The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets (U.S. House Committee on Agriculture)

Hearing	The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets
Committee	U.S. House Committee on Agriculture
Date	June 6, 2023

 

Hearing Takeaways:

• The Current State of the Digital Assets Market: The hearing focused on the current regulatory environment for digital assets and ongoing trends within the digital assets space. Committee Members and the hearing’s witnesses expressed general agreement that the U.S. currently lacks a robust regulatory framework governing digital assets, which has resulted in stakeholder uncertainty and market volatility. Full Committee Chairman Glenn “GT” Thompson (R-PA), Mr. Giancarlo, and Mr. Grewal also highlighted how blockchain technology and digital assets can provide numerous benefits, including improved banking and financial services, data privacy, supply chain logistics, digital forms of identification (ID), and health care records.
  • Lack of Regulation for the Digital Assets Spot Market: Committee Members and the hearing’s witnesses expressed concerns over how there is currently no federal regulatory framework for digital asset spot commodities market. They highlight how the U.S. Commodity Futures Trading Commission (CFTC) only has regulatory jurisdiction over the digital asset commodity derivatives market. They also noted how the CFTC has limited anti-fraud and anti-manipulation enforcement authority over the digital asset spot market and that the CFTC can only respond to this fraud and manipulation after it has already occured. They called this lack of regulatory authority for the digital asset spot commodity market concerning given how Bitcoin and Ether (which comprise 60 percent of the digital asset market) are widely considered to be commodities.
  • Lack of Digital Assets Registration Opportunities: Mr. Grewal and Mr. Gallagher both testified that their companies (Coinbase and Robinhood Markets, respectively) had attempted to register with the U.S. Securities and Exchange Commission (SEC) as special purpose broker-dealers (SPDCs), alternative trading systems (ATSs), and national securities exchanges (NSEs). They stated that the SEC had rebuffed these registration attempts and attributed the SEC’s refusals to approve the registrations to existing securities laws and rules that do not adequately account for the unique nature of digital assets. 
  • Lack of Clarity Surrounding the Classification of Digital Assets: Committee Members, CFTC Chairman Behnam, and Mr. Gallagher discussed how regulators and market participants often experience challenges and controversies when attempting to classify digital assets as commodities, tokens, or other asset types for the purposes of regulatory treatment. They cautioned that that the current test for determining the status of a given asset under the U.S. Supreme Court’s SEC v. W.J. Howey Co. decision (known as the Howey test) is not always straightforward to apply.
  • CFTC Enforcement Actions: Several Committee Members expressed in interest in how the CFTC is employing its existing anti-fraud and anti-manipulation authorities to police the digital assets space. CFTC Chairman Behnam testified that the CFTC has brought over 80 cases that have resulted in over $4 billion in penalties and restitution. He expressed concerns however that even more illegal activity is occurring within the digital assets space that the CFTC cannot address under current law. 
  • SEC Enforcement Actions: Committee Republicans expressed concerns that the SEC has taken a “regulation by enforcement” approach to digital assets, which they called inappropriate for governing markets, adequately protecting customers, and promoting innovation. They noted how the SEC had filed a lawsuit against digital asset exchange Coinbase for listing unregistered securities on the morning of the hearing. Mr. Grewal (who is Coinbase’s chief legal officer) described this lawsuit as “disappointing, but not surprising.”
  • Foreign Regulatory Frameworks for Digital Assets: Committee Members, CFTC Chairman Behnam, Mr. Giancarlo, Mr. Grewal, Mr. Gallagher, and Mr. Lukken expressed concerns over how other jurisdictions, including the European Union (EU), Singapore, Hong Kong, and the United Kingdom (UK), have already developed their own regulatory frameworks for digital assets. They stated that these foreign regulatory frameworks for digital assets put the U.S. digital assets industry at a competitive disadvantage and are driving digital assets activity and innovation abroad. Mr. Giancarlo further expressed concerns that the U.S.’s failure to establish its own regulatory framework for digital assets will lead other jurisdictions to better influence the global regulations for digital assets.
  • Recent Problems in the Digital Assets Market: Committee Democrats discussed how several large digital asset companies have recently collapsed and filed for bankruptcy and how the CFTC and other federal financial regulators have pursued enforcement actions against several of these companies for abusive and manipulative trading practices. CFTC Chairman Behnam attributed many of these problems to the fact that the CFTC has limited authority to oversee the digital assets space. He highlighted however that the CFTC’s regulatory authority over LedgerX (which was an FTX entity) had allowed LedgerX to survive after FTX had declared bankruptcy in 2022 while over 130 other FTX entities had not been able to survive the bankruptcy.
• Potential Digital Assets Legislation: The hearing largely considered a recently proposed discussion draft bill from U.S. House Committee on Agriculture Chairman Glenn “GT” Thompson (R-PA) and U.S. House Committee on Financial Services Chairman Patrick McHenry (R-NC). This discussion draft bill would provide the contours of a statutory framework for digital assets and seeks to provide certainty, fill regulatory gaps, and bolster innovation. Committee Members and the hearing’s witnesses expressed interest in building upon this discussion draft bill to develop comprehensive and bipartisan legislation that can be signed into law. Committee Democrats expressed frustration however that the discussion draft bill had only been released one week before the hearing and stated that they had been provided with limited opportunity to review the proposal and provide input on it. Full Committee Ranking Member David Scott (D-GA) further expressed concerns that the discussion draft bill does not respond to the CFTC’s wants and needs and questioned whether this bill would establish clear regulatory and registration guidelines. Moreover, CFTC Chairman Behnam and Mr. Berkovitz asserted that any new digital assets legislation must not undermine existing law, including the Commodity Exchange Act (CEA), the Securities Act of 1933, and the Securities Exchange Act of 1934.
  • CFTC Regulation, Registration, and Oversight of Digital Assets: Committee Members and the hearing’s witnesses expressed interest in having legislation establish a regulatory, registration, and oversight regime for digital assets at the CFTC. They stated that these new authorities would enable the CFTC to proactively police the digital asset commodity spot markets (which are currently not subject to CFTC registration), oversee digital asset intermediaries, establish a disclosure regime, require segregation of customer funds, and prohibit conflicts of interest. Mr. Lukken also suggested that Congress further consider whether to provide separate registration processes at both the broker and exchange levels. Rep. Jim Baird (R-IN), Mr. Giancarlo, Mr. Grewal, and Mr. Gallagher further stated that the legislation should impose deadlines on the CFTC and the SEC to complete their joint definitional rulemakings for digital assets and warned that the absence of a deadline could lead the financial market regulators to prioritize other non-pressing matters. Mr. Berkovitz cautioned however that Congress should be cognizant of the CFTC’s limitations when seeking to expand its jurisdiction to cover assets traditionally regulated by the SEC. He noted how the function of the CFTC-regulated markets is price discovery and risk management while the function of the SEC-regulated markets is capital formation. He also highlighted how the CFTC’s regulatory regime is designed for the wholesale market and that the SEC’s regulatory regime by contrast is more retail-focused. 
  • Potential Exploitation of Regulatory Regime: Full Committee Vice Chairman Austin Scott (R-GA) expressed interest in determining which cryptocurrencies would qualify for CFTC regulation based on certain thresholds, such as the U.S. dollar value of a cryptocurrency or the number of individual owners involved in a cryptocurrency. He stated that a party may seek to obtain CFTC regulation for a given digital asset through manipulating the asset to meet the thresholds for CFTC regulation. He commented that a regulated cryptocurrency would likely be worth more than an unregulated cryptocurrency.
  • Digital Assets Disclosure Requirements: Committee Members, CFTC Chairman Behnam, and Mr. Gallagher expressed interest in developing disclosure requirements for digital assets that account for the unique characteristics of these assets. These characteristics include investment risk, cybersecurity risk, mining, settlement practices, and other related activities. Rep. John Duarte (R-CA) expressed concerns regarding the feasibility of digital asset disclosure requirements given that traditional metrics for securities (including competitive advantages, value propositions, corporate strategies, resources, and talent) are not always applicable to digital assets. Mr. Giancarlo suggested that third party data providers can facilitate investments within the digital asset commodities space.
  • Provisional Rulemaking: Full Committee Ranking Member Scott expressed concerns over the discussion draft bill’s provisional registration process and indicated that this process would be in place while the CFTC and the SEC undergo a resource intensive joint-rulemaking process. Chairman Behnam remarked that the discussion draft bill’s provisional registration framework would constrain the CFTC from using its existing authority to oversee the digital assets space. He stated however that this provisional period would also provide policy certainty to digital asset registrants as the CFTC implements these rules.
  • Determination of a Digital Asset’s Level of Decentralization: Committee Members, CFTC Chairman Behnam, Mr. Ginacarlo, Mr. Grewal, Mr. Gallagher, and Mr. Berkovitz expressed interest in having federal legislation determine when a digital asset achieves sufficient decentralization (or conversely becomes sufficiently centralized) to warrant a reclassification of the asset type. A digital asset’s level of decentralization can determine whether it is a commodity or a security and may fluctuate over time. They further expressed interest in establishing a process for the CFTC and the SEC to make such decentralization determinations.
  • The CFTC’s Principles-Based Regulatory Approach: Committee Members, CFTC Chairman Behnam, Mr. Lukken, and Mr. Berkovitz highlighted how the Commodity Futures Modernization Act of 2000 (CFMA) had provided the CFTC with a new principles-based regulatory regime. This law provides the CFTC with the ability to issue rules and guidance on core principles while providing “built-in flexibility” for entities to take a different approach if they can prove that the core principles are still being met. They asserted that this flexibility has allowed for innovative new products and market approaches and suggested that this approach should be considered when developing new digital assets legislation.
  • Role of Self-Regulatory Organizations (SROs): Committee Members, CFTC Chairman Behnam, and Mr. Luken expressed interest in how the CFTC will leverage SROs, including the National Futures Association (NFA), to oversee the digital assets space as part of any future regulatory framework for digital assets. CFTC Chairman Behnam remarked that the CFTC has a “great” relationship with the NFA and asserted that the NFA’s resources and relationships would make them a valuable and trusted partner in overseeing the digital assets market.
  • Provision of Funding for the CFTC to Develop Rules for and Oversee the Digital Assets Market: Committee Democrats, CFTC Chairman Behnam, Mr. Berkovitz, and Mr. Lukken remarked that federal digital assets legislation must provide the CFTC with sufficient funding to develop rules for and oversee the digital assets market. They warned that the failure to provide the CFTC with adequate funding would delay the Commission’s implementation of a regulatory regime and could result in reduced enforcement activities. Chairman Behnam estimated that it would cost the CFTC $120 million over three years to establish a new regulatory regime for the digital asset commodity spot market. He also estimated that this rulemaking process would take between six months and two years to complete. He recommended that Congress consider establishing a user fee-based system for the CFTC where CFTC registrants would pay proportional fees to help to financially support the Commission.
  • Financial Inclusion Considerations: Rep. Nikki Budzinski (D-IL) and CFTC Chairman Behnam stated that federal digital assets legislation must consider the impact of digital assets on financial inclusion. They noted how digital markets are often promoted as a means of fostering financial inclusion to populations that may be most vulnerable to the inherent risks associated with these assets and predatory financial schemes. CFTC Chairman Behnam remarked that the U.S. must provide disclosures and customer education for digital assets as part of these efforts to ensure that digital assets can support financial inclusion.
  • Climate Change Considerations: Rep. Shontel Brown (D-OH) and CFTC Chairman Behnam expressed interest in having federal digital assets legislation consider the impact of cryptocurrencies on climate change. CFTC Chairman Behnam suggested that the U.S. could further study the digital asset industry’s mining capacity and energy usage, as well as the types of energy sources that support cryptocurrency mining efforts. He also stated that investor disclosures regarding digital asset energy usage and mining techniques could help to address this issue. 
  • Previous Efforts to Expand the CFTC’s Regulatory Authority: Committee Members, CFTC Chairman Behnam, Mr. Berkovitz, and Mr. Lukken highlighted how Congress had previously expanded the authority of the CFTC to oversee the swaps and the retail foreign exchange (forex) markets. They stated that these efforts had been successful and can provide lessons for expanded CFTC regulation of the digital assets market.

Hearing Witnesses:

Panel I:

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

Panel II

1. The Hon. J. Christopher Giancarlo, Former Chairman, Commodity Futures Trading Commission
2. Mr. Paul Grewal, Chief Legal Officer, Coinbase
3. The Hon. Dan Gallagher, Chief Legal Compliance and Corporate Affairs Officer, Robinhood Markets, Inc.; Former Commissioner, U.S. Securities and Exchange Commission
4. The Hon. Dan Berkovitz, Former Commissioner, Commodity Futures Trading Commission; Former General Counsel, U.S. Securities and Exchange Commission
5. The Honorable Walt Lukken, President and Chief Executive Officer, Futures Industry Association; Former Acting Chairman, Commodity Futures Trading Commission

Member Opening Statements:

Full Committee Chairman Glenn “GT” Thompson (R-PA):

• He remarked that blockchain technology and digital assets can provide numerous benefits, including improved banking and financial services, data privacy, and supply chain logistics.
  • He called it important for digital asset consumers and market participants to enjoy the same long standing customer protections that are found in traditional financial markets.
• He discussed how Congress has debated the federal treatment of digital assets for nearly a decade, which has involved numerous hearings, bill introductions, and panel discussions meant to provide regulatory certainty and clarity for these novel technologies.
  • He asserted that further coordination between Committees and Members of Congress is required to address digital assets.
• He thanked U.S. House Committee on Financial Services Chairman Patrick McHenry (R-NC) for his willingness to collaborate with the U.S. House Committee on Agriculture on addressing digital assets.
  • He stated that the two Committees are seeking to develop digital assets legislation that would foster U.S. innovation and establish customer protections for digital asset-related activities and intermediaries.
  • He mentioned how the two Committees had held numerous member and staff education events regarding digital assets and highlighted how the two Committees had recently held a joint-subcommittee hearing on the topic.
• He remarked that current federal policies provide few “rules of the road” for parties that wish to engage with digital assets.
  • He commented that this lack of regulatory clarity has hampered the ability of regulators to pursue enforcement actions and has fostered confusion for both the digital assets industry and the digital assets market.
• He discussed how he had worked with Financial Services Committee Chairman McHenry on developing a discussion draft bill that would provide the contours of a statutory framework for digital assets.
  • He indicated that this discussion draft bill had been released the prior week and commented that this draft seeks to provide certainty, fill regulatory gaps, and bolster innovation.
• He emphasized however that this discussion draft will be improved upon through additional debates, stakeholder feedback, and technical assistance.
  • He expressed his interest in working with Congressional Democrats on this legislative proposal to develop a bipartisan legislative product.
• He called it incumbent on the Committee to bring certainty to the digital assets space and highlighted how other jurisdictions, including the EU, Singapore, Hong Kong, and the UK, have already developed their own regulatory frameworks for digital assets.
• He lastly mentioned how the SEC had just filed a complaint against digital assets exchange Coinbase and noted how a witness from the company would be testifying at the hearing.
  • He commented that while he could not speak to the specific allegations against Coinbase, he asserted that these recent charges demonstrate the importance of addressing digital assets.
• He remarked that the SEC’s current “regulation by enforcement” approach to digital assets is inappropriate for governing markets, adequately protecting customers, and promoting innovation.
  • He expressed hope that the Committee can develop a regulatory framework for digital assets that promotes customer protections, provides clear lines of authority to regulators, and enables regulated entities to understand their obligations under the law.

Full Committee Ranking Member David Scott (D-GA):

• He described the CFTC’s regulated markets as ever evolving and commented that the CFTC requires more resources to obtain the necessary talent and technology to oversee the space.
• He stated that the discussion draft bill under consideration at the hearing does not respond to the CFTC’s wants and the needs.
  • He asserted that this bill would instead create several complex and untested processes and questioned whether this bill would establish clear regulatory and registration guidelines.
• He expressed concerns over the discussion draft bill’s provisional registration process and indicated that this process would be in place while the CFTC and the SEC undergo a resource intensive joint-rulemaking process.
• He warned that changes in longstanding regulatory processes and practices increase the likelihood for mistakes and oversights to occur.
  • He noted how the discussion draft bill does not provide additional staffing or funding resources to the CFTC, which will contribute to the likelihood of such mistakes and oversights.
• He then remarked that the digital assets industry exposes all participants to serious potential financial risks and uncertainties.
  • He asserted that the digital asset commodity spot market operates under an ill-suited regulatory regime that varies substantially based on the states in which the trading platforms are operating.
• He stated that digital assets industry has demonstrated its fragility and vulnerability over the previous year and highlighted how this industry had lost billions of dollars in customer funds due to questionable and inefficient business practices.
  • He noted how these failures have included collapses of digital asset trading platforms (including Terra and FTX) and cybersecurity deficiencies.
  • He further mentioned how hackers had stolen a record $3.8 billion from cryptocurrency businesses in 2022.
• He asserted that these problems within the digital assets space should not be permitted to continue.

