of public guidance documents. This guidance has
articulated agency concerns with risks associated with digital
asset activities of banks, expressed their skepticism that many
of these activities can be conducted in a safe and sound
manner, and imposed procedural barriers to their commencement.
My written testimony summarizes these guidance documents. The
pace and coordination of these issuances have increased this
year, with two joint agency statements in as many months, and
an important policy statement from the Federal Reserve.
As Congress considers the actions of the Federal banking
agencies, there are three attributes of bank supervision that I
would like to highlight. First, bank supervision is, by design,
confidential, particularized, and potent. Although the agency
issuances I mentioned are public, their application is not. The
confidential nature of this supervisory relationship
facilitates the flow of information between bank and regulator,
but it can also frustrate accountability and oversight.
Second, safety and soundness. The primary lens through
which these agency issuances are framed in the goal of
prudential regulators like the OCC, the Federal Reserve, and
the FDIC, can be a subjective concept. Banking agencies have
issued thousands of pages of public, non-binding guidance
detailing their interpretations of what safety and soundness
means in a variety of contexts to help banks achieve it, and to
facilitate consistency and the agencies' supervisory
expectations and approach.
Finally, although agency guidance is technically non-
binding, banks rarely challenge or disregard it. The practical
consequences of doing so can be significant in light of the
supervisory process through which guidance is applied. Given
these attributes of bank supervision, generalized and negative
statements raising safety and soundness concerns about
particular industry sectors must be made carefully lest they be
interpreted by the public or bank examiners as an outright
prohibition.
Anecdotal evidence suggests that agency actions over the
last 18 months, while responsive to developments in the digital
asset ecosystem, are indeed having a chilling effect on banks'
practical ability to engage in digital asset activities, as
well as their willingness to entertain or maintain digital
asset entities as banking customers. Because of the
confidential nature of the supervisory relationship, it is
impossible for the public to assess the actual causal effect of
these agency actions.
There are several areas that would benefit from
congressional attention. First, the agencies' actions might be
disproportionate, whether in nature or magnitude, to the risks
posed by digital assets. Relatedly, the strategy to address the
risks posed by digital assets may be less than optimal. Risk
elimination strategies are often less-effective over the long-
term than risk management strategies, as the former tend to
push financial risks into less-visible corners of the economy
where our ability to monitor and manage it can be challenging.
Second, the agencies' actions might be overbroad and risk
chilling innovative activities. Precluding banks from exploring
new technologies, like distributed ledgers or decentralized
networks, to achieve traditional banking activities, like
payments or deposit taking, risks diminishing the important
role played by banks in our economy.
Finally, safety and soundness pronouncements are, in some
sense, a reflection of the agencies' risk tolerance for
individual banks and the banking system as a whole. Congress
should have a key role in defining the risk tolerance of our
banking system, especially when it involves industry-specific
attention, as seems to be the case here. And if it disagrees
with the agencies' risk assessment or risk tolerance, it can
and should do something about it.
The confidential nature of the supervisory relationship
necessarily limits the public's ability to assess the actual
effects of the banking agencies' guidance. Congress is not so
limited. It has the oversight ability to move beyond anecdote
to examine how these guidance documents are being implemented
and their effect. Armed with this information, it can then make
an informed decision about the propriety or prudence of the
banking agencies' actions. I encourage it to do so.
Thank you again for the opportunity to testify. I look
forward to your questions.
[The prepared statement of Mr. Gould can be found on page
60 of the appendix.]
Chairman Hill. Thank you, Mr. Gould.
Mr. Grewal, you are now recognized for 5 minutes.
STATEMENT OF PAUL GREWAL, CHIEF LEGAL OFFICER, COINBASE GLOBAL,
INC.
Mr. Grewal. Good afternoon. Thank you, Chairman Hill,
Ranking Member Lynch, and members of the subcommittee for
inviting me to testify today about how crypto can make our
financial system better and why we need new rules for crypto. I
also wish to express my appreciation to Full Committee Chairman
McHenry and Ranking Member Waters.
My name is Paul Grewal, and I am the chief legal officer at
Coinbase. Coinbase was founded in 2012 with a mission to
increase economic freedom in the world and to be the most
trusted, secure, and compliant onramp to the crypto economy. We
are the largest crypto trading platform in the United States
and became a public company on April 14, 2021. Our products
enable tens of millions of consumers, institutions, and
developers in the United States, and more around the world, to
discover, transact, and engage with crypto and Web3
applications in a safe and reliable way.
Today, I would like to share with you three points that
underscore the urgent need for sound rules for crypto. First,
we need to update our financial system, and the time to act is
now: 80 percent of Americans believe the financial system is
unfair, and 67 percent believe it needs a serious upgrade.
Crypto, along with the blockchain technology that underpins it,
should be part of the solution. With 20 percent of Americans
holding crypto today, the American people are voting with their
feet and their wallets. They want a financial system that is
easier, faster, and more efficient. They are already using
crypto for payments because it is cheaper and more secure. They
are sending remittances to family and friends in countries
where the local currency is unstable, and creating a lifeline
in places that are being torn apart by war.
In Ukraine, for example, the power of crypto is obvious.
The country has embraced crypto to raise money for humanitarian
efforts and to reduce stress on its financial system since the
invasion by Russia. Simply put, crypto and blockchain
technology are helping to make the financial system operate
more efficiently and securely. With just a phone and an
internet connection, Americans and individuals around the world
can securely and safely transfer value or ownership.
Second, if we fail to adopt rules that both permit and
foster this next-generation technology, the United States will
lose its position as a global leader in finance. The rest of
the world is not waiting for us. The European Union, the U.K.,
Australia, Hong Kong, and Singapore, just to name a few, are
putting in place regulatory frameworks that are creating high
standards for crypto. America seems to be the only developed
country dragging its feet. As other countries are bringing
crypto safely into the regulatory perimeter, we should be doing
the same. We should not be pushing it into the shadows and
hoping it will simply go away. It will not go away. Crypto is
built on a transformational technology that consumers want and
innovators know can make our financial system better. This is a
race to the top that the United States cannot afford to lose.
Third, we need to protect consumers. Emerging technologies
can attract bad actors, and crypto has seen its fair share. We
need a regulatory framework that promotes the benefits of
crypto, while keeping people safe. On this, we do not need to
compromise. For our part, Coinbase has embraced consumer
protection and regulation for over a decade. We protect
consumers by prioritizing prudent risk management, employing
rigorous standards for listing digital assets, and fighting
every day against illicit finance, market manipulation, and
fraud.
Let me be clear: Coinbase fully complies with all sanctions
and all anti-money laundering rules in the United States and
abroad. We work tirelessly with law enforcement and have built
and continue to build industry-leading tools to help find and
stop criminals. We also protect customers through transparency.
As a public company, we disclose audited financial statements,
our methods for safeguarding customer assets, our business
operations, and any risk factors as part of our quarterly
reporting that makes Coinbase distinct in the crypto economy.
But transparency is not enough. We need clear rules that
work. To that end, last July we filed a petition for rulemaking
with the SEC. We provided 50 questions that need to be answered
to create a registration pathway for crypto developers and
trading platforms like Coinbase. These regulatory issues are
complex, and Americans are best-served by having the
opportunity to engage with their government on decisions that
affect their everyday lives.
Although the SEC could resolve these questions under
existing authority, we also urge Congress to act. The 20
percent of Americans who already own crypto need clear rules
just as much as Coinbase and the rest of the industry.
Legislation should contain strong consumer and investor
protection standards for digital asset intermediaries, create a
registration pathway for offering digital assets securities and
non-securities, and develop a comprehensive framework for
stablecoins.
In closing, we need to get the rules right for crypto.
Imagine if the United States failed to embrace the
transformational potential of the internet in the 1990s or
smartphones in the 2000s. Without pro-innovation regulation, we
live in a far less connected, enriching, and dynamic place.
This is the approach we need to take with crypto. We don't want
to be looking back and thinking, ``What if?''
I look forward to answering all of your questions. Thank
you.
[The prepared statement of Mr. Grewal can be found on page
65 of the appendix.]
Chairman Hill. Thank you, Mr. Grewal.
And Mr. Reiners, you are now recognized for 5 minutes.
STATEMENT OF LEE REINERS, POLICY DIRECTOR, DUKE FINANCIAL
ECONOMICS CENTER, DUKE UNIVERSITY
Mr. Reiners. Chairman Hill, Ranking Member Lynch, and
distinguished members of the subcommittee, thank you for
inviting me to testify in today's hearing. My name is Lee
Reiners, and I am the policy director at the Duke Financial
Economics Center, and a lecturing fellow at Duke Law. At Duke,
I teach courses in cryptocurrency law and policy, and financial
regulation. Prior to entering academia, I spent 5 years
examining systemically-important financial institutions at the
Federal Reserve Bank of New York.
The title of today's hearing implies that the main
impediment to the growth and success of the digital asset or
crypto industry is regulation, specifically overzealous
enforcement by existing financial regulatory agencies, but I
would argue that the crypto industry's main problem is the
product it is selling. Cryptocurrency is wholly unconnected to
the productive purpose that defines finance, which is helping
businesses, individuals, and governments raise, save, transmit,
and use money for socially- and economically-useful ends. This
leaves you with an asset class with no fundamentals that trades
entirely on sentiment. In fact, I have repeatedly asked crypto
proponents to explain their valuation methodology to me, and I
have yet to receive a straight answer.
Despite this inherent flaw with their product, and the
fragilities revealed by the implosion of FTX, and multiple
other crypto entities over the past year, the crypto industry
wants us to believe that their salvation lies in Congress
granting them, ``regulatory clarity,'' but regulation is not
some magical pixie dust you can sprinkle on an asset class and
transform its fundamental essence. The truth is that the crypto
industry wants the same thing as every industry that came
before: light touch regulation and favorable taxation.
Most of the crypto industries' ire is directed towards the
SEC for simply doing its job. It is important to remember that
Congress intentionally crafted our securities laws to be
principles-based. In the seminal case, SEC v. Howey, the
Supreme Court found that, ``the term, `investment contract,'
embodies a flexible rather than a static principle, one that is
capable of adaptation to meet the countless and variable
schemes devised by those who see the use of the money of others
on the promise of profits.'' Cryptocurrency and blockchain
technology are simply the latest scheme deployed by those
seeking to profit from other people's money.
And despite the industry's claims, the SEC has been clear
and consistent about crypto, dating to the chairmanship of Jay
Clayton. Both Chair Clayton, and his successor, Chair Gensler,
have said that most cryptocurrencies are securities that need
to be registered with the Commission. The SEC has also brought
over 130 cryptocurrency-related enforcement actions, and they
have yet to lose a single case.
For any neutral observer, the law is very clear: The SEC is
not a merit-based regulator. Anyone can raise money from the
public regardless of how bad the business idea may be, provided
they register with the Commission and disclose the relevant
risks to prospective investors. However, the entity must have
something to disclose if they are to register.
Imagine if a corporation approached the SEC because they
wanted to do an IPO of common stock, but the company had no
cash flows or a credible plan to generate cash flows, no
audited financial statements, and the stock it was selling
conferred no legal rights on the purchaser. If the SEC told
that corporation that it wasn't ready to sell to the public
markets, would you say that the SEC was acting inappropriately?
Incredibly, many token issuers and crypto firms who fit this
example claim that the SEC is treating them unfairly.
