Next Generation Infrastructure: How Tokenization of Real-World Assets Will Facilitate Efficient Markets (U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion)

Hearing	Next Generation Infrastructure: How Tokenization of Real-World Assets Will Facilitate Efficient Markets
Committee	U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion
Date	June 5, 2024

 

Hearing Takeaways:

• The Tokenization of Real-World Assets: The hearing considered current tokenization of real-world assets and how policymakers should respond to this tokenization. Tokenization refers to the process of digitally representing assets on blockchains or digital ledgers. The hearing considered the tokenization of both financial assets (such as equities, debt, and bank deposits) and non-financial assets (including titles and supply chain components). While most Subcommittee Members and the hearing’s witnesses agreed that tokenization of real-world assets could benefit consumers and businesses, there was disagreement whether the benefits of tokenization would generally outweigh the risks of this tokenization. Subcommittee Republicans, Rep. Wiley Nickel (D-NC), Ms. Tessler, Mr. Morgan, Ms. Chakar, and Mr. Domingo argued that the tokenization of real-world assets could provide many benefits, including market efficiencies, market transparency, compliance capabilities, and financial inclusion. Most Subcommittee Democrats and Prof. Allen expressed doubts regarding these purported benefits. They raised concerns that tokenization may support illicit finance and pose risks to consumer protection, privacy, safety, soundness, financial stability, and market integrity.
  • Potential Efficiencies: Subcommittee Republicans, Rep. Wiley, Ms. Tessler, Mr. Morgan, Ms. Chakar, and Mr. Domingo discussed how tokenization can automate many of the processes contained within a financial transaction that have traditionally required intermediaries. They stated that this automation provides streamlined payment settlement and lower payment costs, which could improve lending, equity margin calculations, share allocations, and dividend payments. Prof. Allen stated however that while tokenization can increase efficiencies in some markets, she cautioned that these efficiency gains may also lead to fragilities within the U.S. financial system. She commented that policymakers must be cognizant of this tradeoff when considering tokenization.
  • Transparency Capabilities: Subcommittee Chairman French Hill (R-AR), Ms. Tessler, Mr. Morgan, and Mr. Domingo highlighted how tokenization provides for a transparent and immutable record of transactions, which reduces the risk of fraud and errors and increases trust and visibility into transactions. Subcommittee Ranking Member Stephen Lynch (D-MA) noted however that this transparency can raise privacy concerns.
  • Programming Capabilities: Subcommittee Chairman Hill, Ms. Tessler, Ms. Chakar, and Mr. Morgan also noted how tokenization provides the ability to program compliance controls and conditions into the codes of tokens, which can ensure that transactions adhere to existing laws and regulations and automatically execute when certain conditions are met. Prof. Allen noted however that the pre-programming of tokenized assets can cause the assets to be very rigid, which makes them less able to respond to unexpected circumstances. She stated that computer programmers cannot foresee all potential risks and asserted that policymakers should be cognizant of this dynamic.
  • Financial Inclusion Capabilities: Subcommittee Republicans, Mr. Morgan, Ms. Chakar, and Mr. Domingo contended that tokenization could foster greater financial inclusion through making it cheaper for consumers, small businesses, and banks to participate in the financial markets. They specifically highlighted how tokenization can facilitate loan participations among banks, which can enable smaller community banks to better compete with larger financial institutions. Prof. Allen contended however that the chief barrier to financial inclusion is not a lack of investment opportunities and is instead a lack of money to make investments. She argued that tokenization would not address this underlying challenge.
  • Illicit Finance Concerns: Several Subcommittee Democrats and Prof. Allen raised concerns that the connection between tokenization and cryptocurrency poses fraud, cybersecurity, and illicit finance risks. They warned that tokenization and blockchain technologies more broadly can be used for sanctions evasions, money laundering, or supporting ransomware payments schemes.
  • Public Permissionless Blockchain Concerns: Several Subcommittee Democrats and Prof. Allen expressed concerns that public permissionless blockchains are inherently inefficient and wasteful and that the actors on these blockchains can operate anonymously. Prof. Allen stated that these blockchains cannot process large volumes of transactions and that the delays and fees for these blockchains can be significant during peak times. She also raised concerns that these blockchains rely upon developers that are unregulated, could be bad actors, have conflicts of interest, and are not necessarily reliable. Mr. Domingo remarked however that public permissionless blockchains can include know your customer (KYC) controls, anti-money laundering (AML) controls, and transfer restrictions.
  • Traditional Market Impacts: Prof. Allen raised concerns that tokenization would integrate the traditional finance system with the cryptocurrency finance system. She warned that this integration would lead to the volatility and problems within the cryptocurrency finance system to influence the traditional finance markets.
  • Stablecoin Concerns: Prof. Allen and Rep. Brad Sherman (D-CA) expressed concerns over the growth of stablecoins, which are cryptocurrencies that have their values pegged to reference assets (such as the U.S. dollar). They argued that stablecoins are primarily being used to support illicit activities and gambling (rather than to make retail payments). Prof. Allen also stated that stablecoins are a poor settlement asset because stablecoins are prone to runs.
  • The U.S.’s Global Competitiveness in the Tokenization and Digital Assets Space: Rep. John Rose (R-TN) and Mr. Domingo expressed concerns that the U.S.’s failure to provide a regulatory framework for tokenization is causing tokenization activity to move to foreign jurisdictions (which undermines the U.S.’s global competitiveness.
• Policy Topics Related to Tokenization and Blockchain Technology: The hearing also considered several policy proposals and topics related to tokenization and blockchain technology.
  • The Financial Innovation and Technology for the 21st Century (FIT21): Subcommittee Chairman French Hill (R-AR) and Rep. Wiley Nickel (D-NC) highlighted how the U.S. House of Representatives had recently passed the FIT21 Act by a bipartisan vote. This legislation would provide a federal regulatory framework for the digital assets market through providing definitions for digital asset securities and digital asset commodities and through clarifying regulatory jurisdictions over these assets. Ms. Tessler, Mr. Morgan, Ms. Chakar, and Mr. Domingo warned that the current lack of clarity for tokenized securities is impeding regulators in understanding the unique characteristics of compliant tokenized securities and in regulating these securities appropriately. Several Subcommittee Democrats and Prof. Allen raised concerns however that the FIT21 Act would exempt tokenized securities from federal investor protection laws. They warned that this legislation could encourage financial institutions to tokenize their assets to evade regulation and reduce their compliance costs.
  • U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 121 (SAB 121): Subcommittee Republicans, Rep. Nickel, and Ms. Tessler criticized the SEC for their recent issuance of SAB 121, which provides accounting and custody requirements for banks that hold crypto assets. They argued that SAB 121 provides discriminatory treatment for crypto assets relative to traditional assets. Ms. Tessler also stated that SAB 121 provides a very broad definition of crypto assets that encompasses tokenized securities (even if the tokenized securities are merely traditional securities recorded on a blockchain ledger). Of note, Subcommittee Chairman Hill highlighted how Congress had recently voted to repeal SAB 121.
  • State Amendments to the Uniform Commercial Code (UCC) Regarding Digital Asset: Subcommittee Republicans and Ms. Tessler expressed interest how states are adopting amendments to the UCC to address commercial transactions involving digital assets. Ms. Tessler discussed how various states are now adopting the 2022 amendments to the UCC to respond to market concerns about the lack of definitive commercial law rules involving digital assets. She noted that these amendments apply to controllable electronic records, which specifically excludes the scope of any digital assets that meet the definition covered elsewhere in the UCC (such as deposit accounts, electronic money, and investment property).
  • Regulatory Pre-Approval Requirements for Tokenization and Blockchain Technology Projects: Subcommittee Chairman Hill and Mr. Morgan expressed frustration with how banking institutions are now required to obtain non-objection letters or undergo a similar approval process from a federal regulator before conducting any pilot program involving blockchain technology (such as tokenized deposit projects). Mr. Morgan noted how that this pre-approval requirement does not exist for any other technologies.
  • Requirements for Digital Asset Intermediaries: Ms. Tessler and Mr. Domingo expressed concerns over current requirements for intermediaries within the digital assets space and stated that these restrictions prevent tokenization from achieving its full benefits. Ms. Tessler noted that while tokenized securities can be issued under state law, she highlighted how securities laws require the use of intermediaries (such as broker-dealers, custodians, and transfer agents). Mr. Domingo also noted how broker-dealers must become special purpose broker-dealers (SPBDs) in order to custody tokenized securities and stated that the SPBD framework is difficult to achieve, limited in scope, and temporary. He commented that it remains unclear as to which tokenized securities are eligible SPBD custody and highlighted how the SPBD framework expires in February 2026. He also stated that blockchain-based transfer agents should be recognized as primary providers of tokenization and blockchain transfer agent services after meeting appropriate capitalization, insurance, and technical standards. He further remarked that alternative trading systems (ATSs) must continue to be eligible trading platforms for tokenized securities and that peer-to-peer transfers should be sanctioned for investors when wallets are whitelisted and when regulatory transfer restrictions are enforced by smart contracts.
  • Establishment of a U.S. Central Bank Digital Currency (CBDC): Several Subcommittee Democrats and Prof. Lynch criticized the U.S. House of Representatives for its recent passage of the CBDC Anti-Surveillance State Act. This legislation would prevent the U.S. Federal Reserve from studying and pursuing a CBDC. They stated that CBDCs could significantly reduce the cost of cross-border payments and support payment settlements. Subcommittee Vice Chairman Warren Davidson (R-OH) criticized proposals that would have the U.S. implement a CBDC.
  • Establishment of Interoperable Financial Infrastructure: Ms. Chakar remarked that tokenized securities would require the construction of interoperable financial infrastructure so that the tokens can move between different networks. She stated that there will likely exist a network of blockchains (rather than a single blockchain). She noted that there currently exists technology that would allow for incorporation of compliance and rules into the infrastructure and for the development of smart tokens. She commented that this technology would ensure that the tokens comply with AML and KYC rules. Prof. Allen noted however that while blockchains could be made interoperable through the use of bridges, she warned that these bridges contain “major” operational fragilities. She highlighted how there have been many hacks of cryptocurrency bridges.

