Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States (U.S. House Committee on Financial Services)

Hearing	Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States
Committee	U.S. House Committee on Financial Services
Date	December 8, 2021

 

Hearing Takeaways:

• Cryptocurrencies and Digital Assets: The hearing focused on the growth in popularity of digital assets and cryptocurrencies. Committee Members and the hearing’s witnesses expressed interest in how these assets would impact consumers, businesses, and the U.S. more broadly, as well as how policymakers ought to approach these assets. Committee Members and the hearing’s witnesses raised concerns that the U.S.’s failure to provide regulatory clarity for cryptocurrencies and digital assets would cause innovation within this space to move abroad.
  • Regulatory Framework: A key area of discussion during the hearing was the U.S.’s regulatory framework for cryptocurrencies and digital assets. Committee Members and the hearing’s witnesses stated that the U.S.’s current regulatory approach to these assets was very fragmented and forced market participants to obtain licenses and oversight from a variety of federal and state government agencies. The hearing’s witnesses called for the establishment of a primary regulator for cryptocurrencies and digital assets that could better account for the unique natures of these assets (rather than apply ill-fitting existing regulatory frameworks to these assets). Ms. Haas also called for the establishment of a self-regulatory organization (SRO) that would work alongside government regulators to oversee cryptocurrencies and digital assets. She stated that an SRO could more nimbly respond than government regulators to technological changes within the space.
  • Lack of Clarity Surrounding What Constitutes a Security: The hearing’s witnesses expressed frustration with how it was difficult to determine whether a new digital asset constitutes a security. They indicated that while the U.S. Supreme Court had established tests for determining whether digital assets constituted securities in SEC v. W.J. Howey Co. (known as the Howey test) and Reves v. Ernst & Young (known as the Reves test), they stated that these tests were difficult to apply in practice. Mr. Brooks and Ms. Haas noted how the cryptocurrency industry had established the Crypto Rating Council to perform objective quantitatively based assessments of digital assets to make determinations as to whether the assets constituted securities under the Howey and Reves tests. These tests however are not official government tests, which means that the SEC could always override their determinations.
  • Ability to Support International Remittances: Several Committee Members expressed interest in how cryptocurrencies and blockchain technology could be used to enable cheaper and quicker international money remittances. The hearing’s witnesses highlighted how the low number of intermediaries required to support transactions on a blockchain coupled with the continuous operations resulted in cheaper and quicker transactions. Rep. Sylvia Garcia (D-TX) raised concerns however that many parties in these international remittance transactions would still face challenges in terms of converting their physical currency into virtual currency and vice versa.
  • Potential Impact on Financial Inclusion: Several Committee Members and the hearing’s witnesses expressed interest regarding the potential of cryptocurrencies and digital assets to improve financial inclusion. They highlighted how the fees associated with the traditional banking system often made it difficult for people to obtain bank accounts. They noted how people only needed to download digital wallets (rather than establish bank accounts) to make cryptocurrency transactions, which would make this a more accessible payments method. They also emphasized how there were currently more minority cryptocurrency investors than White cryptocurrency investors in the U.S. Mr. Brooks stated that cryptocurrencies provided ordinary investors with access to an early-stage investment opportunity and noted how these opportunities had been traditionally reserved for the very wealthy and well-connected. He further contended that blockchain technology could reduce bias in the financial system because its mathematical basis made it agnostic to a user’s race, gender, nationality, and income. 
  • Concerns Regarding Cryptocurrency’s Volatility: Several Committee Members expressed concerns over the large amounts of volatility currently associated with various cryptocurrencies. Mr. Brooks remarked that much of the current price volatility surrounding cryptocurrencies was attributable to the early stage of the market and the thinly traded nature of the asset. He stated that U.S. equity and debt markets tended to be more stable because there was more price discovery in these markets. He elaborated that the U.S. had regulated equity mutual funds, derivatives products, and futures products and commented that these products provided the market with indicators of what was occurring within the financial system. He remarked that similar tools did not exist within the cryptocurrency space yet, which meant that the cryptocurrency market could be very sensitive to a single actor’s actions. 
  • Concerns Regarding Cryptocurrency’s Impact on Systemic Risk: Several Committee Democrats raised concerns that the volatility surrounding cryptocurrencies could pose systemic risks to the financial system. The hearing’s witnesses argued however that the transparent nature of blockchains would reduce systemic risks because they enabled exchanges to proactively identify and address market issues before they became significant.
  • Concerns Regarding Cryptocurrency Mining’s Environmental Impact: Full Committee Chairman Maxine Waters (D-CA) and Rep. Rashida Tlaib (D-MI) raised concerns over the large amounts of energy needed to run cryptocurrency networks. Ms. Dixon testified that the cryptocurrency industry was working to address these concerns and develop and implement less energy intensive consensus mechanisms.
  • Concerns Regarding Hacking and Surveillance: Several Committee Members expressed concerns over the extent to which digital wallets and cryptocurrency exchanges were vulnerable to hackings and surveillance. The hearing’s witnesses asserted that blockchains were more secure than existing computer networks. Mr. Brooks added that the transparent nature of blockchains enabled parties to identify hackings that had occurred more quickly than in traditional financial systems. Rep. Sean Casten (D-IL) also raised concerns that countries may issue central bank digital currencies (CBDCs) that tracked user activities.
