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