Panel I Witness Opening Statements:

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

• He called for Congress to address the lack of federal regulation over the digital asset commodity market.
  • He mentioned how the U.S. Financial Stability Oversight Council (FSOC) had unanimously issued a landmark 2022 report calling on Congress to enact legislation to address regulatory gaps in the spot market for non-security digital assets.
  • He commented that recent events within the digital assets space (including bankruptcies and frauds) bring added urgency for pursuing federal regulation of this market.
• He discussed how the Committee had previously worked on a bipartisan basis to make reforms to the then-unregulated swaps market following the 2008 Financial Crisis.
  • He commented that these reforms were based on core principles of sound market regulation, including transparency, reporting, and registration.
• He asserted that similar reforms are necessary to prevent future crises within the digital assets space and highlighted how one of the only FTX entities to avoid the broader 2022 FTX bankruptcy had done so because of CFTC regulation.
  • He explained that this regulation had mandated that registered entities maintain segregation of customer funds, sufficient financial resources, and proper governance.
• He contended that the broader digital asset commodity market should be subject to similar time-tested regulations focused on the protection of customer assets, surveillance of trading activity, prohibitions on conflicts of interest, and impositions of cybersecurity standards.
• He expressed encouragement with Congress and the Biden administration’s interest in addressing the current federal regulatory gaps involving digital asset commodities and in supporting legislation that would provide the CFTC with additional authority to address these gaps.
  • He asserted however that any new legislation must not undermine existing laws and stated that the SEC should use its robust authorities to protect customers and to address information gaps in areas where securities laws apply.
• He stated that Congress should ensure that the CFTC is fully empowered to require registered entities to make necessary disclosures regarding a variety of matters, such as investment risk, cybersecurity risk, mining, settlement practices, and other related activities.
  • He added that the CFTC should ensure that customers are receiving the best available prices and that customer assets are segregated and safeguarded in the event of a failure.
• He noted how digital markets are often promoted as a form of financial inclusion to populations that may be most vulnerable to the inherent risks associated with these assets and predatory financial schemes.
  • He asserted that digital assets legislation must recognize this dynamic and require additional studies to better understand how these populations interact with this market.
• He remarked that fraud and manipulation have plagued the digital assets market in the absence of federal regulation and stated that the CFTC has been “aggressive and proactive” in policing this market.
  • He testified that the CFTC has brought over 85 cases that have resulted in over $4 billion in penalties and restitution.
• He stated however that the CFTC’s legal authority within the spot market for digital asset commodity tokens is necessarily limited to acting only after the fraud has occurred.
• He contended that a key feature of any regulatory scheme for digital assets should be the provision of authority for the CFTC to proactively establish rules to minimize fraud in the first place.
  • He commented that this should include the authority to set stringent standards for preventing conflicts of interest, establish rules for maintaining fair, open, and transparent markets, and actively monitoring trading by market participants.
• He then discussed how the CFTC is the only financial market regulator that relies upon appropriated dollars from Congress for its funding.
  • He noted how other financial regulators have self-funding mechanisms in place that provide greater assurances that their fiscal year budget requests will be fully funded.
• He called it imperative for any regulatory taking on new authorities to possess the resources necessary to implement the new authorities.
  • He asserted that the CFTC cannot assume responsibility for these new authorities if it is forced to rely upon its existing resource levels.
• He reiterated his encouragement with the Committee’s efforts to address regulatory gaps within the digital assets space.
  • He expressed his willingness to engage with Congress on developing legislation to address these issues.

Congressional Question Period:

Full Committee Chairman Glenn “GT” Thompson (R-PA):

• Chairman Thompson asked Chairman Behnam to discuss the importance of having Congress proactively work to close the regulatory gaps within the digital asset commodity spot market.
  • Chairman Behnam highlighted the growth of commodity spot markets that are accessible to retail market participants. He noted how commodity markets have historically been wholesale oriented and used for risk management purposes. He stated however that technology developments and increased market access have enabled retail market participants to have greater exposure to commodity assets. He noted that the CFTC regulates derivatives and does not regulate commodity spot markets. He indicated that the SEC regulates securities markets, including both security spot markets and security derivative markets. He stated that the one area that the federal government does not oversee is commodity spot markets. He highlighted how Bitcoin and Ether comprise 60 percent of the digital asset market. He mentioned how a federal court has determined Bitcoin to constitute a commodity and argued that Ether should also be considered a commodity. He stated that this situation results in 60 percent of the digital assets market going unregulated. He called on Congress to fill this regulatory vacuum so that the CFTC can protect customers in this market.
• Chairman Thompson then asked Chairman Behnam to briefly elaborate on FSOC’s recommendations in their 2022 report for addressing the regulatory gaps in the non-security digital asset spot markets.
  • Chairman Behnam noted how FSOC had found that there exists a regulatory gap for digital tokens that are not securities. He also noted how FSOC had emphasized that regulators make use of all enforcement tools to the extent they can. He stated that the CFTC is using its existing authorities to oversee the digital assets space. He described these authorities as “quite limited.”
• Chairman Thompson asked Chairman Behnam to indicate whether his discussion draft bill would address the concerns raised by FSOC’s recent report.
  • Chairman Behnam stated that Chairman Thompson’s discussion draft bill would address the concerns raised by FSOC’s recent report through providing the CFTC with regulatory authority over commodity tokens.
• Chairman Thompson then noted that while the CFTC is significantly smaller than the SEC, he stated that the CFTC has demonstrated itself to be a nimbler regulator. He asked Chairman Behnam to indicate whether the CFTC can expand and adapt to a change in its remit.
  • Chairman Behnam mentioned how the CFTC had expanded its jurisdiction to oversee the swaps market following the 2008 Financial Crisis. He stated that the CFTC had been one of the most efficient and effective regulators in implementing this new regulatory scheme over the swaps market, which he described as large and complicated. He expressed confidence in the CFTC’s ability to oversee the digital asset commodities market so long as the CFTC receives appropriate funding. He stated that the CFTC has expertise and experience with digital assets.

Full Committee Ranking Member David Scott (D-GA):

• Ranking Member Scott asked Chairman Behnam to project what will happen if Congress fails to provide additional funding and resources to the SEC and the CFTC to implement Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill’s joint-rulemaking process.
  • Chairman Behnam remarked that the CFTC would not be able to appropriately and impactfully implement the discussion draft bill without additional resources. He stated that the CFTC would need staff to work on implementing very complex rules. He also stated that the CFTC would need additional resources (both hardware and software) for information technology (IT) purposes and cybersecurity purposes to implement the rules. He further noted how the discussion draft bill would create a new joint-advisory committee, which would have per diem requirements for committee members. He commented that all of the aforementioned requirements would impose financial burdens and responsibilities on the CFTC. He stated that the CFTC already must oversee growing futures, swaps, and options markets. He asserted that the CFTC would therefore require new and additional funding to take on new digital asset market oversight responsibilities.
• Ranking Member Scott asked Chairman Behnam to estimate the amount of time that the discussion draft bill’s joint-rulemaking process will take to complete without the provision of additional resources to the CFTC.
  • Chairman Behnam estimated that it would take between one and two years for the CFTC to implement new rules for digital assets if it were to receive additional resources. He estimated that it would take between three and four years for the CFTC to implement new rules for digital assets if it did not receive additional resources. He attributed this longer implementation period to the CFTC’s existing obligations and staff constraints.
• Ranking Member Scott asked Chairman Behnam to indicate whether there are any benefits to the discussion draft bill’s provisional framework that would provide the CFTC with authorities or information that it cannot currently assess.
  • Chairman Behnam remarked that the discussion draft bill’s provisional registration framework would constrain the CFTC from using its existing authority to oversee the digital assets space. He noted that this existing authority is very limited and focused on combating fraud and manipulation in the digital assets market. He commented that this framework could be improved. He discussed how the CFTC had finalized new rules for overseeing the swaps market within two years following the enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). He indicated that these rules included definitions for swaps, frameworks for swap dealers, and frameworks for swap execution facilities (SEFs). He stated that the finalization of these rules had enabled the CFTC to provisionally register swap dealers and SEFs for several years. He explained that the rationale for this approach was to provide for a registration pathway as the CFTC worked to implement the rules. He remarked that the Committee should consider reforms to the proposed provisional registration framework as the Committee further develops digital assets legislation. He commented that these reforms would ensure that the CFTC would not be constrained in its actions. He noted how the digital assets market is currently unregulated and expressed confidence in the CFTC’s ability to swiftly develop appropriate rules for this market if provided with appropriate funding. He stated that a provisional period following the adoption of CFTC digital asset rules would provide policy certainty to digital asset registrants as the CFTC implements these rules. He indicated that these registrants would include registered exchanges, brokers, and affiliated entities.
• Ranking Member Scott called it important for Congress to provide the CFTC with sufficient funding so that the CFTC can properly oversee the digital assets market.

Full Committee Vice Chairman Austin Scott (R-GA):

• Vice Chairman Scott remarked that cryptocurrencies are not securities and that the CFTC (rather than the SEC) should regulate cryptocurrencies. He noted how there are currently over 20,000 cryptocurrencies in the market. He asked Chairman Behnam to indicate whether the CFTC has conducted any analysis on the workforce it would need to oversee all of these cryptocurrencies.
  • Chairman Behnam estimated that the CFTC would require $120 million over three years to take on new digital asset market oversight responsibilities. He stated that this funding would enable the CFTC to increase its staff to develop a registration system for digital asset exchanges, brokers, custodians, and other parties.
• Vice Chairman Scott interjected to ask Chairman Behnam to indicate the CFTC’s current budget.
  • Chairman Behnam stated that the CFTC’s current budget is $365 million per year.
• Vice Chairman Scott commented that Chairman Behnam’s requested funding increase for the CFTC to take on new digital asset market oversight responsibilities would amount to about a 10 percent increase.
  • Chairman Behnam noted that the CFTC’s current budget request for fiscal year (FY) 2024 is $411 million. He then discussed how the CFTC has largely focused on Bitcoin and Ether because there exist listed futures contracts for these digital asset tokens. He mentioned however that the CFTC has brought enforcement cases involving other digital asset tokens (such as Litecoin). He stated that there currently exists debate surrounding which digital asset tokens constitute securities and which digital asset tokens constitute commodities. He commented that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill seeks to address this debate. He stated that there currently exist digital asset tokens that resemble securities based on current legal precedent. He noted however that there also exist many digital asset tokens that resemble and function like commodities.
• Vice Chairman Scott expressed interest in determining which cryptocurrencies would qualify for CFTC regulation. He asked Chairman Behnam to indicate whether there should exist thresholds for this regulation, such as the U.S. dollar value of a cryptocurrency or the number of individual owners involved in a cryptocurrency. He also asked Chairman Behnam to address how the CFTC could guard against the manipulation of these thresholds. He commented that a party that bought into an unregulated cryptocurrency and took actions to obtain CFTC regulation for the cryptocurrency could make a profit. He commented that a regulated cryptocurrency would likely be worth more than an unregulated cryptocurrency.
  • Chairman Behnam noted how most of the 20,000 current cryptocurrencies are not being traded. He stated that most cryptocurrency trading involves a very small number of cryptocurrency tokens. He remarked that a regulatory regime for digital assets would likely be similar to the existing regulatory regimes for futures, options, swaps, and equities. He explained that these regulatory regimes involve registered exchanges that must list assets for trading. He noted how assets that remain off an exchange would violate the CEA, the Securities Act of 1933, or the Securities Exchange Act of 1934. He predicted that many current digital asset tokens will disappear over time due to regulation and obsolescence.
• Vice Chairman Scott reiterated his concerns that a party could manipulate factors so that a digital asset token would become eligible for CFTC regulation (which would make the token more valuable). He expressed faith in Chairman Behnam’s leadership at the CFTC and ability to support Congress in developing digital assets legislation.

Rep. Jim Costa (D-CA):

• Rep. Costa noted how Chairman Behnam had previously told the U.S. Senate Committee on Agriculture, Nutrition, and Forestry that there would remain gaps in the federal regulatory framework for digital assets absent the provision of new authorities to the CFTC. He asked Chairman Behnam to discuss the lessons that should be learned from FTX’s collapse and to provide recommendations for how the U.S. can prevent future collapses of digital asset firms.
  • Chairman Behnam mentioned how the CFTC had regulated LedgerX (which was an FTX entity) and noted how FTX’s collapse had resulted in over 130 entities around the world filing for bankruptcy.
• Rep. Costa interjected to ask Chairman Behnam to indicate whether the CFTC could have anticipated FTX’s collapse.
  • Chairman Behnam stated that the CFTC had only overseen FTX through LedgerX. He described LedgerX as a highly regulated, well-resourced, and well-governed entity. He stated that the CFTC could not have anticipated FTX’s collapse because the CFTC lacks authority over digital asset commodity tokens. He also noted how much of FTX’s activities occurred outside of the U.S., which had limited the CFTC’s jurisdiction over the company. He expressed interest in working with Congress to provide this authority to the CFTC so that the CFTC can prevent future collapses of digital asset firms.
• Rep. Costa asked Chairman Behnam to indicate whether the U.S. could learn any lessons from foreign regulatory frameworks for digital assets.
  • Chairman Behnam noted how derivatives markets are global in nature because they involve large institutions needing to manage global risks. He commented that digital assets are similarly global in nature. He stated that there are many global efforts to coordinate rules for digital assets. He highlighted how the EU, the UK, Singapore, and Hong Kong have all pursued their own regulatory frameworks for digital assets. He called it important for international jurisdictions to coordinate their rules for these assets.
• Rep. Costa interjected to ask Chairman Behnam to indicate whether there exist models that should inform the U.S.’s rules for digital assets.
  • Chairman Behnam remarked that every jurisdiction is unique. He noted how the U.S. has the largest and most liquid markets in the world and has a very diverse set of market participants. He stated however that the digital asset regulatory frameworks developed by the EU, UK, and Singapore can inform the U.S.’s efforts to develop its own regulatory framework for digital assets.
• Rep. Costa asked Chairman Behnam to discuss the fears he has regarding the continuation of the status quo for overseeing digital assets.
  • Chairman Behnam remarked that the CFTC and the SEC have strong enforcement records regarding digital assets. He highlighted how the CFTC has brought 82 enforcement cases involving digital assets over an eight-year period. He commented that this enforcement activity is significant given how the CFTC lacks regulatory authority over the digital assets space. He indicated that these enforcement cases were based on inbound tips (and not proactive pursuit). He also stated that these enforcement cases are based on narrow authority provided to the CFTC. He expressed concerns that even more illegal activity is occurring within the digital assets space that the CFTC cannot address under current law. He also raised concerns that growth in the digital assets market can pose financial stability risks and other challenges for financial markets.
• Rep. Costa indicated that his question period time had expired and expressed interest in working to pass bipartisan legislation to address digital asset issues.

Rep. Rick Crawford (R-AR):

• Rep. Crawford highlighted how former FTX CEO Sam Bankman-Fried was not a CFTC registrant. He noted how the CFTC had overseen LedgerX (which was an FTX entity) and asked Chairman Behnam to elaborate on the CFTC’s relationship with LedgerX.
  • Chairman Behnam noted how LedgerX was a clearinghouse and trading platform that offered fully collateralized futures, options, and swaps. He mentioned how FTX had purchased LedgerX in the fall of 2021 and indicated that LedgerX had been registered with the CFTC for several years prior to this purchase. He discussed how FTX had submitted an application to the CFTC following this purchase to change LedgerX’s business model from being fully collateralized to margined. He commented that the unique nature of this proposed business model was that it would be non-intermediated.
• Rep. Crawford interjected to comment that this proposed move toward margined instruments could have posed problems. He then asked Chairman Behnam to discuss the potential licensure requirements for digital asset market participants and to address the role that the NFA would play in this process.
  • Chairman Behnam remarked that the CFTC has a “great” relationship with the NFA and commented that a SRO would be necessary to facilitate a regulatory scheme for digital assets. He stated that both Congress and regulators will need to decide whether to permit futures commission merchants (FCMs) or brokers to offer digital assets. He also stated that both Congress and regulators will need to decide whether to permit registered futures exchanges to offer spot digital asset commodities under a CFTC license. He noted how Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would propose the establishment of a digital asset commodity contract market. He commented that policymakers must work to address the aforementioned questions.
• Rep. Crawford interjected to note that his hometown has several vape shops that sell cryptocurrencies and called this situation problematic. He asserted that this situation underscores the need for the U.S. to establish licensure requirements for digital asset market participants. He then asked Chairman Behnam to address how the CFTC will determine which cryptocurrencies it will regulate.
  • Chairman Behnam first stated that no cryptocurrency tokens should be operating within an unregulated space. He remarked however that the U.S. would need to develop a way for determining which cryptocurrency tokens constitute commodities and which cryptocurrency tokens constitute securities. He then stated that the CFTC will need to work with state regulators and the NFA to identify and pursue bad actors that are selling cryptocurrencies. He remarked that the U.S. already pursues Ponzi schemes and “pump and dump” schemes in the futures space and the stock market and commented that digital assets simply provide another means of perpetrating these schemes. He asserted that the CFTC requires additional policing authority to proactively pursue bad actors within the digital assets space.
• Rep. Crawford lastly asked Chairman Behnam to indicate whether the CFTC is engaging with banking stakeholders on its work within the digital assets space.
  • Chairman Behnam testified that he is engaging in conversations with large bank leaders, brokers, and asset managers on digital asset issues. He stated that there is a general reluctance among these stakeholders to enter the digital assets space so long as it remains unregulated. He stated that while several of these stakeholders view certain digital asset tokens as viable financial instruments and have clients that are interested in purchasing these tokens, he commented that these stakeholders remain concerned over the unregulated nature of the digital assets market. He asserted that these stakeholders desire U.S. regulation because it is clear, predictable, and enforced.

