Legislative Hearing to Review S.4760, the Digital Commodities Consumer Protection Act (U.S. Senate Committee on Agriculture, Nutrition, and Forestry)

Hearing	Legislative Hearing to Review S.4760, the Digital Commodities Consumer Protection Act
Committee	U.S. Senate Committee on Agriculture, Nutrition, and Forestry
Date	September 15, 2022

 

Hearing Takeaways:

• The Digital Commodities Consumer Protection Act of 2022: The hearing mainly focused on the Digital Commodities Consumer Protection Act of 2022. This bipartisan legislation would provide the U.S. Commodity Futures Trading Commission (CFTC) with oversight authority over digital assets that act like commodities (such as Bitcoin and Ethereum). The legislation would also require digital asset platforms to segregate and safeguard customer assets, hold sufficient capital, and abide by rigorous cybersecurity standards. Committee Members and the hearing’s witnesses all expressed support for the legislation and asserted that it would provide regulatory clarity and consistency to digital commodities. Of note, Full Committee Ranking Member John Boozman (R-AR) indicated that the Committee intends to markup the legislation “in the near future.”
  • User Fee Provision: A key element of the Digital Commodities Consumer Protection Act of 2022 is that it would authorize the CFTC to impose a user fee only on digital commodity platforms. CFTC Chairman Rostin Behnam asserted that this user fee was key to ensuring that the CFTC possessed adequate funding to assume its new oversight responsibilities under the legislation. Sen. Dick Durbin (D-IL) expressed concerns however that the user fee could be insufficient and that the CFTC was underestimating the total costs associated with regulating digital assets.
  • Study on the Energy Consumption of Digital Assets: Committee Members and the hearing’s witnesses noted how the Digital Commodities Consumer Protection Act of 2022 would require the CFTC to issue a report on the energy consumption associated with cryptocurrencies within six months of the legislation’s passage. This report would provide recommendations to the Committee on how to reduce this energy consumption. Mr. Phillips predicted that investors would tend to move toward digital commodities that consume less energy, which would create incentives for digital assets to reduce their energy consumption.
  • Study on Historically Underserved Customers Participating in Digital Commodities Markets: The Digital Commodities Consumer Protection Act of 2022 would also direct the CFTC to study gender, racial, and ethnic demographics of customers participating in the digital markets and to use this information to inform its rulemaking. Ms. Warren stated that the identification of community needs would help to inform the ways that cryptocurrencies could be used to improve financial access for underserved communities. Full Committee Chairman Debbie Stabenow (D-MI) and Ms. Warren highlighted how digital assets were already popular amongst lower income and underbanked communities.
  • Reliance Upon Self-Regulatory Organizations (SROs): CFTC Chairman Behnam and Dr. Tarbert noted how the Digital Commodities Consumer Protection Act of 2022 would require digital commodity brokers, dealers, and custodians to join a registered futures association. They stated that this SRO membership requirement would provide an additional layer of protection for these entities.
  • Bankruptcy Protections: CFTC Chairman Behnam highlighted how the Digital Commodities Consumer Protection Act of 2022 included bankruptcy protections that would prioritize customer funds and assets over creditors and security holders during the bankruptcy process for digital asset commodity exchanges.
• Proposed Improvements to the Digital Commodities Consumer Protection Act of 2022: Committee Members and the hearing’s witnesses used the hearing to propose several changes to the Digital Commodities Consumer Protection Act of 2022. CFTC Chairman Rostin Behnam stated that while the Digital Commodities Consumer Protection Act of 2022 would constitute a positive development, he asserted that policymakers will still need to address other parts of the digital assets ecosystem. He elaborated that these other parts pertained to stablecoins, securities laws, payments, and settlements. 
  • Clarification for Determining Whether a Digital Assets Constitutes a Security or Commodity: Mr. Phillips, Ms. Parker, and Ms. Dixon criticized the Digital Commodities Consumer Protection Act of 2022 for failing to address when a digital asset should be considered a commodity as opposed to a security. They stated that the current tests for making such determinations were not straightforward and created uncertainty for the digital assets industry. They suggested that the legislation could serve as a good vehicle for clarifying this ambiguity.
  • Revisions for the Legislation’s Definitions for “Broker” and “Dealer”: Full Committee Ranking Member John Boozman (R-AR) and Dr. Tarbert recommended that the Committee refine and narrow the legislation’s definition of digital commodity brokers and dealers. Ranking Member Boozman stated that this legislation was intended to protect retail consumers and did not intend to cover proprietary trading firms under the dealer definition.
  • Safe Harbor Protections for Reclassified Digital Assets: Dr. Tarbert also recommended that the Committee add safeguards to the legislation to protect those that trade digital commodities that have been self-certified or otherwise approved and that were later reclassified as securities. He commented that such safe harbor protections would guard market participants from civil litigation and enforcement actions.
  • Restrictions on Rulemaking by Enforcement: Dr. Tarbert further recommended that the Committee explicitly state that the legislation does not provide a license for reactive rulemaking by enforcement.
  • Decentralized Finance (DeFi) Considerations: Sen. Kirsten Gillibrand (D-NY) and Ms. Warren expressed concerns that the Digital Commodities Consumer Protection Act of 2022 did not adequately address DeFi. Ms. Warren remarked that the DeFi definition proposed under the Digital Commodities Consumer Protection Act of 2022 was “unworkable” based on how DeFi actually operated. She stated that DeFi was rapidly evolving and that the market had not had sufficient time to choose the most appropriate models. She expressed concerns that overly prescriptive rules could unnecessarily limit opportunities within the DeFi space.
• Other Digital Assets Issues: In addition to the Digital Commodities Consumer Protection Act of 2022, Committee Members and the hearing’s witnesses used the hearing to examine other digital assets issues.
  • Frauds, Scams, and Thefts Involving Digital Assets: Several Committee Democrats and Mr. Phillips raised concerns over how digital assets were often involved in frauds, scams, and market manipulations. CFTC Chairman Rostin Behnam highlighted how the CFTC had used its anti-fraud and anti-manipulation authorities to police illicit activity within the digital assets space. He stated that the Digital Commodities Consumer Protection Act of 2022 would further empower the CFTC to pursue frauds, scams, and market manipulations. 
  • Concerns over the Impact of Cryptocurrencies on Retail Investors: Several Committee Democrats expressed concerns over the amount of exposure that retail investors had to cryptocurrencies. They stated that a market downturn could thus disproportionally harm these retail investors. Sen. Dick Durbin (D-IL) expressed further concerns over efforts to integrate digital assets into the traditional banking system and commented that these efforts could exacerbate the threats to the market posed by cryptocurrencies.
  • CFTC Coordination with the U.S. Securities and Exchange Commission (SEC): Committee Members expressed interest regarding how the CFTC worked with the SEC to oversee the digital assets space. CFTC Chairman Behnam noted how the CFTC had previously worked with the SEC to implement the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and to address security and commodity futures. He testified that the CFTC was “constantly” working with the SEC across multiple levels on regulatory matters. He remarked that the relationship between the CFTC and SEC was well-functioning and emphasized the importance of communication, transparency, and shared goals between the two agencies.
  • U.S. International Competitiveness in the Digital Assets Space: Committee Members and Ms. Warren expressed concerns that cryptocurrency companies and trading activities were being pushed out of the U.S. and into foreign jurisdictions due to the U.S.’s lack of regulatory clarity for cryptocurrencies. CFTC Chairman Behnam remarked that the U.S. had one of the world’s most robust digital assets and blockchain technology industries given the size of its market and its broad availability of capital. He stated however that other jurisdictions had taken a “very aggressive” approach to digital assets and blockchain technology to retain innovation within their jurisdictions. He cautioned however that this approach could pose market risks. He contended that the U.S. should maintain its deliberate regulatory approach to digital assets.
  • Use of Digital Assets to Support Remittances and the Distribution of International Aid: Sen. Kirsten Gillibrand (D-NY), Ms. Warren, and Ms. Dixon discussed how digital assets and blockchain technology could support cheap and near instantaneous international transfers of funds. They highlighted how these features had played a key role in enabling the swift distribution of international aid to Ukraine following Russia’s invasion of the country. They also stated that cryptocurrencies could play a key role in supporting remittances and access to capital for disadvantaged communities.