  • Concerns Regarding Cryptocurrency’s Use in Illicit Activity, Fraud, and Sanctions Evasion: Several Committee Members and hearing witnesses expressed interest in working to ensure that cryptocurrencies were not being used in illicit activities, fraud, and sanctions evasions. The hearing’s witnesses testified that their companies and exchanges maintained robust surveillance operations and adhered to know your customer (KYC) and anti-money laundering (AML) requirements.
  • Concerns Regarding Ransomware: Several Committee Members discussed how the problem of ransomware was becoming worse and highlighted how criminals frequently sought payment for ransomware attacks through cryptocurrencies. The hearing’s witnesses highlighted how the transparent nature of blockchains often enabled the recovery of ransomware payments after they were made. Mr. Bankman-Fried commented that standardized open lines of communications between cryptocurrency exchanges and law enforcement bodies would be beneficial in enabling quicker responses to ransomware attacks.
  • Inability to Obtain U.S. Approval for Sport Market Cryptocurrency Exchange-Traded Funds: Several Committee Members, Mr. Brooks, and Mr. Bankman-Fried expressed frustration with how cryptocurrency ETFs were not permitted within the U.S., but permitted outside of the U.S. They stated that this prohibition was denying Americans of investment opportunities and was driving innovation abroad.
  • Concerns Regarding Quantum Computing: Rep. Ed Perlmutter (D-CO) and Rep. John Rose (R-TN) both expressed concerns over the prospects that quantum computing could eventually pose threats to the security of blockchains. Mr. Bankman-Fried He stated that blockchain security algorithms ought to be resistant to quantum computing threats. He remarked however that quantum computing had the potential to create new cryptographic algorithms that were faster, more secure, and more efficient.
  • Concerns Regarding the Infrastructure Investment and Jobs Act’s Expansion of the Definition of Broker for U.S. Internal Revenue Service (IRS) Reporting Requirements: Rep. Al Lawson (D-FL), Rep. Ted Budd (R-NC) Mr. Brooks, Ms. Dixon, and Ms. Haas expressed concerns over the Infrastructure Investment and Jobs Act’s expansion of the definition of broker under U.S. Internal Revenue Service (IRS) reporting requirements to include cryptocurrency miners and other validators, as well as software and hardware digital wallet makers. They asserted that there existed a difference between centralized exchanges and decentralized algorithms and stated that there did not exist a well-situated party to provide tax reporting for decentralized algorithms. Ms. Haas added that this expanded definition raised privacy concerns and could apply to parties that were not necessarily intended to be covered under the law.
  • Proposed Requirements for Digital Identity Standards for Crypto Transactions: Rep. Bill Foster (D-IL) expressed interest in having all crypto transactions be associated with legally traceable identities. He commented that such a requirement would be key to preventing crypto assets from being used for ransomware or other criminal payments. He stated that while a person’s identity for crypto transactions could be pseudonymous for market participants and the public, he asserted that the transactions must be capable of being de-anonymized pursuant to the action of a court within a trusted jurisdiction. The hearing’s witnesses expressed general support for this proposal.
  • Diversity of Cryptocurrency Companies: Rep. Alma Adams (D-NC) and Rep. Sylvia Garcia (D-TX) expressed interest in obtaining demographics data of both the employees and customers of the companies testifying at the hearing. The hearing’s witnesses expressed their willingness to share this data with the Committee.
• Stablecoins: One notable type of cryptocurrency that was highlighted during the hearing was stablecoins. Stablecoins are cryptocurrencies that have their value pegged to an external reference. Both Mr. Allaire and Mr. Cascarilla’s companies offer stablecoins that are backed by U.S. dollars and short-duration U.S. Treasuries.
  • Proposed Regulatory Changes for Stablecoins: The hearing’s witnesses expressed support for establishing requirements for stablecoin issuers to make daily attestations on their stablecoin reserves and have their stablecoin reserves periodically be subjected to third-party audits. They added that regulators should oversee these attestations and audits. They stated that these requirements would make it easier for U.S. consumers to trust stablecoins, which would support their adoption and use.
  • Differential Treatment of Stablecoin and Traditional Financial Assets: Mr. Brooks and Mr. Bankman-Fried contended that the U.S.’s current rules favored traditional financial assets over stabecoins. Mr. Brooks questioned how the U.S.’s current rules only permitted banks to issue stablecoins while the U.S. was failing to grant bank charters to the largest issuers of stablecoins. He commented that stabecoin issuers should be considered less risky than banks given that they tended to not engage in lending activities. He also stated that stablecoins that functioned as payment instruments ought to be treated the same as traveler’s checks and prepaid cards. 
  • Impact on the U.S. Dollar’s Status as the World’s Reserve Currency: Mr. Allaire, Mr. Brooks, and Mr. Cascarilla contended that U.S. dollar-backed stablecoins would be key to maintaining the U.S. dollar’s status as the world’s reserve currency. They stated that these stablecoins would provide people with access to internet-enabled U.S. dollars, which could be transferred at fast speeds and low costs. Mr. Brooks also asserted that the crypto economy would push the U.S. Federal Reserve to address U.S. dollar inflation, which would be beneficial to its global competitiveness. 
  • President’s Working Group on Financial Markets’ (PWG) Report on Stablecoins: Several Committee Members expressed interest in the recent President’s Working Group on Financial Markets’ (PWG) Report on Stablecoins. Mr. Allaire and Ms. Dixon criticized the report’s recommendation that the issuance of stablecoins be limited to depository institutions. They contended that stablecoin issuers were often less risky than traditional banks because they did not engage in lending activities. 
  • Concerns Regarding Meta’s Pursuit of a Stablecoin Project: Full Committee Chairman Waters (D-CA) expressed concerns over Paxos’s partnership with Meta (formerly known as Facebook) to pilot a digital wallet called Novi. Mr. Cascarilla remarked that Novi was merely a customer of Paxos and that Novi likely chose Paxos because it had the most regulated stablecoin product available. He stated that the services that Novi received from Paxos were not different than the services that Novi received from any other financial institution that they maintained a relationship with.