Rep. Shontel Brown (D-OH):

• Rep. Brown first mentioned that the Committee has held three hearings on digital assets in the 118th Congress. She noted however that the Committee will only be holding its first hearing on food insecurity in the 118th Congress tomorrow. She called on the Committee to hold more hearings on specialty crops, minority farmers, and U.S. Department of Agriculture (USDA) operations. She then criticized Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill for not being drafted with input from Congressional Democrats. She commented that Committee Members had little time to review the discussion draft bill prior to the hearing. She mentioned how the U.S. House Committee on Appropriations’s Subcommittee on Rural Development, Food and Drug Administration and Related Agencies Committee had recently marked up legislation that would “dramatically” cut funding for the CFTC. She asked Chairman Behnam to address how this legislation’s proposed funding cuts for the CFTC would impact the Commission’s ability to implement digital assets legislation (such as the discussion draft bill).
  • Chairman Behnam noted how the CFTC’s current annual budget is $365 million and how the CFTC had requested $411 million for FY 2024. He indicated however that the recent appropriations legislation would only provide $345 million for the CFTC. He stated that a reduction in the CFTC’s annual funding would be “devastating” to the Commission given its current responsibilities, growing interest from new stakeholders, new risks around cybersecurity, and growing markets with increasingly diverse constituents. He added that the CFTC is facing elevated costs (which is a problem throughout the federal government). He stated that this proposed reduction in annual funding would likely force the CFTC to furlough some of its staff, limit its ability to issue regulations, and undermine its enforcement programs. He asserted the CFTC’s enforcement programs are the “gold standard” among global regulators. He highlighted how the CFTC has generally returned $8 to the U.S. Department of the Treasury for every $1 that it has received in Congressional appropriations over the previous ten years. He asserted that the CFTC should therefore be viewed as a good investment of federal tax dollars. He warned that a reduction in the CFTC’s funding would reduce the money collected by the U.S. Department of the Treasury.
• Rep. Brown then noted how the discussion draft bill would not address the impact that cryptocurrencies have on climate change. She asked Chairman Behnam to discuss the climate change issues that should be addressed as part of digital assets legislation.
  • Chairman Behnam noted how the climate change concerns related to digital assets involve cryptocurrency mining’s energy usage. He highlighted how some digital asset industry stakeholders have sought to address cryptocurrency mining methods to reduce energy usage. He applauded these efforts. He suggested that the U.S. could further study the digital asset industry’s mining capacity and energy usage, as well as the types of energy sources that support cryptocurrency mining efforts. He also stated that investor disclosures regarding the energy usage and techniques of cryptocurrency miners could help to address this issue. He expressed hope that these disclosures could encourage the use of less energy intensive cryptocurrency mining practices.

Rep. Mike Bost (R-IL):

• Rep. Bost discussed how FCMs play an important role in enabling farmers to participate in futures markets and hedge their risks. He also noted how FCMs provide farmers with access to exchanges and clearinghouses. He called it important for parties to understand the risks associated with futures trading. He asked Chairman Behnam to discuss the obligations that FCMs have to disclose these risks to their clients.
  • Chairman Behnam noted how the CFTC and the NFA maintain requirements for FCMs to provide disclosures to their customers. He stated however that many of the disclosures within the derivative and commodity markets relate to the risk of loss and the actual contract specifications themselves. He remarked that the U.S. must create fair, transparent, and orderly markets for commodity assets to trade on and that disclosure requirements can support these efforts. He stated however that securities have much more robust disclosure requirements than commodities. He elaborated that securities must provide more detailed disclosures regarding the nature of their assets and their issuers. He concluded that while FCMs have “serious and significant” disclosure responsibilities, he stated that these responsibilities are tailored to the unique attributes of commodity assets. 
• Rep. Bost asked Chairman Behnam to indicate whether the U.S. should require brokers, dealers, and exchanges within the digital asset commodities space to adhere to similar disclosure requirements.
  • Chairman Behnam answered affirmatively. He stated that the CFTC would need to identify specific areas that would warrant disclosure and commented that the Committee could provide direction to the CFTC on where to impose these disclosure requirements. He indicated that potential disclosure areas for digital asset commodity tokens would likely include risk of loss, information regarding the tokens themselves, and information regarding the regulated entity that is facilitating the trading of a given token.
• Rep. Bost asked Chairman Behnam to confirm that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would empower the CFTC and the NFA to require similar disclosures on digital asset commodities registered with the CFTC.
  • Chairman Behnam confirmed that the discussion draft bill would include such disclosure requirements.
• Rep. Bost then discussed how Dodd-Frank had “significantly” expanded the jurisdiction of the CFTC to cover the swaps markets. He noted how this increase in jurisdiction had required the CFTC to undertake increased rulemaking. He asked Chairman Behnam to indicate whether it would be a complex and difficult process for the CFTC to engage in rulemaking for digital asset commodities if the CFTC were to be provided with authority to oversee the digital asset commodity spot market. He also asked Chairman Behnam to estimate the costs and the length of this potential rulemaking process.
  • Chairman Behnam estimated that it would cost the CFTC $120 million over three years to establish a new regulatory regime for the digital asset commodity spot market. He noted how this effort would require establishing multiple rulemaking teams, new hardware and software systems, and increased cybersecurity protections. He also estimated that this rulemaking process would take between six months and two years to complete. He stated that the CFTC has experience in setting up new regulatory regimes and highlighted how the CFTC had established a new regulatory regime for swaps following the enactment of Dodd-Frank. He stated that the CFTC had been one of the most efficient, quick, and effective regulators across the world in implementing its over-the-counter (OTC) derivatives regulatory regime. He contended that the CFTC would be well-suited to adopt a new regulatory regime for the digital asset commodity spot market if it were to be provided with a mandate and appropriate funding.
• Rep. Bost concluded that the Committee must work to develop legislation to regulate digital assets.

Rep. Yadira Caraveo (D-CO):

• Rep. Caraveo discussed how several large digital asset companies have recently collapsed and filed for bankruptcy. She highlighted how the CFTC and other federal financial regulators have pursued enforcement actions against several of these companies for abusive and manipulative trading practices. She remarked that the regulatory framework proposed under Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would be very complex and would require an extensive joint-rulemaking process between the SEC and the CFTC. She also noted how this discussion draft bill would establish a new provisional registration framework while the rulemaking process is underway. She asserted that additional funding for the CFTC would be needed to support this rulemaking process and noted how the discussion draft bill lacks this funding. She also discussed how the CFTC has engaged in conversations regarding digital assets going back to 2014. She stated that the CFTC has subsequently developed significant expertise on digital asset policy topics. She also highlighted how the CFTC has engaged in interagency discussions and reports concerning the appropriate regulatory framework for these assets. She added that the CFTC has been active on digital asset enforcement issues. She asked Chairman Behnam to identify any issues that are missing from the discussion draft bill.
  • Chairman Behnam expressed concerns regarding the discussion draft bill’s provisional registration scheme and stated that Congress could develop a provisional registration scheme that does not “handcuff” the CFTC. He remarked that his main concern regarding the discussion draft bill is its lack of additional funding for the CFTC. He asserted that additional funding will be necessary if the CFTC is to expand its jurisdiction to include oversight of the digital asset commodity spot market. He also stated that the discussion draft bill could be improved through including more disclosure requirements. He suggested that these disclosure requirements could include energy usage information and financial inclusion information. He expressed concerns that there are many fraudsters who are using digital assets to take advantage of financially illiterate people in lower income communities. He then remarked that the discussion draft bill does include many of the core responsibilities and requirements that one would want of a market regulator. He indicated that these responsibilities and requirements relate to registration, surveillance, trading practice monitoring, conflicts of interest, governance, and financial resources. He commented that while he has not had significant time to review the discussion draft bill, he remarked that the bill contains many key elements. He stated that U.S. policymakers will need to further assess the bill and ensure that it comports with existing laws.
• Rep. Caraveo then noted how the discussion draft bill will change the definitions for commodities and securities. She explained that this bill would define whether a digital asset constitutes a commodity or a security based on how a digital asset is traded rather than on the digital asset’s characteristics. She asked Chairman Behnam to opine on this proposed change.
  • Chairman Behnam remarked that Congress must ensure that digital assets legislation does not compromise any existing laws (including the CEA, the Securities Act of 1933, and the Securities Exchange Act of 1934). He commended the bill for its focus on decentralization as a key characteristic of what would constitute a commodity or a security. He also stated that policymakers should consider where investors are obtaining their digital assets from. He commented that assets sold through issuers would be securities while assets sold through CFTC-regulated exchanges would more likely be commodities. He noted however that a token sold through a CFTC-regulated exchange could still be a security. He remarked that the discussion draft bill’s definitional provisions could be improved and expressed the CFTC’s willingness to work with the Committee on such improvements.

Rep. Dusty Johnson (R-SD):

• Rep. Johnson remarked the current lack of regulatory clarity for digital assets is causing digital assets market activity and innovation to move abroad. He noted however that some argue that the SEC is perfectly equipped to regulate the digital assets space and that new digital assets legislation is not necessary. He asked Chairman Behnam to respond to this argument.
  • Chairman Behnam remarked that digital assets regulation is not a “zero-sum game” and commented that providing the CFTC with increased authority to oversee the digital assets market will not result in another regulator losing authority. He stated that there exists a “regulatory vacuum” regarding digital asset commodities. He noted that while the SEC has authority over digital asset commodities, he emphasized that Bitcoin (which is the most popular digital asset) is a commodity. He noted that Bitcoin’s status as a commodity is based on a federal court decision. He indicated that Bitcoin is thus unregulated under current U.S. law. He also mentioned how some digital asset exchanges host tokens that have received legal clarity regarding whether the tokens constitute commodities or securities. He raised concerns that this dynamic could lead digital asset exchanges to only list a small number of tokens for which they have legal clarity. He called on the U.S. to fill the regulatory gaps within the digital assets market.
• Rep. Johnson then noted how Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would determine the extent to which a given asset is sufficiently decentralized. He asked Chairman Behnam to indicate whether the bill’s provisions related to the Howey test are sensible.
  • Chairman Behnam commended the discussion draft bill’s general framework for determining whether a given digital asset constitutes a security or a commodity. He stated however that this framework could be further improved upon and that the CFTC will need to further review the bill to provide more precise recommendations. He remarked that the U.S. must view decentralization as the core factor for determining whether a given asset constitutes a security or a commodity. He also commended the bill for its focus on determining where an investor is obtaining an asset from. He commented that an asset that comes from an issuer is more likely to be a security while an asset that comes from a third-party exchange or venue is more likely to be a commodity. He emphasized that neither of the aforementioned venues necessarily dictate the status of a given asset.
• Rep. Johnson expressed support for the discussion draft bill’s test for determining the extent to which an asset is decentralized. He then noted how Chairman Behnam had expressed interest in ensuring that the bill’s intermediary registration provisions would comport with the CFTC’s existing statutory authorities. He stated that the discussion draft bill did not want to simply apply existing broker and dealer requirements to digital asset intermediaries. He noted how the bill would create new definitions for digital commodity brokers and digital commodity dealers. He asked Chairman Behnam to opine on the bill’s approach of establishing new requirements for digital asset intermediaries. He commented that these new proposed requirements would be very similar to existing requirements.
  • Chairman Behnam expressed faith in the U.S.’s existing regulatory framework for futures, options, and swaps. He called this existing framework time-tested and well-functioning. He also stated that this framework is being constantly updated to reflect market evolutions. He remarked that the discussion draft bill would base its regulatory framework on principles of transparency, orderliness, and fairness. He expressed support for the bill’s focus on these principles.
• Rep. Johnson asked Chairman Behnam to indicate whether he supports the discussion draft bill’s approach of establishing new requirements for digital asset intermediaries (rather than on relying upon existing intermediary requirements).
  • Chairman Behnam expressed support for establishing unique classifications for digital asset intermediaries in the near-term. He stated that the U.S. will likely learn ways to align its regulatory approaches for digital assets and traditional assets over time.

Rep. Andrea Salinas (D-OR):

• Rep. Salinas discussed how frauds, scams, and manipulations in cryptocurrency markets have been growing and commented that these problems are especially present within her state of Oregon. She mentioned how the U.S. Federal Bureau of Investigations (FBI) had reported that Oregonians had lost $13.6 million in cryptocurrency scams during the first ten months of 2022. She also mentioned how a federal grand jury in Oregon had indicted four Russian nationals for their roles in a global cryptocurrency Ponzi and pyramid scheme in February 2023. She asked Chairman Behnam to discuss what the CFTC and other federal agencies are doing to protect Americans from fraud and manipulation within the digital assets space. She also asked Chairman Behnam to address how the CFTC and other federal agencies should work together to address these frauds and manipulations.
  • Chairman Behnam noted how there are two types of financial assets: securities and commodities. He indicated that digital asset tokens can be either securities or commodities. He stated that the CFTC currently has “extremely limited” authority to police spot markets in the event of fraud or manipulation. He noted that the CFTC must be reactive in policing the spot market and testified that the CFTC’s 82 enforcement cases involving digital assets have all involved frauds and manipulations being reported to the Commission. He called this approach suboptimal and asserted that there should exist proactive regulation, registration, and surveillance of markets, individuals, and institutions that are offering digital assets. He stated that while the CFTC is using its existing authorities to police the digital assets space, he reiterated his concerns that current limits on the CFTC’s authorities prevent the Commission from policing the entire digital assets market. He commented that digital asset markets already exists and called it incumbent on the CFTC to police this space.

Rep. Jim Baird (R-IN):

• Rep. Baird remarked that the segregation of customer funds has served as the “bedrock” for protecting customers within the derivatives market. He asked Chairman Behnam to explain how customer funds are segregated. He also asked Chairman Behnam to discuss appropriate fund segregation practices for protecting customers.
  • Chairman Behnam remarked that the CFTC views customer funds as “sacrosanct” and stated that the CEA and its associated rules make the segregation of customer funds the CFTC’s highest priority. He indicated that these policies seek to ensure that customer funds are completely separate and siloed from an intermediary or a broker that is facilitating the trading of futures, options, and swaps. He stated that the CFTC’s objective is to ensure that customer funds are completely protected from claims against an intermediary, broker, or FCM in the event of a failure or bankruptcy. He remarked that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would apply the CFTC’s existing customer fund segregation regime to the digital assets market. He commended the bill’s use of this approach. He discussed how the segregation of customer funds constitutes one of the greatest concerns for the digital assets market. He highlighted how FTX had failed to segregate the funds of its customers and how digital asset exchange Binance has allegedly failed to segregate the funds of its customers according to recent SEC and CFTC enforcement cases. He reiterated his assertion that Congress must work to ensure that customer funds are not being commingled and commended the bill’s work to address the issue. He expressed his willingness to work with the Committee on this issue.
• Rep. Baird then asked Chairman Behnam to discuss the CFTC’s relationship with the NFA and to address how this relationship impacts efforts to segregate customer funds.
  • Chairman Behnam called the NFA a longstanding and “close” partner of the CFTC. He described the NFA as the CFTC’s “boots on the ground” because of the NFA’s close relationships with CFTC registrants and stakeholders. He stated that the NFA provides “invaluable” disclosures, protections, and education and literacy campaigns for all market participants. He called SROs (like the NFA) an “absolute necessity” given the size and scale of the markets that the CFTC oversees. He expressed encouragement with the fact that the discussion draft bill considers a relationship with an SRO and applies time-tested principles to the digital assets market.
• Rep. Baird asked Chairman Behnam to indicate whether the CFTC’s working relationship with the NFA is positive and will provide additional customer protections.
  • Chairman Behnam answered affirmatively.

Rep. Nikki Budzinski (D-IL):

• Rep. Budzinski remarked that the digital assets industry has framed digital assets as tools to support greater financial inclusion. She noted how people of color are more likely to own digital assets. She indicated however that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill does not address the impact of digital assets on financial inclusion. She asked Chairman Behnam to discuss the utility of digital assets to support financial inclusion. She also asked Chairman Behnam to indicate whether the CFTC and the SEC should consider the effects of digital assets on financial inclusion in their registration and approval processes.
  • Chairman Behnam remarked that the CFTC is working through its Office of Customer Education and Outreach (OCEO) to provide the public with information regarding digital assets. He acknowledged however that these outreach efforts likely do not reach enough people. He expressed agreement with Rep. Budzinski’s concerns regarding the “friction” between the publicized financial inclusion opportunities of digital assets and digital asset use cases and impacts on unbanked and low-income communities. He noted how many lower income communities experience banking challenges and commented that digital assets could enable these communities to transfer funds more seamlessly and instantly across the world. He noted that many people in these communities have relatives located abroad and that digital asset technologies can improve remittances. He stated however that these remittance capabilities have risks associated with them. He noted that there often does not exist sufficient information regarding digital assets, that digital assets can be volatile, and that there can exist fraud within the institutions facilitating digital asset transfers. He remarked that the U.S. must provide disclosures and customer education for these assets. He also stated that the CFTC should examine digital asset use cases and whether these assets are actually supporting financial inclusion efforts. He noted that the CFTC cannot conclude whether digital assets are currently promoting financial inclusion or fraud.
• Rep. Budzinski expressed agreement with Chairman Behnam’s calls for more studies regarding the impacts of digital assets on financial inclusion. She asked Chairman Behnam to provide further details regarding the low-income populations that use digital assets. She also asked Chairman Behnam to discuss how digital assets legislation should address financial inclusion challenges to ensure that low-income populations are protected.
  • Chairman Behnam noted that low-income communities and racially diverse communities that are living in traditionally underbanked areas are increasingly using digital assets. He stated that digital assets reduce barriers to accessing financial markets and banking services because digital assets only require the user to possess a phone (as opposed to physical banks, credit scores, physical address information, and financial history information). He remarked that digital assets can both provide opportunities and pose risks to consumers. He asserted that policymakers must consider how digital assets impact vulnerable communities, which are more prone to using digital asset technologies.