Hearing Witnesses:

Panel I:

1. The Hon. Rostin Behnam, Chairman, U.S. Commodity Futures Trading Commission

Panel II:

1. Mr. Todd Phillips, Director, Financial Regulation and Corporate Governance, Center for American Progress
2. Ms. Shelia Warren, Chief Executive Officer, Crypto Council for Innovation
3. Ms. Christine Parker, Vice President, Deputy General Counsel, Coinbase
4. Dr. Heath Tarbert, Chief Legal Officer, Citadel Securities
5. Ms. Denelle Dixon, Chief Executive Officer, Stellar Development Foundation

Member Opening Statements:

Full Committee Chairman Debbie Stabenow (D-MI):

• She discussed how a “rapidly increasing” number of Americans were investing in cryptocurrencies and stated that there was no federal oversight over the tokens that comprised the majority of this market.
• She noted how cryptocurrencies tended to be very volatile assets, which had caused many ordinary Americans to experience significant financial losses.
  •  She highlighted how many cryptocurrency companies had gone bankrupt and how some widely traded cryptocurrencies had their values sharply plummet in recent months.
• She also mentioned how $1.9 billion worth of cryptocurrency had been stolen in hacks during the first seven months of 2022.
  • She indicated that this amount of theft constituted a 60 percent increase over the same period last year.
• She remarked that cryptocurrencies and blockchain technology offered an alternative to using large financial institutions.
• She noted how one-third of Americans that bought or used cryptocurrencies earned less than $60,000 per year.
  • She highlighted how some of these Americans did not trust large financial institutions or could not afford these institutions.
• She remarked that there must exist clear and consistent “rules of the road” for cryptocurrencies that would enable innovation while also safeguarding customers.
  • She commented that the Committee’s oversight over the CFTC provided it with a responsibility to ensure that the cryptocurrency marketplace possessed adequate protections.
• She mentioned how she had introduced the bipartisan Digital Commodities Consumer Protection Act, which would provide the CFTC with oversight authority over digital assets that act like commodities (such as Bitcoin and Ethereum).
  • She called the lack of oversight for these digital assets a “glaring hole” in the U.S. financial system.
• She also noted how the Digital Commodities Consumer Protection Act of 2022 would require that all digital asset commodity platforms to register with the CFTC.
  • She commented that this policy would set a uniform national standard for digital asset commodity platforms and enable the CFTC to prevent fraud.
• She stated that the Digital Commodities Consumer Protection Act of 2022 was focused on consumer protection and noted how the legislation would require digital asset platforms to segregate and safeguard customer assets, hold sufficient capital, and abide by rigorous cybersecurity standards.
  • She also asserted that this legislation would eliminate many conflicts of interest within the digital assets market.
  • She further noted that this legislation would mandate that digital asset platforms speak truthfully about the risks associated with trading digital assets and that digital asset platforms do not engage in misleading advertising.
• She remarked that the CFTC was the appropriate regulator for overseeing digital assets and recounted how the CFTC had demonstrated its competence as market regulator in its oversight of the swaps market.
• She discussed how U.S. derivatives markets had served as a mainstay for U.S. producers during the recent supply chain disruptions and during periods of elevated commodity prices.
• She also mentioned how former Republican CFTC Chairman J. Christopher Giancarlo had recently expressed his support for the Digital Commodities Consumer Protection Act of 2022.
• She further noted how the Digital Commodities Consumer Protection Act of 2022 would provide the CFTC with additional resources to support their digital assets oversight work and would recognize the roles that other federal agencies would play in overseeing digital assets.
  • She commended SEC Chairman Gary Gensler for his recent comments regarding the importance of having the SEC and the CFTC work together to oversee the digital assets market.
  • She also mentioned that the Committee had engaged in “productive” conversations with SEC staff about this legislation.

Full Committee Ranking Member John Boozman (R-AR):

• He mentioned how he was a cosponsor of the Digital Commodities Consumer Protection Act of 2022 and stated that the legislation would bring regulatory certainty to the digital commodity ecosystem.
• He remarked that U.S. regulation of the digital commodities space must ensure market integrity and consumer protection while also fostering innovation.
  • He asserted that the Digital Commodities Consumer Protection Act of 2022 would accomplish these objectives.
• He discussed how digital asset spot markets were currently subjected to a “patchwork” of regulations at the state and federal levels.
  • He called this situation inadequate from both market structure and consumer protection perspectives.
• He remarked that digital commodities and related technologies would continue to play an important role in the global economy for decades to come.
• He contended that the U.S. must provide regulatory certainty to the digital commodities market and create a framework that makes sense from both a domestic and international perspective.
  • He called it imperative for both Congress and regulators to work with industry and consumer advocates to create understandable laws and regulations for market participants.
  • He also asserted that a “regulation by enforcement” approach for digital commodities was inadequate and would unfairly punish stakeholders that operate in good faith.
• He expressed interest in using the hearing to obtain feedback on the Digital Commodities Consumer Protection Act of 2022 from CFTC Chairman Rostin Behnam and industry stakeholders.
• He stated that the Committee intends to markup the Digital Commodities Consumer Protection Act of 2022 “in the near future.”

Panel I Opening Statements:

The Hon. Rostin Behnam (U.S. Commodity Futures Trading Commission):

• He remarked that the unique characteristics of the growing digital assets industry necessitated a comprehensive federal regulatory regime and thanked the Committee for introducing the Digital Commodities Consumer Protection Act of 2022 to address this need.
  • He testified that he had directed CFTC staff to analyze and identify what the Agency would need to have to support the legislation’s implementation.
• He discussed how digital asset commodity cash markets have significant speculative retail participation, often employ high levels of leverage, and largely rely on platform-based custody arrangements outside of the traditional regulated banking sector.
  • He noted that while market participants might perceive themselves to be interacting with traditionally regulated exchanges and intermediaries, he asserted that the reality of these exchanges were very different.
• He mentioned how over $1 trillion in digital assets market value had been lost in conjunction with the failure of several large high profile digital asset firms “operating in the shadows” since he had last appeared before the Committee in February 2022.
  • He stated that one lesson from this experience was that leverage, interconnected markets, and contagion could wreak havoc on the digital assets ecosystem.
• He reiterated his assertion that many digital assets constitute commodities and contended that the CFTC’s expertise and experience made it the right regulator for the digital asset commodity market.
• He discussed how the CFTC facilitates customer protections through its principles-based market oversight disclosure regime.
  • He commented that these structures informed customers about who they were dealing with and provided clarity regarding the risks associated with participating in commodity markets.
• He noted how the Digital Commodities Consumer Protection Act of 2022 would require digital commodity brokers, dealers, and custodians to join a registered futures association.
  • He commented that this requirement acknowledged the key role that SROs, such as the National Futures Association (NFA), played in safeguarding the integrity of markets.
• He stated that the CFTC had often adapted its oversight capabilities to meet the demands of evolving markets.
  • He highlighted how Congress had provided the CFTC with regulatory authority over 95 percent of the swaps market following the 2008 Financial Crisis.
• He then testified that the CFTC had brought almost 60 enforcement cases involving digital assets since 2014.
• He remarked that the CFTC’s lack of full visibility into the digital commodity asset market had forced the Agency’s enforcement program to rely primarily upon tips and complaints from the public to identify fraud and manipulation.
• He stated that the CFTC had developed a “deep” understanding of the novel digital commodity asset market and its underlying innovations.
  • He specifically mentioned how the CFTC had hired specialists, formed internal task forces and working groups, leveraged public-private partnerships, and restructured its financial technology (FinTech) hub into the Office of Technology Innovation.
• He remarked that the Digital Commodities Consumer Protection Act of 2022 would leverage the CFTC’s experience as a market regulator through requiring registration and supervision of digital commodity platforms and digital commodity intermediaries.
  • He noted that the legislation would subject digital commodity facilities to compliance with core principles and would require that these platforms establish and enforce rules minimizing conflicts of interest, prohibiting abusive trade practices, establishing system safeguards to minimize cybersecurity and other operational risks, ensuring the financial integrity of transactions and intermediaries, and protecting customer funds.
  • He further noted that the legislation would require all digital commodity platforms to maintain adequate financial, operational, and managerial resources, segregate customer funds, and comply with CFTC requirements for the treatment of customer assets.
• He also stated that the Digital Commodities Consumer Protection Act of 2022 would directly address the increased role of retail participants in the digital asset commodity markets through directing the CFTC to adopt customer protection rules for digital commodity platforms.
  • He indicated that these rules would require these platforms to disclose to customers material conflicts of interest and material risks of trading digital commodities, establish duties to communicate in a fair and balanced manner, and establish platform standards for marketing and advertising.
• He expressed optimism that the Digital Commodities Consumer Protection Act of 2022 would achieve its intended goals given how it would ensure that the CFTC had adequate resources and given its clear mandates for customer education, outreach, and information gathering.
  • He elaborated that the legislation proposed a new funding mechanism that would support the CFTC’s new obligations.

Congressional Question Period:

Full Committee Chairman Debbie Stabenow (D-MI):

• Chairman Stabenow noted how retail customers engaged in large amounts of cryptocurrency trading activity. She mentioned how there were concerns that the CFTC lacked a customer protection mandate, which meant that the Agency might lack the necessary tools for protecting retail customers. She asked Chairman Behnam to respond to these concerns.
  • Chairman Behnam first remarked that the Commodity Exchange Act and the rules that were promulgated based on the law directly supported customer protections. He stated that the law itself and the associated rules were prescriptive in nature and contained more specific requirements for registered entities. He elaborated that these policies provide system safeguards (which directly address cybersecurity and operational risks), address conflicts of interest, maintain reporting and recordkeeping standards, and provide prohibitions on exchange-listed contracts that are readily susceptible to manipulation. He then discussed the CFTC’s efforts to ensure that regulated entities were complying with the CFTC’s rules and regulations through a series of inspections, examinations, and investigations. He also mentioned how the CFTC worked in tandem with the NFA to ensure that individuals and institutions were complying with the law. He further highlighted the importance of the CFTC’s enforcement actions. He then discussed how the CFTC had faced challenges in terms of receiving adequate funding and noted how the CFTC’s average fiscal budget had been just over $240 million per year over the previous ten fiscal years. He indicated that the CFTC’s Division of Enforcement had assessed average penalties of over $1.5 billion per year during this ten-year period. He commented that the CFTC therefore provided an over 600 percent return on investment for U.S. taxpayers. He also highlighted how the CFTC had been involved in pursuing various high-profile manipulation cases related to oil markets and the London Inter-Bank Offered Rate (LIBOR). He lastly applauded the Committee for its inclusion of bankruptcy protections into the Digital Commodities Consumer Protection Act of 2022. He explained that this provision would prioritize customer funds and assets over creditors and security holders during the bankruptcy process for digital asset commodity exchanges.
• Chairman Stabenow then mentioned how President Biden had expressed interest in a “whole of government response” to digital assets regulation. She asked Chairman Behnam to address how the CFTC would work with the SEC to regulate the digital assets space.
  • Chairman Behnam noted how the CFTC had previously worked with the SEC to implement Dodd–Frank and to address security and commodity futures. He testified that the CFTC was “constantly” working with the SEC across multiple levels on regulatory matters. He stated that the CFTC and the SEC naturally had intersections between their markets. He specifically highlighted how there were entities that registered with both the CFTC and the SEC, including intermediaries, broker-dealers, futures commission merchants (FCMs), and investment managers. He remarked that the relationship between the CFTC and SEC was well-functioning and emphasized the importance of communication, transparency, and shared goals between the two agencies.