I applaud the SEC and other financial regulatory agencies
for enforcing the law. However, more must be done. While I
agree with Chairman Gensler that most cryptocurrencies are
securities that are subject to registration and disclosure
requirements, some cryptocurrencies are most likely
commodities. While the CFTC regulates commodity derivatives,
they do not regulate commodity spot markets. The practical
effect of this structure is that cryptocurrency exchanges in
the U.S. are presently not regulated at the Federal level.
In my written testimony, I provide a detailed roadmap for
how Congress can close this gap by carving out cryptocurrency
from the definition of, ``commodity,'' in the Commodity
Exchange Act, and recognizing cryptocurrencies as securities
under special definition to the securities laws. This will give
the SEC exclusive authority to regulate all aspects of the
crypto industry. I realize that giving the SEC additional
authority under its present leadership is unpalatable to some
members of this committee. However, SEC Chairs come and go. The
American people are looking to Congress to exercise foresight
in determining how to regulate the crypto industry for the long
term. The SEC was endowed with a mandate to protect investors,
and investor protections are sorely lacking in crypto markets.
I appreciate the committee's focus on this crucial task,
but it is worth noting that this is not a race. As you know,
passing financial regulatory legislation is hard, and once in
place, it tends not to change, absent some future crisis. I
look forward to working with you to make sure we get it right
the first time. Thank you.
[The prepared statement of Mr. Reiners can be found on page
124 of the appendix.]
Chairman Hill. I appreciate your testimony. We will now
turn to Members' questions, and I will first recognize myself
for 5 minutes.
First, let me say thanks to the panel. It is an excellent,
diverse set of views on a very complicated subject, so all of
you have been very helpful to our committee. We are grateful
for that. And even inside a regulated framework, we have huge
dislocation and the potential for malfeasance, fraud, and there
is just plain mismanagement. Look at the dot-com boom, which
was fully under the scope of the SEC, between March of 2000 and
October of 2002, and $5 trillion was lost by people who
followed the rules effectively. I am excluding WorldCom and
Enron in that pure fraud; I am just talking about how Mr.
Reiners is not buying his pets on Pets.com.
And then, you go to the next crisis in our society, which
was the mortgage crisis created by the policies of the Bush and
Clinton Administrations for housing, fully under the most-
regulated thing on the planet, and yet it was taken advantage
of, and there were huge losses that led to the crisis. So, we
all recognize that inside or outside a regulatory framework, we
can still have huge financial challenges and criminal issues as
well. And in my view, you are better off with that regulatory
framework, and I think each of you have given your perspective
on that.
SEC Chair Gensler has insisted that the SEC's 2019
Framework provides sufficient clarity now for market
participants to apply the securities laws to the digital asset
ecosystem. And he has repeated on his routine CNBC appearances
and other television appearances that one just has to come in
and register, which is sort of a theme for him, and that he
will work with them. And that is how it is going to be since
2019, and it has been effective.
Let me start with you, Mr. Grewal. You are the chief legal
officer for one of the largest andmost recognized-platforms.
What does that look like in practice? Is there a path for
companies to come in and register as a national securities
exchange?
Mr. Grewal. Thank you, Chairman Hill. The answer to your
question is, at present, no, and I say so definitively because
Coinbase very much wishes to register with the SEC. We do not
currently list digital asset securities, but we have a great
interest in making these products and services available to
Americans who want them. In order to be able to do that, a
national security exchange registration must be made available.
Perhaps alternatively, a broker-dealer or ATS alternative might
be considered. But in either case, we have not been able to
successfully register with the SEC, despite our best efforts
and despite conversations with the Commission that go back now
many, many months.
Chairman Hill. Thank you for that. How about BitGo's
experience, Mr. Belshe? How was your experience with, ``come in
and visit?'' And can you come in and register, in your
experience?
Mr. Belshe. As I mentioned in my testimony, we did visit
the SEC all the way back in 2018. It is worth noting that this
is not the current Administration's SEC, this was the prior
Administration's SEC, so the problem is not any specific
Administration. It is actually systemic to just getting
questions answered. The basic question of how should those
covered by the Investment Advisers Act have custody obviously
should be answered.
A second point to note is that the common problem around
ruling by enforcement as opposed to ruling by direct answering
of what is allowed and what is not. Recent enforcement actions
around staking as a service left the entire industry confused.
We can see, in an enforcement action, a long list of potential
problems that the SEC might have with that particular product,
but we can't tell exactly which parts of that were specifically
problematic and if any of those parts of that service were
acceptable behaviors.
Chairman Hill. Thank you. Let me turn to Mr. Gould, and
let's switch subjects. I think that come in and register is not
quite as straightforward as perhaps it is being presented by
the Commission. Mr. Gould, I am looking at the American Bankers
Association statement for the record: ``Prudential regulators
have instructed banks to proceed in the digital asset ecosystem
with extreme caution, requiring advanced supervisory notice and
formal approval.'' And yet, it says that banking agencies are
not prohibited or discouraged from providing banking services
to customers. That seems kind of contradictory to me. You
referenced risk elimination versus risk management, so as a
former Comptroller, how should the banking agencies look at
that?
Mr. Gould. The way I think about safety and soundness
guidance is that it provides a path, one path to get to how to
do the activity and perform the activity in a safe and sound
manner. I think a lot of the guidance that we are seeing is
more negatively-phrased. It is focusing on kind of the risks
associated, but it is not necessarily showing any kind of
credible path to actually be able to perform whatever the
activity is in a safe and sound manner.
Chairman Hill. Thank you. My time has expired. And I
recognize the ranking member of the subcommittee, Mr. Lynch,
for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman. Mr. Reiners, we hear
that it has been suggested that the, ``come on in and
register,'' model does not work. Are there deeper reasons in
your mind as to why these crypto firms are unwilling to come in
and register with the SEC?
Mr. Reiners. Yes. Thank you, Congressman. It is important
to note that the crypto industry, despite knowing the rules,
has willfully chosen to operate outside the regulatory
perimeter. I think the main reason that they haven't come in
and been registered is because it would be unprofitable for
them to do so. When you look at crypto platforms or exchanges,
how they are currently structured, that model is not allowed in
traditional securities markets. You cannot be the broker, the
exchange, the market maker, the clearing agent, the custodian,
and in some cases, they have venture arms that are investing in
tokens that they end up listing. You can't do that. The
national securities exchange has to make themselves open to
registered broker-dealers. So, the reason that they are not,
``coming in and registering,'' is because it would be
unprofitable for them to do so. And they are trying to convince
you and the public that the SEC is acting unfairly and
arbitrarily when they are making a deliberate choice.
Mr. Lynch. Let me go to that point. As you mentioned, both
the former Chair, Chair Clayton, and the current Chair, Chair
Gensler, have both taken basically the exact same position with
respect to cryptocurrencies, well, most of them, the vast
majority of them as securities. So, there has been no
difference in terms of Mr. Clayton's position, who was
appointed by a Republican Administration, and Mr. Gensler, who
was appointed by President Biden.
The underlying mission of the SEC, the reason it was
created was to provide a counterbalance to the asymmetry
between investors and the industry itself. There was an
asymmetry of information and knowledge, expertise between a
customer or an investor and the seller of that security, which
is what triggers the whole requirement for disclosure.
From my own experience in trying to investigate some of
these cryptocurrencies and stablecoins, sometimes it is nothing
more than a very, very technical--and I have an engineering
degree--White Paper, and that is it. That is it for the average
person who wants to invest in some of these products. Following
the collapse of FTX, a lot of the crypto players attempted to
distance themselves by claiming that FTX was the bad apple, but
until that point, up until their collapse, they were actually
sort of the model. They were actually an industry leader. And I
am just wondering, if you share the concerns, could you speak
to the potential future risks that can occur in this space if
this activity continues to go unregulated?
Mr. Reiners. FTX was just one of many bad apples. I would
suggest that the entire industry is rotten, frankly, and we are
going to see more unless we bring this industry inside the
regulatory perimeter. We are going to continue to see more
everyday Americans get harmed by crypto platforms and crypto
firms. FTX, the crypto industry likes to point out, is just
like you said, ``a bad apple.'' This is not an indictment of
crypto with underlying blockchain technology, but it was all
made possible by crypto.
FTX was founded in 2019, and 3 years later, at the time of
its failure, it was worth $32 billion. That is only possible
with crypto, where you can just mint tokens out of thin air.
And when you look at how the FTX fraud was run, it was the FTT
exchange token that was underpinning the whole thing. Alameda
Research was borrowing customer assets from FTX, using FTT, a
token that FTX created out of thin air, as collateral, and when
users were withdrawing their funds from the platform, FTX was
selling FTT. The moment that the Binance CEO, Changpeng Zhao,
tweeted that he was selling his stash of FTT, the game was
over. So, crypto and the unique nature of crypto was what
fueled FTX's rise, and it is what made FTX collapse in the
blink of an eye.
Mr. Lynch. Thank you, Mr. Chairman. My time has expired,
and I yield back.
Chairman Hill. I thank the ranking member.
I now turn to the distinguished ranking member of the full
Financial Services Committee, my friend, Ms. Waters, for 5
minutes for her questions.
Ms. Waters. Thank you very much, Mr. Hill. Mr. Reiners,
recently, Full Committee Chairman McHenry and Subcommittee
Chair Huizenga sent a letter to SEC Chair Gensler demanding
records and communications between the SEC's Enforcement
Division and the Justice Department regarding charges against
FTX founder, Sam Bankman-Fried, and his subsequent arrest. I
was deeply perplexed by this approach from our Republican
leadership, as the bad actor here is not the SEC, but Mr.
Bankman-Fried and his colleagues. When I was the Chair of the
Full Committee, we regularly brought in the heads of companies
to answer to Congress. It is this reason that I wrote to
Chairman McHenry urging him to compel testimony from Sam
Bankman-Fried as soon as possible. Was it wrong for the SEC to
bring a civil enforcement against him, Sam Bankman-Fried, for
harming U.S. investors? Was the SEC wrong for doing its job?
Mr. Reiners. Not at all, and I applaud the SEC, as well as
the CFTC, for bringing enforcement actions very quickly. And I
also should give credit to the Department of Justice and the
Southern District of New York for bringing criminal charges
very, very quickly. Sam Bankman-Fried will have his day in
court, and we will learn more about what happened during that
time, but I think the authorities acted very quickly and very
aggressively, and rightfully so.
Ms. Waters. Okay. Let me continue. Last month, the OCC,
along with the Fed and the FDIC, released a joint statement on
the liquidity risks to banks resulting from crypto market
vulnerabilities, including examples of effective risk
mismanagement practices. Nevertheless, the California
Department of Financial Protection and Innovation announced
that Silvergate Bank, a prominent banking partner for crypto
companies, had voluntarily begun the process of liquidation.
This came after the collapse of FTX, which led to a run on
Silvergate late last year. It seems to me that these
developments validate the bank regulators in expressing
caution, the banks dealing with crypto currencies. Do you
agree?
Mr. Reiners. I do agree, and I think this is another
example of the banking agency simply doing their job and
enforcing their safety and soundness mandate.
Ms. Waters. I want you to know that when I became
chairwoman, we took a close look at Facebook as it tried to
launch its own global Stablecoin, which it called Libra, if you
remember. When Mark Zuckerberg testified before our committee,
I challenged him to not proceed with their project unless they
had regulatory approval to do so. Later on, Facebook tried to
partner with Silvergate Bank, but Treasury Secretary Janet
Yellen opposed this, and Facebook subsequently folded its
operation. So given the problems that Silvergate Bank and the
crypto market are now facing, had Facebook been approved back
then, I wonder whether millions of additional investors could
have lost their money? In light of these lessons we are
learning, Mr. Reiners, do you believe regulators are
overreaching in their cautious approach towards crypto
currencies?