Hearing Witnesses:

1. Mr. Carlos Domingo, Co-founder and CEO, Securitize
2. Ms. Nadine Chakar, Global Head of DTCC Digital Assets, Depository Trust and Clearing Corporation
3. Mr. Robert Morgan, Chief Executive Officer, USDF Consortium
4. Ms. Lilya Tessler, Partner, Sidley Austin LLP
5. Prof. Hilary Allen, Professor of Law, American University Washington College of Law

Member Opening Statements:

Subcommittee Chairman French Hill (R-AR):

• He noted how the Committee had recently advanced comprehensive digital asset market structure legislation through the full U.S. House of Representatives with “strong” bipartisan support.
  • He mentioned how this achievement had followed Congress’s successful vote to repeal SAB 121 and explained that this repeal would allow for regulated financial institutions to custody digital assets.
  • He commented however that the Subcommittee’s work with digital assets is “far from done.”
• He then expressed interest in having the Subcommittee explore the tokenization of real-world assets and asserted that this topic deserves its own distinct conversation and prioritization.
• He noted that digital assets are generally issued and managed on blockchain networks while tokenization can bring traditional finance “on chain.”
  • He asserted that tokenization could leverage the efficiency and transparency of blockchains to help modernize U.S. markets.
• He discussed how some components of capital markets suffer from inflated costs, stranded liquidity, siloed markets, and high barriers to entry.
  • He also mentioned how some of these limitations are present within the banking system and noted how it can take time to transfer funds and reconcile ledgers between different financial institutions.
• He stated that tokenization (with the help of blockchain technology) can automate some of these critical processes within a financial transaction, which can provide for streamlined settlement and lower costs.
  • He commented that lowering agency costs is very important for benefiting financial services consumers.
• He remarked that the transparency, immutability, and compliance programming of blockchains enable them to offer a secure and transparent record of ownership for tokenized assets, which reduces the risk of fraud and errors and increases trust and visibility into transactions.
  • He commented that many markets could benefit from these features.
• He highlighted how many states have adopted new amendments to the UCC and described these developments as “positive steps.”
  • He explained that these amendments provide updated rules for governing commercial transactions involving digital assets.
• He lamented however that regulators have also hindered technological progress through guidance.
  • He noted how banking institutions are now required to obtain non-objection letters or undergo a similar approval process from a federal regulator before conducting any pilot program involving blockchain technology (such as tokenized deposit projects).
• He remarked that the private sector should not need to pursue a financial regulator’s endorsement prior to exploring the latest innovation in technologies.
  • He commented that the Subcommittee must ensure that regulators are welcoming innovations involving tokenization in order to modernize U.S. markets.
• He expressed hope that the hearing could identify opportunities within capital markets and the banking system where tokenization could be utilized and that the hearing could explore potential regulatory and legal amendments and considerations to support tokenization.
  • He also expressed interest in exploring how the U.S.’s tokenization efforts compare to tokenization efforts in foreign capital markets.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• He mentioned how the U.S. Financial Stability Oversight Council (FSOC) had found that the overall value and impact of tokenized assets remains “somewhat limited” in comparison to the traditional financial system and the crypto asset market.
  • He indicated however that the tokenization market is continuing to expand and noted how the Boston Consulting Group had recently estimated that asset tokenization could reach $16 trillion globally by the end of the decade.
• He discussed how financial companies are increasingly relying upon tokenization to facilitate real-time settlements and payments and to improve operational efficiency.
• He noted however that financial regulators are continuing to warn that the growth of tokenization markets could also present corresponding risks to consumer protection, privacy, safety, soundness, financial stability, and market integrity.
  • He called it “entirely appropriate” for the Subcommittee to examine tokenization’s use cases and tokenization’s potential benefits, risks, and regulatory considerations.
• He lamented that the Committee had moved forward with legislation that would directly hinder the U.S.’s ability to mitigate risks within the tokenization space.
• He criticized the FIT21 Act and commented that this legislation would explicitly exempt tokenized securities from long standing and proven investor protection laws.
  • He also asserted that this legislation would undermine potential benefits that might otherwise accrue from tokenization.
• He raised concerns that the FIT21 Act would incentivize financial institutions to tokenize basic securities that are commonly exchanged in a way to allow for those products to evade compliance with securities laws.
  • He commented that this legislation could lead some company shareholders to insist that companies employ tokenization as a means for reducing their compliance costs.
• He also mentioned how the hearing would consider legislation that would require the SEC and the U.S. Commodity Futures Trading Commission (CFTC) to study tokenization, which he called a “wise move.”
• He noted however that this legislation is being proposed after the U.S. House of Representatives had passed a ban on a U.S. CBDC and commented that the establishment of a U.S. CBDC would entail the studying of tokenization.
  • He mentioned how consulting firm Oliver Wyman had found that it had cost $120 billion in 2020 to move $23 trillion across borders and that a multicurrency CBDC could cut these costs by 80 percent.
• He remarked that U.S. policymakers should consider tokenization technologies long before moving forward with legislation to implement the technologies within the U.S. financial system.
• He then stated that while the Subcommittee should distinguish between tokenization and cryptocurrencies, he asserted that the deep connection between tokenization and cryptocurrency pose fraud, cybersecurity, and illicit finance risks.
  • He indicated that the cryptocurrency industry has been the main adopter of tokenization technologies and commented that this industry’s products are primarily used for gambling and criminal activities.
• He noted how major financial institutions (including large banks and asset managers) are announcing their intention to offer tokenized products.
• He stated that policymakers should consider the various risks and legal considerations surrounding token ownership, transfers, investor protections, AML compliance, privacy, and consumer data protection.

