Building Blockchains: Exploring Web3 and Other Applications for Distributed Ledger Technologies (U.S. House Committee on Energy and Commerce, Subcommittee on Innovation, Data, and Commerce)

Hearing	Building Blockchains: Exploring Web3 and Other Applications for Distributed Ledger Technologies
Committee	U.S. House Committee on Energy and Commerce, Subcommittee on Innovation, Data, and Commerce
Date	June 7, 2023

 

Hearing Takeaways:

• Blockchain and Web3 Technologies: Subcommittee Members and the hearing’s witnesses expressed interest in the growth and innovation of blockchain and Web3 technologies. A blockchain is broadly defined as an electronic ledger system that is stored on a network of computers that multiple parties can contribute entries to. Blockchains can employ a variety of validation methods to ensure the integrity of the added entries for all their system participants. Web3 (also known as Web 3.0is to the decentralized version of the internet that employs blockchain technology. Subcommittee Members and the hearing’s witnesses noted that while policy discussions regarding blockchain technology have primarily focused on the technology’s financial applications (such as cryptocurrencies), they emphasized that the technology has many non-financial applications. They also called it important for the U.S. to become a global leader on blockchain technology and blockchain technology policy so that the U.S.’s adversaries cannot develop global rules for this technology.
  • Smart Contracts and Decentralized Autonomous Organizations (DAOs): Subcommittee Members, Prof. Reyes, and Prof. Sudler noted how additional computer programs, such as smart contracts and DAOs, can be layered on top of blockchain protocols to support additional applications and governance functions. A smart contract is a computer program that automatically executes if certain conditions are met. A DAO is a governance structure with no central body that can dictate the affairs of a blockchain.
  • Limitations of Blockchain Technology: Subcommittee Chairman Gus Bilirakis (R-FL), Prof. Reyes, Prof. Sudler, and Mr. Schulman cautioned that blockchain technology is not a panacea and that the technology has limitations. Subcommittee Chairman Bilirakis highlighted how blockchain technology has many technical challenges related to scaling, data available, and cybersecurity. He added that blockchain technology poses human challenges, such as fraudsters and compliance with law enforcement. Prof. Reyes and Mr. Schulman commented that a blockchain technology application’s effectiveness is heavily dependent on its data’s accuracy (which humans can significantly impact). Mr. Schulman also raised concerns over how blockchains often employ inefficient validation methods. Prof. Sudler further cautioned that blockchains may become vulnerable to corruption if they are too concentrated in terms of geography and ownership. He elaborated that an authoritarian government could seize a blockchain network’s servers if the servers were largely concentrated in a single country.
  • Impact on Consumer Privacy: Full Committee Chairman Cathy McMorris Rodgers (R-WA) and Mr. Wyatt expressed interest in how blockchain technology and Web3 applications can enable consumers to regain control over their personal data. They discussed how consumers must currently rely upon online platforms to store their data and noted how these companies will monetize this data for their own benefit. They stated that blockchain and Web3 technology applications could empower consumers to decide when and how they share their data with companies. Mr. Schulman warned however that the transparent nature of blockchains can compromise the privacy of their participants. He commented that researchers and law enforcement agencies have demonstrated that transaction analysis can uncover the real names of users.
  • Impact on Cybersecurity: Subcommittee Members and Mr. Wyatt expressed interest in how blockchains and similar distributed ledger technologies (DLTs) can impact the cybersecurity of systems. Subcommittee Mr. Wyatt recommended that the U.S. standardize code auditing to ensure the security and privacy of DLT protocols.
  • The U.S. Federal Trade Commission’s (FTC) Role in Combatting Scams and Frauds Involving Blockchain Technology: Subcommittee Members and Mr. Schulman expressed interest in the FTC’s efforts to combat scams and frauds involving blockchain technology. Mr. Schulman stated that while scams and frauds involving blockchain technology tend to heavily resemble traditional scams and frauds, he noted how blockchain technology enables these scams to be perpetrated through better and faster means of payments. He mentioned how the FTC maintains resources highlighting ongoing scams and recommended that people review these resources to reduce their risk of getting involved in a scam. Subcommittee Ranking Member Jan Schakowsky (D-IL) and Mr. Schulman called on Congress to provide the FTC with more funding and technical expertise to police the blockchain technology space.
  • Environmental and Energy Usage Concerns: Some Subcommittee Democrats expressed concerns over the energy consumption and environmental impact of blockchain technology. Prof. Sudler and Mr. Wyatt noted how there exist blockchain validation methods (such as proof of stake) that are less energy intensive than other blockchain validation methods (such as proof of work). They expressed optimism that these less energy intensive blockchain validation methods will become increasingly popular.
  • Artificial Intelligence (AI) Considerations: Rep. Russ Fulcher (R-ID) expressed interest in how AI technologies will interact with blockchain technology applications. Prof. Reyes and Mr. Schulman argued that blockchains are too slow to support the data needs of AI applications. Prof. Sudler and Mr. Wyatt argued however that blockchains can support AI applications through identifying biases in AI models, verifying AI source materials, supporting efficient code auditing, and improving the design of smart contracts.
  • Federal Efforts to Support Blockchain Technology: Rep. Darren Soto (D-FL) highlighted how Congress has worked to support blockchain technology in previous laws through establishing the Blockchain Center of Excellence within the U.S. Department of Commerce and through supporting blockchain applications relating to food tracing, encrypted military communications, electronic health records (EHRs) for veterans, and energy grid modernization.
  • U.S. Department of Commerce Report on Blockchain Technology: Full Committee Chairman Cathy McMorris Rodgers (R-WA) expressed frustration that the U.S. Department of Commerce has not yet released their Congressionally mandated report on blockchain technology and ways for the federal government to promote U.S. leadership and adoption of the technology.
• Blockchain Technology and Web3 Applications: Subcommittee Members and the hearing’s witnesses expressed interest in the current blockchain technology and Web3 applications being developed. These include decentralized social media applications, messaging applications, music streaming applications, privacy enhancing technologies, and contracts. Rep. Rick Allen (R-GA), Prof. Sudler, and Mr. Wyatt also stated that these applications can enable small businesses to cheaply manage their supply chains.
  • Military Applications: Several Subcommittee Members and Prof. Sudler highlighted how the U.S. Department of Defense (DoD) has pursued several military blockchain technology applications, including the Blockchain Approach for Supply Chain Additive Manufacturing Parts (BASECAMP) and the Authenticity Ledger for Auditable Military Enclaved Data Access (ALAMEDA) projects. Prof. Sudler stated that the U.S. military is likely using permissioned ledgers for these applications.
  • Foreign Aid and Government Assistance Applications: Rep. Kat Cammack (R-FL) and Prof. Sudler discussed how blockchain technology could be used to support the distribution U.S. foreign aid and government assistance through the tracking of recipients. Prof. Sudler noted however that the U.S. would need to ensure that the privacy rights of government assistance recipients.
  • Agriculture and Food Tracking Applications: Several Subcommittee Members discussed how blockchain technology can support agriculture and food tracking capabilities. They also highlighted how blockchains can identify the sources of food borne illnesses and contamination incidents within the food supply chain, which can enable quicker interventions.
  • Health Care Applications: Subcommittee Members, Prof. Sudler, and Mr. Wyatt discussed how blockchain technology can support several health care applications. These include applications related to EHRs, contact tracing, pharmaceutical ingredient tracking, and pharmaceutical prescribing. Prof. Sudler also stated that blockchain technology can be used to combat the problem of counterfeit prescriptions. Rep. Robin Kelly (D-IL) stated however that policymakers must be vigilant in ensuring that these applications do not compromise patient data privacy and security.
  • Outer Space and Satellite Applications: Subcommittee Members and Prof. Sudler expressed interest in how blockchain technology can support satellite-to-satellite communications. Prof. Sudler highlighted how blockchains can support missions involving satellite constellations. He commented that satellite constellations can support greater resiliency (especially regarding cyberattacks) and enable satellites to take over the responsibilities of lost satellites. He also discussed how there are several key considerations involving the deployment of blockchains in outer space, such as energy usage, data storage, and latency issues.
  • Sports Applications: Rep. Jeff Duncan (R-SC), Prof. Reyes, and Mr. Wyatt discussed how blockchain technology could support several applications related to sports. Rep. Duncan and Mr. Wyatt discussed how blockchain technology could enable athletes to develop digital collectable non-fungible tokens (NFTs) to capitalize on their name, image, and likeness (NIL) rights. Mr. Wyatt noted how athletes are using NFTs as a form of membership pass to provide their fans with access to them. Rep. Duncan and Prof. Reyes also stated that blockchain technology could support the ability of schools and college athletic conferences to monitor student athlete-agent interactions and student athlete NIL compensation deals.
  • Video Game Applications: Rep. Cammack and Mr. Wyatt further expressed interest in how blockchain technology can support video game applications. Mr. Wyatt highlighted how video games offer users the ability to purchase digital items and stated that blockchain technology can enable video game users to own these items (rather than merely license these items from a publisher).
• Potential Federal Legislation: Subcommittee Members and the hearing’s witnesses expressed interest in having Congress develop federal legislation to support blockchain technology innovation and to provide regulatory clarity for the blockchain technology space.
  • Calls for Prudence: Prof. Reyes and Prof. Sudler recommended that the U.S. take a prudent approach to regulating blockchain technology and consider guardrails for the technology on an industry-by-industry basis. They stated that the technology is still relatively nascent and that the U.S. should observe how the technology matures before it pursues more ambitious rules for the space. Prof. Reyes stated that the U.S. can provide regulatory clarity to the blockchain industry through the traditional federal rulemaking process. She commented that this rulemaking process is transparent and provides opportunities for stakeholder comments.
  • Technology Neutrality: Prof Reyes and Mr. Schulman stated that the principle of technology neutrality should inform U.S. blockchain technology policy. Mr. Schulman argued that blockchain technology does not require targeted regulation beyond standard consumer protections.
  • Blockchain Technology Education: Prof. Reyes stated that policymakers should understand how blockchain protocols function (including their limits) and whether the use of these protocols necessitates legal or policy attention. She recommended that the U.S. establish a blockchain technology education program for lawmakers and regulators and stated that these policymakers must be aware of blockchain technology nuances. She asserted that regulatory clarity for blockchain technology depends on understanding the difference between financial use cases and non-financial use cases of blockchain technology.
  • Open Source Code: Prof. Reyes and Mr. Schulman cautioned against regulations that target open source code and commented that these regulations would cause more harm than good through stifling innovation and further development. Prof. Reyes emphasized that blockchain protocols are not the only open source software that Americans rely upon on an everyday basis.