Hearing Witnesses:

1. Mr. Jeremy Allaire, Co-Founder, Chairman and CEO, Circle
2. Mr. Samuel Bankman-Fried, Founder and CEO, FTX
3. Mr. Brian P. Brooks, CEO, Bitfury Group
4. Mr. Charles Cascarilla, CEO and co-Founder, Paxos Trust Company
5. Ms. Denelle Dixon, CEO and Executive Director, Stellar Development Foundation
6. Ms. Alesia Jeanne Haas, CEO, Coinbase Inc. and CFO, Coinbase Global Inc.

Member Opening Statements:

Full Committee Chairman Maxine Waters (D-CA):

• She discussed how Americans were increasingly making financial decisions using digital assets and noted how some pension funds had even begun to invest in cryptocurrencies on behalf of retirees.
  • She commented how these investments in cryptocurrencies were being made in spite of their volatile natures.
• She also stated that the COVID-19 pandemic was leading many working families to consider cryptocurrencies as a way of rebuilding their savings and retirement accounts.
• She mentioned how the cryptocurrency industry had become increasingly visible as a result of celebrity endorsements and the advent of ATMs that exchange cash for cryptocurrencies.
• She remarked that there remained questions as to how existing rules applied to cryptocurrencies and whether regulators possessed sufficient authority to protect investors and consumers.
  • She commented that the lack of an overarching and centralized regulatory framework for cryptocurrency markets left digital asset investments vulnerable to fraud, manipulation, and abuse.
• She mentioned how some cryptocurrency market exchanges and stablecoin issuers had obtained state money transmitter and sale of checks licenses from multiple states.
  • She also indicated that at least three cryptocurrency companies had obtained conditional approval for national trust bank charters from the U.S. Office of the Comptroller of the Currency (OCC).
• She also discussed how the U.S. Federal Reserve was conducting research on CBDCs and how other federal agencies, including the U.S. Federal Deposit Insurance Corporation (FDIC) and the U.S. National Credit Union Administration (NCUA), had announced requests for information (RFIs) from the digital assets industry.
  • She further noted how the U.S. Securities and Exchange Commission (SEC) was using its existing authorities in order to carry out enforcement actions against cryptocurrency market participants.
• She then mentioned how the increasing popularity of cryptocurrencies had raised environmental concerns tied to the computing power needed to mine some cryptocurrencies.
• She remarked that the Committee would explore the promise of digital assets in terms of their ability to provide faster payments, instantaneous settlement, and lower transaction fees.