Full Committee Ranking Member John Boozman (R-AR):

• Ranking Member Boozman first commended Chairman Behnam’s previous response regarding the CFTC’s enforcement capabilities. He then noted how the CFTC did not have the authority to impose user fees on derivative market activities. He indicated however that the Digital Commodities Consumer Protection Act of 2022 would authorize the CFTC to impose a user fee only on digital commodity platforms. He asked Chairman Behnam to indicate whether the Digital Commodities Consumer Protection Act of 2022 as written would prevent any application of a user fee onto derivative market activities.
  • Chairman Behnam answered affirmatively. He stated that the Digital Commodities Consumer Protection Act of 2022 was drafted prescriptively to ensure that any fees would only be assessed on digital commodity platforms and not on traditional derivatives market entities.
• Ranking Member Boozman asked Chairman Behnam to indicate whether the Digital Commodities Consumer Protection Act of 2022 would establish a precedent that new legislation would be required to authorize user fees in the traditional derivatives market.
  • Chairman Behnam answered affirmatively.
• Ranking Member Boozman then thanked Chairman Behnam and the CFTC staff for their provision of technical assistance to the Committee. He noted how many industry stakeholders had expressed concerns over the definition of the term “dealer” under the Digital Commodities Consumer Protection Act of 2022. He stated that this legislation was intended to protect retail consumers and did not intend to cover proprietary trading firms that invest only for their own accounts under the dealer definition. He asked Chairman Behnam to indicate whether this legislation as currently written would cover this kind of non-retail consumer facing market activity.
  • Chairman Behnam remarked that the Digital Commodities Consumer Protection Act of 2022 was meant to focus on retail customers and stated that proprietary trading firms should be exempt from the legislation’s definition for dealers. He commented that this approach was consistent with the Committee and the CFTC’s general approach to traditional swap dealers.

Sen. Amy Klobuchar (D-MN):

• Sen. Klobuchar discussed how the digital commodities markets were very volatile and stated that the recent digital commodities market crash had harmed many retail investors. She also highlighted that many retail investors might not realize that they were trading digital commodities on unregulated platforms. She asked Chairman Behnam to discuss how the underlying digital commodities markets worked and to address why the CFTC was able to oversee volatile digital commodities markets. She further asked Chairman Behnam to address how defrauded and scammed digital commodities consumers could obtain recourse in the absence of regulation.
  • Chairman Behnam remarked that the unregulated digital asset platforms operated in a similar fashion to the traditional markets. He stated that the regulation of these digital asset platforms was limited to the U.S. Financial Crimes Enforcement Network (FinCEN) and some state money transmitter licenses. He remarked however that a market regulatory structure would provide transparency for these unregulated digital asset platforms. He asserted that the market structure for these digital asset platforms and traditional markets were largely the same, notwithstanding some custody issues. He stated that the Digital Commodities Consumer Protection Act of 2022 sought to enhance transparency for digital asset platforms. He then predicted that more regulation of the digital assets market would lead to reduced volatility because it would lead more people to enter the digital assets market (which will reduce bid-ask spreads). He called for the implementation of core principles around trading practices for digital asset platforms.
• Sen. Klobuchar then mentioned a June 2022 U.S. Federal Trade Commission (FTC) report had found that $575 million of the cryptocurrency fraud losses that had been reported to the Agency since 2021 related to bogus investment opportunities. She noted that many of these frauds had originated on social media platforms (including Instagram and Facebook). She asked Chairman Behnam to discuss how social media platforms were contributing to cryptocurrency frauds and to provide recommendations for combating these frauds.
  • Chairman Behnam remarked that the CFTC was limited in its ability to police trading platforms. He elaborated that the CFTC could not directly oversee trading platforms and instead needed to rely upon customers to report instances of fraud. He testified that every single CFTC digital asset enforcement case thus far had originated from a complaint. He stated that the Digital Commodities Consumer Protection Act of 2022 would provide the CFTC with the authority needed to regulate markets and predicted that this regulation would reduce digital assets market volatility, fraud, and manipulation.
• Sen. Klobuchar then noted how there were significant questions surrounding the environmental sustainability of cryptocurrencies given the significant amounts of energy consumption associated with certain types of cryptocurrency mining. She asked Chairman Behnam to address how the Digital Commodities Consumer Protection Act of 2022 considered the environmental impacts of cryptocurrencies.
  • Chairman Behnam noted how the Digital Commodities Consumer Protection Act of 2022 would require the CFTC to draft a report within six months of the legislation’s passage in consultation with other regulators on energy consumption in digital commodities markets. He expressed support for this approach and stated that the report would serve as a “starting point” for addressing the high energy consumption of digital assets. He commented that this report could spur future policy discussions, new disclosure requirements, and incentives to move away from carbon intensive energy sources. He also applauded Ethereum’s recent actions to reduce its energy consumption.

Sen. Joni Ernst (R-IA):

• Sen. Ernst noted how there were concerns that cryptocurrency companies were being pushed out of the U.S. and into foreign jurisdictions due to the U.S.’s lack of regulatory clarity for cryptocurrencies. She asked Chairman Behnam to discuss how the Digital Commodities Consumer Protection Act of 2022 would address these concerns and strengthen the U.S.’s global competitiveness. She also asked Chairman Behnam to address why the U.S. should want to become a global cryptocurrency leader and an attractive jurisdiction for cryptocurrency companies.
  • Chairman Behnam noted how he had heard many anecdotes of cryptocurrency companies needing to leave the U.S. due to the U.S.’s lack of regulatory certainty. He stated that while the Digital Commodities Consumer Protection Act of 2022 would only be one element of the larger digital asset ecosystem, he asserted that the legislation would constitute a “huge step forward.” He remarked that the legislation would provide cryptocurrency innovators and entrepreneurs with the regulatory certainty to remain within the U.S. He then stated that digital assets constituted the newest type of innovation and commented that there existed demand for and optimism surrounding this innovation. He remarked that policymakers should work to balance customer protections against innovation when addressing digital assets.
• Sen. Ernst asked Chairman Behnam to project what would happen if Congress failed to advance the Digital Commodities Consumer Protection Act of 2022.
  • Chairman Behnam remarked that the U.S. generally stuck the appropriate balance between taking a prudent approach to regulations and fostering innovation. He stated that the U.S. needed to provide a clear regulatory framework for innovators and entrepreneurs to promote domestic innovation. He contended that the Digital Commodities Consumer Protection Act of 2022 would support the U.S. in these efforts to promote domestic innovation.

Sen. Kirsten Gillibrand (D-NY):

• Sen. Gillibrand remarked that the Digital Commodities Consumer Protection Act of 2022 could be “transformational” and called the legislation necessary to create stability and regulatory certainty for the growing digit assets market. She thanked Chairman Behnam for his support in the drafting of the legislation. She asked Chairman Behnam to discuss why it was important for the Committee to consider the Digital Commodities Consumer Protection Act of 2022 at the present time. She also discussed how digital assets could take numerous asset forms (including commodities and securities). She asked Chairman Behnam to address how the Digital Commodities Consumer Protection Act of 2022 would enable the U.S. to establish a foundation for digital assets regulation that would support future regulatory efforts related to other asset types.
  • Chairman Behnam remarked that the regulation of digital assets was a “big issue” and noted how there were various digital asset issues surrounding stablecoins, security tokens, payments, custody, and settlements. He commented that these issues were all interconnected. He stated that the Digital Commodities Consumer Protection Act of 2022 was important because it addressed the commodity tokens (including Bitcoin and Ethereum) that constitute a “significant majority” of the digital asset marketplace. He commented that this legislation will advance policy discussions around digital assets through bringing clarity, transparency, and customer protections to the digital assets market. He stated however that the U.S. needed to also address the non-commodity elements of the digital assets market so that there would not exist a “patchwork” of regulations. He asserted that this consistency was needed from both a regulatory perspective and a prudential perspective.
• Sen. Gillibrand then expressed interest in working to address cyberthreats, fraud, theft, privacy breaches, and other technology-based crimes facilitated through Web 3 applications by foreign adversaries. She asked Chairman Behnam to discuss the CFTC’s efforts to address the aforementioned threats. She also asked Chairman Behnam to identify additional actions that need to be undertaken to bolster the security of the commodities market.
  • Chairman Behnam remarked that cybersecurity was currently “top of mind” for the CFTC and noted how the CFTC was a financial markets regulator with systemically important registrants. He mentioned how the CFTC had core principles that drove its regulation and commented that the core principle around system safeguards directly relates to cybersecurity. He stated that the Digital Commodities Consumer Protection Act of 2022 would directly address this issue through prescriptively mentioning cybersecurity. He remarked however that the CFTC would need to bolster its cybersecurity capabilities given the custody element of digital assets technology. He stated that using the Digital Commodities Consumer Protection Act of 2022’s resources would be critical for recruiting, retaining, and building out cybersecurity infrastructure. He noted how previous cyberattacks (including the Colonial Pipeline Ransomware Attack) had shown that bad actors could use digital assets to attack the U.S. through systemically important infrastructure.