Witness Opening Statements:

Ms. Lilya Tessler (Sidley Austin LLP):

• She discussed how many real-world assets are currently digitally represented in electronic databases and noted how most companies manage their inventories through electronic databases.
  • She commented that this use of digitally represented assets is largely uncontroversial and noted how digitally represented assets have long been used in the finance and securities space.
• She recounted how Congress had previously directed the SEC to end the physical movement of securities certificates.
  • She indicated that this action was in response to Wall Street’s “Paperwork Crisis” in the late 1960s and early 1970s and was based on a view that securities markets had “resisted industry modernization.”
• She remarked that the U.S. should now embrace blockchains as a tool for providing for more digital capabilities.
• She explained that tokenization refers to the process of digitally representing and recording an asset using blockchain technology.
  • She commented that a blockchain is essentially a digital ledger.
• She stated that tokenization can be applied to a wide variety of assets, such as securities, bank deposits, gold, food, pharmaceuticals, and real estate.
  • She indicated that the act of tokenization neither changes the essential nature or character of the asset nor creates a new asset class.
• She noted that tokenization enables an asset to be recorded and transferred using blockchain technology, which offers certain capabilities.
  • She indicated that these capabilities include improving efficiency, mitigating risk, enhancing distribution channels, providing greater liquidity, and allowing for programmability through the use of smart contracts.
• She discussed how the offer, sale, trading, and custody of securities involves financial institutions that operate in a highly regulated environment that does not currently provide for an efficient market structure.
• She noted how a hedge fund may issue and track its shares as tokenized securities and that the method used to record securities is generally a matter of state law.
  • She mentioned how certain states have expressly allowed for the use of blockchains to record the ownership of securities.
• She indicated however that hedge fund shares can be sold as private securities under exemptions from federal securities laws.
• She noted how tokenized securities rely upon the same exemptions as traditional securities and provide the ability to program compliance controls into the code of tokens.
  • She also highlighted how the blockchain information can also be shared with securities market participants in real-time, which provides for efficiency and enables a more liquid secondary market.
• She remarked that the full realization of a blockchain’s capabilities depends on whether all participants in the securities markets can interact with the tokenized security on-chain.
• She noted that while tokenized securities can be issued under state law, she highlighted how securities laws require the use of intermediaries (such as broker-dealers, custodians, and transfer agents).
  • She indicated however that these intermediaries may not have the regulatory ability to use the blockchain as the official record of ownership or to custody the tokenized securities on-chain.
  • She commented that this situation limits a blockchain’s capabilities and creates redundancies, inefficiencies, and risks in the trade flow.
• She remarked that current regulatory guidance may not provide sufficient clarity and flexibility for market participants to fully leverage the capabilities offered by tokenization.
• She mentioned how the SEC had issued a temporary no-action relief for a SPBD to custody tokenized securities and indicated that SPBDs cannot custody traditional securities.
  • She commented that this situation creates market confusion because a tokenized security is merely a traditional security that is recorded on a blockchain ledger.
• She remarked that tokenization does not change the essential nature of an asset and contended that the current market for tokenized real-world assets cannot fully develop until regulations treat a tokenized asset the same as an underlying traditional asset.
• She asserted that collaboration between regulators and industry is “crucial” to provide a clear and consistent path that supports innovation and competition while protecting investors and market integrity.
  • She called on the Subcommittee to continue exploring blockchain technology’s capabilities and the ways that the tokenization of real-world assets could support the U.S. in being a leader in digital innovation.

Mr. Robert Morgan (USDF Consortium):

• He discussed how money is already digital for most Americans and exists largely in the form of bank deposits.
  • He explained that these bank deposits are delivered through a diverse and competitive banking system that ensures individual protections and systemic soundness while supporting credit creation.
• He stated that the advent of new technologies promises to reshape the nature, function, and impact of money.
• He discussed how tokenization refers to the use of novel shared ledgers to record, store, and transfer traditional banking assets and liabilities, including bank deposits.
  • He commented that tokenization should not be confused with cryptocurrency, despite their similar technological underpinnings.
• He explained how tokenization refers to the use of distributed ledger technology (DLT) to improve the delivery of real-world assets (such as bank deposits, bonds and other regulated financial instruments).
  • He indicated that this differs from cryptocurrencies, which tend to be bearer assets that exist in novel markets.
• He then mentioned how various ledger technologies have played a central role in banking as a system of record.
  • He noted how these technologies have evolved from paper systems to on-premise servers to cloud computing and asserted that DLT constitutes the next evolution in ledger technology.
• He discussed how financial infrastructure currently consists of a series of siloed systems separating banks and products within an individual bank and stated that tokenization has a unique ability to break down these silos.
  • He commented that tokenization would facilitate real-time collaboration between financial institutions.
• He remarked that tokenization could facilitate many benefits for individuals, firms, and the financial system.
  • He first stated that tokenization could facilitate faster and cheaper payments, which would ensure that customers have real-time access to their funds.
  • He secondly stated that tokenization could facilitate programmable payments that automate complex transaction flows, reduce fraud, and improve transparency.
  • He thirdly stated that tokenization could facilitate atomic settlement and commented that the added liquidity provided by atomic settlement allows for new funding options that can lower the cost of credit.
  • He lastly stated that tokenization can foster collaboration among community banks, which will enable these banks to compete with larger financial institutions.
• He remarked that tokenization does not merely enable cost savings at banks and that the technology also allows for the development of novel products that can benefit the consumers and small businesses served by banks.
• He mentioned how the USDF Consortium’s members are exploring how tokenization can improve the construction lending process.
  • He noted how programmable payments can tie loan disbursements to the completion of certain milestones, such as pouring the foundation of a new building or receiving permitting approvals.
• He stated that this application of tokenization to the construction lending process can help contractors and their employees receive quicker payments, reduce risks, and lower the cost of credit.
  • He commented that these benefits could ultimately increase the availability of affordable housing.
• He also mentioned how the USDF Consortium is exploring how tokenization could help facilitate loan participations among banks.
  • He commented that this collaboration allows for a community bank to maintain a relationship with a customer that might need to find a relationship with a larger bank because of growth.
• He further discussed how the USDF Consortium is participating in industry-wide initiatives, such as the Regulated Settlement Network (RSN) proof-of-concept.
  • He explained that this project is a collaborative effort involving large banks, payments networks, and other regulated financial institutions that is exploring how the creation of a shared ledger might improve the U.S.’s settlement infrastructure.
• He stated that the USDF Consortium’s participation in the RSN proof-of-concept ensures that banks of all sizes are involved in the exploration of new settlement infrastructure systems.
• He remarked however that there currently exists significant regulatory uncertainty that limits the ability of banks to adopt the aforementioned innovations under development.
  • He noted how any bank seeking to pursue a tokenization innovation project must receive full regulatory approval for the project and indicated that this requirement does not exist for any other technologies.
• He called on Congress to work with banking agencies to help provide regulatory clarity that would allow for banks to responsibly explore tokenization.
  • He recommended that the U.S. eliminate technology-specific approval requirements for engaging in tokenization, provide clear guidance on the regulatory requirements for DLT infrastructure, clarify that tokenization does not change the underlying nature of deposits, and promote public-private partnerships to explore the opportunities for tokenization in financial services.
• He remarked that bank deposits are a “cornerstone” of the U.S.’s monetary and financial system that support the dominance of the U.S. dollar around the world.
• He stated that tokenization promises to upgrade bank deposits, which would lower the cost of offering financial services and allow for banks to provide safe, affordable, and inclusive products.
  • He added that tokenization would still maintain the critical protections that banking regulation ensures.