Full Committee Ranking Member Patrick McHenry (R-NC):

• He discussed how cryptocurrencies had achieved mainstream popularity in 2021 and stated that the companies before the Committee were creating the “on ramps” that enabled Americans to participate in the digital asset ecosystem.
• He asserted that while the technology underlying cryptocurrencies was already being regulated, he acknowledged that the regulations might be “clunky” and not up to date.
  • He stated that policymakers needed to improve their understanding of the technology so that they could appropriately update the regulations and laws governing it.
• He remarked that the technology underlying cryptocurrencies promised a new direction for financial economies, services, and products and stated that U.S. policymakers must work to ensure that cryptocurrency innovation occurred within the U.S. (and not overseas).
  • He expressed concerns that overregulating the technology underlying cryptocurrencies before the technology was fully understood could stifle innovation.
• He asserted that the U.S. should not force the private sector to navigate unclear public statements from policymakers and that regulation by enforcement constituted the wrong approach for overseeing cryptocurrencies.
• He noted that while there existed concerns over the use of cryptocurrencies for nefarious activities, he highlighted how existing currencies (including cash) were already being used for nefarious activities.

Witness Opening Statements:

Mr. Jeremy Allaire (Circle):

• He asserted that the U.S. should be “aggressively” promoting the use of the U.S. dollar as the primary currency of the internet and leverage this use as a source of national economic competitiveness.
• He noted how his company, Circle, was the sole issuer of the USD Coin (USDC) and stated that this stablecoin provided fast, inexpensive, highly secure, global, and interoperable value exchange over the internet.
  • He asserted that USDC did not have the downside of extreme volatility that had plagued most cryptocurrencies.
• He remarked that USDC was helping to create a system in which digital U.S. dollars could become the leading currency of the internet.
• He discussed how the use of stablecoins in everyday payments was expanding “rapidly” and testified that his company was signing on institutional customers who were using these services for small business payments, international remittances, and efficient payments for remote workers.
• He then acknowledged that while not all stablecoins were created equal, he asserted that not all stablecoins were entirely unregulated.
• He remarked that Circle had prioritized building, designing, and guarding the prudential standards for USDC inside of and conforming with prevailing U.S. regulatory standards that apply to leading financial technology (FinTech) and payments firms.
  • He stated that this approach had helped USDC to reach over $40 billion in circulation and powered more than $1 trillion in on-chain transactions.
• He testified that the reserves backing USDC were held in the care, custody, and control of the U.S.-regulated banking system.
  • He indicated that these reserves were “strictly held” in cash and short-duration U.S. Treasuries and that Circle had consistently reported on the status of these reserves and their sufficiency to meet demands for USDC outstanding with third party attestations from a global accounting firm.
• He then discussed how Circle planned to deploy cash deposits to minority depository institutions (MDIs) and community banks across the country for the allocation of USDC reserves.
  • He commented that these efforts sought to foster a more inclusive banking and payments system.
• He mentioned how the PWG Report on Stablecoins had made recommendations for establishing national regulatory supervision of firms like Circle and expressed support for the effort.
  • He noted how Circle had announced plans to pursue a national banking charter from the OCC prior to these recommendations and stated that Circle remained actively engaged with both federal and state banking regulators.
• He discussed how the technology underlying blockchains and digital assets were constantly evolving and asserted that policymakers must seek to ensure the U.S.’s global leadership within these areas.

Mr. Samuel Bankman-Fried (FTX):

• He discussed how his company, FTX, was a global cryptocurrency exchange that processed about $15 billion per day of trading value on its platform.
• He remarked that the cryptocurrency industry had the potential to improve a lot of people’s lives through reducing fees paid to intermediaries.
  • He commented that these fees particularly impacted vulnerable populations that tended to have reduced access to the financial ecosystem.
• He asserted that cryptocurrencies could address the aforementioned issues through making it easier, cheaper, faster, and more equitable to transfer funds.
• He then discussed how FTX had a different structure than most traditional exchanges in that it provided open and free market data to all of its users.
  • He indicated that this data access was available to users accessing the exchange through an application programming interface (API), website, or mobile application.
• He also testified that FTX had adopted robust risk controls for its platform and indicated that FTX conducted sophisticated KYC diligence on all of its users.
  • He noted how FTX monitored all blockchain transfers into and out of its exchange.
• He mentioned that FTX maintained a 24/7 risk engine and stated that its 24/7 nature made it unique.
  • He noted that traditional risk engines tended to accumulate risks during nights, weekends, and holidays and explained that FTX’s risk engine did not allow for risks to accumulate.
• He remarked that FTX was already regulated and licensed by both states and the federal government.
  • He elaborated that states regulated FTX through the money services business and money transmitting regime and that the U.S. Commodity Futures Trading Commission (CFTC) regulated FTX at the national level.
• He expressed support for efforts to regulate the cryptocurrency industry and reiterated that the industry was already subject to regulation in certain areas.