Mr. Reiners. Not at all, and I appreciate your focus a few
years ago, Ranking Member Waters, on Facebook's Libra project.
I think the main reason it generated so much attention was
Facebook's scale. We still live in a fiat currency world. If
you use crypto, at some point, you are going to have to cash
out. That is where we can enforce regulation, and that is where
I think this committee's focus should be. But because Facebook
has over 2 billion active monthly users across its suite of
products--Instagram, Messenger, WhatsApp--there was the real
possibility that people could be essentially living their lives
in Libra, and maybe someday, in Mark Zuckerberg's version of
the metaverse, they will be again, I don't know.
But the reason that Facebook ultimately backed down was
because of political pressure and the focus that you and many
others here put on them. But from my vantage point, there were
really no legal or regulatory restrictions that forced them or
required them to back down. So I think as this committee moves
forward and thinks about how to regulate crypto, it is very
clear that we should button that up and not allow these Big
Tech companies to issue stablecoins or something similar.
Ms. Waters. I have to yield back, but let me just say, you
said you had some recommendations that you are letting us have
access to, and I would love to take a look at those, and then
talk with you.
Thank you. I yield back the balance of my time, and thank
you, Chairman Hill.
Chairman Hill. The gentlewoman yields back. Now, we will
turn to the gentleman from Oklahoma, Mr. Lucas, for 5 minutes.
Mr. Lucas. Thank you, Chairman Hill, for holding this
hearing, the first of the Digital Assets Subcommittee. And I
look forward to working with you, and Ranking Member Lynch, and
the rest of the subcommittee as we look to bring much-needed
regulatory clarity to the digital assets arena.
I would first like to focus on the SEC's regulatory
approach. The SEC has decided the best way to communicate on
what the law is regarding digital assets is through enforcement
actions. The SEC contends that digital asset intermediaries can
simply go in and register, while at the same time not giving
real guidance or any indication of what a special registration
process looks like. More practical, I should say. Someone
called it special. Professor Evans, could you discuss how to
square the SEC's enforcement approach with its mandate to
protect investors and maintain fair, orderly, and efficient
markets, please?
Ms. Evans. Yes, thank you for the question. In thinking
about the mandate for the SEC and regulating, and encouraging,
and supporting orderly markets, they have quite broad
discretion, as you know, and part of that discretion is the
ability to leverage the full power that it has. Obviously,
Congress cannot become a subject matter expert on everything,
and so when delegating your legislative authority to an agency,
you are trusting them to use that discretion wisely.
Part of that process is also the ability to leverage the
tools that they have at their disposal. That is, the
adjudication procedure and also rulemaking to selectively use
adjudication and to select the actual parties or regulated
interests that they would focus on leaves the rest of the
industry to wonder, because it is case-by-case rather than the
broad rulemaking or even guidance that would give some
perspective to the ecosystem.
Mr. Lucas. Many of the legislative proposals to provide
clarity in this space grant the Commodity Futures Trading
Commission (CFTC) spot market authority over crypto. Since the
CFTC was first established through the Commodity Futures
Trading Commission Act of 1974, the agency has been a
principles-based regulator. This principles-based approach is
fundamental to the CFTC's regulatory framework, which enables
it to be an innovative and proactive regulator. Now, with that
said, jurisdiction over the spot market authority deserves a
robust conversation around what is best for investors,
consumers, and even the agencies.
Mr. Grewal, could you share your thoughts on where spot
market authority for crypto assets should belong?
Mr. Grewal. Thank you very much, Congressman. You are
correct in identifying that spot market authority for crypto
assets currently represents a gap in the overall legislative
landscape. We would certainly support any legislation which
made clear that the CFTC had such authority in order to enforce
and establish those principles which are appropriate for the
spot market.
Mr. Lucas. Professor Evans, would you like to tackle this
question as well?
Ms. Evans. There is a clear gap, a concerning one, when you
think of the nature of programmable currency that can change
form from commodity to security during the life cycle of a
currency, to be sure. So, ensuring that there is no gap between
derivatives markets on the commodity side and the securities
market is critical.
Mr. Lucas. Yesterday, after months of uncertainty, a major
lender in the crypto industry, Silvergate, announced it would
be winding down and liquidating its bank.
Mr. Grewal, there is real anxiety about crypto market
downturns like we are currently experiencing having an impact
on the traditional financial sector. Can you speak to this
concern?
Mr. Grewal. Congressman, I appreciate the question. The
concern is real, and important, and, of course, legitimate.
With respect to Silvergate, we were certainly made aware, as
was the rest of the market, that it had made the voluntary
decision to wind down operations this week. Prior to this,
Coinbase executed a longstanding plan for the orderly
disposition of corporate and customer funds, so we have no
particular exposure to that bank at present.
But the issue generally of crypto firms, and exposure to
banks which may be at risk, is an important one. We think
transparency offers the solution here. It is very, very
important for investors and for market regulators to understand
what these risks are, what exposure individual firms may have,
and, of course, most importantly, for firms to have prudent
risk management plans in place so that in the event of a
failure, a wind-down, or anything else, customer funds are
always kept safe. And that is exactly what we think could
happen as part of not only legislation, but regulatory
oversight pursuant to rulemaking.
Mr. Lucas. My time has expired. Thank you, Mr. Chairman.
Chairman Hill. Thank you, Mr. Lucas.
The Chair now recognizes the distinguished ranking member
of the subcommittee, my friend, Dr. Foster, for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman, and thank you to our
witnesses. A little more than a year ago, when we had Sam
Bankman-Fried and various crypto luminaries in front of this
committee, I asked them what I considered the foundational
question about crypto assets, which is that if we wish to
prevent crypto assets from being used for ransomware, if we
wish to prevent wash trades and other market manipulation, is
there any alternative to having every crypto transaction
ultimately associated with a traceable legal identity issued by
a country with which we have extradition treaties? And their
answer at the time was, no, that this was necessary if you are
going to have self-custody, and if you are going to allow self-
custody and permissionless transactions, you will have
ransomware, and you will not be able to prevent wash trades.
Has anything changed in the last year? Is there a magic
technology that would allow us to prevent crypto assets from
being used for ransomware and so on that does not rely on
having ultimately a traceable legal identity, a license plate,
if you will, on every crypto wallet? Just for the record, no
one volunteered such a magic technology.
Yes, Mr. Reiners, are you aware of one?
Mr. Reiners. I am not aware, other than if you have every
country in the world comply with the guidance put out by the
Financial Action Task Force (FATF) around preventing crypto
from being used by money launderers, ransomware hackers and
whatnot, but we know that is not happening. And when it comes
to ransomware, really, all roads lead to Russia. I think
Chainalysis has said that over 70 percent of ransomware
proceeds ultimately get cashed out in Russia. And certainly,
the Office of Foreign Assets Control (OFAC) has ramped up its
designation activity when it comes to those Russian-based
exchanges, but, again, it is very easy to open a new one.
Mr. Foster. Yes, that is right. It is a lack of a legally-
traceable identity from a country with which we have
extradition treaties. That is where the rubber hits the road on
this, so it is interesting that that has not changed. The way I
view this is, just imagine that we are at the birth of the
automobile industry, and someone says, I have this great new
product called the automobile, but if you ask me to put license
plates on the automobile, if you ask for a driver's license for
operators, you will crush innovation. And the exact opposite is
actually true, that it was essential to the healthy development
of the automobile industry that we have this system of license
plates, of driver's license, of VIN numbers to prevent theft in
vehicles and vehicle parts, so all of this, and it is something
that is recognized by every civilized country. And an analogous
licensing regime is certainly technically possible.
I had a discussion yesterday with Mr. Grewal about this,
and you recognize its utility and its feasibility, and it is
simply that when you want to possess a crypto asset, you say,
okay, get it in your wallet, and I will go register your wallet
using a secure digital ID, mobile driver's license, or
passport, or something like that, to register yourself in that
wallet. And it can be a secret number, it can be
cryptographically-secured, but sort of like James Bond's
rotating license plates, if you remember the movie, but that
would allow you to have the same guarantee that you have with
cars, that normally when you are driving down the road, you
have no idea who is in the car next to you, but you know that
there is a valid license plate on it. And you know that if they
come into your neighborhood and they run over your dog, you can
go to a judge, prove a crime has been committed, and drag that
person into court for running over your dog or whatever. And
this has been essential, and it would be completely
unacceptable to live in a world where automobiles could drive
through your neighborhood or cross international borders with
unlicensed operators and unlicensed cars.
And this is the essential thing that has to be provided for
the healthy development of the crypto industry. Somewhere,
there has to be an Application Programming Interface (API)
provided by a trusted third party to register your crypto
wallets, and then at that point, it can be anonymous and
everything else. But that is, I think, the essential ingredient
that we have to come to terms with and where I hope this
Congress eventually settles as the only way to prevent these
from being used for ransomware, market manipulation, you name
it. Does anyone have thoughts on this?
I will start with Mr. Grewal. You have had 18 hours to
think about this concept.
Mr. Grewal. Thank you, Congressman. I appreciate the
opportunity to think another hour or two about this very
important subject. What you are describing, sir, of course is
the critical importance of attribution so that we can link
illicit activity or other activity, which is properly the
subject of government action or civil law action, to
individuals. I would also call out and underscore two other
points in your comments, which I think are important to any
system, which makes sense, court supervision or appropriate
government oversight in an independent branch. I think that is
critical. You mentioned the importance of extradition from
countries with which we have treaties. The point is that we
need to be able to, through legal process, link illicit
activity to actors who are responsible for that activity.
We think there is a way to do this technically that does
not involve the mass collection of personally-identifiable
information. I do not think that is what your comments or
questions were suggesting, but I think that is important as
well so we can strike the right balance between personal
privacy and holding people accountable for committing illegal
activity.
Mr. Foster. Thank you.
Chairman Hill. The gentleman's time has expired. We now
recognize the gentleman from Minnesota, Mr. Emmer, who is also
the Majority Whip of the U.S. House, for 5 minutes.
Mr. Emmer. Thank you, Chairman Hill and Ranking Member
Lynch, for holding this important hearing today, and thank you
again to our witnesses for your testimony.
Crypto technology is shifting economic power from
centralized institutions back into the hands of the people. It
is transformational, and it can be threatening to unelected
bureaucrats and, quite frankly, some elected people here in
Washington, D.C. This threat is most saliently observed through
several recent administrative actions. On January 3, 2023, the
Fed, the FDIC, and the OCC issued a statement discouraging
banks from holding crypto or servicing crypto clients on a,
``safety and soundness basis.'' On February 7, 2023, the
Federal Reserve published a statement in the Federal Register,
seemingly turning this perspective into a final rule without
following the public comment process outlined in the
Administrative Procedure Act.
In the midst of this, on January 27, 2023, the White House
National Economic Council published the Administration's
roadmap to mitigate cryptocurrency risks. This report
summarizes President Biden's political plan to lawlessly abuse
the administrative state to push American crypto firms and
their United States customers into offshore, unregulated,
opaque, and unsafe markets.
These recent actions are an explicit display of what
Congress and the American people already noticed: This
Administration is weaponizing the banking sector to de-bank
legal crypto activity here in the U.S., using scare tactics to
run an entire industry out of the country. And the collapse of
FTX should warn us of the vulnerable position we are putting
American consumers in when we do not compete to keep crypto
firms onshore. Clearly, the Administration's policies are
motivated by a thirst for increased control over the American
people, because here in Congress, crypto is not partisan.
Republicans and Democrats have an 8-year history of working
productively together on solutions to this space.