Sen. Tommy Tuberville (R-AL):

• Sen. Tuberville expressed support for the Digital Commodities Consumer Protection Act of 2022 and asserted that the U.S. must immediately regulate digital commodities. He then noted how over 90 percent of all cryptocurrency trades were being executed outside of the U.S. He asked Chairman Behnam to address why the U.S. lagged the world in terms of cryptocurrency trading.
  • Chairman Behnam remarked that the U.S. needed to both preserve the financial integrity and resilience of its digital assets markets and support digital assets progress and innovation. He stated that many jurisdictions throughout the world viewed digital assets as providing an opportunity to increase economic development. He stated that this view could lead the jurisdictions to reduce their regulatory standards for digital assets in order to attract individuals and institutions. He remarked that the U.S. must be deliberate in its regulatory approach to digital assets considering its size and legal structure. He stated that this deliberate approach would provide certainty for market participants, which would in turn attract digital assets innovation and trading activity to the U.S.
• Sen. Tuberville then expressed interest in how other countries (including China) were beginning to launch their own digital currencies. He asked Chairman Behnam to comment on this development and to address how these countries were regulating digital currencies.
  • Chairman Behnam remarked that China was taking several approaches to digital currencies that the U.S. should not emulate. He specifically criticized China’s approach to privacy issues in their work on digital currencies. He noted how the U.S. Federal Reserve was currently contemplating digital U.S. dollar proposals and commented that these proposals involved many technical, monetary policy, and infrastructure considerations. He stated that the U.S. was considering digital U.S. dollar proposals at the right pace and commented that the U.S. should take a cautious approach when considering these proposals.
• Sen. Tuberville then asked Chairman Behnam to indicate whether the CFTC would have the requisite resources to implement the Digital Commodities Consumer Protection Act of 2022 if the legislation were to be passed.
  • Chairman Behnam highlighted how the Digital Commodities Consumer Protection Act of 2022 included a user fee that was exclusively focused on digital platforms. He stated that this user fee would provide the CFTC with the needed resources to implement the legislation if passed.
• Sen. Tuberville then asked Chairman Behnam to address the CFTC’s relationship with the SEC.
  • Chairman Behnam called the CFTC’s historic and present relationship with the SEC “very positive.” He stated that the CFTC and the SEC needed to work together to serve customers, taxpayers, and market participants.
• Sen. Tuberville then mentioned how digital ATM machines were beginning to be rolled out in his state of Alabama. He asked Chairman Behnam to provide his thoughts on these machines.
  • Chairman Behnam first commended the work of the Alabama Securities Commission and testified that the CFTC worked “very closely” with the Alabama Securities Commission. He then expressed concerns over the national rollout of digital ATM machines. He remarked that policymakers needed to ensure that consumers could make informed capital allocation decisions and asserted that the digital ATM market was operating “in the shadows.” He noted that while the CFTC worked to provide advisories and customer alerts on their website, he contended that these actions were not enough. He remarked that the CFTC must work with states on consumer education efforts. He further stated that the Digital Commodities Consumer Protection Act of 2022 would support these consumer education efforts.
• Sen. Tuberville concluded that digital assets were not a fad and expressed support for the CFTC’s efforts to oversee the digital assets market.

Sen. Tina Smith (D-MN):

• Sen. Smith asked Chairman Behnam to address how the U.S. would develop a coordinated approach to digital assets regulation across agencies.
  • Chairman Behnam stated that while the Digital Commodities Consumer Protection Act of 2022 would constitute a positive development, he asserted that policymakers will still need to address other parts of the digital assets ecosystem. He elaborated that these other parts pertained to stablecoins, securities laws, payments, and settlements. He remarked that the Digital Commodities Consumer Protection Act of 2022 would create clarity surrounding the commodities markets through defining digital commodities. He noted that the legislation’s definition of digital commodities would exclude physical commodities, securities, and any potential form of a digital U.S. dollar. He also stated that the SEC and other prudential regulators could use this legislation to better identify the digital assets that would fall under their jurisdictions.
• Sen. Smith asked Chairman Behnam to discuss how policymakers should approach digital assets trading platforms that offered different types of digital assets that were regulated under different regimes.
  • Chairman Behnam remarked that a digital assets platform that offered securities trading and commodities trading would be regulated by both the SEC and the CFTC. He stated that the trading platform might silo their offered contracts or segregate customer accounts and the custodian services provided to the client. He further suggested that the trading platform could offer a single account to a client that serviced the client’s securities and commodities activities. He stated that technology and the U.S.’s current experience in the swaps market would make it relatively easy for a trading platform to handle different types of digital assets. He noted how there were already dual registrants within the U.S. financial system, including investment advisors, broker-dealers, and FCMs. He concluded that having a digital assets trading platform offer different types of digital assets would be very feasible.
• Sen. Smith asked Chairman Behnam to indicate whether coordination between the CFTC and other regulatory agencies could help to address the complexities associated with trading platforms that offered different types of digital assets
  • Chairman Behnam answered affirmatively.
• Sen. Smith then discussed how the Digital Commodities Consumer Protection Act of 2022 would take the existing regulatory structure for commodities and apply it to digital assets that were being marketed toward retail investors. She noted however that the CFTC did not work directly with retail investors. She asked Chairman Behnam to address how the legislation’s structure would apply to retail investors.
  • Chairman Behnam indicated that while most of the participants that worked with CFTC-regulated markets were institutional investors, he testified that the CFTC did have a “fair amount” of retail investor participation in CFTC-regulated markets. He also mentioned how the CFTC worked closely with the NFA to ensure that there was sufficient market oversight and appropriate disclosures. He indicated that the Digital Commodities Consumer Protection Act of 2022 did contemplate the role that SROs (like the NFA) could play in helping to provide oversight for the digital assets markets. He further mentioned how the CFTC maintained core principles for market regulation that focused on combating fraud and manipulation and providing customer protections and disclosures. He then discussed how commodities and securities had very different disclosure regimes. He explained how securities disclosure requirements entailed the good faith bridging of information gaps between the security’s issuer and the security’s investor. He noted however that there did not exist a similar type of issuer within the commodities context. He stated that the CFTC needed to ensure that its markets remained transparent, fair, and orderly and that customers understood market-based risks when they made capital allocation decisions.

Sen. Deb Fischer (R-NE):

• Sen. Fischer noted how SEC Chairman Gary Gensler was reportedly working with the CFTC to develop a formal memorandum of understanding (MoU) that would establish a unified approach to the regulation of digital assets and digital assets exchanges. She asked Chairman Behnam to address the importance of having a unified approach to overseeing these assets and exchanges across regulators.
  • Chairman Behnam called it important for there to exist a mutual understanding between regulators (and particularly market regulators) about how to oversee markets. He stated that there always existed an intersection between the CFTC and the SEC because there were dually registered entities and individuals. He asserted that MOUs or less formal agreements therefore played key roles in enabling coordination across regulators.
• Sen. Fischer interjected to ask Chairman Behnam to indicate whether the CFTC was currently working to develop a formal MoU with the SEC regarding the regulation of digital assets and digital assets exchanges.
  • Chairman Behnam testified that the CFTC was currently not working to develop a formal MoU with the SEC regarding the regulation of digital assets and digital assets exchanges. He stated that he talked with SEC Chairman Gensler on a frequent basis and expressed his openness to having the CFTC develop an MoU-type document with the SEC if needed.
• Sen. Fischer asked Chairman Behnam to indicate whether the CFTC could initiate an MoU with the SEC on its own or if the CFTC would require guidance from Congress in order to pursue such an MoU.
  • Chairman Behnam stated that the CFTC was able to pursue an MoU with the SEC on its own and mentioned how the CFTC and the SEC already maintained several MoUs, including MoUs on enforcement matters.
• Sen. Fischer then mentioned how Nebraska had recently passed state legislation that allows for digital asset depositories to be created. She explained that this legislation allowed for state-chartered banks in Nebraska to offer digital asset services to their customers. She noted that Nebraska was the second state in the U.S. to pass this type of legislation. She expressed interest in how state regulators would work with federal regulators on overseeing the digital assets space moving forward, especially regarding investor education and protection issues. She asked Chairman Behnam to provide his views on the relationship between the CFTC and state market regulators on digital assets issues.
  • Chairman Behnam remarked that state regulators played critical roles in their oversight of markets and noted how the CFTC lacked the capacity and resources to fully oversee markets across the U.S. He asserted that state regulators were especially important for ensuring market integrity at the state, local, and district levels. He noted how the CFTC maintained MoUs with the North American Securities Administrators Association (NASAA) to support their coordination efforts. He noted that while the Digital Commodities Consumer Protection Act of 2022 would preempt states from imposing registration requirements on digital asset entities, he highlighted that the legislation would preserve state authority over anti-fraud measures. He called this anti-fraud authority “critical” for state attorneys general to oversee bad actors at the local level. He remarked that the CFTC would continue to use its existing relationships with state regulators to address investor information, disclosure, and education needs and to combat fraud.
• Sen. Fischer asked Chairman Behnam to indicate whether the CFTC had received any requests for guidance from states looking to pass their own digital assets laws.
  • Chairman Behnam testified that he had spoken with Alabama’s Securities Commissioner on digital assets issues. He also mentioned how he had delivered a speech at NASAA’s recent Washington, DC fly-in. He indicated however that he had not spoken with Nebraska’s Securities Commissioner and expressed interest in developing a relationship with Nebraska’s securities regulators.