Hearing Witnesses:

1. Prof. Carla L. Reyes, Associate Professor of Law, SMU Dedman School of Law
2. Prof. Hasshi Sudler, Professor and Chief Executive Officer, Villanova University College of Engineering and Internet Think Tank, Inc.
3. Mr. Ryan Wyatt, President, Polygon Labs
4. Mr. Ross Schulman, Senior Fellow, Decentralization, Electronic Frontier Foundation

Member Opening Statements:

Subcommittee Chairman Gus Bilirakis (R-FL):

• He remarked that cryptocurrencies and certain financial aspects of blockchains have “hijacked” the public’s attention regarding emerging blockchain technology.
  • He commented that the hearing would highlight how blockchains are having significant impacts beyond the financial sector.
• He called it “essential for Congress to accurately understand blockchain technology before it engages in policymaking within this space.
• He stated that the core issue regarding blockchains relates to how data is organized, preserved, and protected.
  • He commented that the Subcommittee has jurisdiction over these data topics.
• He discussed how a blockchain is a linked list (or ledger) of transactions stored on a network of computers and explained that blockchains are composed of “building blocks” of data chained together cryptographically.
  • He commented that the hearing would consider what it means for blockchains to be decentralized, immutable, and open.
• He remarked that blockchains are a new “foundational” technology that can provide individuals and businesses with new ways to access, record, and validate digital activities online.
• He discussed how Web 1.0 had lasted from approximately 1993 to 2004.
  • He indicated that Web 1.0 had been characterized by dial-up internet service.
• He noted how Web 2.0 is the current version of the internet.
  • He indicated that Web 2.0 has been characterized by smartphones and large technology platforms.
• He stated that Web 3.0 (which encompasses NFTs other use cases) is the emerging internet that is built on top of blockchains.
  • He indicated that Web 3.0 is characterized by increased user control, decentralization, and transparency.
• He discussed how developers are using blockchain technology and DLT to support various innovations, such as decentralized social media applications, messaging applications, music streaming applications, and privacy enhancing technologies.
• He reiterated that blockchain technology should be viewed as something that is distinct from cryptocurrencies.
  • He referenced a recent report that found that cryptocurrency prices had declined by 70 percent while blockchain technology developers had only declined by 10 percent.
• He remarked that there exist “respected” blockchain technology developers that are working to build a new evolution of the internet and commented that blockchain technology, Web3, and DLT are merely tools.
• He then stated that blockchains (like the internet) will impact many areas of the Committee’s jurisdiction.
  • He elaborated that this technology could help to address challenges with the current internet ecosystem, bolster supply chains, verify information, and increase efficiencies for businesses.
• He asserted however that the Subcommittee should not treat blockchain technology as a panacea and commented that this technology still has many technical challenges related to scaling, data available, and cybersecurity.
  • He added that blockchain technology users can be vulnerable to fraudsters and actors that do not comply with law enforcement agencies.
• He discussed how the top regulator of scams and fraud is the FTC and argued that the FTC should focus its efforts on protecting Americans from fraudsters.
  • He noted how bad actors will often shift how they perpetrate their illicit activities from using older technologies to using newer technologies.
• He mentioned how his legislation, the Reporting Attacks from Nations Selected for Oversight and Monitoring Web Attacks and Ransomware from Enemies (RANSOMWARE) Act, had been signed into law during the previous 117th Congress.
  • He explained that this law requires the FTC to increase its cooperation with foreign law enforcement agencies and to report on ransomware and other cybersecurity-related attacks.
• He stated that the FTC should take a lead role in ensuring that Americans are made whole when international hackers target Americans using blockchains.
• He remarked that the U.S. must become a global leader on blockchain technology and blockchain technology policy so that the U.S.’s adversaries cannot develop global rules for this technology.
  • He asserted that the U.S. must ensure that these rules reflect the U.S. values of freedom, human rights, and human dignity.

Subcommittee Ranking Member Jan Schakowsky (D-IL):

• She discussed how blockchains are being used to solve problems (including supply chain management problems) and to create digital contracts and wills.
• She remarked however that blockchain technology contains some “significant” shortfalls.
  • She stated that some blockchains have energy and environmental implications that policymakers must monitor.
• She stated that her greatest concern regarding blockchain technology is its potential for use by scammers, fraudsters, and extortionists.
  • She lamented how many people have lost their life savings due to blockchain-related scams and frauds.
• She mentioned how the U.S. Securities and Exchange Commission (SEC) had recently alleged that two of the largest cryptocurrency exchanges were scamming consumers.
• She further noted how criminals often demand that ransomware payments be made in cryptocurrencies.
  • She highlighted how these ransomware attacks are often perpetrated against hospitals.
• She mentioned how Illinois residents alleged that they have lost $45 million to cryptocurrency scams between 2017 and 2022.
• She remarked however that the U.S. possesses the requisite tools and agencies (including the FTC) to pursue these scams.
  • She called it important for the FTC to possess the necessary resources to take enforcement actions within the blockchain technology space.
• She expressed interest in working to ensure that blockchain technology is deployed in a manner that is safe for both consumers and the U.S. economy.

Full Committee Chairman Cathy McMorris Rodgers (R-WA):

• She remarked that blockchains, Web3, and other DLTs represent a new technological shift that are comparable to the internet.
• She asserted that the Committee must ensure that the U.S. (rather than China and Europe) is the global leader in deployment and standard setting for these technologies.
  • She highlighted how the Committee had previously served as a leader on other emerging technologies, including the internet.
• She stated that the Committee must work to provide a regulatory environment for blockchain technology that keeps pace with the constantly evolving technology sector.
  • She highlighted how the Committee had held one of the first Congressional hearings on blockchains in 2016 and commented that blockchain technology has continued to evolve in the ensuing years.
• She mentioned how she had led efforts to pass the American Competitiveness of a More Productive Emerging Tech Economy Act (American COMPETE Act) in 2020.
  • She explained that this law required the U.S. Department of Commerce to study ways that the U.S. can advance several emerging technologies.
• She specifically highlighted how the American COMPETE Act requires the U.S. Department of Commerce to study blockchains and ways for the federal government to promote U.S. leadership and adoption of the technology.
  • She noted that the Biden administration has failed to release its report on the topic, despite the law’s statutory deadline and a Congressionally-granted extension of the deadline.
• She remarked that the U.S. must move quickly to deploy blockchain technology and expressed concerns that the U.S. may not be a global leader in this technology if it fails to take prompt action.
  • She highlighted how less than 40 percent of blockchain technology companies are headquartered within the U.S. and added that this figure is continuing to decline.
• She warned that foreign adversaries will seek to fill any U.S. technology leadership void and mentioned how Chinese technology company Huawei had recently played a major role in global efforts to deploy 5G communications technology.
  • She called it critical for the U.S. to become a global leader on blockchain technology, especially given the technology’s implications.
• She then noted how large technology companies have developed tools that seek to track the online and offline activities of Americans and asserted that DLTs can support the goals of comprehensive data privacy legislation.
  • She elaborated that these technologies could enable people to reclaim control of their personal online data and limit the ability of companies to control and share collected information.
• She also stated that the Committee must ensure that entrepreneurs and small businesses can continue to thrive and commented that smaller businesses are less able to afford the compliance costs associated with complicated regulations.
  • She noted that these complicated regulations include the European Union’s (EU) General Data Protection Regulation (GDPR) and the current “patchwork” of state privacy laws.
• She then noted that securities and commodities are just two of the many uses of blockchain technology and stated that the Financial Services Modernization Act of 1999 (also known as the Gramm–Leach–Bliley Act) should not be used to regulate the use of the personal information of Americans outside of the financial sector.
  • She asserted that Congress must determine appropriate definitions and regulations for blockchains to provide a conducive business environment for blockchain technology startup companies.