Mr. Gould, no regulator has understood the importance of
unlocking access to financial services for crypto companies
better than the OCC, under Brian Brooks. Of course, you did
great work on that team, so I am going to ask you a series of
questions that will, I hope, assist our committee's work.
First, in your view, is the Administration's regulatory posture
towards digital assets encouraging or discouraging financial
institutions from offering services to digital asset firms?
Mr. Gould. Discouraging.
Mr. Emmer. In your view, is the Administration's regulatory
posture towards digital assets encouraging or discouraging
financial institutions from innovating themselves, and offering
digital asset products and services to their clients?
Mr. Gould. Discouraging.
Mr. Emmer. As it concerns innovation and consumers, what is
the potential impact of the Administration's negative wide-
ranging statements on safety and soundness with financial
institutions engaging in digital asset activities?
Mr. Gould. One possible consequence is that it drives it
into less-visible areas of our economy where we can't monitor
it. We can't manage the risks associated with it. Another
possible outcome is that it increases the technology gap
between the larger banks, which continue to invest and expand
in technology versus the smaller banks, which, frankly, do not
have the same resources and aren't able to pursue as
aggressively investments in technology.
Mr. Emmer. Can you please give us an example of when an
Administration has taken this type of regulatory posture toward
an industry in the past, and what the effects were?
Mr. Gould. Many people have suggested that it is similar to
what happened with Operation Choke Point, but there are
important differences. Number one is that what the
Administration is doing currently is transparent, at least to
the extent you can do that within the confidential supervisory
system. They have been very clear, to their credit, on what
their views are and what their concerns are.
Number two, I think it is different from Operation Choke
Point in the sense that, as I understood Choke Point, it was
more focused on discouraging banks from banking in certain
industry sectors. This is actually broader than that because
this also applies to essentially discourage existing banks from
exploring new technologies, including digital assets.
Mr. Emmer. Thank you. This Administration's attempt to de-
bank the crypto community and prevent financial institutions
from offering digital asset products and services to customers
is a lazy and destructive regulatory strategy that is already
chilling innovation and subjecting users of digital assets to
less-sophisticated jurisdictions that are not equipped to
manage the potential risks. Again, I appreciate everybody being
here today, and hopefully we are going to do some productive
work going forward.
Thank you, Mr. Chairman. I yield back.
Chairman Hill. The gentleman yields back. I will now
recognize the gentleman from New York, Mr. Torres, for 5
minutes.
Mr. Torres. Thank you, Mr. Chairman. The lesson learned
from the FTX collapse is that companies like FTX--offshore,
deregulated, centralized, overleveraged companies--have the
highest risk of losing customer funds and defrauding their
customers.
My first question is for Mr. Belshe regarding the
enforcement priorities of the SEC. Is the SEC prioritizing
enforcement actions against the worst actors like FTX--
offshore, deregulated, overleveraged, centralized actors--or is
the SEC taking action against companies that are the opposite
of FTX, onshore regulated companies?
Mr. Belshe. I am not aware of any actions that the SEC took
against FTX or Sam Bankman-Fried prior to its collapse, so you
have to argue that it is the latter, that it is actually the
folks are trying to do it right. And you do have to wonder if
we couldn't have avoided the massive amounts of money that
flowed to FTX if the basic principle of a bitcoin exchange-
traded fund (ETF) had been provided and approved by the SEC
when there had been 25-plus valid applications, some from
Invesco and other reputable firms who have done ETFs for many
years in the past.
Mr. Torres. The CFTC and the SEC seem to be engaged in a
regulatory turf war over digital assets. In December 2022, the
CFTC, in a court filing, declared Ether to be a commodity. Yet
in February 2023, SEC Chair Gary Gensler, in an interview with
New York Magazine, disagreed with the CFTC, declaring
everything other than bitcoin to be a security.
Mr. Grewal, is it fair to say that the mixed messaging from
the SEC and the CFTC and the regulatory confusion it creates
underscores the need for Congress to step in and bring legal
clarity to the status of digital assets?
Mr. Grewal. I believe it does underscore that point,
Congressman Torres. As you point out, if the Chairs of two of
the most important regulators applicable to our industry and to
this part of the economy can't agree on the security status of
one particular token, that obviously speaks to the challenge
for anyone else looking to stay on the right side of the rules
and make proper determinations that are in accordance with
legal expectations. That is a long way of saying, yes, sir.
Mr. Torres. Bloomberg Opinion writer, Matt Levine, who is
no crypto cheerleader, made the following observation about the
SEC's approach to regulating crypto: ``The SEC is being
ruthless and creative about exploiting legal provisions to
expand its powers, and the industry seems to be playing catch-
up.'' What Mr. Levine describes as Chair Gensler's creative use
of his authority led him to declare Ether as a security and
stablecoin as a security, even though neither one clearly
constitutes a security under the Howey test.
The Howey test has four criteria, as I understand it,
including an investment of money in a common enterprise with
the expectation of profit to be derived from the efforts of
others. When it comes to a stablecoin, one might wonder, where
is the expectation of profit? If I buy a stablecoin pegged to
the U.S. dollar, I am not buying it because I expect the
profit. I am buying it in order to use that stablecoin as a
digital dollar on the blockchain. Is that a fair assessment, or
am I missing something, Mr. Grewal?
Mr. Grewal. I think that is a fair assessment, Congressman
Torres. It is absolutely the case that USD-backed stablecoins,
such as those that you described, come with no expectations of
profit. There may be other problems with the Howey test, but of
course, that one fatal flaw renders it anything but a security.
Mr. Torres. And, Mr. Belshe, when it comes to Ether, where
is the centralization? What is the central entity from whose
efforts I, as an investor, would expect to derive profits with
respect to a decentralized asset like Ether?
Mr. Belshe. I think the determinations for this will have
to be argued kind of from both sides. It shows that
decentralization is something that forms over time. It shows
that the determination of these assets is clearly not clear at
all. Perhaps bitcoin, when it was started by one guy, was
centralized, and yet today, no one argues that it is
centralized, and the same thing applies for any new innovation.
Some sort of incubation period where something can grow from a
centralized status to decentralized seems warranted, and this
is unique to digital assets.
Mr. Torres. I actually want to address that question to
Coinbase. Are there assets that could begin as securities and
then morph into something else as it becomes decentralized? The
example would be Ether, that it was likely a security at the
time of an initial coin offering (ICO), but has become
decentralized over time. What do you think of that analysis?
Mr. Grewal. Speaking generally, Congressman Torres, I agree
that assets can change character over time, and to be
completely fair, I suppose it is equally true that an asset
that began as a commodity might evolve into security in some
form as well. But certainly, assets which are centralized,
which are controlled by a managerial group, can, over time,
decentralize in ways that would take them clearly outside of
any reasonable understanding of the definition of a security.
Chairman Hill. The gentleman from New York yields back.
We now turn to the Vice Chair of the subcommittee, Mr.
Davidson, who is also the Chair of our Housing and Insurance
Subcommittee, for 5 minutes.
Mr. Davidson. I thank the chairman, I thank our witnesses,
and I am excited to finally have this subcommittee in
existence. And to have this hearing; as someone who has
basically pleaded for this day since 2017, it is pretty
exciting. On the other side, as somebody who has paid attention
to this space, essentially since I got on the committee 6 years
ago, it is painful to hear arguments that we have worked
through in industry, and with legislators, and regulators since
that time, and yet no actions happen. We have legislation that
has been drafted on the shelves for years, and people in the
industry are publicly and privately coming in and asking, when
are we going to actually get something done?
I will admit I am a little dismayed when I hear some of my
colleagues essentially continue to push, either purposefully or
through ignorance, an idea that these assets are the same
things as a centrally-managed, centrally-controlled database,
when the entire computing architecture of this space structures
it differently so that you cannot have the same type of
compliance tools in every application. You cannot have the same
effect. You have to comply with it differently. And as we talk
about that, it is great to kind of bridge the divide, close
the, ``We do not understand it'' arguments, and just let people
be exposed for the positions that they have.
Towards that end, I ask unanimous consent to submit for the
record statements from the Club for Growth, the Blockchain
Association, the Chamber of Digital Commerce, the Crypto
Council for Innovation, and the National Association of
Federally-Insured Credit Unions.
Chairman Hill. Without objection, it is so ordered.
Mr. Davidson. I thank the chairman, and I just would ask
Professor Evans, does the Securities and Exchange Commission
regulate the payment system or securities?
Ms. Evans. Clearly, securities.
Mr. Davidson. Thank you. And the legal clarity that we are
seeking, frankly, wants to make sure that investors,
innovators, and regulators, like Chairman Gary Gensler, also
know that the Securities and Exchange Commission does not
regulate the payment system.
Mr. Grewal, the CEO of Coinbase, Mr. Armstrong, has made
comments in the past in support of individuals moving crypto
assets off exchanges and to self-hosted wallet, self-custody.
Do you believe that protecting their customers' ability to
eliminate third-party risk through self-custody is an important
first step in consumer protection?
Mr. Grewal. I do, Congressman, yes.
Mr. Davidson. So for people who were caught in bad
investments in the past, because this area has been
unregulated, and people have been abusive, and have outright
misrepresented things, if they had custody of the assets and it
was in their possession, what was their risk if the centrally-
managed unit collapsed or went bankrupt?
Mr. Grewal. There would be none, Congressman.
Mr. Davidson. Because they actually own their property. It
is sort of like if the bank goes out of business and you have
all your cash, even if you have an account with the bank, well,
you didn't lose any money because you had your cash. Now, not
everyone is going to choose to do that, but we certainly should
not prohibit it. Just like cash, we have made it almost
illegal, but not entirely, and in this space, we have people
who are overtly trying to make self-custody illegal.
Mr. Grewal, how does Coinbase work to prevent market
manipulation, fraud, or conflicts of interest, things that
would be barriers to making the spot market function?
Mr. Grewal. Congressman, we have important policies and
procedures to address each of those concerns, but our programs
go far beyond just what we write down in paper. We have
transaction monitoring systems. We also monitor for inside
activity. All of these things are aimed at identifying behavior
that would give concern not only to regulators, to lawmakers
such as yourself, but to Coinbase itself because our entire
business proposition, our entire value for our customers is
grounded in trust.
Mr. Davidson. Yes. Thank you for that, and maybe
particularly so now as a publicly-traded company, so I thank
you for that. I think it is important to address one of the
issues in the space with Silvergate. I wish I had time to go
into depth with some of the questions, but fundamentally, the
run on their assets was precipitated by fraud. The shiny object
was digital assets and crypto that led people to create
accounts in relationships with FTX, but does anyone care to
comment on, why did FTX fail? Was it because they held digital
assets, or was it because they commingled funds, and committed
fraud, and misrepresented what they did?
Mr. Belshe. I will try. FTX made a fundamental
misrepresentation, which is that they claimed to have an
exchange, which is a part of trading infrastructure. And with
all of our trading infrastructure, we want to see well-
understood risks and controls, whether you are a broker-dealer,
an exchange, or otherwise. And what they did is they took funds
out of that exchange and sent it over to their prop trading
firm against the knowledge of their clients.
Mr. Davidson. Thank you, and I yield back.
Chairman Hill. Thank you, Mr. Davidson. We now turn to my
friend from Houston, Texas, Mr. Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman, and I thank the ranking
member as well for this hearing.
Friends, I was here when Bernie Madoff made off. Need I say
more? Now, we have FTX. I am really concerned about the
investors. I appreciate a desire to innovate, but all
innovation isn't positive. Credit default swaps were an
innovation that proved to be quite detrimental.