Sen. Dick Durbin (D-IL):

• Sen. Durbin applauded the CFTC’s performance and stated that the CFTC had enabled the U.S. to establish global leadership in its mercantile exchanges and futures market. He noted how 20 percent of Americans have either invested in or traded cryptocurrencies and highlighted how a significant number of these cryptocurrency investors were lower income individuals. He raised concerns that many retail investors would lose money from cryptocurrency trading and noted how the cryptocurrency market had recently experienced a downturn. He further mentioned how some cryptocurrency platforms had recently suspended withdrawals and transfers and how certain stablecoins had recently collapsed. He called the U.S. fortunate to not have cryptocurrencies inextricably tied to its banking system. He raised concerns over the recent announcement from Fidelity Investments that it would include cryptocurrencies in retirement accounts and stated that this move could imperil retirement accounts in the event of a market downturn. He also raised concerns that the U.S.’s regulatory proposals for digital assets were not robust enough. He also dismissed the assertions that a lack of regulatory certainty would drive digital assets activity abroad. He asked Chairman Behnam to comment on these assertions.
  • Chairman Behnam remarked that the U.S. needed to take a deliberate, cautious, and patient approach to digital assets regulation. He stated however that the U.S. needed to also move forward on digital assets regulation given the disruptiveness of digital assets technology.
• Sen. Durbin asked Chairman Behnam to indicate how much money the CFTC would need to regulate cryptocurrencies.
  • Chairman Behnam noted how he had previously estimated that the CFTC would need $100 million to regulate cryptocurrencies. He indicated that CFTC staff had subsequently looked into this matter and estimated that the CFTC would require $112 million over three years to regulate cryptocurrencies. He indicated that this amount would be largely front loaded to support rulemaking, hiring, training, and outreach.
• Sen. Durbin interjected to ask Chairman Behnam to indicate the CFTC’s current annual budget.
  • Chairman Behnam stated that the CFTC’s current annual budget was $320 million.
• Sen. Durbin commented that the Digital Commodities Consumer Protection Act of 2022’s user fee would provide a “substantial infusion” of money for the CFTC.
  • Chairman Behnam emphasized that the $112 million estimate was for three years. He estimated that the CFTC would require $40 million for the first of the three years. He stated that these estimates were based on rulemakings, reports, and engagement with industry.
• Sen. Durbin expressed concerns that the CFTC was underestimating the costs associated with regulating digital assets. He reiterated that 20 percent of Americans had some type of financial involvement with cryptocurrencies and that retirement accounts were beginning to include digital assets. He commented that these dynamics meant that digital assets posed increasing risks to the U.S. economy.
  • Chairman Behnam expressed the CFTC’s willingness to further analyze the issue. He called the CFTC’s current estimates “off the cuff” and stated that the estimates were based on entities registered with FinCEN and a survey of the markets. He remarked that the CFTC might require additional funding to regulate cryptocurrencies and that the current $120 million figure was meant to serve as a more justified estimate. He also stated that growth or consolidation in the digital assets market could impact the total amount of funding needed.
• Sen. Durbin asked Chairman Behnam to confirm that digital assets stakeholders would pay for the CFTC’s regulation of cryptocurrencies through user fees.
  • Chairman Behnam answered affirmatively.

Sen. John Thune (R-SD):

• Sen. Thune called it critical for the U.S. government to possess the proper tools to regulate the digital commodities market and to provide certainty to digital commodities platforms. He mentioned how he was an original cosponsor of the Digital Commodities Consumer Protection Act of 2022. He stated that the legislation would clarify the regulatory uncertainty surrounding cryptocurrencies and provide the CFTC with explicit authority to establish rules and regulations for governing digital commodities. He then asked Chairman Behnam to discuss the CFTC’s recent experiences in regulating digital commodities.
  • Chairman Behnam remarked that the CFTC had been overseeing the digital commodities market since 2014. He stated that the CFTC had mostly relied upon an enforcement mechanism to oversee this market and that the CFTC had used its anti-fraud and anti-manipulation authorities. He testified that the CFTC had brought over 60 enforcement cases related to digital commodities and noted how some of these cases involved large incumbent cryptocurrency firms. He also mentioned how the CFTC had overseen listed futures contracts relating to digital assets since 2017. He further discussed how native and incumbent crypto firms were now purchasing CFTC-regulated entities, which was forcing the CFTC to bolster its knowledge and oversight of the digital assets space. He stated that this experience had prepared the CFTC to implement the Digital Commodities Consumer Protection Act of 2022 and to take a stronger oversight role over the digital assets market.
• Sen. Thune asked Chairman Behnam to respond to concerns that the CFTC is not equipped to serve as the lead regulator for digital commodities.
  • Chairman Behnam asserted that these concerns were not grounded in facts and highlighted how the CFTC had taken numerous enforcement actions within the digital commodities space. He stated that the CFTC was one of the world’s toughest overseers of the digital commodities space. He further stated that the CFTC’s experience with digital commodities technology had enabled the CFTC to develop digital commodities expertise. He remarked that the Digital Commodities Consumer Protection Act of 2022’s user fee provision would enable the CFTC to hire and train the right people to immediately police the digital commodities space.
• Sen. Thune asked Chairman Behnam to rank the U.S globally in terms of its digital assets and blockchain technology industries. He also asked Chairman Behnam to project the impact of the Digital Commodities Consumer Protection Act of 2022 on U.S. competitiveness in the digital assets and blockchain technology space.
  • Chairman Behnam remarked that the U.S. had one of the world’s most robust digital assets and blockchain technology industries given the size of its market and its broad availability of capital. He stated however that other jurisdictions had taken a “very aggressive” approach to digital assets and blockchain technology to retain innovation within their jurisdictions. He cautioned however that this approach could pose market risks. He contended that the U.S. should maintain its deliberate approach to digital assets. He stated that the Digital Commodities Consumer Protection Act of 2022 would foster regulatory certainty and provide incentives to innovators and entrepreneurs to remain in the U.S., which would bolster the U.S.’s global status regarding digital assets technology.
• Sen. Thune then asked Chairman Behnam to discuss how the Digital Commodities Consumer Protection Act of 2022 would help build upon the CFTC’s existing customer protections and enforcement actions.
  • Chairman Behnam discussed how the CFTC maintained multiple levels of safeguards, including reporting and recordkeeping requirements, conflicts of interest protections, cybersecurity protections, and prohibitions on the listing of contracts susceptible to manipulation. He also highlighted how the CFTC enforced these safeguards through inspections, examinations, and investigations. He remarked that the CFTC’s regulatory and oversight regime for the traditional derivatives market could be successfully applied to the digital assets market.

Sen. Cory Booker (D-NJ):

• Sen. Booker expressed optimism regarding the blockchain technology underlying digital assets and tokens. He stated that the Digital Commodities Consumer Protection Act of 2022 would address several concerns related to digital assets, including scams, risky projects with inadequate disclosures, and deceptive advertisements. He remarked that the U.S. currently lacked sufficient guardrails and transparency for digital assets and called for better regulation of the digital asset space. He contended that the Digital Commodities Consumer Protection Act of 2022 would both foster digital asset innovation and provide protections for digital assets market participants. He asked Chairman Behnam to respond to the criticisms that this legislation would merely provide “light touch” regulation for the digital assets market and not provide robust consumer protections. He also asked Chairman Behnam to address how the CFTC would work with the SEC to ensure that the U.S. maintained robust regulations for digital assets.
  • Chairman Behnam remarked that the CFTC’s rules were based on customer protections and asserted that the CFTC was one of the toughest regulators in the world. He stated that the CFTC vigorously enforced its rules and testified that the CFTC had returned six times its budget every year for the previous ten years.
• Sen. Booker interjected to comment that the additional resources provided by the Digital Commodities Consumer Protection Act of 2022 would enable the CFTC to engage in more significant enforcement activities. He then discussed how there were concerns surrounding the energy consumption involved in cryptocurrency mining. He asked Chairman Behnam to discuss how the Digital Commodities Consumer Protection Act of 2022 would enable the CFTC to address these energy consumption concerns.
  • Chairman Behnam discussed how the Digital Commodities Consumer Protection Act of 2022 requires the CFTC to issue a report on the energy consumption associated with cryptocurrencies. He noted that this report would provide recommendations to the Committee on how to reduce this energy consumption. He noted how the legislation requires the CFTC to work with other federal regulators with physical energy markets expertise on this report. He indicated that the legislation sets a six-month deadline for the report’s completion.
• Sen. Booker then expressed concerns over the U.S.’s persistent gender and racial wealth disparities. He noted how women and African Americans were overrepresented within the digital assets space, which he called concerning given the U.S.’s lack of regulations for digital assets. He stated however that digital assets could support the democratization of wealth. He mentioned how the Digital Commodities Consumer Protection Act of 2022 directs the CFTC to examine gender, racial, and ethnic demographics of customers participating in the digital markets and to use this information to inform its rulemaking. He asked Chairman Behnam to comment on this provision of the legislation.
  • Chairman Behnam expressed support for the provision of the Digital Commodities Consumer Protection Act of 2022 that directs the CFTC to examine gender, racial, and ethnic demographics of customers participating in the digital markets. He also mentioned how he had established a Chief Diversity Officer position at the CFTC and how the CFTC had moved the Office of Customer Education within its Office of Public Affairs. He remarked that the CFTC now had an infrastructure that would enable it to engage in outreach to lower income and historically marginalized communities. He stated that he viewed these outreach efforts as a priority. He asserted that the legislation’s authorities coupled with its user fee should support the dissemination of important information to consumers.