Mr. Brian Brooks (Bitfury Group):

• He remarked that digital assets were important to supporting the U.S. financial sector’s competitiveness, empowering average consumers, and enabling the next iteration of the internet.
• He noted that his company, Bitfury Group, provided a suite of infrastructure products and services that support various aspects of the cryptocurrency ecosystem.
  • He explained that the cryptocurrency ecosystem was often referred to as Web 3.0 because crypto assets represent either the rewards paid to participants for maintaining a particular decentralized network or an application that operated on such a network.
• He remarked that a national policy agenda for cryptocurrency should assess whether it was sensible to keep cryptocurrency activities outside or inside of the regulated financial system.
  • He questioned how the U.S.’s current rules only permitted banks to issue stablecoins while the U.S. was failing to grant bank charters to the largest issuers of stablecoins.
  • He also questioned how the U.S. was bringing enforcement actions against certain crypto assets as unregistered securities while preventing these crypto assets from being registered and traded on national securities exchanges.
• He stated that the U.S. needed a clear policy for a decentralized Web 3.0 that would be powered by crypto assets and asserted that the U.S. should not solely regulate crypto assets as financial services.
  • He contended that the U.S.’s regulatory approach should focus on doing no harm to the emerging Web 3.0 network.
• He made several suggestions for the policy questions that policymakers ought to consider when approaching Web 3.0.
  • He suggested that policymakers consider whether a user-controlled decentralized internet would be preferable to an internet controlled by a small number of large companies.
  • He suggested that policymakers consider whether the financial services sector was any less subject to network effects than information or commerce had been in earlier iterations of the internet.
  • He suggested that policymakers consider whether big banks or open-source software were more trustworthy in terms of their ability to maintain ledgers of account and to allocate credit and capital.
  • He lastly suggested that policymakers acknowledge that there existed a difference between crypto projects that failed due to a lack of demand and crypto projects that were scams.
• He then remarked that crypto policy should take into account both new risks introduced into the financial system and the risks within the present system that could be solved through decentralization.
• He recounted his experience issuing civil monetary penalties (CMPs) against banks during his tenure at the OCC and asserted that the U.S.’s current financial system possessed ample risks and costs, as well as safety and soundness problems.
• He stated that the U.S. should consider ways that algorithms and open-source software could help to improve the existing financial system.
  • He commented that these algorithms and software could take a measure of human error, greed, negligence, fraud, and bias out of the financial system.
• He then expressed concerns that U.S. regulatory decisions were driving cryptocurrency activities offshores in ways that harmed U.S. investors, innovators, and workers.
  • He specifically highlighted how cryptocurrency ETFs were not permitted within the U.S., but permitted outside of the U.S.
  • He also noted how cryptocurrency exchanges and stablecoin issuers were unable to obtain e-money licenses within the U.S.
  • He lastly stated that there was no path for crypto-insured depositories chartered within the state of Wyoming to access U.S. Federal Reserve payment services (which other insured depositories had access to).

Mr. Charles Cascarilla (Paxos Trust Company):

• He discussed how his company, Paxos, was a regulated financial institution and blockchain infrastructure platform that helped financial institutions provide their clients with reliable and regulated access to digital assets.
  • He testified that Paxos’s customers included Bank of America, PayPal, MasterCard, Interactive Brokers, and Credit Suisse.
• He also mentioned how Paxos offered the Pax Dollar (USDP), which he described as a uniquely structured and regulated stablecoin.
  • He explained that each USDP was fully backed by one U.S. dollar and asserted that this backing meant that the USDP was not volatile.
• He stated that the USDP could be transferred nearly instantly, overnight, and on weekends and was programmable, secure, and traceable.
• He remarked that digital assets and blockchain technologies could create a more efficient, secure, and innovative financial system, as well as a more inclusive and equitable global economy.
• He stated that while bank accounts were critical for participating in the traditional financial system, he noted that 18 percent of all Americans were either unbanked or underbanked according to the U.S. Federal Reserve.
  • He added that this figure was even higher for African Americans and adults without high school degrees.
• He discussed how the current financial system was expensive and slow and noted how there were trillions of dollars in capital held up in unsettled transactions at any given time.
• He also emphasized how digital assets were very accessible and could be sent or received using a smartphone.
  • He indicated that no bank account was required to transfer digital assets.
• He further highlighted how the transfer of digital assets was instantaneous, convenient, and inexpensive.
• He then contended that blockchain technology could reduce bias in the financial system because its mathematical basis made it agnostic to a user’s race, gender, nationality, and income.
• He also discussed how a blockchain’s permanent and public recording of transactions reduced errors, fraud, and systemic risk.
  • He commented that the ability of blockchains to settle transactions instantaneously reduced potential counterparty risks and eliminated the need for costly central clearinghouses.
• He testified that Paxos had recently completed a successful pilot program to offer same day security settlement.
• He then called regulation “essential” for increasing public trust in digital assets and ensuring their adoption.
  • He mentioned how Paxos had sought out oversight by a primary prudential regulator, even though it did not require such oversight.
• He testified that Paxos adhered to the same AML and KYC requirements as banks and was subject to regular examinations of their operations, procedures, and capital levels.
  • He also noted how Paxos’s financial products were regulated.
• He remarked that the uncertainty surrounding digital asset regulation was hampering the industry’s development and asserted that the solution to this problem was not to “shoehorn” digital assets into pre-existing regulatory structures.
• He contended that a primary prudential state or federal regulator should oversee digital asset companies and their products.
• He also stated that independent auditors should regularly attest that the assets backing a stablecoin were regularly being held in reserve.
  • He commented that these reserves ought to be held in bankruptcy remote accounts.
• He warned that the U.S. government’s stifling of the adoption of digital assets would drive issuers, talent, and capital to more welcoming foreign jurisdictions.
• He remarked that the absence of regulated U.S. dollar-backed stablecoins or a CBDC would make it less viable for other countries and companies to continue using the U.S. dollar as the global reserve security.