Ms. Nadine Chakar (DTCC Digital Assets, Depository Trust and Clearing Corporation):

• She mentioned how her company, Depository Trust and Clearing Corporation (DTCC), owns and operates three clearing agencies that have been designated systemically important financial market utilities (SIFMUs).
• She noted how DTCC owns the National Securities Clearing Corporation (NSCC), which clears broker-to-broker transactions in stocks, bonds, and other products.
  • She indicated that NSCC provides clearing and settlement services for approximately 200 million transactions a day.
• She also highlighted how DTCC’s central securities depository manages lifecycle events (such as dividends and corporate actions) for over 1.4 million eligible securities.
• She remarked that DTCC plays a central role in post-trade processing for the U.S. securities industry, which makes it subject to strict risk management standards and heightened oversight from U.S. regulators.
  • She indicated that the SEC and the U.S. Federal Reserve serve as the main regulators of DTCC.
• She noted how DTCC is industry-owned and industry-governed and stated that DTCC has a long history of innovating purposefully.
  • She testified that DTCC has been developing digital asset solutions since 2016.
• She mentioned how DTCC had recently acquired Securrency, which now operates within the company as DTCC Digital Assets.
• She testified that DTCC Digital Assets offers institutional grade blockchain infrastructure to facilitate end-to-end lifecycle processing for tokenized real-world assets.
  • She stated that DTCC Digital Assets is seeking to develop technology that could ultimately underpin the evolution of an enterprise-wide digital asset infrastructure.
• She stated that DTCC Digital Assets’s efforts would enable market participants to unlock the opportunities presented by tokenization, including increased efficiencies, clearing, settlement management, collateral management, and payments.
  • She testified that DTCC Digital Assets is now working to harden its technologies to ensure that the technologies can satisfy the operational resilience requirements that apply to SIFMUs.
• She remarked however that technology alone will not change capital markets and asserted that measured and thoughtful collaboration and coordination among all stakeholders will be necessary to change these markets.
• She indicated that while tokenization provides a “tremendous opportunity” to mature markets (such as the U.S. equities and fixed income markets), she stated that it would take time to realize these benefits.
  • She commented that tokenization efforts must be undertaken with “due care” to support the existing regulatory framework’s objectives (which include efficiency, resilience, robust financial risk management, transparency, and investor protection).
• She remarked that the U.S. should provide a regulatory framework for tokenization is based on current financial regulations.
  • She commented that this regulatory framework should follow the principle that the same regulations would be applied to the same activities and risks.
  • She commented however that this regulatory framework for tokenization should also recognize the need for special refinement or clarification in certain areas.
• She noted that the U.S. possesses the most liquid, efficient, and cost-effective financial market in the world and stated that DTCC provides services that benefit all participants in the capital markets.
  • She contended that the DTCC’s financial market infrastructure will be key to driving change in digital securities and tokenization.

Mr. Carlos Domingo (Securitize):

• He discussed how his company, Securitize, provides a regulated path for companies to tokenize their financial assets and to issue, sell, and trade securities on blockchains.
• He testified that Securitize had recognized the need for it to become a registered entity early in its history in order to provide its tokenization services lawfully.
  • He mentioned how Securitize had registered as a transfer agent with the SEC in 2019.
  • He also mentioned how Securitize had acquired broker-dealer and ATS licenses in September 2020 to legally sell and provide a regulated marketplace for trading tokenized securities.
  • He further mentioned how Securitize had subsequently acquired the requisite approvals to operate.
• He remarked that Securitize has been primarily focused on realizing the efficiencies of tokenization in private capital markets.
• He stated that private capital markets lack modern and standardized digital infrastructure and are encumbered by inefficiencies, outdated intermediaries, a lack of accessibility to many investors, and poor liquidity.
  • He commented that tokenization could potentially solve these problems.
• He testified that Securitize is now a leader in the compliant tokenization of financial assets and has become the U.S.’s largest blockchain-based transfer agent.
  • He indicated that Securitize has issued “dozens” of tokenized securities that are valued at nearly $1 billion.
  • He also mentioned how Securitize has worked with several of the largest asset managers (including Hamilton Lane, KKR, and BlackRock) on tokenization projects.
• He then remarked that the U.S.’s legislative focus has primarily involved cryptocurrencies, digital assets, and stablecoins.
  • He commented that the U.S. has provided less focus to legislation that would enable traditional financial services and products to benefit from blockchain technology and tokenization.
• He stated that existing statutes and regulation do not consider blockchain technology and contain provisions that preclude or limit the issuance, trading, and settling of tokenized securities.
  • He commented that this situation has impeded market participants from using blockchain technology in regulated financial markets and can undermine the U.S.’s global competitiveness.
• He remarked that the U.S. must provide clarity regarding the definition of digital asset securities and tokenized securities to distinguish these assets from other types of digital assets.
  • He warned that the current lack of clarity is impeding regulators in understanding the unique characteristics of compliant tokenized securities and in regulating these securities appropriately.
• He then discussed how broker-dealers must become SPBDs in order to custody tokenized securities and stated that the SPBD framework is difficult to achieve, limited in scope, and temporary.
  • He commented that it remains unclear as to which tokenized securities are eligible for SPBD custody and highlighted how the SPBD framework expires in February 2026.
• He also stated that SPBDs should be permitted to hold payment stablecoins to facilitate efficient on-chain transactions between securities and cash.
  • He indicated that these efficient on-chain transactions are currently not possible.
• He then remarked that tokenized securities must be allowed to flourish on public and permissionless blockchains (in addition to private and permissioned blockchains) in order to realize the full benefits of blockchain technology.
  • He commented that any blockchain should be an acceptable market infrastructure for tokenized securities so long as it ensures resilience and stability, mitigates risks, and is subject to a proper technical assessment.
• He also stated that transfer agents and SEC-registered companies and blockchain-based transfer agents are critical to the tokenization ecosystem and must be recognized as such.
  • He commented that blockchain-based transfer agents should be recognized as primary providers of tokenization and blockchain transfer agent services after meeting appropriate capitalization, insurance, and technical standards.
• He then remarked that ATSs must remain eligible trading platforms for tokenized securities and that peer-to-peer transfers should be sanctioned for investors when wallets are whitelisted and when regulatory transfer restrictions are enforced by smart contracts.
  • He further asserted that registered ATSs within SPBDs must be allowed to facilitate both the trading and settlement of transactions in tokenized securities.
• He stated that tokenized securities can expedite and condense trading and settlement to near real-time and enable the merger of trading and post-trading activities, which would eliminate the need for central security depositories (CSDs).
  • He noted how the European Commission has adopted this model for Europe and contended that the U.S. entities should be able to realize similar efficiencies and capabilities.
• He called on Congress to either prioritize legislation or encourage clear SEC guidance that facilitates safe, responsible, and compliant tokenization of financial assets as soon as possible.