Mr. Reiners, you have iterated previously on this topic,
but what do we need to do to protect investors?
Mr. Reiners. Thank you, Congressman Green. To protect
investors in crypto, you simply need to impose the same
standards and safeguards that have long been present in
traditional securities markets. You have to have segregation of
customer assets from firm assets. You have to have adequate
disclosure so that investors can make informed decisions about
how to risk their capital. You have to have these firms produce
audited financial statements, not proof of reserves. You have
to have prohibitions on conflict of interest. You can't allow
these firms to front-run their own customers, which is what is
happening currently in crypto markets.
This is not rocket science. The blueprint is there. It is
just a matter of Congress clarifying once and for all that one
agency--I prefer it to be the SEC because they were created to
protect investors; the CFTC does not have an investor
protection mandate. In the markets that the CFTC oversees,
commodity derivatives markets are principally made up of large,
sophisticated, institutional investors. They do not have a long
history of protecting retail markets, so it is not that
complicated. We figured it out. Generally speaking, of course,
there are going to be frauds from time to time, just like
Bernie Madoff, but the recipe is there.
Mr. Green. Some of your colleagues seem to think that this
in some way would thwart innovation and prevent these
businesses from developing appropriately. What is your response
to that?
Mr. Reiners. Of course, I reject that premise. U.S. capital
markets are the envy of the world, and there are a variety of
reasons for that. But one of them is that we have a robust
regulatory environment, that you can deploy your capital here
with adequate information, that you have legal remedies
available to you. So for the crypto industry to benefit long-
term, it is going to need those same guardrails. Obviously,
there is a massive trust deficit right now with crypto. The
average American just does not trust it, and rightfully so. So
for this industry to succeed long-term, and people can disagree
with me on the underlying utility and merits of crypto, but I
still think we can agree on the need for there to be a robust
regulatory environment, because that will allow users to trust
it, and to know that they have protections, and the industry
will benefit perhaps over the long term. But absent that, those
guardrails, people are continuing not to trust crypto, and it
will sort of be the plaything of technologically-sophisticated
individuals.
Mr. Green. Thank you. Just a closing comment, I was
somewhat amazed recently when I pulled up to a service station
in a neighborhood where most of the people are wage earners,
probably not sophisticated investors, and there was a bitcoin
ATM readily available. I really am concerned about people who
assume that regulations exist that do not, and that they are
protected when they are not. It causes me consternation, and I
am not getting a great sense of belief that the industry is as
interested in the investors as they are in making profits. I
yield back the balance of my time.
Chairman Hill. The gentleman yields back. Mr. Rose of
Tennessee is recognized for 5 minutes.
Mr. Rose. Thank you, Chairman Hill and Ranking Member
Lynch, for holding this hearing, and thanks to our witnesses
for taking the time to be with us today and for sharing your
expertise. I am going to dive right in.
Mr. Grewal, will you describe the existing--and this is a
broad question, I know--regulatory structures for digital asset
trading platforms, and discuss the current authorities of the
SEC and the CFTC when it comes to regulating digital asset
trading platforms?
Mr. Grewal. Thank you, Congressman. I can certainly speak
to that issue with respect to Coinbase's own experience as a
platform that is regulated here in the United States. Just to
give you some sense of the scope of our oversight, we have
something like 45 money transmission licenses across the United
States. We are also licensed as a BitLicensee under New York
law.
At the Federal level, we have a registered DCM, and we are
seeking to register an FCM with the CFTC. We are also
registered as a money services business (MSB) with FinCEN as
part of the Department of the Treasury. Even within the SEC, we
actually have registered broker-dealers, two of them I believe,
but we are not able to do anything with them because there are
no digital asset securities that are currently available for
listing. So, that is the broad landscape that we currently
face. What we do not have, though, is a viable path for
registration, either as a national securities exchange or as a
broker-dealer, ATS, with the SEC, and that is, I think, an
important part of the gap that we believe legislation could
help fill.
Mr. Rose. Thank you, and this next question is for all of
you, so we will go across the dais down there when I get
finished asking the question. It seems that in the digital
asset space, much of the friction, at least in the U.S., is
between who would be the primary regulator, given that we have
separate securities and derivatives regulators. Previous
Congresses have considered merging the two regulators to
provide more regulatory certainty.
A 1995 GAO report found that merging the SEC and the CFTC
could yield a number of benefits, including reducing regulatory
uncertainty, enhancing market efficiency and innovation, and
increasing regulatory effectiveness. In 2012, now-SEC
Commissioner, Hester Peirce, called a merger of the SEC and
CFTC politically difficult to engineer but added that it would
be a reasonable step towards much-needed regulatory
consolidation. Additionally, the Treasury Department, under
President Trump, also considered an SEC-CFTC merger, but
ultimately opted not to pursue the policy.
I am curious about each of your opinions on whether the
digital assets industry would benefit from having a combined
securities and derivatives regulator, and we will start on my
left and go across, if you do not mind. Mr. Belshe?
Mr. Belshe. It is easy to say, ``digital assets.'' Today,
we classify at least five different types of assets as digital
assets. We have stablecoins, we have cryptocurrencies, we have
DeFi tokens, we have digital property like NFTs. I think I am
probably leaving off some. Having a single regulator for five
very diverse and different activities probably is not exactly
the right approach. I think we talked a lot about the SEC
because of the definition of what is a security and what is
not. In terms of what is a security, I think it should be under
the SEC. I think it is unlikely to see a hybrid of the CFTC and
the SEC. But then lastly, I think the right approach is what
was mentioned earlier by Mr. Davidson, which is a principle-
based approach to regulation of digital assets.
Mr. Rose. Professor Evans?
Ms. Evans. Yes. Thank you, Congressman. If we were
beginning today, and I speak normatively as an academic, what
you might create, and ideally, some hybrid version might be
applicable. Although, I agree with my colleague that given the
complexity and the nuances of the different types of tokens and
coins, it is not likely. But if I recall correctly, in the
enabling legislation for both the SEC and the CFTC, there is
some language that calls upon them to work jointly in some
capacity, although it is rarely used, and I would lean into
that language and see what might be created in light of things
that already exist.
Mr. Gould. Congressman, although I am not an expert on
market regulation, I would just note that in the Federal
banking agency space, there are multiple regulators and they
serve different functions. And generally speaking, as long as
those different missions and tensions are handled
constructively, it is valuable having multiple regulators in
the banking agency space.
Mr. Rose. Thank you.
Mr. Grewal. Congressman, in the past, Coinbase has urged
the adoption of a unified regulator across securities,
commodities, and other types of digital assets. We, however,
have recognized the political challenges that Commissioner
Peirce and others have pointed to. The main point, we think, is
to have a unified framework, even if it involves individualized
or separate regulators. With the right rules, we can manage the
complexity of different regulators taking their fair share.
Mr. Reiners. Congressman, I will quickly note that Paul
Volcker also thought the CFTC and the SEC should be merged, and
I agree with him on that, and this divergence has very,
frankly, bizarre outcomes. So in 2017, the CFTC permitted the
listing of cash settled bitcoin futures contracts, while the
SEC continues to rightfully--
Mr. Rose. My time has expired. I'm sorry.
Mr. Reiners. We have ETF and bitcoin futures as different
things.
Mr. Rose. I would welcome your follow-up on that. Thank
you.
Chairman Hill. Mr. Reiners, please--
Mr. Rose. I yield back.
Chairman Hill. --feel free to answer his question in
writing.
Mr. Casten is now recognized for 5 minutes.
Mr. Casten. Thank you, Mr. Chairman. Mr. Reiners, I hope
you will forgive me for starting with just a really simple
question. What, in your estimation, is the market value of the
total traded crypto assets today?
Mr. Reiners. You can go to coin market cap, and I think it
is a little over a trillion dollars, although market cap, when
it comes to cryptos, is a troubling metric, frankly, because
anyone can create a token, hold a bunch for themselves, sell 10
for $100 and then say, oh wow, we have a billion-dollar market
cap token here.
Mr. Casten. You have anticipated why I asked the question.
You mentioned you get one of the pithier explanations of the
FTX bankruptcy that I have heard, which I appreciate, and
essentially with what you just described, FTT, there was more
desire for dollars than FTT, and all of a sudden, there was a
run on the bank, as it were. If I understand the Silvergate
bankruptcy, it's sort of the same story. It sounds like they
were sort of doing dollar settlement of crypto trades, and all
of a sudden, there was more demand for dollars than they had in
reserves, and so they had washed that out. Is that a reasonable
characterization of the Silvergate bankruptcy?
Mr. Reiners. Yes, Congressman, I think that is fairly
reasonable. Silvergate suffered a liquidity crisis. Over 90
percent of their deposits were affiliated with crypto firms,
and once crypto melted down, of course, there was essentially a
run on the bank. They had to sell assets to meet that run. A
lot of those assets were fixed-income assets that have gone
down in value since the Fed started raising interest rates, so
they lost money on that. That was a hit to capital, and then it
became a sort of capital liquidity play on one another and
brought them to the brink of failure.
Mr. Casten. The reason I started with the capitalization is
that as I am sitting here, Silvergate is described as one of
the most-important banks in crypto, with a $12-billion
bankruptcy; FTX, one of the major exchanges, an $8-billion
bankruptcy; Celsius, $4 billion; Genesis, $3 billion. I do not
think I have left out any of the major bankruptcies. In
aggregate, that is about $28 billion. If the major players in
the industry are going bankrupt and accounting for 3 percent of
the nominal value, I am saying, is the trillion dollars real or
not? How much of the value of this is inflated? Now, $28
billion is the market cap of Walgreens. I am happy to be on the
corner and happy and healthy, but nobody would say that
Walgreens is systemically important. Given what you have done
in the systemically-important banking space, are there any
legitimately systemically-important crypto players? If this
industry went away tomorrow, from a financial perspective, does
it matter?
Mr. Reiners. It wouldn't move the needle one bit on GDP,
unemployment, or anything. Chair Powell would probably never
bring it up. We just had obviously a massive crypto failure, a
crypto winter, $2 trillion in market cap, whatever that is
worth, just evaporated, and, yet, this is not a systemic risk
event, as you said. The average person is not feeling this or
experiencing this in any meaningful way, and, frankly, that is
a policy success, a little celebrated policy success, because
it could have been a lot worse.
As we have heard today, the crypto industry is desperately
trying to become integrated with the traditional financial
system, which is, frankly, ironic given that the origins of
crypto was to exist outside the financial system. The very
first bitcoin block had a text in there that said, from The
Times of London newspaper, ``Chancellor on brink of second
bailout.'' Now, they are looking for the banking system for
their salvation, which is--
Mr. Casten. And I agree. I am glad it is not. Maybe there
is no systemic failure because we have done such a good job up
here. I am always willing to take credit for that. Maybe it
just is not really that big because if the trillion dollars is
ridiculously overinflated, we do not have a special
subcommittee on Walgreens. I raise all of that because I think
you have made the good case of much of crypto as a security.
There are other good cases to be made about it as a commodity.
Is there any good case for crypto as a currency, because I am
left saying, what is the value for cryptos or currency? That is
basically a late-night Glenn Beck Gold Bug ad. It is something
that is finite, that is valued by a few people, but I can't pay
my taxes, and I can't pay my mortgage with it.
Mr. Reiners. It is far too volatile to be used as a medium
of exchange as a currency. If you are a merchant, why would you
accept payment in something that could go down by 20 percent
within an hour because Elon Musk sent out a tweet, right? It
has completely failed as a currency. People like to talk about
stablecoins being used as a currency, but the reality is, as
Gary Gensler said, they are the, ``poker chips,'' at the
casino. People use stablecoins so they can speculate an
overseas exchanges and in DeFi, right? That is the main reason
stablecoins exist.