Ms. Denelle Dixon (Stellar Development Foundation):

• She discussed how the Stellar Development Foundation’s network, Stellar, was open, permissionless, and decentralized and stated that the network was optimized for payments.
  • She testified that there was no single entity (including her foundation) that controlled the code base of the network or its growth.
• She stated that Stellar was designed for asset issuance, which made it possible to create, send, and trade digital assets backed by nearly any form of value.
  • She also noted how Stellar was designed with compliance tools built-in in order to help digital asset issuers meet their own compliance obligations.
• She mentioned how numerous businesses and users had built use cases around Steller-based stablecoins over the past several years.
  • She commented that these use cases were not confined to lending, trading, and borrowing.
• She discussed how MoneyGram International was using the Stellar network to develop a solution that would enable the seamless conversion between cash and digital assets.
  • She indicated that this solution was currently in the pilot phase within the U.S. and was expected to be widely available by 2022.
• She also highlighted how Leaf Global Fintech had built a solution using the Stellar network for refugees and cross-border goods traders who were vulnerable to theft.
  • She asserted that this functionality was only possible as a result of Stellar’s ability to issue stablecoins and exchange value with low transaction fees and high speeds.
• She further mentioned how Tala was currently working to use Stellar’s assets and stablecoins to help their customers with accessing credit through allowing them to borrow, spend, save, invest, send, and receive money.
• She testified that a recent report from the Group of Twenty (G20) and the International Finance Corporation (IFC) had identified five Stellar ecosystem companies for having innovative solutions in digital finance that supported micro, small, and medium enterprises (MSMEs).
• She remarked that stablecoins were a core technological component for the aforementioned use cases and called stablecoins essential for supporting financial inclusion.
• She then criticized the PWG Report on Stablecoins for seeking to limit the issuance of stablecoins to insured depository institutions.
  • She stated that this proposal was not narrowly tailored to the actual risk of stablecoin arrangements because most stablecoins were fully reserved.
• She advocated for a regulatory approach that would focus on stablecoin reserves.
  • She called for requiring stablecoin arrangements to be fully reserved by appropriate assets.
  • She called for requiring reserves to be held at insured depository institutions.
  • She called for creating clear standards for regular audit and public disclosure of stablecoin reserves and key contractual terms regarding redemption.
  • She called for making explicit that payment stablecoins did not constitute securities.
• She stated that the aforementioned regulatory approach should permit oversight through state banking supervision or a narrowly tailored OCC charter.
• She lastly discussed how regulators around the world were hampering innovation within the digital assets space through premature regulation and legislation and urged U.S. policymakers to avoid these mistakes.

Ms. Alesia Jeanne Haas (Coinbase Inc. and Coinbase Global Inc.):