Rep. Doug LaMalfa (R-CA):

• Rep. LaMalfa discussed how Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would impose new requirements on the digital asset commodities that would be registered with the CFTC. He indicated that these new requirements would relate to customer risk disclosures and conflicts of interest. He noted how the NFA already maintains similar requirements. He asked Chairman Behnam to discuss how the CFTC currently works with the NFA on these requirements and to project how these requirements would be applied to digital asset commodities.
  • Chairman Behnam remarked that the discussion bill would seek to apply current requirements for traditional markets to the digital assets space. He noted how the CFTC currently works closely with the NFA to implement disclosures regarding assets and risks of loss, conflict of interest, anti-money laundering (AML) requirements, and know your customer (KYC) requirements for both retail and institutional market participants. He asserted that these requirements are key for protecting investors and have been developed based on experience and previous frauds. He commented that these requirements are time-tested and promote information flows to investors that enable informed decision making. He expressed interest in applying these requirements to the digital assets market.
• Rep. LaMalfa interjected to ask Chairman Behnam to comment on the feasibility of applying requirements designed for traditional financial markets to the digital assets market (which he described as very different).
  • Chairman Behnam remarked that many of the existing requirements for traditional financial markets are adaptable to the digital assets market. He stated however that the U.S. will still need to make appropriate modifications to these requirements to reflect the unique nature of digital assets.
• Rep. LaMalfa asked Chairman Behnam to comment on the CFTC’s ability to work with the NFA to modify their requirements for the digital assets space.
  • Chairman Behnam remarked that the CFTC has a great working relationship with the NFA and expressed confidence in the CFTC’s ability to work with the NFA to modify their requirements for the digital assets space.
• Rep. LaMalfa then asked Chairman Behnam to discuss how the CFTC works to support fair, open, and transparent derivatives markets.
  • Chairman Behnam discussed how the CFTC maintains a registration regime to obtain information from exchanges, FCMs, introducing brokers, associated persons, commodity pool operators, and trading officers about key personnel, governance, compliance, and conflicts of interest. He also mentioned how the CFTC conducts regular surveillance of derivatives markets and will work closely with exchanges and SROs to monitor these markets. He stated that the CFTC maintains a robust Whistleblower Program, which encourages people to alert the CFTC about bad actors within the derivatives markets. He further noted how the CFTC uses its civil enforcement authority through its Division of Enforcement to discourage illegal activity. He remarked that the CFTC’s oversight regime for derivatives markets focuses on registration, surveillance, and enforcement. He stated that this approach has proven successful and can be replicated within the digital assets market.
• Rep. LaMalfa then asked Chairman Behnam to address how digital asset commodity spot market regulatory authority would have enabled the CFTC to ensure consumer protections. He commented that requirements for digital asset firms to segregate their customer assets would have been important for protecting FTX customers.
  • Chairman Behnam noted how LedgerX was an FTX-affiliated entity that was subject to CFTC regulation. He highlighted how FTX’s current CEO John Ray III has indicated that LedgerX has responsible management and valuable franchise. He noted how LedgerX had recently been auctioned for $50 million. He stated that LedgerX’s operational and financial viability following FTX’s collapse demonstrates the success of the CFTC’s regulatory regime. He asserted that expanded CFTC jurisdiction within the digital assets space will help to prevent future crises.

Rep. Jonathan Jackson (D-IL):

• Rep. Jackson asked Chairman Behnam to indicate how digital asset account deposits are assured.
  • Chairman Behnam noted that the CFTC requires FCMs to have relationships with either banking entities or custodians. He indicated that the CFTC receives daily reports regarding customer funds and balances to ensure that customer funds are in the correct locations and available to be withdrawn or used for trading activities.
• Rep. Jackson then asked Chairman Behnam to discuss the current level of transparency for bidders and bids.
  • Chairman Behnam noted how the CFTC maintains an order book and rules regarding transparent markets, settlements, and the validity of bids. He stated that the CFTC prohibits many disruptive trading practices, including spoofing and wash sales. He lamented however that these disruptive trading practices are “systemic” in the unregulated digital assets trading market. He also discussed how the CFTC maintains rules at both the Agency level and the exchange level to ensure that bids and offers are valid and that bids and offers will be executed if they are on the order book.
• Rep. Jackson asked Chairman Behnam to explain how digital asset exchanges process their bids. He expressed concerns that the sudden failure of a digital asset exchange could cause all bids on the platform to disappear. He also expressed concerns that bad actors can abuse the bidding process to engage in wash trading.
  • Chairman Behnam thanked Rep. Jackson for highlighting the problems associated with unregulated markets. He noted how unregulated markets lack rules for bids and segregated customer funds and commented that the absence of these rules can result in unscrupulous activities. He mentioned how the CFTC has brought several enforcement cases related to wash sales, spoofing, the co-mingling of customer funds, and conflicts of interest. He stated that the digital asset commodity market remains largely unregulated. He called on the U.S. to apply the many of the rules and requirements used for traditional markets to the digital asset market.
• Rep. Jackson asked Chairman Behnam to indicate who ultimately possesses custody of a digital asset in the unregulated digital asset space.
  • Chairman Behnam stated that the answer to Rep. Jackson’s question would depend on the entity and who is facilitating the trading. He noted how some of the larger entities that facilitate digital asset trading have custodians and comply with state regulations around custody. He added that these entities will comply with the U.S. Department of the Treasury’s AML and KYC requirements. He stated that while the entire digital assets industry is not void of regulation, he asserted that these current regulations are not sufficient. He remarked that there remain too many bad actors and institutions willing to skirt rules within the digital assets space. He commented that this dynamic can lead digital asset firms to implode, declare bankruptcy, and lose customer funds.

Rep. Frank Lucas (R-OK):

• Rep. Lucas remarked that consumer protection should be a central aspect of any potential digital asset market structure framework. He asked Chairman Behnam to discuss the importance of ensuring that any legislative framework for digital assets will be consistent with federal securities laws and the CEA.
  • Chairman Behnam remarked that the U.S.’s existing governance frameworks for securities and commodities markets are time-tested and have proven efficient and effective in supporting capital formation and risk management. He stated that these governance frameworks have helped make U.S. financial markets the world’s strongest and most desirable financial markets. He commented that these governance frameworks provide clarity, certainty, and a robust legal system (which provides assurances that bad actors will be held accountable). He reiterated his assertion that the U.S.’s existing governance frameworks for securities and commodities markets are well-functioning and stated that these frameworks should inform the development of a governance framework for digital assets. He noted how the U.S. had previously used these existing governance frameworks for futures and options to inform its development of a regulatory framework for the swaps market.
• Rep. Lucas then discussed how Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill is the result of a collaborative effort with U.S. House Committee on Financial Services Full Committee Chairman Patrick McHenry (R-NC). He commented that this bill seeks to provide a regulatory framework for digital assets. He stated that the CFTC and the SEC will need to work together to oversee the digital assets market. He commented however that there exist “notable” cases of disagreement between the CFTC and SEC regarding which digital assets constitute commodities and which digital assets constitute securities. He asked Chairman Behnam to discuss the current collaboration between the CFTC and the SEC regarding the treatment of digital assets and their intermediaries. He also asked Chairman Behnam to address how the bill would support this collaboration.
  • Chairman Behnam stated that the CFTC and the SEC are in frequent communication on digital asset issues and testified that he frequently communicates with SEC Chairman Gary Gensler on these issues. He commented that these communications often focus on observed changes in the digital assets markets and the entrance of new participants in these markets. He stated that CFTC has been working on digital asset issues for eight years. He mentioned how there have been listed futures contracts related to Bitcoin since 2017 and futures contracts related to Ether since 2020. He acknowledged that the CFTC and the SEC often differ on which digital assets constitute commodities and which digital assets constitute securities. He described this disagreement as “healthy.” He remarked that the CFTC must consider the Bitcoin and Ether derivatives products that are listed on CFTC-regulated exchanges. He stated that the CFTC must monitor the underlying spot markets for products with derivatives that trade on CFTC-regulated exchanges. He elaborated that any fraud, manipulation, or disruptive trading that occurs in a spot market will likely impact the derivatives markets (which the CFTC oversees). He asserted that Bitcoin and Ether constitute commodities based on the CFTC’s legal analyses and the fact that these digital assets have derivatives products that are listed on CFTC-regulated exchanges. He stated that the discussion draft bill seeks to promote cooperation between the CFTC and the SEC and expressed support for this cooperation. He also highlighted how the bill would establish an advisory committee and expressed his receptiveness toward this proposal.

Rep. Jahana Hayes (D-CT):

• Rep. Hayes called the recent circulation of Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill “promising” given the persistent policy uncertainty within the digital assets space. She stated that Congress must provide regulatory authority and clarity that protects consumers and fosters a safe and reliable marketplace. She then mentioned how it was recently revealed that Bitcoin of America had failed to obtain proper licenses for Bitcoin ATM kiosks within her state of Connecticut. She noted how several customers had lost tens of thousands of dollars from a scam involving these kiosks. She indicated that these cryptocurrency-related scams have cost Connecticut residents millions of dollars and highlighted how these scams disproportionately harm senior citizens. She asked Chairman Behnam to discuss how the CFTC holds scammers and other bad actors accountable within the digital assets marketplace.
  • Chairman Behnam remarked that much of the digital assets market remains unregulated and noted how many kiosks and local vendors often sell Bitcoin to vulnerable Americans. He warned that cryptocurrency-related scams are likely to continue so long as the Bitcoin space remains unregulated. He stated that the CFTC’s current enforcement and legal authorities are “very limited” He noted that if a commodity has a derivative contract listed on a CFTC-registered exchange, then the CFTC has a clear and vested interest in the underlying commodity’s health (which includes Bitcoin and Ether). He stated that the CFTC is therefore concerned over kiosk-related frauds and manipulations involving cryptocurrencies. He noted how the CFTC has used its limited enforcement authority to police spot markets and commented that these efforts have been successful. He emphasized however that the CFTC cannot use traditional market regulatory tools (such as registration, surveillance, and oversight) to police the digital assets space. He indicated that the CFTC can only respond to fraud and manipulation in this space after the fraud and manipulation has been reported to the Commission. He stated that the CFTC’s reliance on reporting is suboptimal and expressed support for empowering the CFTC to proactively police the digital assets space. He commented that this proactive policing authority would reduce the prevalence of cryptocurrency-related scams.
• Rep. Hayes then asked Chairman Behnam to indicate whether the discussion draft bill’s lack of a funding mechanism for the CFTC would limit the CFTC’s ability to enforce the law and ensure accountability. She raised concerns that the lack of a funding mechanism will limit the bill’s ultimate effectiveness.
  • Chairman Behnam expressed agreement with Rep. Hayes’s concerns. He remarked that any increased authority for the CFTC to oversee the digital assets space must be accompanied by appropriate resources and funding for the Commission to carry out such authority. He warned that the CFTC will lack sufficient personnel and technology (both hardware and software) to fulfill the additional responsibilities being contemplated by the Committee absent increased funding. He stated that the CFTC already maintains oversight significant responsibilities for traditional markets and expressed the CFTC’s appreciation for its recent funding increases from Congress. He expressed concerns however that the CFTC’s fluctuating appropriations from Congress will impact the Commission’s ability to carry out its mission. He noted that the markets that are overseen by the CFTC are growing and the number of CFTC registrants is also growing. He added that technology is driving demand for participation in CFTC-regulated markets. He warned that imposing additional regulatory responsibilities on the CFTC to oversee digital assets without additional funding would limit the CFTC’s effectiveness in overseeing digital assets.
• Rep. Hayes acknowledged that her question period time had expired and expressed interest in learning how the CFTC could use additional funding to carry out the aims of the discussion draft bill.

Rep. Tracey Mann (R-KS):

• Rep. Mann asked Chairman Behnam to discuss the lessons that the CFTC had learned during the expansion of the Commission’s authority under Dodd-Frank.
  • Chairman Behnam discussed how financial markets will often face “inflection moments” due to financial crises or new technologies. He stated that these moments force policymakers to consider how the U.S. should regulate previously unregulated markets or new types of markets. He recounted how the swaps market had been in existence since the 1980s and stated that the 2008 Financial Crisis had led policymakers to determine that the market needed regulation. He remarked that the CFTC had been able to develop a successful regulatory regime for the swaps market in a quick and efficient fashion. He stated that the U.S. swaps market is now more transparent, functions orderly, and supports risk management and price discovery for institutional investors.
• Rep. Mann asked Chairman Behnam to indicate whether there exist any “pitfalls” that Congress should avoid as it considers legislation to expand the CFTC’s authority over the digital assets market.
  • Chairman Behnam first remarked that increased funding will be key to enabling the CFTC to expand its jurisdiction to cover digital assets. He acknowledged that while the U.S. is facing increasing budget constraints, he emphasized that the CFTC has consistently provided a surplus to the U.S. Department of the Treasury over the previous decade. He noted how many people view the digital assets market as a driver of U.S. innovation, growth, and competitiveness and commented that increased CFTC funding will be necessary for the Commission to oversee this market. He also stated that the U.S. should apply some of its regulatory principles for traditional markets to the novel digital assets market. He commented that while the U.S. may need to adjust some regulatory principles to account for the unique characteristics of digital assets technology, he asserted that these principles have proven effective.
• Rep. Mann lastly asked Chairman Behnam to indicate whether granting the CFTC with regulatory jurisdiction over the digital asset commodity spot markets would constitute a natural extension of the CFTC’s current enforcement authority.
  • Chairman Behnam answered affirmatively and noted how the CFTC has brought enforcement cases involving digital assets for eight years. He stated that these enforcement actions have enabled CFTC’s staff to gain experience and expertise regarding digital asset issues. He also noted how the CFTC oversees some cryptocurrency-based futures contracts and currently works with digital asset firms. He asserted that the CFTC is therefore well-prepared to oversee the digital asset commodity spot markets. He stated that swift Congressional action on digital assets regulation will ensure that the CFTC can adequately respond to future growth within the digital assets space.

Rep. Barry Moore (R-AL):

• Rep. Moore asked Chairman Behnam to address how the U.S. can strike the appropriate balance in defining digital assets between being overly prescriptive and being too broad. He also asked Chairman Behnam to discuss how the U.S. can regulate digital assets in a manner that will provide consumer protections without hindering the digital assets industry’s growth.
  • Chairman Behnam discussed how the CFTC maintains a principles-based regulatory scheme that supports more prescriptive rules for brokers, exchanges, custodians, individuals that are offering services, and individuals that are managing money. He remarked that this regulatory scheme has functioned well and has supported market innovation and growth. He also stated that this regulatory scheme has enabled the CFTC to be flexible in adapting to market changes. He recommended that Congress base any digital assets legislation on the CFTC’s core regulatory principles. He stated that this approach would provide the CFTC with a clear set of expectations for approaching custody, registration, surveillance, cybersecurity, conflict of interest, and governance issues. He commented that the CFTC could then develop rules for these issues based on Congressional expectations and adapt these rules to account for market changes when necessary.
• Rep. Moore asked Chairman Behnam to identify his top desired inclusions in a piece of digital assets legislation.
  • Chairman Behnam remarked that his top request for digital assets legislation would be the provision of legal authority for the CFTC to police the digital asset commodity market. He also stated that this legislation should include customer fund segregation requirements for digital asset firms and a prohibition on conflicts of interest. He elaborated that an entity that is offering broker-dealer, banking, and custodian services will need to keep these services separate. He stated that technology is driving vertical integration within the digital assets space and mentioned how the CFTC is experiencing an uptick in applications that propose more vertically integrated structures. He commented that policymakers must consider the merits of permitting more vertically integrated services within the digital assets space. He lastly remarked that Congress should provide more financial resources to the CFTC.
• Rep. Moore noted how Chairman Behnam had previously estimated that it would take the CFTC 48 months to establish a regulatory framework for digital assets if it does not receive additional funding. He asked Chairman Behnam to estimate how long it would take the CFTC to establish a regulatory framework for digital assets if it were to receive additional funding.
  • Chairman Behnam estimated that it would take the CFTC between 12 months and 24 months to establish a regulatory framework for digital assets if it were to receive additional funding.

Rep. John Rose (R-TN):

• Rep. Rose mentioned how the SEC has just filed a lawsuit against digital asset exchange Coinbase for listing unregistered securities. He also highlighted how the SEC had recently filed a lawsuit against digital asset exchange Binance. He noted how the SEC in both lawsuits is claiming that Solana, Cardano, MATIC, Filecoin, Sand, and Axie Infinity Shards (AXS) are all securities. He asked Chairman Behnam to indicate whether he agrees with SEC Chairman Gary Gensler’s assessment that the aforementioned tokens should all be classified as securities.
  • Chairman Behnam refused to answer Rep. Rose’s question. He justified his refusal to respond to the question on the basis that the question pertains to ongoing litigation. He stated that the current lack of clarity surrounding whether a given token constitutes a security or a commodity underscores the need for Congress to pass digital assets legislation. He expressed hope that such legislation could address this lack of clarity.
• Rep. Rose asked Chairman Behnam to indicate whether the timing of the SEC’s lawsuits against Coinbase and Binance was coincidental.
  • Chairman Behnam commented that he did not know whether the timing of the SEC’s lawsuits against Coinbase and Binance were intentional. He stated that enforcement cases often take time to build and that a variety of factors can influence when these types of cases are filed.
• Rep. Rose asked Chairman Behnam to indicate whether the CFTC considers political or media considerations when filing lawsuits. He commented that the SEC appears to be taking political and media considerations into account when filing lawsuits.
  • Chairman Behnam stated that the CFTC does not consider political or medical considerations when filing lawsuits.
• Rep. Rose then mentioned how U.S. House Committee on Financial Services Full Committee Ranking Member Maxine Waters (D-CA) had recently asserted that the SEC and the CFTC are aligned on the fact that the SEC is the regulator that determines whether digital assets are securities. He also noted how the SEC had asserted that nearly all digital assets constitute securities. He noted however that SEC Chairman Gensler has declined to indicate whether Ethereum is a commodity or a security. He asked Chairman Behnam to indicate whether Ethereum constitutes a commodity or a security.
  • Chairman Behnam stated that Ether is a commodity and noted how Ether products have been listed on CFTC-regulated exchanges. He mentioned how the CFTC had first permitted Ether futures contracts to be listed on CFTC-regulated exchanges in 2020 and testified that “robust” legal analysis had been employed to support this listing. He expressed confidence in the CFTC’s 2020 decision and noted how Ether futures contracts remain listed on CFTC-regulated exchanges.
• Rep. Rose then asked Chairman Behnam to indicate whether the CFTC possesses statutory authority to require registered entities to disclose greenhouse gas emissions under the CEA.
  • Chairman Behnam answered no.
• Rep. Rose expressed agreement with Chairman Behnam’s answer. He then discussed how SEC Chairman Gensler has insisted that a digital asset’s legal status depends on individual facts and circumstances and that digital asset projects should work with the SEC to determine a compliance pathway. He noted how only four digital asset projects have been able to come into compliance with the SEC. He asked Chairman Behnam to indicate whether the CFTC maintains a compliance pathway for exchange registration. He also asked Chairman Behnam to describe this compliance pathway.
  • Chairman Behnam stated that there does exist a compliance pathway for exchanges to register as it relates to derivatives. He also stated that the CFTC works to enable incumbent exchanges to list digital asset derivatives and newer exchanges to register and list digital asset derivatives. He remarked that the CFTC has developed a system that engages with potential registrants and provides transparency to these registrants.
• Note: Rep. Rose’s question period time expired here.