Rep. Darren Soto (D-FL):

• He described blockchains as fixed electronic ledgers that can have information permanently added to them.
  • He called this feature important because it provides integrity to the technology’s applications.
• He noted how cryptocurrencies are a use case of blockchain technology where transactions are added to ledgers and commented that blockchains can have additional applications within the health care and climate change contexts.
  • He highlighted how Chinese dissidents are adding language to blockchains to protest their maltreatment in China.
• He also explained how Web3 refers to a decentralized version of the internet that employs blockchain technology.
  • He commented that the current version of the internet is very centralized.
• He noted how much of the discussion surrounding blockchain technology has focused on cryptocurrencies and expressed interest in considering the information applications of blockchain technology.
  • He mentioned how he is a co-chair of the Congressional Blockchain Caucus.
• He discussed how blockchain technology has many potentially useful applications, such as helping local retailers and producers to track produce shipments (which can enable the quick tracing of contamination or food-borne illnesses) and supporting international remittances.
• He remarked that the U.S. must remain a leader in new digital technologies and called it important for the Committee to promote innovation and research into blockchain technology.
  • He also asserted that the Committee must work to protect consumers from this “very complex yet critical” technology.
• He then mentioned his efforts to establish the Blockchain Center of Excellence within the U.S. Department of Commerce and explained that this Center coordinates federal uses of blockchain technology.
• He discussed how Congress had included several blockchain technology initiatives as part of its budgets and National Defense Authorization Acts (NDAAs) in recent years.
  • He first mentioned how Congress has sought to promote the adoption of blockchain technologies in veteran EHRs and commented that these efforts seek to make the data in these EHRs more secure.
  • He secondly mentioned how Congress has supported the DoD’s efforts to employ blockchain technology for communications activities.
  • He lastly mentioned how Congress has supported the U.S. Department of Energy’s efforts to employ blockchain technology for assessing complex energy datasets and for supporting energy grid modernization efforts.
• He further discussed how blockchain technology is being employed for food tracing activities and for improving interventions when contaminations occur.

Witness Opening Statements:

Prof. Carla L. Reyes (SMU Dedman School of Law):

• She noted that a blockchain protocol is one type of distributed database (known broadly as DLT).
  • She explained that a blockchain protocol uses a specific type of data structure (mainly a blocked group of data linked together by one-way cryptographic pointers) to thwart malicious efforts to manipulate the network.
• She stated that blockchains track changes in data (often referred to as transitions in state) in order to allow for network participants to reach agreement about the existence and evolution of shared facts between them without relying upon third-party intermediaries.
  • She indicated that a blockchain protocol is often referred to as Layer 1 of the blockchain technology stack.
• She also noted how additional computer programs, such as smart contracts and DAOs, can be layered on top of blockchain protocols and explained that these programs are known as Layer 2 programs.
• She discussed how smart contracts can be used to build regulatory technology (RegTech) tools to help make regulatory compliance more efficient and transparent.
  • She added that smart contracts can enable experiments with innovative methods of economically productive activity.
• She also highlighted how DAOs are building productive organizations and communities with flatter governance structures than the governance structures that are typically found in corporations. 
  • She commented that these flatter governance structures can return control over business activity and entity conduct to the owners (rather than requiring trust in a corporate system).
• She then remarked that U.S. blockchain technology policy should embrace three principles to ensure that U.S. entrepreneurs can harness the democratizing and transparency-enhancing power of blockchain protocols.
• She first stated that the principle of technology neutrality should inform U.S. blockchain technology policy.
  • She commented that law and policy should target specific activities and actions, irrespective of the technology used to undertake those activities or actions.
• She secondly stated that policymakers should understand how blockchain protocols function (including their limits) and whether the use of these protocols necessitates legal or policy attention.
  • She commented that technical precision is required when discussing blockchain functions and objectives.
• She lastly stated that policymakers should acknowledge that blockchain protocols are not monolithic and commented that the technical details of blockchain protocols and the applications built on top of these protocols vary wildly.
  • She asserted that the acknowledgement of the functions and features of blockchain protocols will prevent the creation of “one size fits all” policy and legal frameworks that lead to industry confusion.
• She remarked that the adoption of the aforementioned principles will enable the law to learn from blockchain technology and its use cases.
  • She elaborated that the technology can help identify areas where there exist gaps in current laws.

Prof. Hasshi Sudler (Villanova University College of Engineering; Internet Think Tank, Inc.):

• He discussed how there exist non-financial applications of blockchain technology, including health care applications and space satellite applications.
• He recounted how he had previously presented a blockchain technology application to the Committee in April 2020 that supported COVID-19 contact tracing.
  • He explained that this application would use cellular phones to detect the proximity of individuals to one another and would transmit this contact information to a blockchain.
  • He indicated that this global and anonymous blockchain can deliver critical information regarding when someone encounters an infected person.
• He stated that the global nature of this contact tracing application was beneficial in addressing the global nature of COVID-19.
  • He highlighted however that different countries and U.S. states had used their own COVID-19 contact tracing applications that could not communicate with one another.
  • He commented that these separate applications had impeded COVID-19 contact tracing efforts.
• He mentioned how this blockchain technology contact tracing application had been tested with Presbyterian Senior Living in Philadelphia and testified that this application had been useful for this group.
  • He noted however the senior citizen residents of Presbyterian Senior Living dd not like using cellular phones.
• He stated that a key benefit of blockchain technology is that it is device agnostic, which enables users to connect to a blockchain network using their preferred devices.
  • He commented that this device agnostic feature had been beneficial in deploying the contact tracing blockchain application at the Presbyterian Senior Living facility.
• He stated however that the absence of a global technology strategy during the COVID-19 pandemic had limited the effectiveness of this contact tracking blockchain technology application.
• He asserted that the global nature of pandemics and other public health issues necessitates the development of technologies with global features (such as blockchain technology).
  • He recommended that federal policymakers establish standards to support technologies that can function across both state borders and international borders.
• He then discussed his efforts to develop blockchain technology applications for space satellites to support satellite-to-satellite communications.
  • He commented that these communications could be transmitted to satellite operators on earth to respond to problems.
• He noted how these blockchain technology applications could be combined with zero-trust technologies to encrypt satellite information.
  • He indicated that this encryption would ensure that only the desired recipients of data can read the data.
• He concluded that blockchain technology is very nascent and stated that federal legislation can help to encourage non-financial applications of blockchain technology.

Mr. Ryan Wyatt (Polygon Labs):

• He remarked that Web3 can benefit users and consumers and called it important for Web3 technology to be built domestically.
• He discussed how large centralized corporations had primarily built the internet over the previous four decades.
  • He commented that these corporations have been very innovative and have created technologies that have exceeded the expectations of the internet’s original inventors.
• He noted however that 95 percent of internet traffic currently goes to the top 1 percent of websites and that the top 1 percent of application publishers account for 85 percent of mobile application usage.
  • He commented that the large corporations that control these websites and applications accrue the value of the time, data, and money of consumers.
  • He asserted that this situation places website and mobile application users at a disadvantage.
• He stated that the growth and innovation from Web2 has come at a “steep cost” to the consumer and everyday internet users in terms of both fees and data collection.
  • He noted how map applications record user locations, how social media platforms require users to give up personally identifiable information (PII), and how web browsers collect and share user search histories with other applications to provide targeted advertisements.
• He discussed how online identities are currently stored in silos within company databases and stated that the storage of this information creates value for the companies.
  • He commented that these companies wield user data for their own benefit and only share the least amount of value to users to ensure continued use.
• He contended that user privacy is inherently compromised in Web2 for the aforementioned reasons and added that users have become accustomed to this dynamic.
• He remarked that a blockchain-based internet would address these privacy issues and asserted that blockchains can democratize the internet.
  • He noted how blockchains are run by groups of people or entities running individual computers who receive incentives for verifying information transmitted to the blockchain and for securing the network.
• He discussed how third parties develop Web3 applications and indicated that these applications are built on top of blockchain networks.
  • He emphasized that these applications are built separate and apart from the original developers of the blockchains themselves.
• He noted how the disintermediated nature of blockchains enable users to connect to Web3 applications through their own personal software and decide when, how, and whether to share any information about themselves.
  • He commented that Web3 creates a “value layer” of the internet where users can control all aspects of their online interactions.
• He testified that startup software developers, large companies, and governmental organizations are creating new Web3 applications on the Polygon network.
  • He indicated that these large companies include Nike, Starbucks, the Coca-Cola Company, and the National Football League (NFL).
  • He indicated that these governmental organizations include the United Nations International Children’s Emergency Fund (UNICEF).
• He remarked that the potential for blockchains to enable people to reclaim control of their online activities makes it “critical” for blockchain technology to be developed domestically.
• He warned that the U.S. is ceding its leadership in blockchain technology to other countries, including China.
  • He commented that China is promoting all aspects of blockchain technology without providing the privacy and data security features of the technology.
• He noted how the U.S. is losing many blockchain technology companies (and the accompanying jobs) to countries that have already created or are currently creating strong regulatory frameworks for the technology.
  • He highlighted how the EU has developed a strong regulatory framework for blockchain technology.
• He concluded that U.S. action will be key for determining whether U.S. users and consumers will have the benefits of Web3 accompanied by a robust and comprehensive consumer protection framework.