Sen. John Hoeven (R-ND):

• Sen. Hoeven noted how the Digital Commodities Consumer Protection Act of 2022 would have the CFTC regulate the digital asset spot market. He asked Chairman Behnam to address whether this change would significantly impact the CFTC. He also asked Behnam to indicate whether this change could lead the CFTC to regulate other spot markets beyond the digital assets market.
  • Chairman Behnam remarked that the Digital Commodities Consumer Protection Act of 2022 would not lead the CFTC to regulate spot markets beyond the digital assets market. He stated that the digital assets market was unique among commodities markets because it was highly speculative and retail-oriented. He contended that the CFTC therefore had a “very important” role to play within the digital assets market.
• Sen. Hoeven asked Chairman Behnam to discuss how the U.S.’s regulatory structure for digital assets should work. He noted how multiple federal agencies would have a role in regulating digital assets and expressed concerns that the lack of a clear regulatory structure could foster confusion and the shirking of responsibilities.
  • Chairman Behnam remarked that the U.S.’s regulatory structure for digital assets ought to resemble the U.S.’s current regulatory structure for traditional financial markets. He noted how the CFTC and the SEC have been forced to work together for the previous half century because many market participants were dually registered with both agencies. He asserted that the CFTC and the SEC could successfully apply this regulatory framework and foundation to the digital assets space. He stated that there existed good will and good faith between the CFTC and the SEC.
• Sen. Hoeven asked Chairman Behnam to indicate whether the CFTC was currently interfacing with other federal agencies that will be involved in overseeing and regulating digital assets. He also asked Chairman Behnam to indicate whether there existed a structure for interactions between these agencies. He further asked Chairman Behnam to address whether there were other legislative proposals under consideration that the CFTC was working to reconcile with the Digital Commodities Consumer Protection Act of 2022.
  • Chairman Behnam testified that the CFTC worked most closely with the SEC. He stated that the CFTC maintained close relationships with other federal regulators and highlighted the CFTC’s participation in both the President’s Working Group on Financial Markets (PWG) and the U.S. Financial Stability Oversight Council (FSOC). He testified that the CFTC was currently working on several projects related to digital assets with other federal agencies and stated that President Biden’s Executive Order (EO) on Ensuring Responsible Development of Digital Assets was directing this work. He remarked that there currently did not exist a structure governing these interactions and attributed this lack of structure to the current regulatory vacuum. He noted how there were currently digital assets legislative proposals surrounding stablecoins and cash markets. He contended that the Digital Commodities Consumer Protection Act of 2022 would be beneficial in enabling federal regulators to develop a coordinated regulatory structure.
• Sen. Hoeven asked Chairman Behnam to identify who was ensuring that the various digital assets legislative proposals under consideration could support a coordinated regulatory structure for digital assets.
  • Chairman Behnam suggested that the Committee look at its successful experience in developing Dodd-Frank and stated that Dodd-Frank had established a successful regulatory framework for derivatives that involved multiple agencies.
• Sen. Hoeven reiterated the importance of a coordinated regulatory structure for digital assets. He then noted how the CFTC had previously not relied upon user fees to fund their activities. He asked Chairman Behnam to provide his thoughts on the Digital Commodities Consumer Protection Act of 2022’s user fee provision.
  • Chairman Behnam stated that the Digital Commodities Consumer Protection Act of 2022’s user fee provision should not be difficult to implement. He called it “critically important” for the user fee to be structured in a way that the CFTC would need to work with Congressional appropriators to set upper limits for fees. He asserted that the CFTC would not be able to take on the new responsibilities being imposed by the Digital Commodities Consumer Protection Act of 2022 without having the ability to impose a user fee.

Panel II Opening Statements:

Mr. Todd Phillips (Center for American Progress):

• He expressed support for the Digital Commodities Consumer Protection Act of 2022 and stated that the legislation would provide “much needed” oversight of the digital commodities markets.
• He discussed how digital assets had grown significantly in recent years in terms of their usage and prominence.
  • He attributed this growth to the innovative nature of the technology underlying digital assets and a popular narrative that digital assets were revolutionizing the financial system.
• He remarked however that market manipulation, rug pulls, fraud, and theft had plagued the digital assets market.
  • He noted how $2.9 billion worth of cryptocurrencies had been stolen during the first four months of 2022 according to one estimate.
• He stated that the aforementioned problems posed significant risks to retail investors.
  • He noted how these investors often assumed that they were protected from such problems by federal financial regulations that applied to other types of financial assets.
• He asserted that the lack of federal regulation for digital assets was responsible for many of the problems within the digital assets space.
• He discussed how digital assets were generally either securities or commodities and noted how digital assets deemed to be securities were subject to various investor protections.
  • He indicated however that the CFTC only possessed limited anti-fraud and anti-manipulation over digital assets deemed to be commodities.
• He noted how the cryptocurrency industry has maintained that most digital assets are commodities, which has led issuers, exchanges, and depositories to not enforce securities laws and guardrails meant to protect digital assets retail investors.
  • He stated that the question of whether a digital asset constitutes a security or commodity was a facts and circumstances determination that was “appropriately” left to courts.
• He highlighted how Bitcoin was a commodity and indicated that Bitcoin accounted for nearly 40 percent of the cryptocurrency market by volume.
  • He lamented how Bitcoin’s status as a commodity meant that the U.S. lacks a regulatory regime for it.
• He noted that while some courts have applied legal tests to declare specific digital assets as securities, he commented that the case law on this subject remained nascent.
• He stated that judicial determinations finding that digital assets were commodities would hamstring federal regulators in their ability to oversee the assets.
• He remarked that the Digital Commodities Consumer Protection Act of 2022 would provide an appropriate regulatory framework for decentralized digital commodities and highlighted how the legislation would grant the CFTC with the authority to oversee digital commodities markets.
  • He emphasized that the legislation would not apply to securities and that existing securities laws would continue to apply to digital assets deemed to be securities.
• He also stated that the Digital Commodities Consumer Protection Act of 2022 would implement consumer protections for digital commodities.
  • He indicated that these protections would include prohibitions on trading platforms listing digital assets that were readily susceptible to manipulation from engaging in fraudulent, deceptive, or manipulative practices, from trading against their clients, and from insider trading.
  • He highlighted how these consumer protections currently apply to the securities markets.
• He further discussed how digital assets projects tended to have inconsistent and unverifiable disclosures that were often difficult to obtain.
• He noted how the Digital Commodities Consumer Protection Act of 2022 would require digital commodity platforms to disclose conspicuous and plain language information about listed assets to customers.
  • He also mentioned how the Digital Commodities Consumer Protection Act of 2022 would require digital commodity platforms to hold customer assets in segregated funds and would update the bankruptcy code to better protect the funds of customers.
• He lastly highlighted how the Digital Commodities Consumer Protection Act of 2022 would require the CFTC to address the impacts of cryptocurrencies on climate change and financial inclusion.
  • He commented that these provisions could encourage token issuers to migrate toward more energy efficient blockchains.

Ms. Shelia Warren (Crypto Council for Innovation):

• She remarked that the Digital Commodities Consumer Protection Act of 2022 could provide regulatory certainty to spur economic growth, create jobs, foster financial inclusion, and enhance privacy and security.
• She asserted that cryptocurrencies were the current generation’s best chance for addressing inequities in financial and technical systems.
  • She stated that cryptocurrencies could provide a “more equal playing field” to people that lacked “meaningful” access to such systems.
• She contended that the Digital Commodities Consumer Protection Act of 2022 would help to provide clarity and oversight to the digital assets space and applauded the Committee for its bipartisan work on the legislation.
• She remarked that cryptocurrencies improve efficiency and accessibility, reduce costs, and remove frictions from financial transactions.
  • She specifically highlighted how cross-border payments underpinned by blockchains could lead to $4 billion in annual savings through reducing remittance fees.
• She also asserted that cryptocurrencies provided an “unprecedented” opportunity to boost financial equity and noted how financial services access challenges were particularly pronounced among lower income individuals, less educated individuals, and racial minorities.
  • She partially attributed this dynamic to the fact that these groups often did not trust traditional banks.
• She noted however that 37 percent of the U.S.’s underbanked population and 12 percent of Americans without access to financial services reported owning cryptocurrencies according to a 2021 Morning Consult poll.
• She stated that an ownership-based model was key to providing “meaningful” financial inclusion opportunities to historically excluded populations.
• She then discussed how cryptocurrencies had been used to swiftly distribute foreign aid to Ukraine during their military conflict with Russia.
  • She highlighted how Ukraine had received roughly $100 million in cryptocurrency donations and stated that this aid had arrived before more traditional forms of foreign aid could.
• She remarked that cryptocurrencies were global by nature and stated that other countries were not waiting for the U.S. to pursue their own cryptocurrency policies.
  • She mentioned how the European Union (EU), the United Kingdom (UK), South Korea, and China were all taking actions to position themselves to be global leaders with respect to cryptocurrencies.
• She asserted that forward looking digital assets regulation was “paramount” to U.S. national security and commented that there would be risks associated with U.S. companies becoming less predominant within the digital assets space.
  • She called for proactive policymaking to ensure that the U.S. maintains a competitive position within this space.
• She also stated that it would be important for the SEC and the CFTC to work together on digital assets regulation issues and for Congress to provide clarity as to when a digital asset constitutes a security.
• She lastly applauded the provisions of the Digital Commodities Consumer Protection Act of 2022 that would direct the CFTC to study the impacts of digital assets on underserved communities and energy consumption.