Rep. Jasmine Crockett (D-TX):

• Rep. Crockett mentioned how House Democrats had held numerous hearings during the previous 117th Congress to consider the regulatory gaps within the digital assets space. She noted how House Republicans also had held numerous hearings on digital assets during the early months of the current 118th Congress. She noted that the Committee is now holding a hearing to consider Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill. She commented that this bill is very technical and noted that Committee Democrats had only received the bill for review last week. She asserted that this process has become very partisan and expressed hope that the Committee could take a more bipartisan approach to digital assets moving forward. She called it “essential” that Congress pass legislation to address the regulatory gaps within the digital assets space. She commented that the SEC’s lawsuit against Binance underscores the urgent need for digital assets regulation. She also remarked that blockchain technology and its financial technology (FinTech) applications hold significant promise. She stated that there exists a bipartisan consensus that digital assets regulations are necessary to create jobs, build wealth, and protect Americans. She lamented however that the U.S. House Committee on Appropriations has proposed to reduce the CFTC’s funding. She commented that this reduction in CFTC funding would occur at a time where Congress is asking the CFTC to assume additional regulatory responsibilities. She asked Chairman Behnam to project the impact that reducing the CFTC’s budget and requiring the CFTC to assume new regulatory responsibilities would have on consumers and the digital assets industry.
  • Chairman Behnam remarked that a funding decrease for the CFTC would undermine the Commission’s ability to carry out its current obligations for traditional markets. He noted how the CFTC is already experiencing increased costs and increased participation in its regulated markets. He warned that a reduction in funding would force the CFTC to furlough a large portion of its staff. He highlighted how the CFTC has returned about $8 to the U.S. Department of the Treasury for every $1 it has received over the previous decade. He explained that the CFTC derives these returns through its enforcement actions and customer protection efforts. He expressed hope that Congress will honor the CFTC’s budget request so that the CFTC can fulfill its existing obligations. He commented that this funding will be especially important if the CFTC receives new regulatory authority over digital assets.
• Rep. Crockett then noted how Chairman Behnam had discussed the potential of creating an independent funding source for administering digital asset regulations. She asked Chairman Behnam to expound upon how an independent funding source model could be incorporated into digital assets legislation.
  • Chairman Behnam noted how the CFTC is the only financial regulator to not have a user fee-based system. He commented that this lack of a user fee-based system has posed challenges to the CFTC. He also stated that the CFTC has faced budget challenges following the expansion of its regulatory responsibilities because of flat funding levels. He recommended that Congress consider establishing a user fee-based system for the CFTC where CFTC registrants would pay proportional fees to help to financially support the Commission.

Note: The Committee took an approximately ten-minute recess at this point of the hearing.

Rep. Randy Feenstra (R-IA):

• Rep. Feenstra noted how the total value of cryptocurrencies has fallen significantly from its peak and expressed concerns over how this cryptocurrency market decline has impacted many young people. He highlighted how there are currently over 23,000 cryptocurrencies. He also mentioned how many of the digital asset exchanges that list these cryptocurrencies have collapsed or faced lawsuits for securities law violations. He asked Chairman Behnam to discuss how Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would impact digital asset intermediaries and exchanges.
  • Chairman Behnam mentioned how the CFTC has some experience overseeing the retail forex market following the enactment of the Food, Conservation, and Energy Act of 2008 (also known as the 2008 Farm Bill). He stated that the retail forex market had been “entirely opaque” and prone to fraud and manipulation prior to the enactment of this law. He compared the current landscape for digital asset intermediaries and exchanges to the pre-2008 Farm Bill forex trading landscape. He also mentioned how there had been concerns prior to the 2008 Farm Bill that regulation of the retail forex market would provide a false impression to retail investors that forex trading is safe. He remarked however that market regulators must acknowledge retail market activities are occurring and work to ensure that these activities can be conducted safely. He asserted that market regulators should abstain from merit judgements of these activities. He stated that technology has enabled commodity assets to be traded on phones and other devices and contended that the U.S. has a responsibility to provide disclosures and transparency to markets. He remarked that the U.S. will need to register and regulate digital asset brokers, asset managers, and exchanges. He acknowledged that while this registration and regulatory scheme will have costs, he stated that this scheme will provide transparency, fairness, and a reduction in abuse, fraud, and manipulation.
• Rep. Feenstra then asked Chairman Behnam to project how the digital asset market landscape will change over the next five-to-ten years.
  • Chairman Behnam remarked that U.S. financial markets are the strongest, deepest, and most sought-after markets in the world because of the U.S.’s regulatory structure, certainty, and the legal enforcement authorities behind the regulatory structure. He stated that the adoption of a regulatory structure for digital assets would eliminate fraud and manipulation within the digital assets market, which would provide for greater stabilization of the market.
• Note: Rep Feenstra’s question period time expired here.

Rep. Monica De La Cruz (R-TX):

• Rep. De La Cruz mentioned how some have argued that all digital assets are securities and that the SEC should be the sole regulator of digital assets. She commented that this argument would suggest that the CFTC would not need to play a role in overseeing the digital assets market. She asked Chairman Behnam to comment on this argument.
  • Chairman Behnam expressed disagreement with the argument that all digital assets are securities and that the SEC should be the sole regulator of digital assets.
• Rep. De La Cruz mentioned how there exists a general consensus that Bitcoin is a commodity (which would make it not subject to SEC regulation). She also noted how SEC-regulated entities are not permitted to offer Bitcoin trading because Bitcoin is not a security. She noted however that Bitcoin trading accounts for approximately 70 percent of digital asset trading activity. She asked Chairman Behnam to indicate whether the CFTC and the SEC could use their existing authorities to address the current regulatory gaps within the digital assets market.
  • Chairman Behnam answered no. He stated that the existing regulatory gap within the digital assets market is significant given how Bitcoin trading accounts for the majority of digital asset trading activity. He discussed how the CFTC’s existing enforcement tools to oversee digital assets activity are very limited. He noted how the CFTC must first receive claims of wrongdoings within the digital assets space before it can take action. He commented that this reactive approach results in a suboptimal regulatory regime and causes fraud and manipulation to go unchecked. He stated that Congress should provide the CFTC with the legal authority to police fraud and manipulation in the digital asset commodity spot market. He commented that this authority would ensure safety and soundness in digital asset markets and would protect customers.
• Rep. De La Cruz asked Chairman Behnam to identify the point in time where a digital asset may transform from a commodity to a security or vice versa.
  • Chairman Behnam noted how a promoter or a group or individuals could offer digital asset tokens in exchange for cash and that this cash could be used to support the establishment of a ledger, protocol, or blockchain system. He indicated that the purchasers of these digital asset tokens might have an expectation that the value of the tokens will increase over time. He stated that the digital asset tokens in the aforementioned scenario would resemble securities. He remarked however that there might occur an eventual break in the linkage between the issuer of a set of digital asset tokens. He commented that this breakage would result in there no longer being a centralized body that is conducting business or operations that would impact the value of the tokens. He stated that this breakage would constitute the point in time when a digital asset becomes decentralized and the asset in this scenario would most likely morph into a commodity. He commented that the ability for assets to change between securities and commodities is a special feature of the digital assets space. He expressed his encouragement with Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill for focusing on centralization and decentralization for determining a digital asset’s status as either a security or a commodity. He also highlighted how this bill would consider where a party obtains their digital asset tokens from to determine the token’s status. He commented that whether a party purchases a digital asset from an issuer directly or an exchange should play a role in determining the token’s status. He expressed his interest in working with the Committee to refine the process for determining whether a given digital asset constitutes a security or a commodity.

Rep. Max Miller (R-OH):

• Rep. Miller remarked that any functional digital asset legislative strategy should provide digital asset firms with regulatory certainty and protect against “regulatory turbulence” created by jurisdictional uncertainty. He discussed how other countries are developing their own regulatory frameworks for digital assets and seeking to attract digital assets activity. He noted how the largest digital asset trading platform issuers currently are based outside of the U.S. He also mentioned how many entrepreneurs are advocating for digital asset companies to move abroad. He stated that the ability of other countries to develop successful regulatory frameworks for digital assets demonstrates the need for U.S. action. He discussed how there currently does not exist a comprehensive regulatory regime for the spot trading of digital asset commodities. He expressed support for the Committee’s efforts to develop a regulatory framework for digital assets that would benefit both market participants and consumers. He commented that these efforts seek to provide digital asset firms with regulatory certainty and address current gaps in the U.S.’s regulatory oversight of the digital assets market. He asked Chairman Behnam to discuss how the current gap in regulatory certainty for digital assets may hinder innovation and undermine consumer protection.
  • Chairman Behnam remarked that Congress should provide additional guidance on how to classify digital assets with respect to existing laws. He discussed how federal market regulators currently rely upon decades-old precedent to decide whether digital assets should be classified as either securities or commodities. He asserted however that digital assets possess certain unique characteristics that warrant the adoption of additional considerations for their classifications. He stated that while the CFTC can make classification decisions regarding digital assets, he commented that technological and market developments render it suboptimal for the U.S. to rely upon decades-old precedents to make such decisions. He noted how Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would consider a digital asset’s level of decentralization and the venues for obtaining the digital asset to inform digital asset classification systems. He also remarked that the fundamental goal of digital assets legislation is to address information gaps for digital asset securities and provide fair and orderly markets for digital asset commodities. He noted how a traditional commodity contract (such as one involving corn or soybeans) would likely not require significant investor disclosures because there does not exist a central entity controlling the price of the underlying commodities. He stated however that a centralized security involves a group of individuals that can impact the price of the security. He remarked that the U.S.’s consideration of these factors will enable it to develop a workable regulatory framework for digital assets.
• Rep. Miller expressed agreement with Chairman Behnam’s response. He then asked Chairman Behnam to address how the discussion draft bill’s proposed regulatory framework for digital assets would provide digital asset firms with regulatory certainty and fill the gap between the CFTC’s authorities and the SEC’s authorities.
  • Chairman Behnam remarked that his top priority is for the CFTC to receive regulatory authority to police the digital asset commodity spot markets so that the Commission can combat fraud and manipulation. He applauded the discussion draft bill’s efforts to apply market requirements surrounding registration, surveillance, cybersecurity, conflicts of interest, and governance to the digital assets space. He stated that the application of these requirements will support the creation of a transparent and orderly digital asset market. He also commented that digital assets legislation will need to adjust these requirements to reflect the unique nature of digital assets. He then commended the discussion draft bill’s efforts to clarify the definitions for digital asset securities and digital asset commodities. He stated that additional technical refinements will be needed for these definitions and for determining how a digital asset can transform from a security into a commodity. He elaborated that the bill would need to address which entity will determine when an asset has changed from a security into a commodity and the rules governing the transition process.

Rep. Zach Nunn (R-IA):

• Rep. Nunn discussed how the EU, the UK, and Singapore have already developed regulatory frameworks for digital assets. He noted how the U.S. is still working to develop such a framework. He highlighted how there has occurred a tenfold increase in venture capital investments in European digital asset projects are up tenfold since the EU’s adoption of its regulatory framework for digital assets. He stated that potential U.S. digital assets jobs, companies, and innovations are moving abroad because of SEC Chairman Gary Gensler’s regulatory overreach. He mentioned how he had recently met with a founder of a digital assets company that is contemplating moving their workforce to Europe because of the U.S.’s lack of regulatory clarity for digital assets. He also mentioned how nearly 25 percent of the capital in the digital assets market had moved outside of the U.S. during the most previous quarter. He called this situation concerning and commented that this situation demonstrates a lack of regulatory certainty in the U.S. digital assets market. He then asked Chairman Behnam to indicate whether Ethereum is a commodity or a security.
  • Chairman Behnam stated that Ether is a commodity.
• Rep. Nunn asked Chairman Behnam to discuss the CFTC’s analysis that had led them to conclude that Ether is a commodity.
  • Chairman Behnam stated that the CFTC has applied traditional methods (including the Howey test) to assess Ether’s status. He asserted that Ether is decentralized and noted how there is no central entity that can dictate Ether’s value. He discussed how Ether relies upon a large and dispersed group of individuals to validate its network and noted how securities tend to involve a centralized group of individuals to make decisions for the asset.
• Rep. Nunn interjected to express agreement with Chairman Behnam’s response. He expressed concerns that the current lack of regulatory clarity for digital assets is enabling the SEC to selectively regulate certain digital asset tokens. He asked Chairman Behnam to indicate whether he shared these concerns.
  • Chairman Behnam remarked that digital asset tokens can be packaged, used, and offered in a variety of ways.
• Rep. Nunn interjected to assert that the U.S.’s current lack of a regulatory framework for digital assets harms all U.S. digital asset stakeholders and forces these stakeholders to seek out jurisdictions with more regulatory clarity. He then asked Chairman Behnam to indicate whether a digital asset can start as a security and then transition to a commodity.
  • Chairman Behnam answered affirmatively.
• Rep. Nunn asked Chairman Behnam to indicate whether Congress or the SEC should be the “driving force” in providing regulatory clarity for the digital assets space.
  • Chairman Behnam remarked that Congress should play a role in dictating the future of digital assets policy given the evolving nature of the digital assets market.
• Rep. Nunn expressed agreement with Chairman Behnam’s response. He asked Chairman Behnam to indicate whether the U.S. should work to ensure that digital assets innovation remains within the U.S. and does not occur in foreign jurisdictions.
  • Chairman Behnam answered affirmatively.
• Rep. Nunn asked Chairman Behnam to indicate whether regulatory coordination between the CFTC and the SEC is possible.
  • Chairman Behnam answered affirmatively.
• Rep. Nunn asked Chairman Behnam to indicate whether the CFTC has a history of working with the SEC.
  • Chairman Behnam stated that the CFTC has a “long history” of working closely with the SEC. He expressed confidence that the two regulators will continue to work tougher.
• Rep. Nunn remarked that the CFTC and the SEC can be successful in overseeing the digital assets space if the two regulators work together.  He stated that one regulator should not assume total responsibility over the digital assets space before Congress considers digital assets legislation.

Rep. Kat Cammack (R-FL):

• Rep. Cammack noted how Chairman Behnam’s testimony had asserted that digital assets legislation should not undermine existing laws (including federal securities laws). She discussed how Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would not amend the definition of a security. She indicated that the bill would establish a process to help market participants work with the SEC to determine when a digital asset is no longer part of an investment contract. She asked Chairman Behnam to indicate whether this modification disrupts the SEC’s authority to protect customers and address information gaps between digital asset issuers and investors.
  • Chairman Behnam first remarked that the development of digital assets legislation is not a “zero-sum game.” He elaborated that granting the CFTC additional regulatory authority to oversee digital asset commodity spot markets would not result in another federal regulator (such as the SEC) losing authority. He emphasized that this federal regulatory authority over the digital asset commodity spot markets does not exist currently. He asserted that the Committee should remain cognizant of this fact as it drafts digital assets legislation. He then remarked that the U.S. maintains a robust, effective, and impactful set of market laws related to both securities and commodities. He asserted that digital assets legislation should not undermine these existing laws. He clarified that he is not suggesting that the discussion draft bill would undermine these existing laws. He recommended that Congress work closely with the SEC to ensure that the bill does not undermine existing securities laws. He commented that while Congress may not intend to undermine existing securities laws, he noted how legislation can often have unintended consequences.
• Rep. Cammack then asked Chairman Behnam to indicate whether the CFTC’s current anti-fraud and anti-manipulation authorities are sufficient for preventing a future “FTX-like debacle” in the digital asset commodity spot markets.
  • Chairman Behnam answered no. He stated that the digital asset commodity market will continue to fluctuate if the status quo is maintained, which will lead to future digital asset firm collapses and bankruptcies.
• Rep. Cammack asked Chairman Behnam to respond to the criticisms that the CFTC is a “light touch” regulator.
  • Chairman Behnam disputed the criticisms that the CFTC is a “light touch” regulator. He noted how the CFTC’s FY 2022 budget was $320 million and how the CFTC had collected $2.5 billion in penalties and restitution. He added that the CFTC had consistently returned $8 to the U.S. Department of the Treasury for every $1 that it had received in Congressional appropriations over the previous decade. He then noted how the CFTC is a principles-based regulator and stated that the CFTC maintains extensive rules derived from the CEA. He commented that these rules are very prescriptive and specific to protecting customers and investors. He further asserted that the CFTC’s registrants would dispute the criticism that the CFTC is a “light touch” regulator.
• Rep. Cammack indicated that her question period time had expired and that she will submit additional questions for the hearing’s record.

Note: The Committee held an approximately five-minute recess at this point.

Panel II Witness Opening Statements:

The Hon. J. Christopher Giancarlo (Former Chairman, U.S. Commodity Futures Trading Commission):

• He recounted how the CFTC had developed a unique process of heightened review for cryptocurrency derivatives during his tenure as CFTC Chairman under the Trump administration.
  • He commented that the U.S. cryptocurrency derivatives markets and the CFTC’s oversight of them have been “quite successful.”
• He discussed how Bitcoin is continuing to grow in terms of transactional volume, adoption, network strength, and code execution.
  • He commented that this growth is occurring despite increasing politicization and hostility.
• He noted that while the CFTC’s original decision to approve Bitcoin futures had been controversial, he stated that a decision to block these futures products would not have stopped the rise of Bitcoin or other virtual currencies.
  • He asserted that blocking these futures products would have deprived Americans of “smart regulation.”
• He recounted how he had told the U.S. Senate Committee on Banking, Housing, and Urban Affairs in 2018 that the interest in digital assets could not be solely attributed to technological efficiencies and benefits.
  • He asserted that generational, cultural, social, and human interests were driving the popularity of digital assets.
• He lamented however that Congress had not provided “thoughtful and balanced” legislation to support the development of digital assets in the years following his 2018 testimony to the U.S. Senate Committee on Banking, Housing, and Urban Affairs.
  • He commented that U.S. innovators, investors, and young people are awaiting Congressional action to create a legal framework for digital assets innovation.
• He applauded Congress for undertaking a joint-committee lawmaking effort and commended Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill for closing CFTC oversight gaps.
  • He also expressed agreement with CFTC Chairman Rostin Behnam that there exist elements of digital asset commodity spot markets that are suitable for direct CFTC oversight.
• He also recounted how the Financial Stability Board (FSB) had been skeptical of the CFTC’s initial decision to permit Bitcoin futures and stated that many of the FSB’s member countries are now seeking to embrace digital assets.
• He remarked that Congress must now work to support innovation within the digital assets space and thanked the Committee for developing its discussion draft bill.