Mr. Ross Schulman (Electronic Frontier Foundation):

• He noted how data structures and algorithms are the “fundamental building blocks” of computer programs and stated that blockchains are a relatively new type of data structure.
  • He asserted that blockchain technology is neither inherently good nor inherently evil and commented that this technology contains both benefits and drawbacks.
• He remarked that blockchains do not require targeted regulation beyond standard consumer protections.
  • He contended however that the U.S. “desperately” needs a consumer-driven and enforceable general privacy law.
• He also stated that blockchains do not require incentives or assistance to be innovative.
  • He further commented that blockchains are not the only technology to provide a method for decentralization.
• He then discussed how blockchains provide a means for two or more parties to agree on the value of a piece of data when the parties do not trust one another or cannot trust a third party to keep track of the piece of data for them.
  • He commented that these parties may rely upon a bank, legal contract, or a handshake agreement to set the value of a piece of data in a non-blockchain system.
• He explained that blockchains distribute the necessary trust across a network of peers and require that a simple majority of the network act honestly for the network to be relied upon.
  • He noted how this feature is often referred to as a solution to the “double spending problem” within the context of currencies.
  • He commented that while this feature is useful in more circumstances than blockchain technology’s detractors would claim, he asserted that blockchain technology proponents had been overly optimistic regarding the potential usefulness of this feature.
• He stated that blockchains make it easier to provide transparency and auditability of their contents.
  • He commented that these features could support government recordkeeping, business document tracking for audit purposes, and chain of custody assessments in legal proceedings.
• He also stated that blockchains can provide value when they are tied into systems where they provide compensation for a service provided by the network itself.
  • He highlighted how the Filecoin blockchain uses a unique validation system known as proof of storage in which the network’s nodes are compensated for providing hard drive storage space to the network.
• He remarked however that blockchains have several limitations and stated that blockchains are not inherently good for people’s privacy.
  • He commented that certain cryptocurrencies (including Bitcoin and Ethereum) are bad for privacy because transactions involving these cryptocurrencies must be publicly posted.
  • He acknowledged that while identities on these networks are not tied to real names, he noted how researchers and law enforcement agencies have demonstrated that transaction analysis can uncover the real names of users.
  • He added that privacy within the blockchain space often is the result of special projects, such as Tornado Cash and Zcash.
• He also stated that blockchains are relatively inefficient and noted how some blockchains require all network nodes to expend large amounts of resources to solve meaningless math equations to validate additional entries being added to their ledgers.
  • He commented that this proof of work validation system (which is used on the Bitcoin network and other blockchain networks) leads to wasted energy and high transaction costs.
  • He further asserted that this “purposeful” inefficiency can drive recentralization and noted how many blockchains are susceptible to attacks because a small number of entities comprise most of the deciding power for said blockchains.
• He remarked that there have been efforts to address the aforementioned problems and highlighted how the Ethereum blockchain had adopted a proof of stake validation method in September 2022.
  • He commented that this adoption was meant to reduce inefficiencies and the barrier to entry for validators through eliminating the need for large capital costs.
• He recommended that the U.S. rely upon existing regulations to address the current challenges posed by blockchains.
  • He specifically commented that the FTC’s unfair and deceptive practices prohibition can address many issues within the blockchain ecosystem.
• He also stated that Congress should pass consumer-driven comprehensive privacy legislation and provide adequate funding for the FTC.
  • He commented that adequate FTC funding will enable the Commission to hire the necessary technical and legal experts to investigate and prosecute potential harms.
• He further remarked that regulations that target open source coders will cause more harm than good through stifling innovation and further development.
• He reiterated that while blockchain technology has some beneficial applications, he asserted that blockchain technology’s usefulness extends to a limited number of contexts.
  • He stated that policymakers should not pursue blockchain technology-specific regulations and should focus more on how the technology is being used.

Congressional Question Period:

Subcommittee Chairman Gus Bilirakis (R-FL):

• Chairman Bilirakis asked Prof. Reyes to indicate whether blockchain technology is simply a new way to organize, send, preserve, verify, and protect data.
  • Prof. Reyes first discussed how different blockchain constituents will use different terms when describing blockchain technology, which can result in poor communication. She then stated that the characterization that a blockchain technology is a new way to organize, send, preserve, verify, and protect data is dependent on the blockchain itself. She noted how many blockchains are not general purpose databases. She highlighted how the Bitcoin blockchain is focused on tracking which unspent transaction outputs (UTXOs) have been spent and which UTXOs have not been spent. She stated however that other blockchains can enable decentralized file storage and identified the Filecoin network and the InterPlanetary File System (IPFS) as examples of such blockchains. She remarked that a blockchain’s function as a data storage service is dependent on a blockchain protocol’s architecture, purpose, and technology stack. She described a blockchain protocol as the “base layer” on which nodes communicate with one another about a specific thing (such as the transmission of UTXOs). She noted how other applications can be built on top of the protocol. She indicated however that blockchains may host data on centralized servers and connect that data to the blockchain protocol so that the blockchains can track changes to the data (rather than the track data itself).
• Chairman Bilirakis interjected to discuss how his state of Florida has a vibrant space industry. He expressed interest in Prof. Sudler’s comments regarding the potential for blockchain technology applications for satellites. He mentioned how he serves on the U.S. House Committee on Energy and Commerce’s Subcommittee on Communications and Technology, which focuses on broadband internet development. He asked Prof. Sudler to explain how blockchains will protect security and resiliency in the broadband internet development space and support innovation within outer space.
  • Prof. Sudler remarked that there are several key considerations for deploying blockchains in outer space. He noted how blockchains on earth are located on stationary servers and data centers while blockchains in outer space will be housed on top of satellites (which are moving very quickly). He also noted how satellites must synchronize their activities with one another in short spaces of time. He further highlighted how satellites may be located far away from each other, which can pose latency concerns. He then remarked that blockchains can support missions involving satellite constellations. He commented that satellite constellations can support greater resiliency (especially regarding cyberattacks) and enable satellites to take over the responsibilities of lost satellites. He also stated that blockchains can support data storage and ensure that the data is not tampered with. He commented that the immutable nature of blockchains will support their resiliency benefits. He concluded that blockchains can thus support satellite security and ultimately national security.

Subcommittee Ranking Member Jan Schakowsky (D-IL):

• Ranking Member Schakowsky asked Mr. Schulman to describe blockchain-based scams in terms of their appearances and tactics. She also asked Mr. Schulman to provide recommendations for how Congress can protect consumers from these scams. She further asked Mr. Schulman to identify the warning signs for these schemes that consumers should be vigilant of.
  • Mr. Schulman remarked that the scams present within the blockchain space resemble traditional scams and simply involve a new form of payment. He commented that these scams often prey upon a target’s fear of missing out on an opportunity, have a narrow focus on upside, and promise the target great riches. He noted however that blockchain technology enables these scams to be perpetrated through better and faster means of payments. He remarked that people should approach blockchain-based scams the same way that they approach traditional scams. He mentioned how the FTC maintains resources highlighting ongoing scams and recommended that people review these resources to reduce their risk of getting involved in a scam. He also stated that people should generally refrain from sending cryptocurrencies if requested. He commented that these requests are often part of scams.
• Ranking Member Schakowsky noted that while there have been many failures within the cryptocurrency space, she commented that the promises of cryptocurrencies being lucrative and having no risks can be very alluring to consumers. She then mentioned how the FTC had found that consumers had reported over $1 billion in cryptocurrency losses in 2021 and 2022. She asked Mr. Schulman to address how the FTC should work to protect consumers within the cryptocurrency space.
  • Mr. Schulman remarked that the FTC’s biggest challenge is its resource constraints and stated that the FTC’s current consumer protection strategies are effective. He mentioned how former FTC Chairman Joseph Simons had previously sent a letter to Congress indicating that the FTC had 40 employees devoted to privacy and data protection issues. He noted how this letter had highlighted that the United Kingdom’s (UK) Information Commissioner’s Office (which is the UK’s FTC equivalent agency) had about 500 employees dedicated to privacy and data protection issues.
• Ranking Member Schakowsky interjected to ask Mr. Schulman to indicate whether the FTC needs to hire more technologists and other experts.
  • Mr. Schulman answered affirmatively.