Ms. Christine Parker (Coinbase):

• She remarked that the U.S. government could either establish a digital assets regulatory framework that embraces the transformative nature of cryptocurrencies and protects consumers or impose an unworkable digital assets regulatory framework that pushes innovation and jobs overseas.
  • She warned that the second approach would lead many retail investors to access digital assets through unregulated foreign companies that did not comply with anti-money laundering (AML), consumer protection, and safety standards.
• She applauded the Committee for its introduction of the Digital Commodities Consumer Protection Act of 2022 and commented that this legislation would create a “robust” framework for the effective regulation of digital assets.
• She remarked that the U.S.’s current regulatory environment for digital assets was complex and disjointed.
  • She stated that the federal government has relied upon laws to oversee digital assets that have not kept pace with the underlying technology.
  • She stated that recent state laws and regulations governing digital assets were often inconsistent across jurisdictions.
• She noted how the Digital Commodities Consumer Protection Act of 2022 would amend the Commodity Exchange Act to create a regulatory framework for digital asset commodities spots markets.
  • She commented that this framework would fill existing gaps in federal oversight and create more consistent consumer protections throughout the U.S.
• She also stated that the Digital Commodities Consumer Protection Act of 2022 would leverage the CFTC’s existing framework for regulating futures and derivatives, which she called comprehensive and well-understood.
  • She mentioned how Coinbase currently operated a CFTC-regulated designated contract market (DCM) and expressed hope that Coinbase would soon operate a CFTC-regulated FCM.
• She discussed how the Digital Commodities Consumer Protection Act of 2022 would define digital commodities to include Bitcoin and Ethereum and emphasized that additional types of digital assets may fall under the legislation’s definition for digital commodities.
• She noted however that the Digital Commodities Consumer Protection Act of 2022 would not define what exactly constitutes a digital asset security and stated that this question remained unsolved.
• She mentioned how Coinbase employed a “rigorous” listing process to determine whether a given asset was legal, compliant, and secure before it listed the asset on its platform.
  • She stated that a key aspect of this process was determining whether the asset had characteristics of a security.
• She testified that Coinbase had approved and currently lists 219 assets for trading on its platform and expressed confidence that these assets were not securities.
  • She remarked however that Coinbase’s process was not scalable throughout the entire digital assets industry and stated that the process forced Coinbase to reject many assets that it might otherwise be lawfully permitted to list.
• She contended that the Digital Commodities Consumer Protection Act of 2022 could be strengthened through further defining digital asset commodities.
  • She urged Congress to make firm distinctions between different types of digital assets to ensure that the assets were being overseen by the appropriate regulator.
• She remarked that statutory clarity would help existing and new market participants to confidently offer new innovations to consumers in a safe and reliable way.

Dr. Heath Tarbert (Citadel Securities):

• He expressed support for the Digital Commodities Consumer Protection Act of 2022 and commented that the legislation would achieve the U.S.’s regulatory goals for digital assets.
• He first discussed how the CFTC was currently limited in its ability to write prophylactic rules for digital assets.
  • He noted that while several states had worked to develop prophylactic rules for digital assets, he asserted that the ensuing “patchwork” of differing regulatory regimes across states was ill-suited for a national market.
• He remarked that the Digital Commodities Consumer Protection Act of 2022 would address the aforementioned problem through granting the CFTC the authority to directly regulate digital commodity trading.
  • He commented that this approach would enable the digital commodity market to grow responsibly.
• He stated that having clear rules in place for digital commodities would enable market participants (including Citadel Securities) to enter the digital assets space more easily, which would bring stability to the space.
• He also remarked that the Digital Commodities Consumer Protection Act of 2022 would help Americans through enhancing customer protections.
  • He noted how the legislation focused on abusive trading practices, transparency issues, and conflicts of interest.
  • He further noted how the legislation would subject all platforms to financial and systems safeguard requirements.
• He then highlighted how the Digital Commodities Consumer Protection Act of 2022 was bipartisan in nature, which meant that it was more likely to weather political changes.
• He also stated that the Digital Commodities Consumer Protection Act of 2022’s use of principles-based regulation would allow for “reasonable yet flexible” compliance with core principles.
  • He commented that this approach would avoid the “loopholes” that arise when regulations are too detailed to keep pace with rapidly changing markets.
• He further remarked that the Digital Commodities Consumer Protection Act of 2022 would supplement the CFTC’s new authority through SROs, which he commented would provide a “first line of defense” for markets.
  • He also stated that the legislation would recognize the important role of regulators beyond the CFTC.
• He then provided three recommendations for improving the Digital Commodities Consumer Protection Act of 2022.
  • He first recommended that the Committee refine and narrow the legislation’s definition of digital commodity brokers and dealers.
  • He then recommended that the Committee add safeguards to the legislation to protect those that trade digital commodities that have been self-certified or otherwise approved and that were later reclassified as securities.
  • He lastly recommended that the Committee explicitly state that the legislation does not provide a license for reactive rulemaking by enforcement.

Ms. Denelle Dixon (Stellar Development Foundation):

• She first discussed how her organization, the Stellar Development Foundation, maintained the Stellar network, which is an open, permissionless, and decentralized blockchain network that is optimized for payments and asset issuance.
  • She stated that the Stellar network is particularly useful in supporting the use of stablecoins in payments.
  • She recounted how MoneyGram, Circle, and a growing number of digital wallets had recently launched a global service that enables the conversion of cash into digital assets (and vice versa) using the Stelar network.
• She then remarked that the Digital Commodities Consumer Protection Act of 2022 would help to support a regulatory framework that will enable payments services to flourish.
• She expressed support for the Digital Commodities Consumer Protection Act of 2022’s provision of authority to the CFTC to regulate spot markets.
  • She commented that the CFTC was well-suited to regulate spot markets given its history of vetting and approving new products.
• She also applauded the Digital Commodities Consumer Protection Act of 2022 for its inclusion of consumer protection and education provisions, as well as the legislation’s inclusion of study on the energy consumption of digital commodities.
• She further commended the Digital Commodities Consumer Protection Act of 2022 for establishing a process for listing stablecoins.
  • She specifically highlighted how the legislation would not consider payment stablecoins as securities, which was consistent with the recommendation from the PWG Report on Stablecoins.
• She then criticized the Digital Commodities Consumer Protection Act of 2022 for failing to address when a digital asset should be considered a commodity as opposed to a security.
  • She asserted that the test for determining whether a given asset constitutes a commodity or security created under the U.S. Supreme Court’s SEC v. W. J. Howey Co. decision (known as the Howey test) is unclear.
• She remarked that the digital assets industry “desperately” needed clarification as to when a digital asset constitutes a commodity versus a security and contended that the Digital Commodities Consumer Protection Act of 2022 would serve as the perfect vehicle for providing such clarity.
• She stated that the U.S. needs a practical and principles-based framework for digital assets that focuses on asset functionality.

Congressional Question Period:

Full Committee Chairman Debbie Stabenow (D-MI):

• Chairman Stabenow stated that a top goal of the Digital Commodities Consumer Protection Act of 2022 was to bring the trading of digital assets under federal oversight. She asked Mr. Phillips to identify the risks for consumers that could result from Congress’s failure to pass the Digital Commodities Consumer Protection Act of 2022.
  • Mr. Phillips noted how consumers had lost billions of dollars in recent years due to cryptocurrency scams, rug pulls, and hacks. He remarked that the Digital Commodities Consumer Protection Act of 2022 would enable the CFTC to write rules that would protect consumers from such scams, rug pulls, and hacks. He stated that the access to exchange data feeds under the legislation would enable the CFTC to find market manipulation and enforce its anti-fraud and anti-manipulation authority. He also noted that the legislation would require platforms to make appropriate disclosures to their consumers. He further noted how the legislation would allow for the CFTC to write rules around cybersecurity protections for platforms. He expressed his support for the Digital Commodities Consumer Protection Act of 2022.
• Chairman Stabenow then discussed how many individuals in historically underserved communities were using and trading cryptocurrencies. She noted how the Digital Commodities Consumer Protection Act of 2022 would direct the CFTC to study the racial, ethnic, and gender demographics of digital asset traders. She indicated that this study would help to inform the CFTC’s future outreach, education, and rulemaking efforts related to digital assets. She asked Ms. Warren to provide recommendations for the CFTC regarding outreach strategies.
  • Ms. Warren called it “critically important” for policymakers to consider community needs as part of their outreach efforts. She mentioned how she was a cofounder of the Crypto Research and Design Lab, which employed technology ethnography to identify the needs of historically underserved communities. She stated that this identification of needs helped to inform the ways that cryptocurrencies could be used to improve financial access for these communities. She asserted that this type of analysis should inform disclosure regimes and stated that disclosures ought to be made in plain language. She further called for education that focused on baseline digital literacy and commented that this education should occur in community colleges, post-secondary schools, and secondary schools. She stated that this education was important for ensuring that Americans would be prepared for the global digital economy, regardless of their backgrounds.
• Chairman Stabenow then mentioned how the U.S. House Committee on Financial Services was working on legislation to regulate stablecoins. She asked Ms. Dixon to address how this legislation from the U.S. House Committee on Financial Services would interact with the Digital Commodities Consumer Protection Act of 2022.
  • Ms. Dixon noted how the stablecoin legislation under consideration from the U.S. House Committee on Financial Services would provide a clear definition for stablecoins. She mentioned how many commonly marketed stablecoins did not have 1:1 backing with a reference asset, audit requirements, or transparency. She stated that the establishment of a clear definition for stablecoins would therefore be important for protecting consumers and promoting stablecoin innovation.