Mr. Paul Grewal (Coinbase):

• He discussed how his digital asset exchange, Coinbase, seeks to provide the world’s most trusted, secure, and compliant on-ramp to the cryptocurrency economy.
  • He noted how Coinbase had gone public in 2021 and is currently the U.S.’s largest cryptocurrency platform.
  • He commented that Coinbase enables millions of consumers, institutions, and developers around the world to buy, sell, and meaningfully use cryptocurrencies.
• He remarked that Coinbase has embraced regulation since its founding and stated that the company takes its obligations to its customers, investors, and regulators seriously.
  • He testified that Coinbase has implemented robust consumer protection controls, prudent risk management, and “industry leading” security practices.
• He then discussed how the SEC had just filed a lawsuit against Coinbase, which he described as “disappointing, but not surprising.”
• He remarked that the SEC’s reliance on an “enforcement only” approach in the absence of clear rules for the digital assets industry is harming the U.S.’s economic competitiveness and the digital asset companies that are most committed to compliance.
  • He called on Congress to enact digital assets legislation that would provide fair rules that are developed transparently and applied equally.
• He stated that the U.S. is “falling behind” other countries in terms of distributed ledger and digital asset technology.
  • He expressed agreement with the White House’s contention that this technology is “critical and foundational” to the U.S.’s future.
• He warned that the U.S.’s lack of regulatory clarity for digital assets is driving digital assets activity abroad and commented that other countries are taking advantage of U.S.’s lack of regulations for digital assets.
• He highlighted how the EU, the UK, Singapore, and Hong Kong are adopting rules for digital assets and asserted that these rules both support innovation and protect consumers.
  • He commented that the U.S.’s failure to adopt rules governing digital assets will harm the U.S. from both economic and national security standpoints.
• He then discussed how digital assets have real-world applications and asserted that a regulatory framework for these assets will be necessary to protect responsible innovation.
  • He commented that digital assets are creating new ways to store and transfer value and have use cases related to payments, digital forms of ID, and health care records.
• He stated however that digital assets do not fit into any of the existing regulatory frameworks.
  • He commented that some digital assets are commodities, some digital assets are securities, and some digital assets do not fit into existing categories.
• He noted how over 20 percent of Americans own and use cryptocurrencies and asserted that the U.S. needs a regulatory framework for digital assets that will protect U.S. consumers and enable innovation.
• He remarked that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill is a “strong step forward” in providing regulatory clarity for the digital assets space.
  • He commented that Congress alone has the power to establish clear and comprehensive rules for digital assets.
• He stated that the bill would build upon existing and workable regulatory precedent while also recognizing the unique properties and opportunities provided by digital assets.
• He also noted that the bill draws upon many of the key findings of President Biden’s Executive Order (EO) on Ensuring Responsible Development of Digital Assets and the ensuing agency reports.
  • He commented that the most notable of these findings is the need for a federal regulator for the spot trading of digital assets.
• He discussed how the bill would create a regulatory framework for digital asset commodities that is based on existing CFTC structures for commodity markets and market participants.
• He also noted how the bill recognizes that centralized intermediaries, such as Coinbase, should be regulated and creates transparency through mandatory registration, disclosure requirements, and inspection and examination authority.
  • He described the bill’s registration regime as “fit-for-purpose” and commented that the regime would not attempt to force market participants into ill-suited pre-existing requirements that are not mapped to actual risks and consumer needs.
  • He further mentioned how the bill would allow for side-by-side trading and would create clear consumer protections, such as conflict of interest disclosures and limitations, requirements to segregate funds, and bankruptcy priority.
• He then remarked that the bill would provide “necessary” adaptations to existing SEC rules, such as Regulation A, Rule 144, and the regulations related to ATSs.
  • He commented that the bill would establish a “fit-for-purpose” framework for the regulation of restricted digital assets and digital assets regulated as securities.
• He stated that the bill articulates guardrails and requirements to protect investors and ensure transparency and consistency for all markets.
• He expressed Coinbase’s support for creating a strong and comprehensive regime for the regulation of digital asset commodities and digital asset securities.
  • He asserted that only Congress could create such a regime.
• He stated that the bill under consideration would create a “workable foundation” for consumers, investors, and market participants.

The Hon. Dan Gallagher (Robinhood Markets, Inc.; Former Commissioner, U.S. Securities and Exchange Commission):

• He discussed how his company, Robinhood, was formed with the mission of democratizing finance and noted how the company has over 2,000 U.S. employees.
  • He highlighted how Robinhood had pioneered an investing model that is commission-free and that has no account minimum requirements.
• He also stated that Robinhood had worked to democratize access to areas of the financial markets beyond equities, including cryptocurrencies.
  • He mentioned how Robinhood Crypto has offered customers the ability to buy, sell, store, and transfer certain cryptocurrencies at low cost with no trading commissions and with no account minimum requirements.
• He lamented how U.S. market participants face a “patchwork” of inconsistent state regulatory frameworks for digital assets and lack regulatory clarity for digital assets at the federal level.
  • He asserted that this “unpredictable” regulatory landscape stifles innovation and hampers responsible firms (such as Robinhood).
• He remarked that Robinhood Crypto possesses a “qualitatively different” model than other digital asset platforms.
  • He noted that Robinhood Crypto is not an exchange that matches customer orders, only offers 18 digital assets, and does not offer yield-generating products (such as staking or lending).
  • He further mentioned how Robinhood Markets is a publicly traded company subject to SEC disclosure rules and operates two highly-regulated registered subsidiary broker-dealers.
• He disputed the arguments that the current federal law is clear and that no further guidance for digital assets is necessary.
  • He explained how federal regulators look to the U.S. Supreme Court’s SEC v. W.J. Howey Co. 1946 decision (which had pertained to orange groves) to define whether a digital asset is an investment contract subject to securities laws.
• He asserted that there exist legitimate questions as to whether certain digital asset transactions involve investment contracts.
  • He commented however that it is difficult to apply the U.S. Supreme Court’s SEC v. W.J. Howey Co. decision to the modern digital assets ecosystem.
• He remarked that the current lack of regulatory clarity for digital assets harms U.S. consumers, innovation, and global competitiveness.
  • He highlighted how Europe and other foreign jurisdictions are taking digital assets market share away from the U.S.
• He stated that regulatory clarity for digital assets would enable market participants to provide digital asset products and services that consumers want without the constant threat of “crippling” enforcement actions.
  • He also asserted that this regulatory clarity would ensure that the U.S. remains a global leader within the digital assets space.
• He remarked that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would provide such regulatory clarity for digital assets.
  • He also thanked U.S. House Committee on Financial Services Chairman Patrick McHenry (R-NC) and Ranking Member Maxine Waters (D-CA), as well as U.S. House Committee on Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion Chairman French Hill (R-AR) and Ranking Member Stephen Lynch (D-MA), for their work on digital assets policy.
• He called it important for Congress to develop strong digital assets legislation and indicated that his written testimony includes additional recommendations for the legislation.
• He described the discussion draft bill as a “positive step forward” and asserted that it will bring regulatory clarity to the digital assets space.
  • He expressed his interest in working with Members of Congress and their staffs to enhance this bill.

The Hon. Dan Berkovitz (Former Commissioner, U.S. Commodity Futures Trading Commission; Former General Counsel, U.S. Securities and Exchange Commission):

• He remarked that digital assets and the associated blockchain technologies have the potential to transform the availability, scope, and efficiency of financial services.
• He stated however that recent problems demonstrate that unregulated digital asset markets present significant risks to customers and investors.
  • He indicated that these risks relate to information asymmetries, abusive trading practices, manipulation, and conflicts of interest.
• He discussed how the SEC regulates the trading of digital assets that are securities and how the CFTC regulates the trading of digital asset derivatives.
  • He noted how neither the CFTC nor the SEC has regulatory authority over the spot markets for non-security digital assets and asserted that this gap in regulation needs to be closed.
• He discussed how the CFTC currently regulates the futures markets for digital assets, conducts surveillance of the underlying spot markets as part of its oversight of the futures markets, and can bring enforcement actions for fraud or manipulation in the spot markets.
• He remarked that providing the CFTC with regulatory authority over these non-security spot markets would leverage the CFTC’s current enforcement authority and surveillance program.
  • He stated that legislation to provide the CFTC with regulatory authority over these markets should require that trading facilities for non-security digital assets be licensed by the CFTC.
  • He also stated that this legislation should provide for the regulation of intermediaries in these markets and establish core principles for the operation of a non-security digital asset trading facility.
• He proposed that the U.S. should establish a dual track for reviewing digital assets for trade on trading facilities. 
• He noted that the first track would involve the SEC reviewing a digital asset to determine whether the digital asset is a security.
  • He explained that digital assets deemed to be securities would continue to be regulated under securities laws and would be ineligible for trading on a CFTC-licensed facility.
• He noted that the second track would involve the CFTC reviewing a digital asset being to determine whether the digital asset will be traded in accordance with the CFTC’s core principles (including disclosure requirements).
• He then remarked that the CFTC should be provided with a dedicated source of funding for the regulation and oversight of the non-security digital assets spot markets.
  • He asserted that current CFTC resources are not sufficient to sustain this new responsibility without undermining the CFTC’s ability to oversee the traditional commodity markets (including agricultural commodity markets).
• He also stated that the legislation should otherwise maintain existing agency jurisdictions and authorities and commented that the CFTC and the SEC possess the necessary and appropriate authorities to regulate the derivative and security markets.
  • He warned that amendments to the SEC’s authorities over one particular asset class (such as digital assets) would be unnecessary and counterproductive.
• He remarked that limiting the SEC’s authority over a particular type of asset based upon its particular technology of creation or distribution or its degree of centralization would pose several problems.
  • He first warned that this approach would disrupt decades of settled securities law.
  • He then warned that this approach would create uncertainty regarding the meaning and interpretation of new and existing statutory terms.
  • He thirdly warned that this approach would delay compliance with securities and commodities laws for years while agencies work on new rulemaking efforts to define new terms and to establish new requirements.
  • He fourthly warned that this approach would hinder current enforcement of securities laws to protect investors.
  • He lastly warned that this approach would generate opportunities for regulatory arbitrage in the capital markets.
• He stated that the legislation outlined in his written testimony would close the current regulatory gap for digital assets in a straightforward manner and provide critically needed protections to investors.
  • He also commented that his proposed dual track process for reviewing digital assets would provide regulatory certainty regarding the legal status of a digital asset prior to the trading of the asset on any facility.
• He asserted that these reforms would enable the U.S. to maintain its global leadership in FinTech and markets.

The Hon. Walt Lukken (Futures Industry Association; Former Acting Chairman, U.S. Commodity Futures Trading Commission):

• He discussed how the Commodity Futures Trading Commission Act of 1974 had created the CFTC and had provided the Agency with exclusive jurisdiction over futures trading.
• He also noted how this law had “greatly” expanded the definition of the term “commodity” to encompass more than just agricultural products.
  • He commented that this law had broadened the definition for the term “commodity” in order to capture the financial products that were beginning to be listed on boards of trade.
• He also stated that this definition’s broad language served to “future-proof” the law for innovative new products.
  • He highlighted how futures contracts have launched on interest rates, energy, weather, carbon offsets, volatility, and digital assets in the decades following the law’s passage.
• He then discussed how the CFMA had provided the CFTC with a new principles-based regulatory regime.
  • He commented that the CFTC’s core principles framework has proved effective due to its “flexible but clear” approach.
• He noted how this law provides the CFTC with the ability to issue rules and guidance on core principles while providing “built-in flexibility” for entities to take a different approach if they can prove that the core principles are still being met.
  • He asserted that this flexibility has allowed for innovative new products and market approaches.
• He also stated that this flexible approach has helped the CFTC to extend its regulatory regime cross-border given the global nature of many benchmark futures products.
  • He suggested that this cross-border framework built on regulatory cooperation and comparability would align well with the cross-border nature of digital asset commodities.
• He then stated that the CFTC has a strong track record of protecting customer funds and combating fraud and abuse impacting retail customers.
  • He commented that this experience could benefit the digital asset spot markets.
• He noted how the CEA contains strong disclosure and money segregation requirements aimed at protecting customer funds.
  • He indicated that these protections include risk disclosures, capital and AML requirements, customer trade guarantees, and KYC obligations.
• He stated that the CFTC and the NFA have analogous experience in the regulation of spot markets where retail participants were experiencing abuse and recounted how Congress had previously closed the gap in regulation for the retail forex spot markets in 2008.
  • He noted how this action had enabled the CFTC and the NFA to set limits on leverage, require brokers to register and be well-capitalized, and enforce rules against fraud.
  • He commented that the CFTC and the NFA were ultimately able to eliminate significant fraud and abuse in retail forex spot markets.
• He indicated that while the CFTC currently lacks regulatory authority to oversee digital asset spot markets, he noted how the CFTC possesses broad enforcement powers over spot markets and commodities.
  • He highlighted how the CFTC has aggressively used these enforcement powers to bring more than 80 enforcement actions involving wrongdoing in digital asset commodities.
• He further stated that the CFTC has a proven track record beyond digital assets of preserving market integrity through the enforcement of market manipulation.
  • He mentioned how the CFTC has successfully pursued manipulation enforcement cases against energy and agricultural companies, as well as the “precedent setting” case on the manipulation of the London Interbank Offered Rate (LIBOR) benchmark.
• He expressed confidence in the CFTC’s ability to use its enforcement powers to protect customers within the digital assets space.

Congressional Question Period:

Rep. Randy Feenstra (R-IA):

• Rep. Feenstra asked Mr. Giancarlo to describe the current value of digital asset commodities. He also asked Mr. Giancarlo to project the future value of these commodities in the future for U.S. businesses and consumers beyond trading. He further asked Mr. Giancarlo to address why Congress should care about digital asset commodities.
  • Mr. Giancarlo remarked that the answer to Mr. Giancarlo’s question depends on how one views the value of digital assets innovation. He noted that the total value of digital assets in terms of current U.S. dollars is approximately $1 trillion. He noted however that digital assets can also be viewed as a “new architecture” of value, banking, finance, and banking. He discussed how current financial infrastructure involves the storage of value on balance sheets of proprietary commercial firms. He indicated that this system results in 90 percent of the financial system’s value being housed as liabilities. He noted that these proprietary commercial firms (i.e., financial institutions) can collapse. He stated that digital assets infrastructure leverages the internet and digital networks for the purposes of value storage. He commented that traditional financial infrastructure is slow, expensive, unstable, and exclusive. He highlighted however that the internet has never gone down and is very inclusive. He asserted that it would be naive to think that the internet could not transform banking and finance given its previous impacts on communications, information, and retail commerce. He remarked that the U.S. must therefore work to ensure that digital assets innovation reflects U.S. values. He commented that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill seeks to ensure that digital assets innovation will reflect U.S. values.
• Rep. Feenstra expressed agreement with Mr. Giancarlo’s response. He also asked Mr. Giancarlo to confirm that the discussion draft bill would establish a regulatory framework for trading digital asset commodities that would protect millions of Americans.
  • Mr. Giancarlo highlighted how foreign jurisdictions are adopting their own regulatory frameworks for digital assets. He stated that these foreign regulatory frameworks for digital assets are based on the values of their jurisdictions. He asserted that the U.S. now has an opportunity to ensure that digital assets innovation reflects U.S. values.
• Rep. Feenstra then noted how Mr. Lukken had stated that the CFTC’s principles-based regulatory approach is flexible and designed to “future proof” the regulation of new products that had not been considered prior to the CEA’s drafting. He asked Mr. Lukken to discuss how the CFTC’s principles-based approach can be beneficial to the CFTC’s regulation of the digital assets market.
  • Mr. Lukken stated that Congress had realized that a principles-based system could provide flexibility to both market participants and the CFTC to keep pace with innovations.
• Rep. Feenstra then asked Mr. Grewal to address the importance of having the discussion draft bill be based on existing laws and regulations for securities and commodity derivatives.
  • Mr. Grewal remarked that the benefit of basing the decision draft bill on existing laws and regulations is that it allows for investors, regulators, and Congress to have confidence in the regulatory system for digital assets. He commented that these existing laws and regulations involve standards, practices, and histories that are well understood and have functioned well. He expressed confidence in the CFTC’s ability to regulate novel digital assets given the Commission’s history of regulating underlying markets with listed futures.