Rep. Jeff Duncan (R-SC):

• Rep. Duncan thanked Subcommittee Chairman Gus Bilirakis (R-FL) for his efforts to develop federal student athlete NIL compensation legislation. He noted how a student athlete could use their NIL rights to create a digital sports collectable NFT. He asked Mr. Wyatt to discuss how athletes are currently using NFTs in the digital sports collectable space.
  • Mr. Wyatt mentioned how Nike is engaged within the blockchain technology space and commented that blockchain technology can benefit athletes. He discussed how blockchain technology can enable athletes to offer unique opportunities to their communities and fans. He noted how athletes are using NFTs as a form of membership pass to provide their fans with access to them. He indicated that the benefits of these membership passes could include meet-and-greets and autograph signings. He stated that this use of NFTs can provide athletes with a new monetization stream.
• Rep. Duncan asked Prof. Reyes to discuss how blockchains could be used to track an athlete’s engagement with an agent as part of NIL compensation deals.
  • Prof. Reyes remarked that the first consideration needed for such a blockchain system would be whether the athlete, the agent, and the oversight body trust one another and the information being exchanged. She stated that if such trust exists, then a blockchain system may not be required. She noted how blockchains are generally used when people do not know or trust one another or a third party to handle the information. She commented that blockchains are used to provide such trust.
• Rep. Duncan interjected to ask Prof. Reyes to indicate whether blockchain technology could enable college athletic conferences, universities, and other governing authorities to oversee student athlete NIL compensation deals.
  • Prof. Reyes remarked that blockchain technology could be useful for overseeing student athlete NIL compensation deals if there exists an information gap or difficulty in obtaining information from parties engaged in NIL compensation activity. She stated however that a permissioned distributed ledger (rather than a blockchain) may be sufficient in this context. She explained that a permissioned distributed ledger system would limit who could participate in the system and the kinds of entries that can be made into the system.
• Rep. Duncan then asked Mr. Wyatt to address how blockchain technology can combat fraud, corruption, and intellectual property (IP) infringement.
  • Mr. Wyatt remarked that a key feature of blockchains is their inherent transparency and commented that this transparency is often not present in traditional databases. He noted how consumers have historically needed to rely upon large corporations to store and protect their data and stated that blockchains allow consumers to control their own data. He commented that this ability for consumers to control their own data will result in improved privacy for consumers.
• Rep. Duncan then noted how Prof. Sudler’s written testimony had highlighted how the U.S. Air Force is using the BASECAMP application. He also noted how Prof. Sudler had indicated that the DoD has commissioned a blockchain project known as ALAMEDA. He explained that the ALAMEDA project is meant to support the DoD’s logistics capabilities. He commented that these blockchain defense applications should be classified. He asked Prof. Sudler to indicate whether there exist different types of blockchains that can serve different purposes.
  • Prof. Sudler remarked that different blockchains are created for different purposes and stated that blockchains have three main types of parameters: security, speed, and fees. He noted how consensus models drive blockchains and highlighted how Bitcoin’s blockchain uses a proof of work consensus model.
• Rep. Duncan asked Prof. Sudler to indicate whether the U.S. military is using a different blockchain consensus model.
  • Prof. Sudler commented that the U.S. military is most likely not using a proof of work consensus model. He speculated that the U.S. military is likely using a proof of authority or a proof of stake consensus model. He also speculated that the U.S. military is likely using a permissioned ledger because the U.S. military does not desire for their systems to be open to the public.
• Rep. Duncan indicated that his question period time had expired.

Rep. Yvette Clarke (D-NY):

• Rep. Clarke remarked that the Subcommittee must do more to learn about blockchains, DLT, and cryptocurrencies as it considers potential legislation to protect U.S. consumers and to foster U.S. innovation and leadership. She then expressed interest in the cybersecurity implications of DLT. She asked Mr. Wyatt to discuss the impact that DLT would have on future cybersecurity from both a defensive and offensive perspective.
  • Mr. Wyatt remarked that DLT applications can protect the cybersecurity and privacy of consumers and stated that the U.S. could improve the security of DLT networks. He recommended that the U.S. standardize code auditing to ensure the security and privacy of DLT protocols. He also noted how DLT and blockchain application users own their data, which improves the privacy of the applications. He called on the U.S. to take additional actions in this space and commented that other countries are further ahead of the U.S. in developing these policies.
• Rep. Clarke provided the other witnesses with an opportunity to respond to her question. (Note: None of the other witnesses provided a response to the question). She then asked Mr. Schulman to elaborate on his assertion that blockchain technology should be treated as “just another tool in a software developer’s toolkit.” She also asked Mr. Schulman to indicate whether blockchain technology has limitations that policymakers should be aware of and to provide recommendations for how the Subcommittee should approach the technology.
  • Mr. Schulman remarked that policymakers and developers should consider whether there exists a trust gap when assessing the suitability of a blockchain solution. He stated that blockchains are useful when two or more parties must agree on something and cannot trust either each other or a third party to validate a transaction. He stated however that blockchains have drawbacks that can render them suboptimal in other types of situations. He elaborated that blockchains can be slow and poor protectors of privacy given their transparency. He commented that policymakers and developers should pursue other technology options for these types of situations.
• Rep. Clarke then asked the witnesses to opine on the energy consumption associated with blockchain technology.
  • Mr. Wyatt remarked that Polygon Labs is “incredibly passionate” regarding the topic of blockchain technology’s energy use. He noted how 19 of the top 20 blockchain protocols employ a proof of stake validation method (rather than a proof of work validation method). He indicated that the proof of stake validation method is less energy intensive than the proof of work validation method. He also testified that Polygon Labs ensures that its activities are carbon neutral and mentioned how Polygon Labs undergoes third-party audits regarding its carbon impacts. He stated that addressing the energy consumption of blockchain technology will be an “integral” part of growing and scaling the technology.
  • Prof. Sudler noted how the Bitcoin blockchain employs a proof of work validation method, which is very energy intensive. He highlighted how Bitcoin mining accounts for the largest amount of energy consumption in certain countries. He called this situation “unacceptable and unsustainable.” He noted however that blockchain developers are now adopting proof of stake and proof of authority consensus models that use less energy. He further stated that it would be impractical to employ blockchain networks using proof of work validation methods in outer space. He elaborated that the energy intensive nature of proof of work validation methods would drain the batteries of satellites very quickly. He expressed confidence that future blockchain applications will consume less energy.
  • Prof. Reyes stated that blockchain protocols that use proof of work validation methods and blockchain protocols that use proof of stake validation methods have different technological architecture value propositions. She noted how blockchains will employ a proof of work validation method to maximize security while blockchains will employ a proof of stake validation method to support throughput and scalability.
• Note: Rep. Clarke’s question period time expired here.

Full Committee Chairman Cathy McMorris Rodgers (R-WA):

• Chairman McMorris Rodgers discussed how large technology companies will silo consumer data to create value for themselves. She asked Mr. Wyatt to explain how Polygon Labs and other similar services can provide an alternative solution to the concentration of consumer data. She commented that the concentration of consumer data has led to abuses and breaches.
  • Mr. Wyatt noted that corporations have traditionally had limited customer data storage options. He stated that blockchain technology has significantly scaled over the previous decade to now support a wide variety of applications. He remarked that blockchain technology enables people to own their privacy and data. He noted how corporations had previously owned this consumer data and had monetized the data for their own benefit. He commented that the ability to monetize consumer data demonstrates the value of consumer data. He asserted that consumers should be able to own their data and make decisions with how their data is used.
• Chairman McMorris Rodgers then remarked that one of her top priorities is the enactment of a federal data privacy standard. She commented that the idea that decentralized data can be private is counterintuitive. She asked Mr. Wyatt to explain the concept of zero knowledge proofs.
  • Mr. Wyatt remarked that zero knowledge proofs enable people to own their data and enable blockchains to remain transparent. He explained that these proofs enable people to self-select the information that they wish to share with applications through cryptography in a trusted way.
• Chairman McMorris Rodgers then expressed interest in smart contracts. She noted how Prof. Reyes’s testimony had suggested that smart contracts could provide automatic alerts to mortgage holders when their mortgage company changes their privacy policies. She asked Prof. Reyes to further discuss smart contracts.
  • Prof. Reyes explained that a smart contract is a computer program that automatically executes if certain conditions are met. She stated that a smart contract could enable the FTC to receive alerts when a company changes their privacy policies. She noted how regulators and users face challenges in monitoring when privacy policies change and commented that smart contracts could support such monitoring. She mentioned how she is researching how to use smart contracts as the basis for privacy policies, which could enable users to better control the use of their data.
• Chairman McMorris Rodgers emphasized that smart contracts could provide alerts to both regulators and individuals when privacy policies are changed. She then asked Prof. Sudler to discuss the importance of U.S. leadership on blockchain technology.
  • Prof. Sudler called it “incredibly important” for the U.S. to be a leader on blockchain technology. He stated that blockchain technology can support crisis response efforts and that U.S. blockchain technology leadership would enable the U.S. to best respond to world crises.
• Chairman McMorris Rodgers reiterated her desire to receive the Congressionally mandated reports on blockchain technology from the U.S. Department of Commerce.