Mr. Casten. I realize I am close to time, and I do not want
to sound like such a Luddite up here, because I think
blockchain is a fascinating technology. There are fascinating
conversations about Web 3.0. But it strikes me that this
conversation has become complicated because we have talked
about it as a currency instead of acknowledging that this is a
volatile thing. Blockchain is fine but to be continued, but I
think if we regulate it as one of the other things that it
actually claims to be, we will probably find a way through.
Thank you, and I yield back.
Chairman Hill. The gentleman yields back. The Chair now
recognizes Mr. Steil for 5 minutes.
Mr. Steil. Thank you very much, Mr. Chairman. Mr. Chairman,
I would like to just make a quick comment that I actually think
that stablecoins have a lot of potential opportunity here. And
it is something that I hope we spend a little time on in this
committee, because I do think I disagree with the previous
witness' comment. I think it actually provides us a lot of
opportunity.
Let me shift gears here, and if I can, Mr. Grewal, I am
going to direct some of these questions to you. I spent a lot
of time thinking about how we get the policies here right, in
large part because I think it is really important that we are
innovating here in the United States of America rather than
allowing a lot of these types of products to be offshore, in
large part for the protection of Americans and American
investors, American consumers. And if we look back at the FTX
implosion, a lot of individuals were hurt, including many in
the United States.
As you know, as I know, and as many people have learned,
FTX was headquartered in the Bahamas, not here. Although it had
some domestic subsidiaries, the bulk of its operations were
offshore, outside the protections of the United States
Government. And if we want to protect investors and foster
innovation, I think we need to be encouraging digital asset
businesses to domicile here in the United States, not enforce
foreign jurisdictions that have less-robust rules of the road
and regulations to protect people. But, as I am looking at the
SEC, it seems like they are failing to provide a clear
framework to facilitate responsible U.S.-based leadership on
digital assets.
The question here is, we have seen Chairman Gensler, and he
recently gave an interview this week in which it seemed like he
may have waved off concerns that digital asset businesses would
continue to migrate overseas. He said, ``We lose more if
investors get harmed here.'' How do you view those comments?
Where would continued digital assets' offshoring be in relation
to the investor outcomes that we want here in the United
States?
Mr. Grewal. As an American cryptocurrency exchange
incorporated under the laws of the State of Delaware, we
obviously have a strong interest in seeing robust protections
for consumers that recognize the need for innovation right here
in the United States. I can't help but observe, however,
Congressman, that even as we are debating issues such as, what
is the definition of a security, or which agency ought to have
primary jurisdiction over one element of the regulatory
framework or another, other countries around the world are
moving ahead. The U.K., Australia, Singapore--and I could list
many, many other countries that are taking a sensible approach
to these issues and are attracting real capital and real jobs
that create real national security concerns for the United
States if this gap, if this race continues unaddressed by our
country.
Mr. Steil. Let's dig in on that a little bit. There is a
discussion of whether or not the regulatory path forward is
clear, so I want to go back to Chairman Gensler's comments on
that. We have seen a flurry of enforcement actions from the SEC
after many of the firms in the crypto space, and he was
recently quoted as saying, ``The path to compliance is clear.''
I understand, kind of in other words, that he is arguing that
digital asset firms can and should register with the SEC, and
the failure to do so is a choice. That is how I heard that
comment. Maybe you could share with me how you view that
comment? And then further, in your interaction with the SEC, is
the path to compliance clear for your firm or for firms in the
same space?
Mr. Grewal. Congressman, what I can say with respect to
registration is that we actually share the goal I laid out just
a minute ago. Coinbase is eager to be able to offer digital
asset securities here in the United States under the
supervision of the SEC. And to that end, we have pursued
registration under a number of different models, some that we
have proposed and others that staff of the SEC have suggested.
But to date, we have been unable to reach an accommodation and
identify a path towards registration or that would result in
registration for the simple fact that the current registration
rules don't make a lot of sense when it comes to digital
assets.
Mr. Steil. I am assuming you are going back and forth with
the SEC. I know last summer, you sent a petition outlining a
series of questions that you had. Could you characterize your
interaction with the SEC, and have you received answers to the
questions that you asked last summer?
Mr. Grewal. Yes, sir. In July of last year, we filed a
formal petition for rulemaking under the procedure set out in
the Administrative Procedure Act, seeking rules along the lines
that we have been discussing. I would characterize our
interactions with the SEC as always professional. We held no
particular grudge towards the Commission, even as we have
strong policy disagreements. We have received no answer to our
petition.
Mr. Steil. You received no answer to your petition. I think
that says the future and the path year may be less than clear.
We have an opportunity to clarify that. Thank you for your
testimony today.
Mr. Chairman, I yield back.
Chairman Hill. Thank you, Mr. Steil. Mr. Nickel is
recognized for 5 minutes.
Mr. Nickel. Thank you to all of our witnesses for being
here today, and a special welcome to Mr. Reiners, who is from
Duke University in the great State of North Carolina. I saw
that, and I imagine you have not been looking at your phone. I
did look at mine and did note that Duke is up significantly at
the half. And, Mr. Chairman, we have been talking a lot about
the SEC today, but you and the good people of the Great State
of Arkansas' 2nd District as well will be much more interested
in another SEC at 7:00 tonight.
Chairman Hill. I'm looking forward to it.
Mr. Nickel. But I am glad to be working across the aisle to
make progress on digital asset regulation. This emerging
technology has incredible potential. It has the power to bring
more fair and equitable access to financial services for
everyday Americans, especially those who are unbanked. It also
has the power to reduce costs, increase efficiency, and grow
our economy. However, without proper regulation, digital assets
can be harmful to consumers.
Additionally, without clear rules of the road, we risk this
technology revolution moving outside of the United States. I
think it is essential to our economy and our national security
that America remain the world's dominant financial center.
Because of this, I am happy to be co-sponsoring Chairman
McHenry's Keep Innovation in America Act, along with
Congressman Torres. This bill provides the regulatory clarity
needed to ensure crypto innovation remains in the U.S., and
directs the Treasury Secretary to conduct a study on this issue
so that we can better regulate it going forward.
Mr. Reiners, what additional regulation do you believe is
needed in this industry to encourage innovation here in America
while also protecting consumers?
Mr. Reiners. Congressman, first, I appreciate the update on
the Duke game, because it has been on my mind, and I will just
note that we are peaking at the right time of year here.
I laid out in my written testimony what I think is the
right approach. And I would just push back slightly on the
concept that there is any innovation here worth embracing,
frankly. Crypto has been around for 14 years. That is a pretty
long track record, to take a step back and look at the harms
that has caused and the benefits, and on the harm standpoint,
the ledger is pretty long. It facilitates ransomware attacks,
which have absolutely crippled America's small businesses,
municipalities, and healthcare systems. It undermines our
national security by sanctions evasion and terrorist financing.
I would just note that North Korea stole $1.7 billion worth
of crypto last year to fund their ballistic missile program.
And then, of course, there are the environmental impacts
associated with proof-of-work mining, and then the numerous
investor losses, as well as frauds, hacks, and scams. So, when
you look at that in its totality, what are the benefits that we
are receiving in return? I don't really see any. I think as
lawmakers, you need to be clear-eyed about what is happening
here. And because of that, investor protection, I think, should
be front and center, while also minimizing risk to financial
stability. I think letting the SEC fulfill its mandate to
protect investors and giving them exclusive oversight over
crypto is the right approach.
Now, I will concede, it doesn't necessarily mean that all
of the rules that apply to traditional securities firms should
apply one-to-one for crypto firms. One area that I think many
people in crypto would agree with me on is perhaps there is a
need for a customized disclosure framework, because the
information that crypto investors want is probably different
than what a normal equity investor would want. And even Chair
Gensler has alluded to this point and noted that asset-backed
securities have a different disclosure regime. That is a long-
worded answer there, but I think the SEC is best-suited to
impose some investor protections here.
Mr. Nickel. Thank you. Mr. Grewal, the Board of Governors
of the Federal Reserve System issued a policy statement that
confers new obligations on the State member banks regarding the
permissibility of engaging in crypto asset-related activities.
The policy statement seems like it significantly impacts the
ability of consumers to access the crypto ecosystem through
safe and well-regulated outlets. How will this rule hurt
consumers and innovation?
Mr. Grewal. Congressman, the challenge, of course, with any
new rule is that it has unintended consequences or downstream
effects, which aren't necessarily contemplated at the time of
its enactment. In this particular case, let me be very clear,
we support rules for disclosures to consumers and investors
that allow them to make informed decisions about what they are
investing in, who they are banking with, and the like. So to
the extent we all share that goal, we think progress in this
way would be constructive.
Chairman Hill. The gentleman yields back. Mr. Flood is
recognized for 5 minutes.
Mr. Flood. Thank you, Mr. Chairman. I would like to thank
our witnesses for coming today, and I really look forward to
hearing your feedback on some of the SEC's recent actions
related to digital asset custody.
Mr. Gould, I am referring specifically here to Staff
Accounting Bulletin (SAB) 121, which asked public banks to hold
custody in crypto assets on balance sheet. Can you speak to how
this differs from how the OCC regulates custody?
Mr. Gould. Sure. The SAB 121 guidance document that you
referenced begs the question of, if a bank is subject to that
guidance and, thus, it has to treat the assets it is custodying
as if they were on its balance sheet, it begs the question of
what is the appropriate regulatory capital treatment for those
assets? And at least to my knowledge, the answer is unknown at
this point. The Basel Committee has proposed regulatory capital
treatment, which is highly punitive. But to my knowledge, I am
not sure what banking agencies are telling banks that are
attempting to custody digital assets and that are subject to
that SAB 121 guidance, which, again, I think has a chilling
effect on their willingness to custody those digital assets.
Mr. Flood. And speaking of that potential risk to
discourage banks from taking custody, what do you think the
practical effects will be? If you were advising a bank board,
if you were advising the CEO of a bank, what would you say to
them about SAB 121?
Mr. Gould. I think it would be a question of the bank's
risk appetite as well as its available capital and whether or
not they want to devote high levels of capital potentially to
engage in an activity custody, which, at least traditionally,
is not the most lucrative of activities.
Mr. Flood. Mr. Gould, I appreciate the answer, and I fear
that investors would not be very well-served by an environment
where banks cannot custody digital assets. If banks can't
provide these services, can you speak to who might fill the
void? Is there a risk of American investors' crypto assets
being custodied largely offshore? And that has been mentioned
already today.
Mr. Gould. I agree. I think there is that risk, and
obviously, banks historically have custodied all manner of
assets, whether they be electronically-stored assets or
physical assets. So, banks have a long history of managing
risks associated with the custodying assets.
Mr. Flood. Thank you. Chairman Gensler claims that he wants
investors' digital assets to be protected, but at the same
time, the SEC has taken actions that have driven some of the
safest, most highly-regulated institutions out of digital asset
custody. That just doesn't make much sense. He is creating a
situation where he is going to drive digital asset activities
offshore and leave American investors less safe as a result.
Next, I would like to touch on the SEC's latest custody
rulemaking. First, I want to express the importance of keeping
a pathway for custodians with a State charter to become a
qualified custodian under the rule. I wrote and passed the
Nebraska Financial Innovation Act, which allows Nebraska State-
chartered banks to custody digital assets. Other States, like
Wyoming and New York, have their own pathways to becoming a
digital asset custodian. I believe it would be a grave mistake
for the SEC to cut custodians who are already regulated at the
State level entirely out of the market.