Sen. Kirsten Gillibrand (D-NY):

• Sen. Gillibrand remarked that DeFi had “enormous” opportunity to foster innovation and financial inclusion. She noted that while the Digital Commodities Consumer Protection Act of 2022 did include DeFi in its regulatory framework, she expressed concerns that the legislation did not adequately address the topic. She asked Ms. Warren to provide recommendations for improving the Digital Commodities Consumer Protection Act of 2022 to better account for DeFi. She commented that the legislation’s current definitions appeared to be overly broad.
  • Ms. Warren remarked that the DeFi definition proposed under the Digital Commodities Consumer Protection Act of 2022 was “unworkable” based on how DeFi actually operated. She stated that DeFi was rapidly evolving and that the market had not had sufficient time to choose the most appropriate models. She expressed agreement with Sen. Gillbrand’s optimism regarding the ability of DeFi to foster financial inclusion. She then asserted that it was important for DeFi innovation to occur within the U.S. She raised concerns that the offshoring of DeFi innovation would result in consumer protection principles-based frameworks not being embedded in DeFi applications. She recommended that policymakers study the DeFi space and wait to develop policies for this space. She expressed concerns that overly prescriptive rules could unnecessarily limit opportunities within the DeFi space.
• Sen. Gillibrand asked Ms. Warren to explain why the Digital Commodities Consumer Protection Act of 2022’s definitions might fail to adequately address DeFi.
  • Ms. Warren explained that DeFi enabled precise peer-to-peer connection between two parties that were engaging in a transaction. She emphasized that there did not exist a centralized intermediary for this connection.
• Sen. Gillibrand interjected to comment that DeFi was software and not an entity.
  • Ms. Warren expressed agreement with Sen. Gillibrand’s comment. She remarked that it was difficult for policymakers to oversee DeFi-enabled exchanges of value given how these exchanges did not involve a centralized governing entity. She stated that policymakers must consider a regulatory approach to this issue that would both protect consumers while retaining the innovation provided by DeFi. She asserted that this regulatory approach must involve a principles-based framework that was based on the U.S.’s historical approach to financial services.
• Sen. Gillibrand then highlighted how the Digital Commodities Consumer Protection Act of 2022 would have the CFTC study the energy consumption associated with digital currencies. She asked Mr. Phillips to discuss this study and to identify other federal agencies that might help the CFTC to study the issue. She further asked Mr. Phillips to project the long-term impact of this study.
  • Mr. Phillips mentioned how the Digital Commodities Consumer Protection Act of 2022 would direct the CFTC to conduct a study that would examine the energy impacts of several digital asset commodities. He noted that the legislation would require the CFTC to list the energy impacts of various digital asset commodities so that investors can make more informed decisions. He predicted that investors would tend to move toward digital commodities that consume less energy, which would create incentives for digital assets to reduce their energy consumption. He then suggested that the CFTC consult with the U.S. Federal Energy Regulatory Commission (FERC), the SEC, FSOC, and banking regulators on its energy consumption study.
• Sen. Gillibrand then discussed how cryptocurrencies had played a key role in swiftly delivering aid to Ukraine following Russia’s invasion of the country. She stated that cryptocurrencies could play a key role in supporting remittances and access to capital for disadvantaged communities. She asked Ms. Warren to discuss how cryptocurrencies and blockchain technology could improve access to capital during times of need.
  • Ms. Warren asserted that the current situation in Ukraine would be very different had cryptocurrency donations not been made during the war’s first days. She noted how these cryptocurrency donations had provided immediate support to the country as it awaited more substantial aid packages from other governments. She stated that the transparent nature of blockchains enabled international observers to see where this cryptocurrency aid went and what this aid was used for. She also discussed how cryptocurrencies had been a “critical tool” for activists and noted how many of these activists were working with the U.S. government against rogue states. She elaborated that cryptocurrencies enabled the U.S. government to covertly send money to these activists. She also highlighted how women in Afghanistan had used cryptocurrencies to protect their funds from Taliban seizure. She remarked that the aforementioned examples demonstrated the importance of cryptocurrencies during times of crisis. She further stated that cryptocurrencies could improve access to financial services within the U.S.

Full Committee Ranking Member John Boozman (R-AR):

• Ranking Member Boozman noted how some consumer advocacy groups were claiming that the Digital Commodities Consumer Protection Act of 2022 would erode the SEC’s authority to police the cryptocurrency market and that the CFTC was ill-prepared to protect retail consumers. He asked Mr. Phillips to confirm that the Digital Commodities Consumer Protection Act of 2022 would defer to the SEC on matters involving digital assets considered to be securities. He also asked Mr. Phillips to confirm that the legislation would only provide the CFTC with regulatory authority over digital commodities. He further asked Mr. Phillips to address how the legislation’s inclusion of user fees would ensure that the CFTC could afford its new responsibilities.
  • Mr. Phillips remarked that the Digital Commodities Consumer Protection Act of 2022 would specifically defer authority over digital securities to the SEC and would reserve authority over digital commodities for the CFTC. He noted that observers had identified a limited number of places where the SEC’s authority might be impinged under the legislation. He indicated that his written testimony included recommendations for addressing these impingements. He also stated that the legislation would provide the CFTC with the capacity and expertise to address digital commodities markets. He then asserted that all federal regulators require additional resources and called on Congress to increase the CFTC’s budget. He stated that the legislation’s inclusion of user fees would help to ensure that the CFTC possessed adequate funding to carry out its new responsibilities.
• Ranking Member Boozman then asked Ms. Parker to discuss Coinbase’s various state and federal regulators. He specifically asked Ms. Parker to identify areas where there might exist regulatory gaps relating to consumer protection. He further asked Ms. Parker to address why the U.S. ought to provide the CFTC with exclusive regulatory authority over digital commodities (as was proposed in the Digital Commodities Consumer Protection Act of 2022).
  • Ms. Parker remarked that Coinbase was under the jurisdiction of many state and federal regulators. She discussed how state banking regulators were often responsible for enforcing consumer protections through their oversight of money transmitter licenses. She asserted that Coinbase was not unregulated and remarked that the problem was that regulation was inconsistent across states. She specifically highlighted how each state maintained their own disclosure requirements for consumers and commented that not all of these requirements were tailored to digital assets. She contended that the Digital Commodities Consumer Protection Act of 2022 solve a “critical gap” in the current regulatory landscape through providing a unitary federal regulator. She stated that this regulator would apply a consistent set of consumer protection requirements to all consumers and that these requirements would be tailored to the unique nature of digital assets. She expressed support for having the CFTC oversee the digital commodities spot market.
• Ranking Member Boozman then noted how Dr. Tarbert’s testimony had highlighted a scenario in which a market participant listed a digital commodity that the SEC subsequently threatened to reclassify as a digital security. He asked Dr. Tarbert to provide suggestions for addressing this type of scenario.
  • Dr. Tarbert remarked that market participants were looking for regulatory clarity and coherence. He stated that market participants desired safe harbor protections if a digital commodity was reclassified as a digital security. He commented that safe harbor protections protect guard market participants from civil litigation and enforcement actions.
• Ranking Member Boozman then discussed how the energy consumption required for proof-of-work consensus mechanism transactions could be significant. He highlighted how the Digital Commodities Consumer Protection Act of 2022 would study this energy consumption. He asked Ms. Dixon to provide her views on measuring the energy consumption of the various consensus mechanisms within the cryptocurrency space.
  • Ms. Dixon expressed support for the Digital Commodities Consumer Protection Act of 2022’s study of the energy consumption of cryptocurrency consensus mechanisms. She expressed hope that this study would create a framework for measuring the carbon output of cryptocurrency consensus mechanisms. She mentioned how Ethereum had recently moved from a proof-of-work consensus mechanism to a proof-of-stake consensus mechanism. She called this move a “momentous shift” in terms of increasing the sustainability of the Ethereum network. She testified that the Stellar Development Foundation had engaged PricewaterhouseCoopers to measure the Stellar Network’s sustainability. She expressed support for similar efforts to assess the sustainability impacts of blockchain networks.