Rep. Robin Kelly (D-IL):

• Rep. Kelly mentioned how she chairs the Congressional Black Caucus Health Braintrust and expressed interest regarding blockchain technology’s potential benefits within the health care sector. She also stated that policymakers must be cognizant of the potential drawbacks of this technology. She noted how health care records are very private and how there exist bad actors seeking to steal data from these records. She also mentioned how cyberattacks can disrupt health care systems. She expressed interest in learning whether health care system adoptions of blockchain technology applications would harm data privacy and security. She also expressed interest in how the agriculture sector could employ blockchain technology. She stated that there exist information weaknesses within agricultural supply chains. She commented that blockchain technology can support agricultural supply chain tracking efforts, which can help to combat food borne illnesses. She then asked Prof. Reyes to explain the differences between permissioned and permissionless blockchains.
  • Prof. Reyes noted how permissionless blockchain systems (such as the Bitcoin blockchain and the Ethereum protocol) enable anyone to download the software, participate as a node in the protocol, and participate in network transactions. She indicated that permissioned blockchains limit participation and the ability of participants to commit transactions to the network. She noted how permissioned blockchain often involve some type of consortium of like-minded organizations and maintain screening processes for their participants.
• Rep. Kelly then asked Prof. Reyes to discuss the benefits and drawbacks of supply chain and logistics blockchain technology applications.
  • Prof. Reyes remarked that blockchain technology can support increased efficiencies, transparency, and auditability for supply chains. She stated however that a supply chain blockchain technology application’s effectiveness is reliant on the reliability of the data being entered into the supply chain. She cautioned that there might not exist incentives for participants in the blockchain to provide reliable data, which can undermine the data integrity of said blockchain.
• Rep. Kelly then discussed how many blockchain technology applications rely upon manual data entry and expressed concerns that this manual data entry can introduce errors into the blockchain. She asked the witnesses to identify potential blockchain protocols that could address manual data entry errors.
  • Prof. Sudler first noted how a blockchain can record who added errors to its records and when the errors were added. He commented that this recording function provides some degree of accountability. He then suggested that smart contracts could be employed to reduce manual data entry errors on blockchains. He explained that a smart contract could flag data when it falls outside of a specified range, which can prevent such errors from being added to a blockchain.
  • Mr. Schulman discussed how users generally employ blockchain technology to mitigate trust gaps within broader systems. He stated however that a blockchain user already does not necessarily trust their counterparty and their counterparty’s ability to enter the correct data onto a blockchain. He commented that this dynamic limits the effectiveness of blockchains in correcting for manual data entry errors.
  • Prof. Reyes disputed the common assertions that blockchains are records of uncensored truth. She commented that the data being recorded in blockchains is not always truthful.
  • Mr. Wyatt mentioned that while health care digitization efforts have proven challenging, he commented that some health care companies (such as MyChart) have made progress on such efforts. He expressed optimism that permissioned blockchains could support health care digitization efforts.

Subcommittee Vice Chair Tim Walberg (R-MI):

• Vice Chair Walberg remarked that U.S. global leadership will be important within the blockchain technology space. He asked Prof. Sudler to categorize the primary uses of blockchain technology.
  • Prof. Sudler mentioned how he had developed the APPS framework for categorizing blockchain technology. He explained that this acronym stands for asset management, payments, public records, and supply chain management. He indicated that the asset management component refers to the representation of physical or digital items with tokens. He noted that these representations are commonly known as NFTs. He indicated that the payments component refers to cryptocurrencies (such as Bitcoin) and other digital payment tools. He indicated that the public records component refers to the commitment of data to public blockchains in an immutable fashion. He commented that this data can be public in nature. He indicated that the supply chain management component refers to the tracking of an asset’s status throughout a system.
• Vice Chair Walberg then noted how blockchain technology proponents have argued that blockchains are more secure than other intermediaries. He asked Prof. Sudler to comment on the security of blockchains and to indicate whether blockchains are more trustworthy than other intermediaries.
  • Prof. Sudler remarked that policymakers must consider a blockchain’s network architecture and software when evaluating a blockchain’s security. He discussed how blockchain networks need to be highly distributed in terms of geography and ownership. He stated that a large concentration of a blockchain network’s servers located in one country would pose risks as an authoritarian government could seize the network’s servers. He commented that such a seizure would destabilize the blockchain network’s security. He also stated that a blockchain’s software should be open and that programmers should be able inspect this software.
• Vice Chair Walberg then discussed how there exist many blockchains and commented that transferring data between these blockchains is not simple. He noted how data transfers across blockchains are vulnerable to hacks. He asked Mr. Wyatt to discuss how the blockchain industry and governments are working to prevent hacks involving data transfers across blockchains.
  • Mr. Wyatt noted that companies will review the code underlying blockchains and rely upon third-party audits to assess this code. He called on the U.S. to standardize and streamline code auditing for blockchains.
• Vice Chair Walberg then discussed how a protocol is a set of instructions for the compilation and interaction of objects. He noted that a blockchain protocol involves a set of rules that allows for network computers to track transactions globally within the network without a centralized or third-party intermediary. He asked Prof. Reyes to explain how smart contract blockchains are similar to the internet.
  • Prof. Reyes first highlighted how blockchain protocols do not function without an internet connection. She then remarked that blockchain protocols are similar to the internet in that additional applications can be built on top of a blockchain protocol. She commented that these applications may vary in terms of their level of decentralization. She noted how consumers tend to interact with blockchain technology at the Layer 2 application level because the user interface (UI) at the Layer 1 level is not user-friendly. She stated that this dynamic resembles the internet in that most users connect to the internet through web browsers and other applications.
• Vice Chair Walberg indicated that his question period time had expired.

Rep. Lori Trahan (D-MA):

• Rep. Trahan remarked that the Subcommittee must fully understand how bad actors can use blockchain technology for nefarious purposes. She commented that the immutability of blockchains makes cryptocurrencies an attractive financial avenue for scammers to fleece unsuspecting consumers. She mentioned how the FTC has repeatedly warned consumers about the increasing prevalence of cryptocurrency scams and how the losses associated with these scams had increased by 25-fold between 2019 and 2022. She asked Prof. Reyes to indicate whether blockchain technology offers some advantages to scammers and to address why scammers are employing blockchain technology.
  • Prof. Reyes remarked that she could not definitively assert that blockchain technology provides advantages to scammers. She stated that many scams involving blockchain technology are modern iterations of traditional scams. She suggested however that the public’s lack of familiarity with blockchain technology could make this technology an attractive tool for scammers. She compared the public’s current lack of familiarity with blockchain technology to the public’s initial lack of familiarity with the internet. She highlighted how the public has gotten better at avoiding internet-based scams. She stated that it would take time for the public to become better educated about scams within the blockchain technology space. She then noted how the term “immutability” within the context of blockchain technology does not mean that a blockchain’s records can never be changed. She also emphasized that the term “immutable” never appears in the Bitcoin Whitepaper and that this whitepaper had merely asserted that it is “computationally improbable” to change the records in Bitcoin’s blockchain protocol. She commented that this dynamic makes blockchains tamper resistant and that it is still possible to change a blockchain.
• Rep. Trahan asked Prof. Reyes to indicate whether consumers (especially vulnerable consumers like children and senior citizens) have the necessary information to detect and avoid scams related to blockchain technology, Web3 technology, and other types of online activities.
  • Prof. Reyes remarked that the U.S. should provide senior citizens with more education regarding scams. She noted how scammers are employing many traditional scam techniques within the blockchain technology space. She then stated that children tend to be more sophisticated relative to other populations regarding the blockchain technology ecosystem. She commented however that children could benefit from additional protections.
• Rep. Trahan then discussed how blockchain technology-related problems often involve promises that cannot be kept. She indicated that these problems have included stablecoins that cannot deliver their promised values and poorly designed blockchain platforms that are vulnerable to cyberattacks. She stated that consumers often cannot easily evaluate the claims of blockchain companies. She mentioned how Mr. Schulman had stated that blockchain technology-related scams often resemble traditional scams. She also noted how Mr. Schulman had asserted that the FTC requires specific technical expertise and resources to respond to scams involving blockchain and Web3 technologies. She asked Mr. Schulman to explain why the FTC experiences challenges when taking enforcement actions against scams involving blockchain technology.
  • Mr. Schulman remarked that blockchain-related scams involve complicated technologies, which can create challenges for the FTC when seeking to identify and pursue frauds. He called it important for the FTC to hire staff with sufficient technical expertise to respond to blockchain-related scams.