Prof. Hilary Allen (American University Washington College of Law):

• She discussed how cryptocurrencies run on permissionless public blockchains and stated that tokenization does not require such permissionless public blockchains.
  • She asserted that the benefits of tokenization (including programmability, composability, and atomic settlement) could all be achieved through using different types of ledgers and databases.
• She remarked that this dynamic is important because public permissionless blockchains suffer from “inescapable” inefficiencies and operational fragilities that render them unsuitable supporting infrastructure for real-world financial assets.
  • She called blockchain technology limited and problematic and asserted that permissionless public blockchains are a “poor fit” for solving most problems.
• She stated that the consensus mechanisms used to verify transactions on permissionless public blockchains are inherently inefficient and wasteful.
  • She commented that these blockchains must be inefficient and wasteful by definition or else bad actors could easily take over these blockchains given their absence of participation restrictions.
• She noted how permissionless public blockchains cannot process large volumes of transactions and that the delays and fees for these blockchains can be significant during peak times.
  • She mentioned how industry experimentation to address these scaling problems often focuses on recentralizing technological and economic control of certain processes, which undermines the stated purpose of permissionless public blockchains.
• She also discussed how permissionless public blockchains are software and require constant monitoring and maintenance to address bugs and cybersecurity issues.
  • She questioned whether there exists any party that possesses an economic incentive to invest time and effort in maintaining the resilience of a public permissionless blockchain.
• She noted how most public permissionless blockchains rely upon core software developers and indicated that a “handful” of these developers are funded by grants and donations.
• She stated that it is often unclear who these public permissionless blockchain developers are, what powers the developers possess, who is funding the developers, and how these developers are chosen.
  • She commented that these developers are unregulated, could be bad actors, could have conflicts of interest, and are not necessarily reliable.
  • She elaborated that a reduction in funding for or interest among developers could result in the blockchain’s infrastructure going unmaintained.
• She noted how most financial infrastructure is heavily regulated and asserted that permissionless public blockchains are incompatible with this regulation.
  • She asserted that permissionless public blockchains should therefore not host real-world financial assets.
• She also remarked that tokenization should not be used to integrate real-world financial services with the cryptocurrency universe.
  • She indicated that she had previously discussed her concerns regarding this integration with the Committee.
• She stated however that tokenization of real-world assets might be able to promote significant efficiencies in some markets when performed on other kinds of ledgers and databases.
• She mentioned how there exists particular interest in tokenizing deposits to increase the speed of cross-border payments.
  • She indicated however that central banks may need to issue wholesale CBDCs to accomplish this objective and commented that this issuance of wholesale CBDCs may be precluded if the CBDC Anti-Surveillance State Act were to be enacted into law.
• She also highlighted how there exists particular interest in tokenizing securities and physical assets (such as real estate and art) and that there is hope that this tokenization could increase liquidity and create more investment opportunities.
• She then remarked that the Subcommittee should not view tokenization as a means for improving financial inclusion.
  • She commented that the U.S.’s problem is not that it lacks investment opportunities and rather that many Americans do not have enough money to make investments.
• She further stated that while tokenized deposits might expedite payments processing for Americans that already have banking services, she commented that tokenized deposits will not benefit those without banking services.
• She then remarked that while tokenization can increase efficiencies in some markets, she cautioned that these efficiency gains may come at the expense of increased fragilities within the U.S. financial system.
  • She asserted that the U.S. should be “very thoughtful” regarding where tokenization is deployed.
• She recounted how supply chains had become very brittle during the COVID-19 pandemic and noted how the U.S. is now sacrificing efficiency to improve the resilience of its supply chains.
  • She commented that the U.S. should consider a similar tradeoff in its approach to tokenization.

Congressional Question Period:

Subcommittee Chairman French Hill (R-AR):