I am also concerned that the SEC's updated custody rules
effectively prohibit self-custody, and could block new entrants
to the marketplace. And from what I have heard, if a startup
wants to issue a new crypto token, registered investment
advisors likely would have trouble custodying the asset
themselves with the rule's new requirements. This could present
a significant barrier to entry for new issuers because it might
take some time for qualified custodians to build up the
technical capability to custody their asset.
So, Mr. Grewal, if an issuer of a new crypto token wants to
work with a qualified custodian, but no qualified custodian has
built up the technical ability to handle their token, what
would that issuer be blocked out of? The market? Do you view
that as a potential concern?
Mr. Grewal. If there were no firm available because it
lacked the technical capacity to serve that customer, that
customer remains unserved.
Mr. Flood. What should we expect? Mr. Grewal, the SEC's new
custody rule expands its reach beyond funds or securities to
assets, including all assets. Can you speak briefly to how this
rule might affect the marketplace for things like paintings,
baseball cards, or NFTs?
Mr. Grewal. Artwork and baseball cards are a little outside
of my day job, Congressman, but I certainly think the fact that
the rule does extend to all assets, as you suggest, is
something that needs to be noted and paid very careful
attention to. That is a dramatic expansion of the very strict
requirements that apply to qualified custodians, so I think
that is something in which a lot of industries, not just
crypto, are going to be very interested.
Mr. Flood. Thank you, Mr. Grewal. Mr. Chairman, I yield
back.
Chairman Hill. Thank you, Mr. Flood. The gentleman from
California, Mr. Sherman, who is also the ranking member of our
Capital Markets Subcommittee, is recognized for 5 minutes.
Mr. Sherman. The title of this hearing says, ``The
Administration's Attack on the Digital Asset Ecosystem.'' I
just wish it was true. The Administration is not doing all they
can to try to keep this scourge out of our economic system. In
fact, if there was a conspiracy against crypto in the
Democratic Party, I would know about it. I think they would
have invited me to it. Unfortunately, it doesn't exist.
We are told that we need to serve investors, because we
expect investors to provide the capital that drives our
economy, because when we hear the word, ``investor,'' we think
of people who are building apartment buildings so people can
live there. People are building factories. Here, we are dealing
with investors in a burglary tool factory or similar to
investing in the North Korean economy.
John Maynard Keynes, I think, coined the term, ``animal
spirits,'' as a very valuable asset for a capitalist economy,
which is the willingness of the people to take a risk, which is
an essential element in building an economy. We, in Congress,
have subsidized that to the tune of hundreds of billions of
dollars a year. We do that through not only the capital gains
allowance, but full forgiveness upon death of all capital gains
on investments.
Mr. Reiners, can you think of a reason why the incentives
that we give to have people invest in housing and businesses
should apply to those who are investing in a chance to
undermine the dollar, or at least partially displace the dollar
as the world's reserve currency?
Mr. Reiners. No, I cannot.
Mr. Sherman. Now, when you have a strong incumbent in a
business area and you are trying to partially take market
share, it is wise to name your company or your product after
what you perceive to be its advantage. Jolt Cola has more
caffeine; it says so right in the name. You want to Jolt?
Cryptocurrency has done the same thing. Cryptocurrency
literally means, ``hidden money.''
Mr. Reiners, can you think of some people who would find
hidden money to be better than unhidden money?
Mr. Reiners. Of course, people who wanted to do bad things.
Mr. Sherman. Evade tax laws would be the biggest market.
Sam Bankman-Fried is right now hoping that he can evade
bankruptcy laws and keep his assets out of the hands of his
claimants, and the one thing I do want to say to my colleagues
here is we can't trash Sam Bankman-Fried and then support his
bill. He wasn't around here as a shorts fashion model. He was
around Rayburn and Congress for one purpose, and that was to
keep the SEC out of crypto. They want the patina of regulation,
but they don't want the most-effective business regulator.
Mr. Reiners, a currency is supposed to be a store of value,
and a medium of exchange, and a measuring stick of value. Does
the dollar do that?
Mr. Reiners. Yes, very well, and it has for a long time.
Mr. Sherman. So, aside from the fact that it is hard to
hide from the IRS, and sanctions evaders, and those enforcing
our human trafficking laws, and those enforcing our laws
against drug dealing, can you think of anything that crypto
adds to people doing honest transactions in conformity with
U.S. law?
Mr. Reiners. I cannot.
Mr. Sherman. And it is talked about as if crypto is a
better payment system, but as I understand it, if I want to
transfer crypto to somebody, and they want to buy a sandwich
with it, I have to take my dollars, pay a fee, and convert it
to crypto. They then get the crypto, they have to pay a fee,
convert it to dollars, and go down to McDonald's and buy a
hamburger. Is that an efficient payment system?
Mr. Reiners. No, not at all. And I would point out, the
fees in the crypto economy are quite high when you compare them
to securities markets.
Mr. Sherman. Thank you.
Chairman Hill. The gentleman yields back. Votes have been
called on the House Floor, and we will continue our questioning
until we have about 200 votes left. And we will now turn to Mr.
Timmons for 5 minutes.
Mr. Timmons. Thank you, Mr. Chairman. I want to start off
my time by saying that I look forward to working with all of my
colleagues on the subcommittee as we continue to shape
foundational legislation for the digital asset ecosystem. The
digital asset space has garnered a great deal of headlines
recently, and I think the call for legislative action is
building serious momentum, even more so. Recent aggressive
actions by regulators show that Congress needs to enact
legislation tailored to the digital asset ecosystem that
appropriately addresses the risks, while ensuring that the
clear benefits of this new technology are not held back.
Republicans on this committee have long advocated for increased
collaboration with regulators to produce legislation that
addresses the risk and benefits of the digital asset ecosystem.
The SEC seems to want to classify all digital assets,
besides bitcoin, as securities. But I am worried that this
neglects the actual use cases for this technology and risks
chilling development and innovation before the value is ever
realized.
Mr. Grewal, can you talk about some of the potential use
cases for this technology outside of the finance space, as that
is where the greatest promise seems to lie, in my opinion?
Mr. Grewal. Thank you very much, Congressman. You are right
to point out that within the financial space, of course,
payments are important, and I would also call out remittances.
Workers here in the United States are using crypto to send
money home as we speak today, and are doing so faster, cheaper,
and more securely than ever before.
Outside of financial use cases, there are interesting and
important new cases emerging every day. I will just highlight a
couple of them to answer your question directly. When it comes
to carbon credits and other forms of environmental protection,
blockchain-based technologies are able to help track those
credits and make sure that they properly account for
environmental remediation. There are also digital health
records that are emerging that are blockchain-based and offer
important value to patients who want to be able to have true
data portability, while protecting their personal information.
Decentralized identification offers another important non-
financial use case that we think facilitates attribution of
activity online without the collection of highly-intrusive,
voluminous, personally identifiable information.
Mr. Timmons. Would any of those potential uses you just
laid out ever be realized if we regulate every token as a
security?
Mr. Grewal. It is not likely, Congressman. The fact of the
matter is that our Federal securities laws impose significant
burdens on issuers, and in certain cases, those burdens are
appropriate where the tokens are, in fact, securities. However,
many, many tokens are not securities. They offer practical
utility in certain cases. They may operate as commodities in
other cases. In any event, the burdens of the Federal
securities laws yield very little benefit, and, as a result,
net-net disincentivize productive economic activity.
Mr. Timmons. Sure. Thank you. Professor Evans, same two
questions to you. Could you talk about potential uses that
maybe he didn't touch on, and what would happen if we regulated
every token as a security?
Ms. Evans. Thank you, Congressman, for your question. I am
very excited actually about use cases regarding identity. The
idea that you could go to a store, if someone has to be 21 to
buy a product, even as a matter of personal security as a woman
where I live, you just need to know whether I am over 21 or
under 21, and so uses of that nature are very intriguing. There
are other use cases beyond NFTs for collectibles as well that
go into healthcare and all sorts of other intriguing issues.
Final point, I think of supply chain issues as well. Not
everything will use cryptographically-secured assets, but
certainly the underlying technology for distributed ledgers.
Mr. Timmons. Thank you for that. Crypto is a trillion-
dollar industry by market cap, and other regulators may want to
move quickly to manage risk. It is imperative that this is done
in a thoughtful and reasonable manner. The January joint
statement by the banking regulators highlighting liquidity
risks associated with certain sources of funding from digital
asset entities, and last month's final rule by the Federal
Reserve essentially prohibiting State member banks from holding
digital assets as principal and discouraging Federal banks from
engaging with the industry--both of those things are very
concerning to me. I don't find them to be thoughtful or
reasonable.
Mr. Gould, with few banks willing to provide banking
services to companies in the digital asset space, how does the
example of Silvergate demonstrate the risk of
overconcentration?
Mr. Gould. I think, in part, the agency guidance runs the
risk of being self-fulfilling, in that they are warning about
concentration risk, and, of course, that is having the
understandable impact of making banks even more hesitant to
bank crypto entities or crypto customers. And you can see the
continuing kind of shrinking of the number of banks that are
willing to bank those customers and, thus, further
concentrating the risk in the very few remaining banks that
will bank them.
Mr. Timmons. Thank you for that. Thank you, Mr. Chairman. I
yield back.
Chairman Hill. The gentleman yields back. Mrs. Houchin is
now recognized for 5 minutes.
Mrs. Houchin. Thank you, Chairman Hill and Ranking Member
Lynch, for holding this hearing, and thank you to the witnesses
for your testimony, for speaking with us today.
Crypto digital assets and other areas of financial
technology have shown immense potential and opportunity over
the last several years, especially as the total market
capitalization for digital assets has risen above $1 trillion.
And technologies, like blockchain and stablecoins, continue to
change the ways that Americans interact with the financial
sector. Despite this, you have all highlighted that companies
in the digital assets industry face great difficulty when
trying to do business and grow here in America from a lack of
regulatory clarity from our Federal agencies, to a restrictive
approach from the Administration. Threats to the industry may
push innovators elsewhere, causing the U.S. to lose its leading
role in digital assets.
Mr. Belshe, in your testimony, you highlighted the need for
regulators to move quickly, alongside innovative businesses.
What would be the impact on U.S. competitiveness within the
global economy if we continue at the current pace?
Mr. Belshe. I think we are currently on track to move this
industry mostly out of the United States. Now, some might like
that in this room. I think those of us on the panel are mostly
not that way. Look, Americans are seeking out these assets. We
have heard statistics: 20 percent of Americans are interested
in touching digital assets today. The use cases are many, and
they keep coming quickly, so there is a whole technology sector
here which is at risk. And someone had asked the question, what
if we just turned it off today, what impact would it have?
Let's take Paul Krugman's quote from back in, I don't know,
1998, when he said, ``The entire internet is going to have no
more value than the fax machine.'' And what if we had taken his
advice and just turned it off back then?
Mrs. Houchin. Yes.
Mr. Belshe. The use cases that we just heard a few moments
ago, there are many, and there are many that haven't even
arisen yet. So it will be, I think, devastating to the American
businesses.
Mrs. Houchin. Thank you. We have heard some testimony today
suggesting that a regulatory structure is, ``not a race.'' But
isn't there great risk to American leadership and
competitiveness on the world stage and to the stability and
preeminence of the U.S. dollar if we fail to establish clear
guidance and rules for digital asset innovators, while other
countries appear to be moving full speed ahead?
Mr. Belshe?