Rep. Rick Allen (R-GA):

• Rep. Allen expressed interest in how blockchain technology can help small businesses, such as construction companies and local grocery stores. He asked Prof. Sudler to indicate whether the adoption of blockchain technologies can support increased supply chain efficiencies for small businesses.
  • Prof. Sudler discussed how supply chains can be very difficult to track and noted how changes in consumer demand levels can significantly impact all elements of a supply chain. He attributed these consumer demand-induced supply chain challenges to the fact that information is not openly shared across supply chain participants. He remarked that blockchain technology can easily alleviate these information sharing problems because it will enable supply chain participants to better understand how other participants are responding to consumer demands. He stated that the resulting supply chain improvements would help small businesses to maintain their margins and engage in more efficient ordering practices.
• Rep. Allen highlighted how small businesses had created almost 70 percent of all new jobs between 2017 and 2018. He noted how Mr. Wyatt’s testimony had indicated that some of the U.S.’s largest brands are using the Polygon Labs platform. He asked Mr. Wyatt to address how small businesses could benefit from using the Polygon Labs platform.
  • Mr. Wyatt remarked that blockchains (including the Polygon Labs protocol) are open to all developers. He stated that companies face various costs (such as cloud infrastructure) when launching applications in a Web2 environment and that Web3 applications are cheaper to launch. He testified that smart contracts on the Polygon Labs protocol can cost “pennies” to implement. He concluded that blockchain technology can provide cost efficiencies to small companies and small developers.
• Rep. Allen commented that the benefits of blockchain applications for small businesses relative to the costs of said applications can be “enormous.”
  • Mr. Wyatt expressed agreement with Rep. Allen’s comment.
• Rep. Allen then remarked that blockchain technology will play a “critical” role in strengthening U.S. supply chains. He mentioned how the agriculture industry is already using DLT to trace and protect their food supply chains. He stated that these non-financial sector blockchain technology applications underscore the need for the U.S. to not limit its conversation on the topic to securities and commodities. He highlighted how several companies, including Walmart, Kroger, Nestle, IBM, Dole, and Sweetgreen, have employed blockchain applications to track food supplies. He stated that blockchains can provide an “unprecedented” level of transparency and resiliency for agriculture-based supply chains. He asked Prof. Sudler to discuss how policymakers can take lessons from blockchain technology use cases in agriculture when developing a regulatory framework for the technology.
  • Prof. Sudler remarked that agriculture blockchain technology applications demonstrate the effectiveness of blockchain technology in managing supply chains. He stated that these lessons can be applied to other types of projects, including megaprojects. He explained that megaprojects are projects valued at $1 billion or more and that involve many contractors and subcontractors that do not necessarily trust each other.  He remarked that these lessons include the effectiveness of certain smart contracts, who should be able to access information on blockchains, and supply chain information management.
• Rep. Allen then asked Mr. Wyatt to explain why he had chosen to leave YouTube and to address how blockchain technology will impact the way that large technologies extract and abuse consumer data.
  • Mr. Wyatt remarked that he had joined YouTube because he viewed YouTube as democratizing education and content. He elaborated that anyone can access and upload content to YouTube. He stated that blockchains perform a similar democratizing function and commented that his joining of Polygon Labs was aligned with this mission.

Rep. Darren Soto (D-FL):

• Rep. Soto mentioned how Congress had passed amendments in previous NDAAs and appropriations bills to support blockchain technology applications. He noted that these applications had related to food tracing, encrypted military communications, and EHRs for veterans. He expressed interest in supporting the advancement of blockchain technology for economic, security, and research reasons. He asked the witnesses to identify partnerships that the federal government should pursue to advance blockchain technology innovation.
  • Mr. Wyatt remarked that Congress should provide regulatory clarity for the blockchain technology space. He stated that this regulatory clarity would ensure that blockchain technology innovation remains in the U.S.
• Rep. Soto asked Mr. Wyatt to indicate whether there exists a particular subject area that the U.S. should focus on as part of its efforts to promote blockchain technology.
  • Mr. Wyatt remarked that decentralization is at the crux of blockchain technology policy and stated that policymakers should therefore focus on the issue of decentralization.
  • Mr. Schulman first recommended that Congress provide the FTC with more funding and resources so that it can better protect participants within the blockchain technology space. He then stated that Congress should provide jurisdictional clarity for federal agencies overseeing blockchain technology and its applications. He specifically called for the U.S. to provide definitional and regulatory clarity regarding DAOs. He noted how federal courts are currently considering these issues.
• Rep. Soto noted how Prof. Sudler had previously discussed how the space sector could use blockchain technology applications. He mentioned how his Congressional District is located near many space industry stakeholders. He asked Prof. Sudler to discuss how the U.S. could support the deployment of blockchain technology applications in outer space.
  • Prof. Sudler remarked that the DoD has many opportunities to support the deployment of blockchain technology applications in outer space. He mentioned how more satellites are currently being launched into outer space and commented that bad actors and enemy nation states may seek to attack individual satellites or satellite constellations. He stated that blockchain technology applications could help to protect these satellites and satellite constellations.
  • Prof. Reyes recommended that the U.S. establish a blockchain technology education program for lawmakers and regulators and stated that policymakers must be aware of blockchain technology nuances. She asserted that regulatory clarity for blockchain technology depends on understanding the difference between financial use cases and non-financial use cases of blockchain technology. She also recommended that federal policymakers consider adopting state reforms related to DAOs and digital asset property rules. She stated that federal policymakers should work to reconcile their policies to support these state policies.

Rep. Diana Harshbarger (R-TN):

• Rep. Harshbarger discussed how the pharmaceutical industry faces challenges in tracking drug components and described the pharmaceutical supply chain as “incredibly complex.” She noted how pharmacists must abide by chain of custody rules under the Drug Quality and Security Act. She elaborated that pharmacists must know the registration status of drug manufacturers, the license status of drug wholesalers, and the license status of pharmacies. She mentioned how Prof. Sudler’s testimony had discussed a blockchain technology-based contact tracing solution to mitigate the spread of COVID-19. She noted how Prof. Sudler’s testimony had stated that blockchain technology could report COVID-19 infectious contacts instantly and anonymously. She expressed interest in how blockchain technology could be applied to the pharmaceutical sector. She expressed particular interest in how blockchain technology could address the pharmaceutical sector’s supply chain challenges.
  • Prof. Sudler also expressed interest in developing blockchain technology applications for the medical and pharmaceutical industries. He mentioned how he had researched the counterfeiting of pharmaceuticals and commented that blockchain technology can help to combat this problem. He stated that the U.S. could deploy blockchain technology applications within the pharmaceutical supply chain to identify the various involved manufacturers and to track medications as they move toward end users. He expressed his eagerness to continue this research and to work with policymakers on this topic.
• Rep. Harshbarger expressed interest in following up with Prof. Sudler on this topic. She then asked Prof. Sudler to indicate whether blockchain technology applications could address challenges related to the prescribing of medications from multiple health care providers and the verification of identities.
  • Prof. Sudler commented that Rep. Harshbarger’s concerns appear to relate to EHRs and their ability to support electronic prescriptions. He stated that the U.S.’s deployment of EHRs has been “very slow.” He mentioned how he is working with CommonHealth on efforts to increase hospital and health care practitioner adoption of EHRs. He noted how this effort involves working with application programming interfaces (APIs) to better integrate blockchain technology applications into health care databases.
• Rep. Harshbarger asked Prof. Sudler to indicate whether blockchain technology applications are more secure options for protecting health and pharmaceutical data relative to current security methods.
  • Prof. Sudler remarked that current technologies provide basic security capabilities. He stated however that blockchain technology can provide additional layers of security to existing systems.
• Rep. Harshbarger interjected to ask Prof. Sudler and Mr. Wyatt to comment on the current state of China’s blockchain technology development efforts.
  • Mr. Wyatt warned that Chinese leadership within the blockchain technology space will result in a blockchain technology ecosystem that does not benefit the U.S. He also stated that Chinese leadership within the blockchain technology space will result in the development of closed, non-transparent, and centralized blockchains. He called it “critical” for the U.S. to promote domestic blockchain innovation so that it does not cede leadership within this space to Russia or China.
• Rep. Harshabarger commented that the U.S. has significant outstanding work to complete with regard to blockchain technology development. She then expressed interest in Prof. Sudler’s statements regarding the potential for blockchain technology applications in satellites. She asked Prof. Sudler to indicate whether he had discussed his research with SpaceX and how it applies to their Starlink satellite internet constellation.
  • Prof. Sudler testified that he had not personally discussed his research with SpaceX CEO and founder Elon Musk. He indicated however that he would be involved in a project using SpaceX’s Falcon 9 rocket in October. He noted how Starlink’s satellites communicate with each other through optical communications and commented that Starlink is working to address communications issues. He highlighted his efforts to deploy blockchain networks to outer space to address communications issues.