• She stated that her company, Coinbase, securely stored 12 percent of the world’s cryptocurrency on its platform and mentioned how Coinbase enabled its customers to learn about, sell, send, receive, and buy more than 100 different types of digital assets on its platform.
  • She also noted how Coinbase enabled customers to spend, borrow, earn, stake, and transact on select digital assets.
• She testified that nearly 50 percent of Coinbase’s transacting customers were doing something other than buying and selling cryptocurrencies and commented that this dynamic suggested that cryptocurrencies had progressed from its initial investment phase to a utility phase.
• She remarked that Coinbase had sought to become the most secure, trusted, and legally compliant bridge to the crypto economy.
  • She mentioned how Coinbase was federally registered as a money services business with the U.S. Financial Crimes Enforcement Network (FinCEN), licensed as a money transmitter in 42 states, held a BitLicense and trust charter from the New York Department of Financial Services, and was authorized to engage in consumer lending in 15 states.
• She testified that Coinbase maintained a “robust” AML and Bank Secrecy Act (BSA) program and indicated that Coinbase was one of only two digital asset members of the U.S. Department of the Treasury’s BSA Advisory Group.
• She discussed how Coinbase was subject to federal regulatory oversight from the U.S. Department of the Treasury, the CFTC, the SEC, the U.S. Federal Trade Commission (FTC), and the U.S. Consumer Financial Protection Bureau (CFPB).
• She then remarked that the U.S. was experiencing “dramatic advancements” in the adoption of crypto participation and highlighted how there were more than 200 million crypto holders globally.
  • She indicated that around 16 percent of Americans had either invested in, traded, or used cryptocurrencies.
• She noted that the total crypto market capitalization at the end of the third quarter of 2021 was over $2 trillion.
• She then remarked that novel technologies, including non-fungible tokens (NFTs) and decentralized application platforms, would support the transition to Web 3.0.
• She contended that “sound” regulation was central to fueling crypto innovation and adoption and mentioned how Coinbase had developed a Digital Asset Policy Proposal, which proposes a four-pillar solution.
• She indicated that the first pillar involved having the government recognize digital assets under a new comprehensive framework that acknowledged the unique technological innovations underpinning these assets.
• She indicated that the second pillar would assign the responsibility for this new framework to a single federal regulator.
  • She stated that this regulator would be charged with establishing a registration process for intermediaries.
• She indicated that the third pillar would establish three goals to ensure that holders of digital assets were empowered and protected.
  • She noted that the first goal would be enhanced transparency, which would be accomplished through robust and appropriate disclosure requirements.
  • She noted that the second goal would be protection from fraud and market manipulation.
  • She noted that the third goal would be market efficiency and resiliency.
• She indicated that the fourth pillar would be ensuring that regulatory solutions promoted interoperability and fair competition.

Congressional Question Period:

Full Committee Chairman Maxine Waters (D-CA):

• Chairman Waters expressed concerns over Paxos’s partnership with Meta (formerly known as Facebook). She noted how Meta had previously sought to enter the cryptocurrency market and mentioned how Meta was partnering with Paxos to pilot a digital wallet called Novi. She discussed how this pilot project would allow for a limited number of people in the U.S. and Guatemala to send and receive USDP. She mentioned how the recent PWG Report on Stablecoins had recommended legislation that would require stablecoin users to comply with activity restrictions that limit affiliation with commercial entities. She asked Mr. Cascarilla to indicate whether there were any barriers that would prevent Meta from allowing its billions of active monthly users to make payments and save funds with the USDP stablecoin or other stablecoins through the Novi digital wallet. She also asked Mr. Cascarilla to explain why this widespread use of the Novi digital wallet would not undermine the U.S. dollar’s status as the world’s reserve currency.
  • Mr. Cascarilla remarked that Novi was merely a customer of Paxos and that Novi likely chose Paxos because it had the most regulated stablecoin product available. He also noted how Novi was a regulated money services business that was permitted to operate in almost all of the states within the U.S. He testified that Paxos had conducted “extensive” due diligence on Novi’s controls and their regulatory oversight. He expressed Paxos’s confidence that Novi was adhering to these controls and regulatory oversight. He stated that the services that Novi received from Paxos were not different than the services that Novi received from any other financial institution that they maintained a relationship with.
• Chairman Waters asked Mr. Cascarilla to indicate whether there was anything preventing Meta from allowing its billions of users to make payments and save funds using the USDP stablecoin or other stablecoins through the Novi wallet. She also asked Mr. Cascarilla to indicate how long the pilot project would last.
  • Mr. Cascarilla testified that the pilot project was limited and controlled and had received regulatory review. He stated that Novi would be best positioned to discuss their plans to expand the pilot project.

Full Committee Ranking Member Patrick McHenry (R-NC):

• Ranking Member McHenry discussed how the internet had evolved over time from a read-only format to a more interactive format and commented that the internet had become more centralized during this evolution. He asked Mr. Brooks to define the characteristics that had defined Web 1.0 and Web 2.0.
  • Mr. Brooks remarked that Web 1.0 was largely based on the ability for users to look into a “curated walled garden.” He noted that Web 1.0 content was not interactive. He then remarked that the innovation of Web 2.0 was that it provided users with the ability to both read and write content. He stated that this evolution had resulted in centralization because a very small number of companies (including Meta and Google) were monetizing this internet activity. He remarked that Web 3.0 would differ from previous versions of the internet because it would permit users to own the actual network. He elaborated that users could be rewarded for providing ledger maintenance services and computing power to networks, which was currently being provided by large companies.
• Ranking Member McHenry asked Mr. Brooks to explain how digital assets would fit into the concept of Web 3.0.
  • Mr. Brooks noted how there existed application layer tokens and protocol layer tokens. He discussed how a cryptocurrency token represented an ownership stake in a crypto network while applications could be built on top of a crypto network. He stated that people would invest in a crypto network’s tokens based on the perceived viability and value of the network. He remarked that the investors in a crypto network would decide how the network would operate. He commented that this dynamic differed from the traditional internet, which was largely governed by a small number of companies with outsized influence.
• Ranking Member McHenry stated that Congress ought to be sensitive to the impact of their actions on the development of Web 3.0.
  • Mr. Brooks remarked that an owner-controlled network (which Web 3.0 would enable) would address many of the problems currently associated with large technology companies.
• Ranking Member McHenry stated that Web 3.0 would enable the development of a whole new suite of technology. He commented that this development would occur regardless of whether the U.S. embraced it. He concluded that it was very important for U.S. policymakers to understand Web 3.0.