Full Committee Ranking Member David Scott (D-GA):

• Ranking Member Scott asked the witnesses to estimate how much it will cost the SEC and the CFTC to develop and maintain a new regulatory system for digital assets. He also asked the witnesses to address how this regulatory system will work for users.
  • Mr. Lukken remarked that the CFTC needs appropriate funding so that it can assume new oversight responsibilities over the digital asset market.
• Ranking Member Scott interjected to ask Mr. Lukken to specify what constitutes appropriate funding for the CFTC to oversee the digital assets market.
  • Mr. Lukken recommended that policymakers consider the CFTC’s assumption of new regulatory responsibilities for the swaps market following the passage of Dodd-Frank. He noted that the CFTC will similarly need to hire more people with expertise if the Commission is granted regulatory responsibility for the digital assets market. He then acknowledged that while the digital assets market is “enormous,” he indicated that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would consolidate much of this regulation into entities (such as exchanges and brokers).
• Ranking Member Scott interjected to note that his question period time is limited. He stated that the CFTC will be responsible for regulating most of the digital assets space. He asked Mr. Lukken to provide an estimate for the cost of the discussion draft bill’s new regulatory framework for digital assets.
  • Mr. Lukken indicated that he could not provide an estimate for the cost of the discussion draft bill’s proposed regulatory framework for digital assets. He also stated that the NFA would play a key role in regulating the digital assets space and would be levying fees on the digital assets industry to support their regulatory efforts. He commented that policymakers must be cognizant of this dynamic.
• Ranking Member Scott asked Mr. Berkovitz to indicate whether he agrees with Mr. Lukken’s response. He also asked Mr. Berkovitz to provide an estimate for the cost of the discussion draft bill’s proposed regulatory framework for digital assets.
  • Mr. Berkovitz remarked that the discussion draft bill would shift several responsibilities from the SEC to the CFTC. He elaborated that the bill would turn several digital assets that are currently considered securities (and under the SEC’s jurisdiction) into commodities (and under the CFTC’s jurisdiction). He noted how CFTC Chairman Rostin Behnam had estimated that the CFTC would require $120 million over three years to implement the bill. He stated that this estimate would probably constitute the minimum amount required to set up a new regulatory regime for digital assets at the CFTC.
  • Mr. Gallagher mentioned how he had not been involved in the SEC’s budget process during his tenure as an SEC Commissioner. He commented that he was therefore unable to provide an estimate for the cost of the discussion draft bill’s proposed regulatory framework for digital assets. He asserted however that the U.S. would face costs and lost opportunities if digital assets activity moves offshore. He also stated that U.S. investors face costs due to the vagueness of the U.S.’s current regulatory structure for digital assets.
  • Mr. Grewal expressed agreement with Mr. Gallagher’s response. He stated that the absence of a regulatory framework for digital assets results in innovation not occurring within the U.S. He commented that Congress must be cognizant of this dynamic when determining resource allocation levels for the CFTC.
  • Mr. Giancarlo expressed confidence in CFTC Chairman Rostin Behnam’s estimate that it would cost the CFTC $120 million over three years to implement a new regulatory system for digital assets.

Rep. Frank Lucas (R-OK):

• Rep. Lucas remarked that the CFTC and the SEC will need to collaborate on the rulemaking process that is proposed under Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill. He noted how CFTC Chairman Rostin Behnam had just reflected on the CFTC’s history of working with the SEC on digital asset issues. He mentioned how the CFTC had previously approved regulated futures contracts tied to Bitcoin back in 2017 (which was during Mr. Giancarlo’s tenure as CFTC Chairman). He asked Mr. Giancarlo to discuss the history of the CFTC’s collaboration with the SEC on digital asset issues. He also asked Mr. Giancarlo to provide recommendations for how Congress could support collaboration between the CFTC and the SEC on digital assets moving forward.
  • Mr. Giancarlo stated that while he could not speak to the history of the CFTC and the SEC’s collaboration on digital asset issuers prior to his tenure as Chairman, he commented that this collaboration on digital assets issues was rumored to be poor. He stated that he had worked as CFTC Chairman with then-SEC Chairman Jay Clayton to improve collaboration between the CFTC and SEC on digital asset issues. He mentioned how he had formed an ad hoc working group on digital assets that had met “roughly” every two weeks to review digital asset innovations. He stated that this ad hoc working group did not have set deadlines. He noted how the first issue that this ad hoc working group had focused on was Bitcoin. He stated that the SEC’s support had enabled the CFTC to move forward with the decision to approve Bitcoin futures. He called the collaboration between the CFTC and the SEC during his tenure as CFTC Chairman “very important.” He stated that this collaboration has likely informed the provisions in the discussion draft bill relating to the establishment of a joint-CFTC-SEC working group. He also noted how former CFTC Chairman Heath Tarbert had continued this collaboration with then-SEC Chairman Clayton after he had left the CFTC.
• Rep. Lucas then mentioned how other jurisdictions (including the EU and Japan) have adopted regulatory frameworks for digital assets. He also noted how other countries (such as the UK) are working to develop their own regulatory frameworks for digital assets. He asked Mr. Lukken and Mr. Giancarlo to discuss how the existence of robust foreign regulatory regimes for digital assets will impact the U.S.’s ability to develop its own regulatory framework for digital assets.
  • Mr. Lukken called it important for the U.S. to show global leadership on digital assets issues and stated that the rest of the world is seeking to fill the regulatory void in the digital assets space. He warned that digital asset markets will develop overseas if the U.S. does not develop its own regulatory regime for digital assets. He remarked that the U.S. cannot merely regulate the digital assets space through enforcement actions. He asserted that the U.S. must establish its own regulatory system for digital assets to ensure that there will exist standards for good conduct and that digital assets trading will occur on well-regulated exchanges. He also stated that the U.S. must coordinate its regulation of digital assets with its international colleagues. He noted how the CFTC’s regulatory system is global in nature. He asserted that U.S. regulation of digital assets would therefore enable the U.S. to demonstrate global leadership on digital asset issues.
  • Mr. Giancarlo discussed the concept of the “Brussels Effect.” He explained that this concept refers to the idea that the EU will use new legislation to develop European standards, which the EU then will force upon the rest of the world through making the adoption of the standards a condition for entering EU markets. He commented that many countries and companies ultimately will adopt these European standards for all of their activities out of convenience. He remarked that the U.S. should work to counter this European influence through adopting its own regulatory framework for digital assets that contains U.S. values. He mentioned how the U.S. had successfully exported its values through its early regulation of the internet. He indicated that U.S. values include consumer protection, transparency, and principles-based regulation. He commented that the discussion draft bill attempts to promote these values.

Rep. Yadira Caraveo (D-CO):

• Rep. Caraveo asked the witnesses to identify any considerations that may be missing from Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill. 
  • Mr. Gallagher remarked that while the discussion draft bill’s initial architecture is “very sound,” he commented that minor improvements can still be made to the bill. He also recommended that Congress make its intent clear to financial regulators. He recounted his experience serving as a SEC Commissioner following the passage of Dodd-Frank and mentioned how the Commission had received 110 rulemaking mandates from Congress. He stated that the SEC had experienced challenges with these rulemaking efforts when it had received less prescriptive guidance from Congress. He recommended that Congress provide prescriptive guidance to financial regulators whenever it has strong views on an issue.
  • Mr. Berkovitz emphasized that CFTC-regulated markets are different from SEC-regulated markets. He explained that the function of the CFTC-regulated markets is price discovery and risk management while the function of the SEC-regulated markets is capital formation. He also stated that both the CFTC and the SEC maintain “fit-for-purpose” regulatory regimes. He discussed how the CFTC’s regulatory regime is designed for the wholesale market and noted how the CFTC has traditionally not overseen retail markets. He stated that the SEC’s regulatory regime by contrast is more retail-focused because it often deals with retirement funds and life savings. He also noted how securities brokers are required to act in the best interest of their customers and how investment advisors in the securities markets have fiduciary duties to their customers and clients. He noted how many of these same duties and expectations are often not present within the CFTC-regulated markets. He expressed concerns that moving digital asset instruments from the securities markets to the commodities markets would reduce the protections for these instruments. He remarked that the discussion draft bill would need to provide additional protections for investments currently regulated in the securities markets that would be reclassified as commodities. He concluded that policymakers must recognize the fundamental differences between the SEC and the CFTC in terms of market regulation.
  • Mr. Lukken highlighted how the discussion draft bill contemplates a disintermediated marketplace. He discussed how the futures markets currently have brokers that deal with customers and noted how current law largely provides customer protections at the broker level (e.g., FCMs). He remarked that the bill would place these protections with the digital assets exchange itself and indicated that these protections include fund segregation and disclosure requirements. He also stated that the legislation does include conflict of interest protections and largely attributed FTX’s collapse to the exchange’s failure to compartmentalize risks. He suggested however that Congress further consider whether to provide separate registration processes at both the broker and exchange levels.
  • Mr. Grewal remarked that the discussion draft bill recognizes a dual role for the CFTC and the SEC on a going forward basis. He also stated that the bill will recognize that the SEC will have a primary role in regulating digital asset securities.

Rep. Jim Baird (R-IN):

• Rep. Baird noted how Mr. Giancarlo had recommended that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill impose a deadline on the CFTC and the SEC to complete their joint definitional rulemakings. He asked Mr. Giancarlo to explain why a deadline would be important in this instance.
  • Mr. Giancarlo remarked that the imposition of a deadline would lead the CFTC and the SEC to devote the resources needed to complete their joint definitional rulemakings in a prompt manner. He warned that the absence of a deadline could lead the financial market regulators to prioritize other non-pressing matters over the joint definitional rulemakings.
• Rep. Baird then discussed how one of the CEA’s purposes is to promote responsible innovation and fair competition. He asked Mr. Lukken to indicate whether the discussion draft bill’s provisions to bring digital asset commodities into the CFTC’s regulatory sphere would accomplish these purposes.
  • Mr. Lukken answered affirmatively. He stated that the discussion draft bill would provide responsible and principles-based regulation. He also stated that the legislation would promote digital assets industry competition, which would help the digital assets industry to police itself.
• Rep. Baird then provided the other witnesses with an opportunity to respond to his previous two questions.
  • Mr. Grewal expressed agreement with the previous comments regarding the value and virtue of deadlines for the CFTC and the SEC’s joint definitional rulemakings. He also remarked that the digital assets market and technologies are changing quickly, which further underscores the need for these rulemaking deadlines.
  • Mr. Berkovitz noted how the discussion draft bill would provide clarification for the classification of a given digital asset based on the digital asset’s trading technology, network characteristics, and network ownership dynamics. He stated that digital assets technology is changing “rapidly” and cautioned the Committee against adopting static definitions for digital asset classifications given this dynamism. He warned that basing digital asset categories on particular technology definitions at a fixed point in time may not be conducive to digital assets innovation. He highlighted how the SEC currently maintains a principles-based regulatory system and cautioned the Committee from getting too technologically focused regarding its efforts to define securities.
  • Mr. Gallagher also expressed agreement with the previous comments regarding the importance of deadlines for the CFTC and the SEC’s joint definitional rulemaking. He noted how Dodd-Frank had provided the SEC with 110 mandated rulemakings and indicated that many of these mandates had one or two-year deadlines. He stated that many of these rulemakings remain unfinished to this day. He remarked that the failure for Congress to impose a deadline on a proposed CFTC and SEC joint definitional rulemaking would lead other “extraneous” rules to take priority over this rulemaking. He commented that this outcome would be suboptimal and constitute an inefficient allocation of resources.

Rep. Nikki Budzinski (D-IL):

• Rep. Budzinski discussed how there are concerns surrounding how consumer protections would be enforced against a fully decentralized blockchain. She asked the witnesses to indicate whether adequate consumer protections could be achieved by regulating digital asset exchanges and platforms according to the CFTC’s established core principles. She also asked the witnesses to identify other protections that Congress could provide under the CEA’s principles-based regulatory framework.
  • Mr. Berkovitz remarked that the CFTC’s regulatory regime does not currently provide the same level of investor and customer protection as the SEC’s regulatory regime. He discussed how advisors and brokers contribute to the superior protections in the securities market and highlighted how advisors have fiduciary duties to their customers. He noted how commodity trading advisors by contrast do not have the same fiduciary duties to their customers. He also highlighted how securities brokers have a duty to act in the best interest of their customers (which can include a duty of best execution). He noted how FCMs and other commodity intermediaries by contrast do not have a duty of best execution. He remarked that moving assets from SEC oversight and regulation to CFTC oversight and regulation will thus result in less investor protections. He stated that the wholesale nature of the CFTC’s market assumes a level of sophistication among participants and commented that this level of sophistication is often not present among retail participants. He asserted that Congress would therefore need to bolster the CFTC’s investor and customer protections if it were to provide the CFTC with increased oversight of digital assets.
  • Mr. Gallagher remarked that the U.S. should take the customer protections for SEC registered brokers and apply them to the digital assets space. He commented that this application of customer protections to the digital assets space would not require additional legislation and asserted that the CFTC possesses sufficient capabilities to implement these customer protections. He also expressed agreement with Mr. Lukken’s statement that the role of FCMs under Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill remains unclear. He stated that FCMs could play a major role in supporting customer protections. He testified that Robinhood Markets could immediately comply with new investor protection requirements for the digital assets market. He elaborated that Robinhood Markets is already providing basic and enhanced investor protections.
  • Mr. Grewal remarked that Coinbase could also immediately comply with new investor protection requirements for the digital assets market. He also stated that the discussion draft bill would protect consumers through providing asset segregation requirements, restrictions on the commingling of funds, and disclosure requirements regarding conflicts of interest involving affiliated entities.
  • Mr. Giancarlo noted how many digital assets technology advocates are seeking a less intermediated financial system. He stated that policymakers must work to provide a sufficient level of intermediation for the financial system. He commented that too much intermediation would defeat the purpose of digital assets technology.
• Rep. Budzinski acknowledged that her question period time had expired.

Rep. John Rose (R-TN):

• Rep. Rose noted how the SEC had alleged that certain digital assets constitute securities in their recent complaints against Binance and Coinbase. He indicated that these digital assets are available on the Robinhood Crypto platform. He asked Mr. Gallagher to indicate whether Robinhood could offer these digital assets through their SEC-registered broker-dealer if these digital assets are found to be securities.
  • Mr. Gallagher answered no. He noted how the SEC had recently issued complaints over certain digital assets and indicated that these digital assets are traded on Robinhood’s platform. He testified that Robinhood is “actively reviewing” the SEC’s analysis to determine whether it should reconsider the listing of these digital assets. He asserted however that it would be impossible to trade digital assets on Robinhood’s broker platform without regulatory relief and infrastructure changes in the securities markets.
• Rep. Rose asked Mr. Gallagher to identify the obstacles that a SEC-registered broker-dealer would face in trying to list digital assets deemed to be securities.
  • Mr. Gallagher recounted how Robinhood had sought to proactively register as a SBDC dealer with the SEC. He testified that Robinhood had worked with SEC staff for 16 months on this registration effort and indicated that this effort was ultimately unsuccessful. He stated that one barrier to this registration effort had been the SEC’s view that there exists an issuer disclosure deficiency within the cryptocurrency markets. He asserted that an agency broker (such as Robinhood) cannot fix a perceived issuer disclosure deficiency and commented that an agency broker cannot control the actions of third parties. He stated that this dynamic had impeded Robinhood’s efforts to successfully register as a SBDC with the SEC. He remarked that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would address this barrier to registration.
• Rep. Rose asked Mr. Gallagher to indicate the current status of Robinhood’s registration effort with the SEC.
  • Mr. Gallagher stated that Robinhood’s registration effort with the SEC has failed. He testified that Robinhood had received an email from the SEC indicating that there would be no more discussions regarding Robinhood’s effort to become a SBDC. He noted however that the SEC had expressed its willingness to receive input from Robinhood on any rulemaking. He stated that Robinhood would engage in any rulemaking efforts regarding SBDCs. He expressed optimism that Robinhood could make progress with the SEC on registration efforts and commended the SEC professional staff for being cooperative in all of their interactions with Robinhood.
• Rep. Rose then mentioned how SEC Chairman Gary Gensler had stated in 2021 that there exist some regulatory gaps regarding the digital assets space. He also noted how SEC Chairman Gensler had called for Congress to provide the SEC with additional authorities to better oversee digital asset transactions, products, and platforms. He mentioned how SEC Chairman Gensler had subsequently stated that exemptive relief may be needed for cryptocurrency platforms to register with the SEC. He stated however that SEC Chairman Gensler is now asserting that the SEC does not require additional authority from Congress to oversee the digital assets space. He asked Mr. Berkovitz to indicate whether the SEC currently has the authority to regulate the digital assets market or requires additional authority from Congress to regulate this market.
  • Mr. Berkovitz remarked that federal securities laws provide the SEC with adequate, sufficient, and appropriate authorities. He stated however that new legislation is required to address the current “regulatory gap” for non-security digital assets.
• Rep. Rose then noted how Coinbase had petitioned the SEC to engage in new rulemaking regarding digital assets. He asked Mr. Grewal to explain why Coinbase believes that Congress needs to pass new digital assets legislation if it is concurrently pressing the SEC to pursue new rulemaking on the topic.
  • Mr. Grewal mentioned how Coinbase had filed a petition for rulemaking with the SEC in July 2022. He noted that the SEC has repeatedly invited digital asset stakeholders to register with the Commission. He stated that Coinbase has attempted to register with SEC as a broker-dealer, an ATS, and an NSE. He testified that the Coinbase had not received any responses or counter proposals from the SEC following months of conversations between the company and the regulator.
• Rep. Rose noted that his question period time had expired.