Rep. Russ Fulcher (R-ID):

• Rep. Fulcher expressed interest in the development of AI technologies. He noted that while AI technologies can support many beneficial applications (such as improving energy dispatches), he stated that these technologies can also raise significant concerns. He expressed concerns over enabled AI-algorithms that can unfairly influence people. He noted how these AI technologies will all be based upon data stored in databases. He asked the witnesses to indicate whether blockchain technology could neutralize some of AI’s drawbacks given how blockchains involve decentralized data storage systems.
  • Mr. Schulman discussed how blockchains are slow and often cannot move large amounts of data quickly. He noted however that AI applications must use large amounts of data to function. He stated that a blockchain technology application could serve as a control mechanism for an AI application. He remarked however that the integration of blockchain technology and AI applications will always be problematic due to the inherent data throughput limitations of blockchain technology.
  • Mr. Wyatt first remarked that blockchain technology and AI are powerful tools that can have both benefits and drawbacks. He commented that policymakers must be thoughtful in terms of how they discuss and regulate these technologies. He then remarked that blockchain technology can support AI applications in three ways. He first stated that blockchain technology can support transparent machine learning models, which enable observers to discern whether these models contain inherent biases. He secondly stated that blockchain technology can support the verification of AI source materials. He noted how AI applications can produce false outputs that manipulate public sentiment and asserted that verification of these source materials will therefore be important. He lastly stated that blockchain technology can support efficient code auditing for AI applications. He concluded that blockchain technology will help to ensure the integrity of AI applications.
  • Prof. Sudler remarked that there exists a “powerful connection” between AI and blockchain technology. He stated that AI can support blockchain technology through improving the design of smart contracts. He elaborated that this improved design would enable blockchain networks to better evaluate the conditions on their systems and support better smart contract responses. He also stated that blockchains can make AI applications more explainable. He noted how the rationales behind AI application decisions are often opaque and commented that blockchains can help explain how these AI applications reach their decisions. He stated that this explainability is especially important when AI applications are applied to human sensitive circumstances, such as autonomous vehicles (AVs).
  • Prof. Reyes expressed agreement with Mr. Schulman’s comments and stated that blockchains would likely not serve as data input sources for AI applications. She commented that while blockchains may eventually serve as data input sources for AI applications, she stated that current blockchain technologies cannot support the data needs of AI applications.
• Rep. Fulcher then discussed how China had established a social credit system and a central bank digital currency (CBDC). He asked Mr. Wyatt to indicate whether a U.S. government-controlled blockchain would be either beneficial or harmful.
  • Mr. Wyatt remarked that a U.S. government-controlled blockchain’s level of benefit or harm would depend on various circumstances. He noted how there exist both permissioned and public blockchains and commented that permissioned blockchains could support some important capabilities. He stated however that there currently exist other blockchain technology use cases that would be more beneficial than a U.S. government-controlled blockchain.
• Rep. Fulcher acknowledged that his question period time had expired.

Rep. Debbie Lesko (R-AZ):

• Rep. Lesko expressed interest in how blockchains can improve “everyday processes” and empower consumers. She stated however that new technology often poses risks and noted how these risks often only become clear following widespread deployment. She asked Mr. Wyatt to identify potential problems that could arise from the increased use of blockchain technology. She also asked Mr. Wyatt to recommend potential actions that the Committee can take to minimize these potential problems.
  • Mr. Wyatt remarked that U.S. inaction on blockchain technology policy would pose the greatest risk. He called on Congress to take urgent action to address blockchain technology. He commented that this action would ensure that the U.S. is a global leader regarding the technology and that there exist adequate consumer protections.
• Rep. Lesko then mentioned how she serves as the Vice Chair of the Committee’s Oversight and Investigations Subcommittee. She asked Mr. Wyatt to discuss how the Committee should balance the need to encourage innovation from technology startup companies and the need to provide government oversight of and regulation for the blockchain technology space. She further asked Mr. Wyatt to address the role that the U.S. government should play in shaping the future of blockchain technology and innovation.
  • Mr. Wyatt remarked that the U.S. government is not responsible for shaping the future of blockchain technology and innovation. He stated however that the U.S. should establish guidelines and regulations for blockchain technology so that people feel comfortable with pursuing blockchain innovations within the U.S.
• Rep. Lesko then remarked that the U.S. must consider the regulatory authorities governing blockchain technology as part of its efforts to anticipate and mitigate the potential risks of the technology. She commented that blockchains constitute a multi-use technology, which necessitate the establishment of clear regulatory authorities. She asked Prof. Sudler and Prof. Reyes to recommend best practices for preventing unfair or deceptive acts or practices, ensuring data security, and regulating blockchain technology. She also asked Prof. Sudler and Prof. Reyes to indicate whether it is too early to regulate blockchain technology.
  • Prof. Sudler mentioned how the U.S. had taken a “hands off” regulatory approach toward the internet during the internet’s early years. He contended that the U.S. should now take a similar regulatory approach toward blockchain technology. He noted how blockchain technology remains relatively nascent and stated that policymakers should permit the technology to further mature before it pursues ambitious regulations for the technology. He stated however that policymakers must consider the application of industry-specific standards to blockchain technology applications. He specifically commented that Congress must consider the application of health care privacy rules to blockchain technology applications. He remarked that policymakers must therefore consider rules and potential guardrails for blockchain technology on an industry-by-industry basis.
  • Prof. Reyes first emphasized that the blockchain technology industry is heavily regulated. She mentioned how she had been a blockchain technology lawyer since 2011 and testified that most of her legal counseling has involved regulatory matters. She remarked that the main problem is that the regulations that apply to the blockchain technology industry are often unclear (particularly within the context of securities law). She stated that the U.S. can provide regulatory clarity to the blockchain industry through the traditional federal rulemaking process. She commented that this rulemaking process is transparent and provides opportunities for stakeholder comments. She noted that many existing laws and rules do apply to activities undertaken using blockchain technology. She cautioned the U.S. against pursuing rules that target blockchain technology and software and against adopting rules that are overly prescriptive. She also expressed agreement with Mr. Schulman’s previous criticism over regulatory proposals that would target blockchain technology developers (particularly open source blockchain technology developers). She emphasized that blockchain protocols are not the only open source software that Americans rely upon on an everyday basis.

Rep. Kat Cammack (R-FL):

• Rep. Cammack discussed how the video game industry had contributed about $260 billion to total economic output in 2019 and indicated that the video game industry expects to achieve $560 billion in total economic output by 2030. She asked Mr. Wyatt to project how blockchain technology will impact the video game industry.
  • Mr. Wyatt discussed how video games have evolved significantly in recent years and now include comprehensive digital environments. He noted how many people want to spend money in these digital environments given how much time they spend in the environments. He indicated that this dynamic has driven demand for digital items in video games, which is driving significant sales activity. He stated that blockchain technology can enable video game users to own their digital items (rather than merely license the digital items from publishers). He asserted that digital items deserve more rights and commented that blockchain technology can provide such rights for customers.
• Rep. Cammack then asked Prof. Sudler to address how blockchain technology could be used to support the U.S. government’s distribution of foreign aid (particularly for countries that lack sophisticated financial systems).
  • Prof. Sudler noted how blockchains could keep track of the recipients of U.S. foreign aid to ensure that adversaries and corrupt officials do not receive the money. He acknowledged however that it may remain difficult for the U.S. to determine how its foreign aid distributions are being spent. He also stated that blockchain technology can support communities in creating local currencies. He commented that the establishment of local currencies can support the development of valuable financial infrastructure without requiring continued disbursement of U.S. foreign aid.
• Rep. Cammack also asked Prof. Sudler to address how blockchain technology can help to combat waste, fraud, and abuse and reduce costs in federal programs, such as the Supplemental Nutrition Assistance Program (SNAP) and the Electronic Benefits Transfer (EBT) system.
  • Prof. Sudler remarked that blockchains could enable the U.S. to track whether SNAP recipients are appropriately using the Program’s services. He stated that this tracking would require that blockchains be able to identify specific people and their activities. He noted that this identification capability does raise privacy issues and commented that policymakers would need to address these privacy issues. He concluded that blockchain technology could be used to track how people use their government benefits.
• Rep. Cammack mentioned how she has privacy concerns regarding blockchains and asserted that blockchain technology applications must still protect the constitutional rights of users (including the right to privacy). She then indicated that her question period time had expired and expressed her desire to submit follow up questions to the witnesses for the hearing’s record.