• Chairman Hill discussed how tokenization could reduce intermediaries, increase liquidity, and democratize access to investment opportunities. He noted how real-world assets (such as real estate, commodities, music rights, and collectables) exist in siloes where the assets are illiquid and frequently disconnected. He indicated however that tokenization could bring these assets on-chain (which he commented could be beneficial). He asked Ms. Tessler to discuss how tokenization allows for assets to be traded more freely and efficiently across current siloes. He also asked Ms. Tessler to indicate whether tokenization could bring liquidity and more marketability to assets that are illiquid and over-the-counter (OTC) in nature.
  • Ms. Tessler remarked that tokenizing real-world assets provides markets with the opportunity to leverage the capabilities of blockchain technology. She noted how tokenization generally involves all market participants using a shared ledger. She stated that the ability of all market participants to access real-time information via a shared ledger eliminates the need to reconcile information across multiple siloed ledgers. She indicated that intermediaries could use this shared ledger to enable two parties to transact with each other instantaneously via programmable smart contracts. She commented that these efficiencies can be realized without sacrificing regulatory compliance because transfer restrictions, verified identity, and other requirements can be built into the smart contract code.
• Chairman Hill then described DTCC as the world’s most important “behind-the-scenes” company in capital markets. He noted how the DTCC is assessing how tokenization could reduce agency costs, increase reliability and accuracy, combat fraud, increase speeds, and lower overall costs. He also mentioned how DTCC had been involved in the GameStop short squeeze. He noted how broker-dealer Robinhood had faced challenges calculating the margin that it needed to post in response to the trading of GameStop’s stock on the Robinhood platform. He asked Ms. Chakar to indicate whether tokenization could have enabled Robinhood to more easily calculate their margin obligations during the GameStop short squeeze.
  • Ms. Chakar commented that while she could not specifically address the GameStop short squeeze, she stated that tokenization would have enabled Robinhood to more easily calculate their margin obligations during this episode.
• Chairman Hill interjected to comment that tokenization could have reduced market fragility during the GameStop short squeeze.
  • Ms. Chakar remarked that the combination of tokenization and smart contracts would allow for improved efficiency in calculating and moving margin.
• Chairman Hill then mentioned how a U.S. mutual fund company had recently tokenized its money market fund. He indicated that the cost reductions associated with this tokenization had enabled the mutual fund company to offer its money market fund (which he described as world class and highly regulated) at a much lower deposit amount. He asked Mr. Domingo to indicate whether this lower deposit amount would increase access to this money market fund.
  • Mr. Domingo answered affirmatively. He remarked that tokenization provides a more efficient way of managing the underlying securities of a fund. He noted how tokenization can support fractional ownership, which enables people to invest in funds at lower levels. He also stated that tokenization can support automation for redemptions and payouts, which can lower the costs of maintaining funds. He remarked that these features of tokenization should benefit investors through providing them with lower fees and enabling them to invest smaller amounts into funds.
• Chairman Hill then asked Ms. Chakar to indicate whether tokenization could immediately support 144A debt offerings and bank loan participations.
  • Ms. Chakar answered affirmatively.
• Chairman Hill interjected to ask Mr. Morgan to address how the USDF Consortium is approaching tokenization as a means of improving deposits and bank loan participations.
  • Mr. Morgan remarked that tokenized deposits provide a “tremendous opportunity” to help streamline particularly complex transactions. He indicated that these complex transactions include cross-border transactions and multi-party transactions (such as the funding of a mortgage). He commented that tokenized deposits can benefit consumers and small businesses.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• Ranking Member Lynch noted how Prof. Allen had asserted that many crypto assets resemble Ponzi schemes because the value of these crypto assets is based entirely on whether other buyers are interested in the assets. He stated that one of the only reasons to purchase cryptocurrencies is to trade cryptocurrencies. He explained that many cryptocurrencies can only be purchased using other cryptocurrencies. He also stated that cryptocurrencies can be used for sanctions evasions, money laundering, or making ransomware payments. He remarked that while the tokenization of certain assets could provide benefits, he asserted that tokenization can also pose significant risks. He asked Prof. Allen to discuss the risks associated with tokenization.
  • Prof. Allen remarked that there exist several gradations of risk associated with tokenization. She stated that the worst-case scenario for tokenization is that it integrates the traditional finance system with the cryptocurrency finance system. She warned that this integration would cause volatility and problems within the cryptocurrency finance system to influence the traditional finance markets. She then remarked that while the tokenization of real-world non-crypto assets could provide some efficiencies, she commented that this tokenization can also present risks. She noted how the pre-programming of tokenized assets can cause the assets to be very rigid, which makes them less able to respond to unexpected circumstances. She stated that computer programmers cannot foresee all potential risks and commented that policymakers should be cognizant of this dynamic.
• Ranking Member Lynch then asked Prof. Allen to indicate whether a globally recognized and respected CBDC would be required to enable settlement transactions across different tokenized asset systems.
  • Prof. Allen remarked that many of the benefits of tokenization depend on the existence of a settlement asset. She asserted that stablecoins would be ill-suited to serve as settlement assets given their fragilities. She remarked that the settlement asset for transactions involving tokenized systems should be some form of a CBDC. She stated however that this settlement CBDC would not need to be a retail product.
• Ranking Member Lynch interjected to note that if the U.S. Federal Reserve is not allowed to issue a CBDC, then another central bank would issue their own CBDC to support the settlement of tokenized assets.
  • Prof. Allen commented that she did not know how a settlement system for tokenized assets would work if the U.S. Federal Reserve were to be barred from issuing a CBDC.
• Note: Ranking Member Lynch’s question period time expired here.

Subcommittee Vice Chairman Warren Davidson (R-OH):

• Vice Chairman Davidson first criticized proposals that would have the U.S. implement a CBDC. He then discussed how tokenized securities are real-world assets. He stated that tokenized securities provide a useful custody function and noted how it is difficult to claim multiple shares of a tokenized security. He commented that short squeezes can involve imbalances in pledged shares. He also disputed the assertions that blockchains would support all high-frequency trading and stated that blockchain structures contain certain execution limitations. He asked the witnesses to address the implications of and opportunities for tokenized securities.
  • Ms. Chakar remarked that tokenized securities would require the construction of interoperable financial infrastructure so that the tokens can move between different networks. She stated that compliance must serve as the underlying principle of this infrastructure. She remarked that there will likely exist a network of blockchains (rather than a single blockchain). She noted that there currently exists technology that would allow for incorporation of compliance and rules into the infrastructure and for the development of smart tokens. She commented that this technology would ensure that the tokens comply with AML and KYC rules.
• Vice Chairman Davidson interjected to state that the tokenization of real-world assets would prevent the double spend problem.
  • Ms. Chakar remarked that there would need to exist entities (such as DTCC) to ensure that tokenized assets are encumbered and not being double spent. She commented that entities would ensure the integrity of these assets and that people have confidence in these assets. She stated that the application of the same regulatory standards to tokenized assets as similar assets would foster security and trust in tokenized assets.
• Vice Chairman Davidson asked Ms. Chakar to compare the public markets for tokenized assets to the private markets for tokenized assets.
  • Ms. Chakar discussed how public markets tend to be more liquid and mature, which leads these markets to have more efficiency and speed. She noted that private markets tend to have shorter settlement cycles and commented that there exist opportunities to reduce transaction costs in these markets. She stated that the frequency of trading in the private markets could be increased, which would eventually result in more liquidity.
• Vice Chairman Davidson then mentioned how his state of Ohio is considering whether to use DLT to store various types of titles (including home and automobile titles). He asked Ms. Tessler to identify actions that policymakers can take to provide functional markets for tokenized titles.
  • Ms. Tessler remarked that blockchain technology can be applied to any industry. She mentioned how there currently exist tokenized asset applications within the food and pharmaceutical industries to support supply chain tracking. She also highlighted how there are now tokenized event tickets to protect authenticity and incorporate transfer restrictions. She further discussed how there exist tokenized asset applications within the real estate space that allow for parties to record tokenized titles, leases, and mortgages on blockchains for transparency purposes.
• Vice Chairman Davidson interjected to note that his question period time had expired.

Rep. Brad Sherman (D-CA):

• Rep. Sherman remarked that public permissionless blockchains are efficient because these blockchains can avoid AML and KYC requirements. He also disputed the assertion that tokenization is innovative and stated that tokenization involves many older technologies. He further criticized the U.S. House of Representatives for passing legislation that would prevent the U.S. from studying CBDCs. He asserted that cryptocurrency advocates only want innovation so far as it allows the advocates to profit from cryptocurrencies and enables parties to evade sanctions, taxes, and other laws. He then remarked that the FIT21 Act includes an “extremely dangerous” title dealing with investment contract assets. He commented that this title would enable existing publicly traded companies to avoid regulation through tokenizing their securities and labeling these securities as investment contracts. He noted how Prof. Allen had asserted that this provision would be very attractive to securities issuers seeking to avoid SEC oversight. He asked Prof. Allen to address how this provision would impact retail investors.
  • Prof. Allen remarked that securities issuers would likely consider opting out of complying with securities laws if given the option so that the issuers could reduce their costs. She stated that the FIT21 Act would allow for these securities issuers to incorporate blockchains into their investment contracts to avoid complying with securities laws.
• Rep. Sherman interjected to comment that the intention of blockchain technology does not appear to be to increase efficiency and instead appears to be to reduce regulatory oversight.
  • Prof. Allen remarked that reduced regulatory oversight should not be viewed as benefiting the public. She asserted that Congress should not be facilitating this reduced regulatory oversight.
• Rep. Sherman then asked Prof. Allen to identify key takeaways from her prior testimonies before Congress that would be relevant to the current hearing.
  • Prof. Allen remarked that stablecoins are poor settlement assets because stablecoins are prone to runs. She also noted how stablecoins rely upon inefficient blockchains.
• Rep. Sherman interjected to ask Prof. Allen to confirm that blockchains are not interoperable with one another.
  • Prof. Allen noted that while blockchains could be made interoperable with bridges, she warned that these bridges contain “major” operational fragilities. She highlighted how there have been many hacks of cryptocurrency bridges. She also noted how stablecoins are not currently being used for retail payments.
• Rep. Sherman discussed how stablecoins yield no interest to their holders while money market funds do yield interest to their holders. He stated that if stablecoins were ever to become a payments system, then stablecoins could be employed to evade AML laws.
  • Prof. Allen stated that stablecoins are currently supporting gambling activity.
• Rep. Sherman interjected to comment that the use of stablecoins in gambling constitutes one example of how stablecoins are being used to evade current laws.