Rep. John Duarte (R-CA):

• Rep. Duarte discussed how a retail investor looking to purchase a company’s stock through a traditional brokerage account can easily research the company’s fundamental and financial information through the brokerage account’s website. He noted how there are now proposals to allow retail investors to purchase digital assets through a traditional brokerage account under the SEC’s guidance. He asked Mr. Gallagher to address how retail investors can evaluate digital assets for potential purchase.
  • Mr. Gallagher remarked that compulsory disclosure in the digital assets space would enable retail investors to evaluate digital assets for potential purchase.
• Rep. Duarte interjected to ask Mr. Gallagher to clarify what needs to be disclosed regarding digital assets. He also asked Mr. Gallagher to identify metrics that would enable retail investors to effectively compare different digital assets.
  • Mr. Gallagher remarked that investors will differ in the metrics that they value for assessing digital assets. He discussed how some digital asset investors prioritize quantitative measures while other digital asset investors prioritize qualitative measures (such as management teams, token utilities, a token’s network, and whether a token can be staked).
• Rep. Duarte noted how traditional equities have metrics like full dilution and earnings per share (EPS). He asked Mr. Gallagher to identify comparable metrics for digital assets.
  • Mr. Gallagher commented that he did not know the answer to Rep. Duarte’s question.
  • Mr. Giancarlo discussed how the CFTC does not require the same type of disclosures for commodities as the SEC requires for securities. He noted how a prospective customer of wheat futures will not receive disclosures regarding the current state of the wheat markets.
• Rep. Duarte interjected to ask the witnesses to identify the prime metrics for evaluating a digital asset in SEC-regulated markets.
  • Mr. Gallagher remarked that Rep. Duarte’s question is difficult to answer because digital assets have not yet been able to register with the SEC.
• Rep. Duarte expressed concerns that the witnesses could not identify what metrics would be disclosed under a new regulatory framework for digital assets. He highlighted how the U.S. is currently closing down special purpose acquisition companies (SPACs) because these companies are too vague, lack substance, and are vulnerable to abuse. He commented that digital assets have many similar issues.
  • Mr. Grewal remarked that the most important disclosure for an asset (whether a traditional or digital asset) relates to the function of the asset. He also stated that it is important for prospective digital asset purchasers to understand how a digital asset’s network functions. He asserted that this information would be provided under a disclosure regime for digital assets. He commented that this information would enable prospective digital asset purchasers to independently determine the value of the digital assets.
• Rep. Duarte interjected to note how traditional equities are assessed based on their competitive advantages, value propositions, corporate strategies, resources, and talent. He expressed confusion as to how these traditional metrics could be applied to digital assets. He then noted that while there exist many commodities, he highlighted how the Chicago Board of Trade (CBOT) will not list all of these commodities. He stated that the most successful digital assets (such as Bitcoin and Ethereum) have very consolidated ownership, which can make them vulnerable to manipulation. He asked the witnesses to address how the U.S. could protect against such manipulation.
  • Mr. Lukken noted how the CFTC has required the filing of large trader reports since 1923 and indicated that these reports are filed on a daily basis. He stated that the use of these reports for digital assets trading could enable traders to identify outsized positions that could be manipulated. He also noted how the CFTC maintains surveillance staff that seeks to persuade market participants to leave positions that can be manipulated. He further noted how this surveillance staff may even force market participants to liquidate their positions if the positions become too large.
• Rep. Duarte asked Mr. Lukken to clarify whether the CFTC had intervened during the previous LIBOR rate manipulation scandal.
  • Mr. Lukken indicated that the LIBOR rate manipulation scandal had involved off-exchange activities.

Note: The Committee took an approximately 25-minute recess at this point of the hearing for votes.

Rep. Mark Alford (R-MO):

• Rep. Alford stated that while he generally supports limiting the federal government’s involvement in the private sector, he asserted that the digital assets space appears to be entirely unregulated. He noted that the digital assets industry is calling for some form of regulation to provide basic protections for the digital assets space. He asked Mr. Grewal to indicate what will occur if the U.S. fails to adopt a regulatory framework for digital assets.
  • Mr. Grewal remarked that the U.S.’s failure to adopt a regulatory framework for the digital asset commodity spot market will imperil market integrity and consumer protections. He emphasized how there is currently no federal protection for the digital asset commodity spot market. He also warned that the U.S.’s failure to adopt a regulatory framework for the digital asset commodity spot market will cause digital assets industry innovations and investments to move abroad. He commented that these innovations and investments will go to jurisdictions with “more balanced and appropriate” regulatory structures for digital assets. He concluded that digital assets regulation is key for both protecting consumers and ensuring domestic innovations.
• Rep. Alford asked Mr. Gallagher to project the economic consequences of U.S. inaction on digital assets regulation and digital assets activity moving outside of the U.S.
  • Mr. Gallagher remarked that digital assets activity is already moving outside of the U.S. He noted that while some digital asset firms are moving abroad to evade regulation, he stated that other digital asset firms are moving abroad to obtain regulatory clarity. He elaborated that many digital asset firms are concerned that the U.S.’s lack of regulatory certainty for digital assets can lead to tokens being abruptly reclassified. He called it important for Congress to swiftly pass digital assets legislation. He also stated that federal market regulators must be prepared to quickly implement any potential digital assets legislation.
• Rep. Alford then discussed how the CFTC has limited anti-fraud and anti-manipulation enforcement authority over spot markets (including the digital assets spot market). He asked Mr. Lukken to indicate whether this limited enforcement authority is sufficient for effectively policing the digital assets ecosystem.
  • Mr. Lukken remarked that enforcement authority alone is insufficient and asserted that the U.S. must have a regulatory system for digital assets. He stated that most digital asset industry stakeholders want to comply with federal laws and regulations and commented that the adoption of a regulatory framework for digital assets can support this objective. He further commented that a regulatory framework for digital assets will repel bad actors from this space.

Rep. Monica De La Cruz (R-TX):

• Rep. De La Cruz noted how Mr. Gallagher had expressed concerns over the U.S.’s “eroding” competitive position in the global digital assets market. She asked Mr. Gallagher to indicate whether the U.S. can reverse this trend. She also asked Mr. Gallagher to indicate how quickly the U.S. must act to pass digital assets legislation.
  • Mr. Gallagher commented that while the U.S. still has time to address its eroding competitive position in the global digital assets market, he asserted that the Congress must act quickly to pass digital assets legislation. He noted how other jurisdictions (such as Singapore and the EU) have already adopted their own regulatory frameworks for digital assets. He expressed his surprise with the fact that the EU had adopted a regulatory framework for digital assets quicker than the U.S. He remarked that the U.S. can have a thriving digital assets market if it adopts a regulatory framework for digital assets. He noted how the U.S.’s current lack of a regulatory framework for digital assets is hampering investments in U.S. digital asset firms and projects. He reiterated his call for Congress to swiftly pass digital assets legislation.
• Rep. De La Cruz then asked Mr. Grewal to summarize interactions between Coinbase and federal regulators that had led the SEC to file a lawsuit against the company on the morning of the hearing.
  • Mr. Grewal testified that he is still in the process of reviewing the SEC’s filed lawsuit against Coinbase. He indicated that Coinbase had engaged in numerous interactions with the SEC that go back several years. He noted how Coinbase has been a publicly listed company since 2021 and discussed how Coinbase’s initial public offering (IPO) process had involved “very thorough” disclosures of the Coinbase’s business model, review process (including its asset consideration process), and assurances that digital asset securities would not be listed on Coinbase’s platform. He testified that Coinbase has had over 30 engagements with the SEC since it had become a public company to develop a “sensible” framework for regulation. He elaborated that Coinbase had sought to identify a regulatory pathway for its platforms to be registered broker-dealers, ATSs, and NSEs. He indicated that Coinbase had not received any response from the SEC regarding its presentations to develop such pathways. He mentioned how Coinbase had filed a formal petition for rulemaking with the SEC in July 2022. He noted that this petition had identified 50 questions that would need to be answered for there to exist a “reasonable and comprehensive” regulatory framework and structure for digital assets. He testified that Coinbase has still not received a response from the SEC on this petition. He noted that the SEC has not indicated whether it would issue rules on this subject and has not provided clarity regarding the nature of potential rules.
• Rep. De La Cruz asked Mr. Grewal to indicate whether the SEC’s concerns raised in their lawsuit against Coinbase could be settled through dialogue with the company. She also asked Mr. Grewal to indicate whether digital assets legislation could address the SEC’s concerns regarding Coinbase.
  • Mr. Grewal remarked that the SEC and Coinbase had not engaged in significant dialogue and asserted that the SEC had not been responsive to Coinbase’s concerns. He stated that Coinbase remains “open and willing” to discussions with the SEC regarding the development of a “sensible” regulatory framework for digital assets. He remarked that digital assets legislation is needed for protecting digital asset consumers in the absence of any dialogue between the SEC and the digital assets industry.

Rep. Dusty Johnson (R-SD):

• Rep. Johnson asked Mr. Gallagher to discuss the SEC’s disclosure regime for parties offering new securities. He also asked Mr. Gallagher to indicate whether these types of disclosures are well-suited for digital assets.
  • Mr. Gallagher remarked that the SEC’s requirements are tailored to actual investment contracts. He expressed disagreement with the view that most existing digital assets constitute securities under the Howey test. He stated that the SEC’s current requirements are not appropriately tailored to digital assets. He remarked that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill’s basic disclosure principles are core issues that would be subsumed within current SEC requirements and more tailored to the digital assets industry. He elaborated that these disclosure principles involve information regarding a digital asset’s source code, transaction history, plan of development, the basic economics of an offering, list of affiliates, and material risks.
• Rep. Johnson asked Mr. Gallagher to confirm that the passage of the discussion draft bill would impose a disclosure regime that better accounts for digital asset marketplace needs.
  • Mr. Gallagher remarked that there is currently no disclosure regime for digital assets. He stated that there are currently no SEC-registered digital asset tokens with merit. He noted that while some digital asset tokens have been registered with the SEC under the Securities Exchange Act of 1934, he asserted that this registration is insufficient. He stated that the discussion draft bill’s registration framework would constitute a “great starting point” and added that this framework may even be sufficient on its own.
• Rep. Johnson then discussed how the CFTC is a principles-based regulator, which enables it to nimbly respond to new innovative product offerings. He commented that this dynamic had led critics to allege that the CFTC is a “light touch” regulator without an appropriate focus on customer protection. He asked Mr. Giancarlo, Mr. Berkovitz, and Mr. Lukken to respond to these allegations.
  • Mr. Giancarlo highlighted how the CFTC’s regulated markets did not experience failures during the 2008 Financial Crisis. He stated that other markets that are often perceived to have “heavy touch” regulation had experienced significant failures during the 2008 Financial Crisis.
  • Mr. Berkovitz remarked that the CFTC’s regulatory system is “fit for purpose” for its regulated markets. He stated that this regulatory system adequately balances principles with prescriptiveness and that this system adequately protects market participants. He asserted however that the CFTC’s regulatory system is inadequate to protect market participants in the securities space. He expressed concerns over proposals that would move securities from the SEC’s jurisdiction to the CFTC’s jurisdiction. He stated that customers and investors do not receive the same degree of protection in the CFTC’s regulated markets as they receive in the SEC’s regulated markets.
  • Mr. Lukken contended that there exists a misunderstanding that the CFTC’s principles-based system constitutes a “light touch” regulatory approach. He commented that while the CFTC’s principles-based system is flexible, he stated that CFTC registrants have significant duties and responsibilities related to protecting customers. He remarked that customers have been “largely” protected when defaults in CFTC-regulated markets occur. He stated that the discussion draft bill would seek to apply this approach to the digital assets space. He then expressed some disagreement with Mr. Berkovitz’s response. He contended that the CFTC is “more than capable” of assuming customer protection responsibilities for digital asset markets and that the CFTC can oversee retail markets. He stated that the CFTC has proven to be an adept regulator of the retail forex markets and noted how there are now “record low” customer protection complaints in these markets.
• Rep. Johnson remarked that the CFTC’s regulatory regime has demonstrated its ability to provide robust customer protections and called the CFTC a strong market regulator. He stated that CFTC-regulated markets have demonstrated themselves to be resilient to broader market disruptions.

Rep. Darren Soto (D-FL):

• Rep. Soto mentioned how he serves as a co-chair of the Congressional Blockchain Caucus and has worked to develop bipartisan legislation to provide jurisdictional boundaries for overseeing digital assets. He asked the witnesses to provide recommendations for how Congress should define digital assets.
  • Mr. Giancarlo remarked that a digital asset’s underlying blockchain should be considered as part of the assessment for a digital asset. He stated that a digital asset should be considered a security if its underlying blockchain serves a capital formation purpose. He noted however that a digital asset’s underlying blockchain may also support a commodity, banking, governance, or artwork function. He remarked that digital assets technology may not neatly comport with a pre-existing regulatory definition, which necessitates consideration of the digital asset’s underlying blockchain’s purpose. He commended the Committee for its work to develop initial definitions for digital assets that can support a legal framework for the assets.
• Rep. Soto commented that the fact that digital assets can have various functions makes it challenging to adopt definitions for the assets. He asked Mr. Grewal to provide recommendations for how Congress should define digital assets. He also asked Mr. Grewal to address how Congress should set jurisdictional boundaries for overseeing digital assets across the SEC, the CFTC, and the U.S. Federal Trade Commission (FTC).
  • Mr. Grewal remarked that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill would provide clarity for digital asset definitions. He expressed agreement with Rep. Soto’s comments that digital assets can serve a myriad of purposes and reflect a myriad of qualities. He applauded the bill for acknowledging that the characteristics of digital assets can and do change over time. He commented that a digital asset created for the purposes of capital formation should be treated as a security. He stated however that this digital asset may evolve over time to become more decentralized and experience broader distribution. He asserted that this evolution would necessitate a different disclosure regime for the digital asset. He commented that the discussion draft bill would appropriately account for this dynamic.
• Rep. Soto mentioned how he had proposed the Securities Clarity Act with Rep. Tom Emmer (R-MN) to provide definitions for digital assets. He asked Mr. Gallagher and Mr. Berkovitz to opine on how Congress should define digital assets and set jurisdictional boundaries for the regulation of digital assets.
  • Mr. Gallagher expressed agreement with the previous comments and commended Full Committee Chairman Thompson’s discussion draft bill. He stated that Congress should establish basic definitions for digital assets and create a process to account for the potential for change in digital asset types.
  • Mr. Berkovitz expressed agreement with the previous assertions that digital assets can evolve over time. He then stated that the technological description of a digital asset or the technology by which a digital asset is traded or distributed does not determine whether the digital asset is a security. He asserted that a digital asset’s functional nature as a capital raising instrument should make it a security.
• Note: Rep. Soto’s question period time expired here.

Rep. Marc Molinaro (R-NY):

• Rep. Molinaro applauded Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill for establishing a process that accommodates digital asset tokens that become decentralized over time. He noted how Mr. Giancarlo had called for the CFTC and the SEC to work together on certifying that a blockchain has become decentralized. He indicated however that the discussion draft only addresses the SEC’s role in certifying that a blockchain has become decentralized. He asked Mr. Giancarlo to address how the CFTC and the SEC might work together to certify that a blockchain has become decentralized. He also asked Mr. Giancarlo to address how a digital asset’s decentralization can be proven.
  • Mr. Giancarlo remarked that the CFTC should have a role in determining whether a blockchain protocol is sufficiently decentralized to be considered a commodity. He noted how a decentralization determination will require the CFTC to regulate the digital asset and ensure that the digital asset trades on CFTC-regulated exchanges. He stated that both the CFTC and the SEC have a vested interest in determining whether a digital asset is sufficiently decentralized. He expressed hope that the discussion draft bill can establish a mechanism to enable both market regulators to make such a determination. He also stated that a digital asset deemed to be decentralized may eventually become centralized again, which would warrant that the digital asset be reclassified as a security. He commented that both the CFTC and the SEC should have input regarding such a decision.
• Rep. Molinaro asked Mr. Giancarlo to indicate whether there currently exist adequate tools for the CFTC and the SEC to determine when a digital asset becomes decentralized. He commented that the anonymity surrounding digital asset ownership can make these determinations difficult.
  • Mr. Giancarlo discussed how the CFTC can easily determine whether traditional commodities (such as agricultural commodities) are decentralized and noted how central parties will not make disclosures regarding these traditional commodities. He stated that market participants in the traditional commodities market rely upon third parties for data on these commodities. He highlighted how there currently exist third parties in the digital assets space (such as Chainalysis) that provide data on digital assets. He commented that these third parties will therefore facilitate investments within the digital asset commodities space.
• Rep. Molinaro then mentioned how Dodd-Frank had “significantly” expanded the CFTC’s jurisdiction to include the swaps market. He noted how this expansion of jurisdiction had required the CFTC to undertake “significant” new rulemaking activities. He asked Mr. Berkovitz to indicate whether the CFTC had been able to effectively implement these new rules. He also asked Mr. Berkovitz to indicate whether the swaps market is now better regulated than it was prior to the enactment of Dodd-Frank.
  • Mr. Berkovitz remarked that Dodd-Frank has “significantly” improved the swaps market’s resilience and has reduced systemic risks. He described the CFTC and the SEC’s joint-rulemakings for swaps as very resource-intensive. He also stated that then-CFTC Chairman Gary Gensler and then-SEC Chairman Mary Schapiro had made these joint rulemakings a high priority. He commented that these joint rulemakings had ultimately been successful.
• Rep. Molinaro asked Mr. Berkovitz to indicate whether the CFTC would be able to provide oversight of digital asset commodity spot markets if provided with sufficient resources and authority.
  • Mr. Berkovitz answered affirmatively.
• Rep. Molinaro then asked the witnesses to indicate whether the absence of Congressional action on digital assets issues would increase the likelihood of scams or another FTX-like scandal, to which all of the witnesses answered affirmatively.

Full Committee Ranking Member David Scott (D-GA):

• Ranking Member Scott remarked that Congress must address the emergence of digital assets and coordinate federal regulation of digital assets across the SEC and the CFTC. He asserted that Congress must appropriate sufficient funding for the SEC and the CFTC so that these market regulators can effectively oversee the digital assets space. He called digital assets the greatest challenge facing the U.S. financial system and reiterated his call for sufficient funding for the SEC and the CFTC to oversee this space. He stated that the effective regulation of digital assets will be critical for maintaining the U.S. financial system’s global supremacy.

Rep. Dusty Johnson (R-SD):

• Rep. Johnson remarked that there were three major themes from the hearing. He indicated that the first major theme is that there exists uncertainty surrounding the process for digital assets transitioning from being securities to becoming commodities. He commented that this uncertainty injures innovation and market activity. He indicated that the second major theme is that the U.S. needs a spot market regulator in the digital assets space. He indicated that the third major theme is that Full Committee Chairman Glenn “GT” Thompson’s (R-PA) discussion draft bill makes “important and serious” investments in addressing both of the aforementioned regulatory gaps.