Mr. Belshe. That is what is happening, and then I think it
gets a little bit worse because this does overlap with money
and finance. So, it is not just a business issue. It is
actually a political power and dominance issue. China has a
central bank digital currency (CBDC). It is not perfect, but
they are exploring it. They are exporting it all through the
Belt and Road Initiative, and a few years from now, they will
have a large economy, which they control. So, the U.S. has a
choice as to whether it wants to participate, and we need to
make that decision now.
Mrs. Houchin. Is it also fair to say that the lack of
action on how to define and regulate crypto over the last few
years under this Administration, and the movement of the crypto
industry overseas to unregulated places like the Cayman
Islands, might have been avoided with a program of oversight
like you are seeking?
Mr. Belshe. For sure. We have flip-flopped even without
changing the legislation, and I think everybody here should be
concerned about that. The OCC opened for business for digital
assets just a couple of years ago and then slammed the door
shut. The laws didn't change, the regulations didn't change,
and yet the Administration changed.
Mrs. Houchin. Yes.
Mr. Belshe. This is a problem.
Mrs. Houchin. Mr. Grewal, several countries and
international organizations have begun to introduce and
implement regulatory frameworks for the digital asset
ecosystem, including the European Union, which has worked
tirelessly in the markets in crypto assets regulation. What is
the impact that efforts in the U.K., Japan, China, and the EU
will have on the regulatory environment for digital assets in
the U.S., and what has prevented the United States from leading
the charge for a digital asset regulation globally?
Mr. Grewal. Thank you for the question, Congresswoman.
There is no question there is tremendous creativity and
progress being made in many markets all over the world. You
have listed several of them. And I want to be very clear that
progress and creativity is not simply about allowing the crypto
industry to do whatever it wants. These are serious Democratic
jurisdictions that are imposing strict limits on what these
crypto firms can do, like ours, and imposing strict
requirements on the Know Your Customer/Anti-Money Laundering
(KYC/AML) rules. All of the security issues are important, so
this is not a race to the bottom, Congresswoman. This is very
much a race to the top, and right now, we are losing in this
country.
Mrs. Houchin. I couldn't agree more. I thank you so much.
Digital assets and crypto, in my view, is the space race of our
generation. We have to figure this out, and not that we are
doing it too quickly, we are going to do it expeditiously, but
we cannot do it. In order to bolster America's global
leadership, ensure national security, and support innovation in
our financial markets, it is vital to cultivate an environment
that allows these technologies to grow. Thank you, Mr.
Chairman. I yield back.
Chairman Hill. The gentlewoman yields back. Mr. Donalds of
Florida is recognized for 5 minutes.
Mr. Donalds. Thank you, Mr. Chairman. And witnesses, thanks
for being here.
Mr. Chairman, as some of my colleagues were going through
questioning, I was reading through testimony, and actually
reading the President's budget right now, which is comical in a
lot of areas, and it brings up an interesting question for me.
We here in Washington, D.C., have a habit of creating program
after program after program and spending hundreds of millions
and billions of dollars. We pat ourselves on the back. We say
these programs work. We have no idea of efficacy. We borrow
trillions of dollars more to continue the spending, and we just
rinse and repeat the programs, and then add to them, conflating
that with, we have a burgeoning industry on our hands.
And the first step is to figure out who is going to
regulate it, how quickly, without asking the first fundamental
question of, does the SEC or the CFTC even have the technical
capacity or know-how to regulate the industry that they both
are clamoring to get their hands on, especially Chair Gensler?
He is ready, this guy is, he is frothing at the mouth, Mr.
Chairman.
So I am confounded by this, because we have been through
regulatory schemes in the United States before. The most recent
large-scale regulatory scheme came after the financial
collapse. We all know it as Dodd-Frank. Dodd-Frank has been an
albatross across community banking in these United States. And
yet, in the President's own budget, he has billions of dollars
more for programs for small business owners through the Small
Business Administration (SBA), more program dollars through the
minority business outlet fund, whatever we want to call it,
when the real remedy is actually a more streamlined regulatory
environment for the banking industry so community banks can
flourish in these United States. And businesses, whether they
are owned by Black people, Hispanic people, or White people,
whether rich, middle-income, or poor, all have access to
capital to grow their businesses without Washington having to
appropriate dollars into these funky programs that we know are
average at best, which brings us back to digital assets.
And this is really a question for all of the witnesses: Do
the agencies that currently exist have the technical capacity
to adequately regulate a digital assets space? And then the
second question is, if they don't, wouldn't it be better for
Congress to do something novel and actually create a regulatory
sandbox so that the industry can actually prepare the
regulatory environment since they have the technical capacity
way past anybody over at the SEC, especially considering that
from what I hear, Chair Gensler works everybody like a dog over
there?
Mr. Belshe, you can go first, and we can go down the list.
Mr. Belshe. On the technical capacity, I think, might not
be the best question, but the principle-based approach will
give some flexibility in how we move forward. I do agree with
you, if you hand it to the existing regulators, it will have a
tremendous gravity to end up with the same market structures
that we have today. The same market structures we have today
aren't perfect. There are a lot of inefficiencies. The bankers
participating in those systems are making more money today than
they have ever made before. We can do a lot better, so you have
to foster the innovation to get a better market structure. This
isn't to avoid market structure. It is to recognize that the
technology in front of us today can settle transactions in real
time all the time, not having to go through four different
middlemen.
Mr. Donalds. Ms. Evans?
Ms. Evans. Thank you, Congressman. This is kind of a,
``both-and,'' answer for me because on the one hand, I have
great respect for Hester Peirce, for example, at the SEC. I
think she has been very thoughtful in how she approaches it.
And I think of Commissioner Kristin Johnson from the CFTC, who
has also been very thoughtful for a long time. But to your
point, technical capacity in this space is critically
important. As a professor, obviously, I am always going to lean
into education, but it has to be education to have true subject
matter experts. Whether they agree or disagree, they have to
understand the fundamental underlying technology, or it is
difficult, if not impossible, to regulate efficiently and
effectively.
Mr. Donalds. Quick follow-up for you, Ms. Evans, do the
agencies have that educational know-how for this fledgling
industry? Yes or no?
Ms. Evans. It is difficult for me to say without knowing
the inner workings. I have not seen much from the perspective
of leaning into the language of it, but I think a lot of
education can go around in all spaces on the legislative and
the regulatory side.
Mr. Donalds. Ms. Evans, I would postulate that answer as,
``no.'' And that is no disrespect to your answer, but
considering how fresh this technology is, I doubt people who
have been in the agency space for 5 to 7 years have that
ability. I know I am out of time, and I apologize. I really
wanted to hear your answer, Mr. Reiners. I really wanted to
hear that, but you know what? You could submit it to us in
writing, and I would love to see it.
Thank you, Mr. Chairman.
Chairman Hill. Thank you, Mr. Donalds.
Mr. Nunn is now recognized for 5 minutes.
Mr. Nunn. Thank you very much, Mr. Chairman, and thank you
for letting me join in on today's hearing on the
Administration's attack on the digital asset ecosystem. As we
have heard from our colleagues today, I think we are very
excited about the potential for this technology, and we want to
make sure that if we are not defining the rules of the road,
someone else in the world will, and we need to be forward-
leaning on this.
Unfortunately, through many of the last couple of years,
the Administration's regulatory enforcement approach has failed
to provide adequate protections for our digital asset market.
Blockchain technologies and digital assets, as we noted, are
here to stay in the United States. Personally, I have served as
a military officer for nearly 2 decades, particularly in the
intelligence area, operating against Russia and China. After 9/
11, I deployed multiple times and served thousands of hours
working in counterintelligence, specifically serving as the
Director of Cybersecurity at the National Security Council
(NSC).
And that is why I am introducing the Financial Technologies
Protection Act of 2023, which will establish an independent
financial technology working group, as my colleague
highlighted, to combat terrorism and illicit financing through
use of these financial systems, because not only can digital
assets be used for good, they are clearly being used for ill.
This will be chaired by the Secretary of the Treasury, and
include the Under Secretary for Terrorism and Financial
Intelligence, and senior-level representatives from the
Department of Justice, the United States Secret Service, the
Financial Crimes Enforcement Network (FinCEN), and the Federal
Bureau of Investigation, among others. Additionally, we include
five appointed by the Under Secretary for Terrorism and
Financial Intelligence to represent financial technology
companies, financial institutions, and organize and engage in
this research, building both the public and private enterprise
to be able to address these threats.
This working group will conduct independent research on
terrorism, their illicit use of new financial technologies,
while also developing legislative and regulatory proposals to
improve anti-money laundering, counterterrorist, and other
illicit efforts in this space. I believe now, more than ever,
we have witnessed over the last year with Russia's unprovoked
attack on Ukraine that our constituents must know their
Representatives are doing everything they can here in
Washington. We must protect families, not just in my home State
of Iowa, but across the United States, and make this space a
successful area for those who want to do well.
Mr. Grewal, I will start with you, as the chief legal
officer at Coinbase. We hear a lot about the risk that crypto
might move offshore, given the lack of regulatory clarity and
the approach being taken by our current financial regulators
seeming to restrain this industry. Could you explain the
downsides associated with a crypto company that were to move
offshore and the threat it could have from that terrorist
element?
Mr. Grewal. Thank you, Congressman. As I have indicated
earlier, we are not only an American company incorporated here
in the United States, we are a proud American company. And we
very much intend to continue to invest in the United States and
in this market, even as we pursue other opportunities around
the world. The fact of the matter is that as regulatory clarity
emerges in jurisdictions other than the United States, it
becomes more and more attracted to invest capital, to place
jobs, and to develop technologies outside the United States for
the simple fact that we know what the rules are, we know where
the boundary is, and we know where we have to go to avoid even
getting close to that boundary.
And there is a material impact. There will be a material
impact to the security of the United States if those
technologies are developed outside the U.S. for one simple
reason, Congressman. Our sanctions programs, which you alluded
to in your comments, are at the core of our ability to prevent
bad actors from gaining access to funds which facilitate bad
acts. You can't have an effective sanctions program based here
in the United States if the technologies that would be subject
to those sanctions programs are being developed elsewhere.
Mr. Nunn. Very good. Mr. Belshe, I would like to ask you,
we just talked about the left and right parameters of this,
being able to control not only the sanctions aspect of it, but
the additional elements of having an uncontrolled currency that
the United States would have a very hard time getting its arms
around if we are not part of the process in developing a
digital asset, which the United States has control over. Could
you talk to us about the national security implications?
Mr. Belshe. Sure. Look, we could ban cryptocurrencies and
digital assets in the United States, but it won't prevent them
from being used outside the United States.
Mr. Nunn. Right.
Mr. Belshe. So, we either figure out how to bring it in and
have the best chance of understanding it, helping lead the
world in terms of the rules around how you manage it, or we
delegate that to someone else. The choice is ours. I think we
want to manage that rather than give it to others.
Mr. Nunn. Thank you very much. I think that we have a
responsibility to help define this battlespace when it is
favorable to the United States, when it helps grow our economy,
that helps us innovate and be a leader in this space, and not
be on our back heels, being responded to by those who would be
adversaries towards us or those who would use it for a
nefarious process. I really appreciate your testimony today and
the great wealth of knowledge that you have offered us.
Mr. Chairman, I yield back.
Chairman Hill. The gentleman yields back. I would like to
thank our witnesses for an outstanding panel, and I appreciate
the participation of our Members.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is adjourned.
[Whereupon, at 4:22 p.m., the hearing was adjourned.]
A P P E N D I X
March 9, 2023
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