Rep. John Rose (R-TN):

• Rep. Rose noted how Ms. Tessler’s testimony had discussed how food items could be tokenized to enhance supply chain visibility. He asked Ms. Tessler to explain how digital tokens could represent food items.
  • Ms. Tessler remarked that any real-world asset can be tokenized. She discussed how the location and authenticity of any asset (including an item of food) can be recorded on a blockchain and how the movement of the asset can be tracked using the blockchain across the supply chain. She noted how this tracking enables different supply chain participants to know the locations of assets through using the blockchain’s shared ledger. She also stated that these tokenized assets could be integrated into commodities markets for trading. She concluded that tokenized assets can have multiple utilities.
• Rep. Rose asked Ms. Tessler to further discuss how tokenization could benefit the agricultural industry and consumers.
  • Ms. Tessler remarked that any type of information (including locations, temperatures, and climate) can be tracked and traced on blockchains. She noted how supply chain participants can access this information. She also stated that the efficiencies provided by blockchains can be passed along to end-consumers. She noted how blockchains can eliminate the redundancies of multiple records along the supply chain among unrelated parties if everyone can use the same source of information.
• Rep. Rose asked Ms. Tessler to indicate whether current technology provides a sufficiently robust connection between physical assets and the tokens representing these assets.
  • Ms. Tessler remarked that authenticity and provenance can be tracked and traced on blockchains. She indicated that physical documentation would be linked to the blockchain.
• Rep. Rose asked Ms. Tessler to indicate whether these tokenized assets would be subject to existing laws.
  • Ms. Tessler stated that tokenized assets would be subject to existing laws. She commented that blockchains merely provide an additional place where information can be stored and transferred.
• Rep. Rose then noted how a banking organization that is subject to SAB 121 must hold additional capital if it seeks to custody tokenized risk-weighted assets. He noted however that the same banking organization would not need to hold additional capital if it custodies a regular non-tokenized asset. He criticized the existence of these two standards given how the risk of the underlying asset is the same. He stated that the SEC’s current regulatory regime does not provide the U.S. with the necessary flexibility to fully realize the capability of blockchain technologies. He asked Ms. Tessler to indicate whether she agrees with this statement.
  • Ms. Tessler remarked that SAB 121 provides a very broad definition of crypto assets that encompasses tokenized securities (even if the tokenized securities are merely traditional securities recorded on a blockchain ledger). She stated that SAB 121 thus provides a different accounting treatment and custody requirements for tokenized securities as compared to traditional securities involving the same assets.
• Rep. Rose then mentioned how foreign and international regulators are very interested in tokenization. He asked Ms. Chakar to compare how U.S. regulators have engaged with DTCC relative to how overseas jurisdictions have engaged with DTCC. He commented that overseas jurisdictions appear to be more quickly proceeding on tokenization issues.
  • Ms. Chakar testified that DTCC is regulated by 20 regulators around the world. She stated that the U.S. has a homogeneous post-trading market, which differs from foreign jurisdictions that tend to have more fragmented post-trading markets. She discussed how DTCC has been working with its various regulators on a variety of projects and commented that these collaborations can be challenging at times. She stated however that DTCC’s constant dialogue with its regulators on issues at a granular level has yielded successes.

Rep. Sean Casten (D-IL):

• Rep. Casten first stated that the terms “blockchain” and “ledger” should not be used interchangeably and that a blockchain is merely an element of a ledger. He elaborated that a ledger will have various requirements (such as approval rights, check writing rights, accounting systems, and identity verification) and that a blockchain merely provides a list of owners of an asset. He then noted how the USDF Consortium is creating a permissioned private system. He commented that the USDF Consortium is likely pursuing a permissioned private system because the Consortium’s members could not have sufficiently audited records with traditional blockchain technology (which is permissionless). He asked Mr. Morgan to discuss what the USDF Consortium is building into its system that is not already present in permissionless public blockchains.
  • Mr. Morgan remarked that the USDF Consortium is building a private permissioned blockchain mainly because existing U.S. regulatory guidance effectively prohibits banks from engaging in public permissionless networks. He stated that there currently exists sufficient permissioned blockchain infrastructure. He also stated that a series of controls would be applied to payments made on private permissioned ledgers.
• Rep. Casten asked Mr. Morgan to indicate whether the USDF Consortium will ultimately develop a Generally Accepted Accounting Principles (GAAP) compliant blockchain system that could obtain approval from a major auditing firm.
  • Mr. Morgan answered affirmatively.
• Rep. Casten asked Prof. Allen to indicate whether it is possible to develop a permissionless GAAP-compliant blockchain system. He also asked Prof. Allen to indicate whether such a permissionless system could have controls built into it.
  • Prof. Allen discussed how permissionless public blockchain systems contain several levels. She noted how her testimony had addressed the software level of the blockchain system. She also noted how there exists a level on top of the software level in which validators operate. She indicated that a permissionless public blockchain allows for anonymity on both levels. She stated that this anonymity makes it difficult to identify which parties are operating on the blockchain system. She commented that the major auditing firms will generally not deal with permissionless public blockchains.
• Rep. Casten then mentioned how Securitize had recently tokenized and distributed shares of a private money market fund issued by BlackRock on the Ethereum blockchain. He asked Mr. Domingo to confirm that any wallet on the Ethereum blockchain can accept tokens from any other user on the network.
  • Mr. Domingo stated that Securitze’s issued tokens are only transferable to whitelisted wallets.
• Rep. Casten asked Mr. Domingo to indicate whether Securitize puts controls on its tokens.
  • Mr. Domingo answered affirmatively and stated that it is possible to adopt controls on a public distributed blockchain.
• Rep. Casten interjected to discuss how “internet trolls” had found this BlackRock money market fund’s wallet addresses immediately after the money market fund had been deployed. He indicated that these “internet trolls” had sent memecoins, non-fungible tokens (NFTs), and tainted funds from Tornado Cash to these wallet addresses. He highlighted how the U.S. Department of the Treasury has sanctioned Tornado Cash for money laundering. He asked Mr. Domingo to address how this BlackRock money market fund was compliant with U.S. laws and rules.
  • Mr. Domingo stated that these memecoins and unsanctioned tokens were not sent to the BlackRock money market fund’s wallet addresses. He indicated that these memecoins and unsanctioned tokens were instead sent to other wallets that were labeled as belonging to BlackRock. He commented that press accounts of this situation have been inaccurate. He then stated that the fact that a memecoin can be sent to a wallet does not mean that the token representing the unit of the BlackRock money market fund (which is a security) can be freely sent to some other wallet.
• Rep. Casten interjected to ask Mr. Domingo to indicate whether there exists a technical solution to this issue.
  • Mr. Domingo interjected to remark that there do exist technical solutions to this issue. He stated that there exist blockchains that prevent assets from being sent to wallets unless the asset has been preapproved. He commented that this capability can easily be built on top of a public permissionless blockchain network.
• Rep. Casten expressed doubts that a public permissionless blockchain can be built safely. He then asked the witnesses to indicate whether a blockchain system that allows for mixers and anonymous wallets can provide a robust ledger of all transactions and can prevent money laundering.
  • Mr. Domingo answered affirmatively. He noted how the internet is currently used for both licit and illicit activities and serves as public infrastructure.
• Rep. Casten commented that the blockchain industry would have more credibility if it more proactively addressed money laundering before enforcement actions were taken.

Rep. Bryan Steil (R-WI):

• Rep. Steil asked Mr. Morgan to address how tokenization technology could benefit the U.S.’s smaller financial institutions. He commented that these smaller financial institutions play an important role in supporting small businesses.
  • Mr. Morgan remarked that an important aspect of DLT and blockchain technology is its ability to help multiple smaller financial institutions work together in real-time to compete with larger financial institutions. He discussed how traditional technology applications have to be spread across a wide customer base and commented that this provides larger banks with an adoption advantage. He noted how DLT provides a shared infrastructure that enables real-time collaboration. He indicated that this capability enables multiple community banks to work together to make loans that would have not previously been feasible for them to make.
• Rep. Steil also discussed how small businesses using community banks may experience delays when receiving international payments. He asked Mr. Morgan to indicate whether tokenization can enable these international payments to be made instantaneously.
  • Mr. Morgan answered affirmatively. He stated that DLT can bring all of the parties involved in a multi-party transaction together on the same ledger and provide real-time transparency. He commented these capabilities provide customers with real-time insight into how quickly funds will move, what the transfer will cost them, and when the funds will be received.
• Rep. Steil asked Mr. Morgan to confirm that tokenization could always allow for instantaneous international transactions (even during bank holidays).
  • Mr. Morgan confirmed that tokenization could always allow for instantaneous international transactions.
• Rep. Steil interjected to ask Mr. Morgan to confirm that these instantaneous international transactions cannot always occur under the current banking system.
  • Mr. Morgan confirmed that instantaneous international transactions cannot occur at all times under the current banking system.
• Rep. Steil then asked Ms. Tessler to identify any potential changes that may be required to the UCC to support the development of tokenization technology. He also asked Ms. Tessler to indicate whether there exist any federal laws that might need to be adjusted to facilitate the development of this technology.
  • Ms. Tessler noted that the UCC does not address federal or state regulations. She indicated that the UCC instead provides a default set of rules to govern commercial transactions. She discussed how various states are now adopting the 2022 amendments to the UCC to respond to market concerns about the lack of definitive commercial law rules involving digital assets. She noted that these amendments apply to controllable electronic records, which specifically excludes the scope of any digital assets that meet the definition covered elsewhere in the UCC (such as deposit accounts, electronic money, and investment property). She stated that the nature of a real-world asset does not change when it is tokenized. She commented that the applicable commercial laws that underlie real-world assets still apply to tokenized assets.
• Rep. Steil then asked Mr. Domingo to discuss the benefits that BlackRock is experiencing because of their tokenization of money market funds.
  • Mr. Domingo indicated that while he could not speak on behalf of BlackRock, he stated that there exist many benefits associated with tokenized funds. He highlighted how the holdings of tokenized funds are fully transparent. He also noted how tokenized funds are transferred on a peer-to-peer level. He further mentioned how Securitize’s tokenized fund with BlackRock is fully transferable into USD Coin (USDC) (which is a stablecoin).
• Rep. Steil interjected to emphasize the benefits associated with tokenizing money market funds. He then asked Mr. Domingo to discuss how Securitize can implement regulatory controls (such as KYC rule compliance) into the tokenization process.
  • Mr. Domingo remarked that public permissionless blockchains can include KYC controls, AML controls, and transfer restrictions. He noted how Securitize is a regulated entity and testified that Securitize provides KYC controls for its wallets, whitelists its wallets on its blockchain, and employs smart contracts to provide transfer restrictions for its wallets.

Rep. Wiley Nickel (D-NC):

• Rep. Nickel first thanked Subcommittee Chairman French Hill (R-AR) and other Subcommittee Members for their work to pass the FIT21 Act through the U.S. House of Representatives. He then remarked that tokenization technology has the potential to advance U.S. financial markets and improve access to growing cryptocurrency capital markets. He criticized SAB 121 for using an overly broad definition of the term “crypto asset.” He explained that SAB 121 defines crypto assets as digital assets that are issued and/or transferred using DLT or blockchain technology. He commented that this definition fails to differentiate the types of digital assets and leads consumers to rely upon “lightly regulated” foreign custodians. He asserted that SEC Chairman Gary Gensler is impeding tokenization technology with SAB 121. He called on SEC Chairman Gensler to withdraw SAB 121 and commented that SAB 121 is impeding bipartisan progress on digital assets policy. He asked Ms. Tessler to discuss the challenges that SAB 121’s definition of crypto assets creates for the adoption of tokenized assets in traditional finance.
  • Ms. Tessler remarked that SAB 121 provides a very broad definition of crypto assets. She noted how tokenized securities are recorded on blockchains and are no different than traditional securities. She indicated that SAB 121’s definition of crypto assets would potentially encompass tokenized securities. She stated that the application of SAB 121’s definition of crypto assets to tokenized securities presents both accounting and custody challenges for market participants. She emphasized that the tokenization of an asset does not change the nature of the underlying asset.
• Rep. Nickel then stated that the tokenization of real-world assets will improve the efficiency of the market. He asked Mr. Domingo to discuss how this tokenization would impact his constituents and to provide examples of real-world asset tokenization use cases.
  • Mr. Domingo remarked that capital markets currently have many inefficiencies and stated that current dividend payment systems are an example of one such inefficiency. He noted how there does not exist a ledger that provides information on the beneficial owners of securities. He stated that this absence of a ledger results in a delay between when companies issue dividends and when investors receive the dividends. He also stated that the transfer agent tasked with paying out the dividends to investors have an incentive to hold onto the dividend payments for as long as possible. He explained that the transfer agent can monetize their short-term holdings of these dividend payments. He remarked that tokenization can enable companies to more quickly transfer their dividend payments to investors, which will enable investors to more quickly redeploy assets (and thus obtain better returns).
• Rep. Nickel then noted how the tokenization of real-world assets does have risks. He asked Ms. Chakar to discuss how Congress and federal regulators should address these risks to ensure that consumers are protected.
  • Ms. Chakar remarked that the same regulatory principles should be applied to similar activities and similar risks. She called for the continued development of guidelines governing financial hygiene, cybersecurity, risk management, resiliency, and financial protections. She stated that tokenization technology could support these functions. She also stated that this technology does not pose additional risks relative to those present within the current market environment.