Rep. Carolyn Maloney (D-NY):

• Rep. Maloney recounted how the New York Attorney General had released a 2018 report on cryptocurrency trading platforms that detailed the potential for conflicts of interest, the lack of serious efforts to stop abuses associated with trading activities, and the limited protections for customer funds. She mentioned how the report had asserted that customers were “highly exposed” in the event of a hack or unauthorized withdrawal. She noted how there did not exist a form of deposit insurance available for virtual currency losses. She highlighted how Coinbase had been the subject of a hack earlier in 2021 that impacted 6,000 of their customers. She asked Ms. Haas to address what would happen to a Coinbase customer in the event of a hack of the Coinbase network or a Coinbase wallet or in the event of unauthorized withdrawal from a Coinbase account. She further asked Ms. Haas to discuss the current protections that Coinbase provided to its customers.
  • Ms. Haas testified that Coinbase secured 12 percent of the world’s cryptocurrency and stated that the company maintained “extensive” controls to protect the assets of their customers. She noted how Coinbase bifurcated its assets into two different storage systems: hot wallets and cold storage. She indicated that less than two percent of Coinbase’s assets were held in hot wallets, which could be subject to a cyberattack. She then asserted that the hack that Rep. Maloney had referenced was not a hack of the Coinbase systems. She testified that Coinbase did reimburse its customers that lost funds stemming from that event. She stated that Coinbase did protect its customers for any hack of the Coinbase hot wallet, maintained a third-party insurance policy, and used its own balance sheet to protect their customers in the event of losses on their platform. She then discussed how press reports typically highlighted Coinbase account takeovers, which involved a customer losing their account credentials due to a hack of their personal device. She remarked that these types of account takeovers were difficult to address. She expressed Coinbase’s interest in working to address this challenge.
• Rep. Maloney asked Ms. Haas to clarify whether other cryptocurrency exchanges and wallets provided the same types of protections to their customers as Coinbase provided to its customers.
  • Ms. Haas indicated that her previous response only addressed the protections that Coinbase provided to its customers.
• Rep. Maloney asked Ms. Haas to indicate whether cryptocurrency exchange and wallet customers could benefit from a set of standardized minimum protections in the event that the customers lose their funds through no fault of their own.
  • Ms. Haas commented that there was an opportunity for a set of standardized minimum protections for cryptocurrency exchange and wallet customers.
• Rep. Maloney then discussed how the problem of ransomware was becoming worse and highlighted how criminals frequently sought payment for ransomware attacks through cryptocurrencies. She remarked that AML requirements were key to combatting fraud, sanctions evasion, and the financing of terrorism. She noted that while Circle and Coinbase had highlighted the AML compliance policies of their respective companies, she stated that many cryptocurrency companies had either rejected or avoided AML compliance standards. She asked Mr. Allaire and Ms. Haas to discuss why their companies had adopted AML compliance policies. She also asked Mr. Allaire and Ms. Haas to provide recommendations for Congress for bolstering AML efforts to ensure broad AML requirement compliance within the cryptocurrency space.
• Note: Rep. Maloney’s question period time expired here.

Full Committee Vice Ranking Member Ann Wagner (R-MO):

• Vice Ranking Member Wagner mentioned how SEC Chairman Gary Gensler had repeatedly asserted that the test for determining whether a crypto asset constituted a security was clear. She noted however that SEC Commissioners Hester Peirce and Elad Roisman had contended that there existed a lack of clarity for market participants regarding how securities laws applied to digital assets and their trading. She expressed agreement with Commissioners Peirce and Roisman and highlighted how the SEC received numerous requests for no action letters. She asked Ms. Haas to indicate whether additional SEC guidance for investors and market participants regarding whether a digital asset constituted a security was needed.
  • Ms. Haas remarked that the current laws were clear as to what constituted a security. She stated however that existing laws, regulations, and legal precedents were clear that blockchain tokens were not securities. She asserted that blockchain-based digital assets were either a new form of digital property or a new way to record ownership. She called for regulatory clarity regarding these assets and commented that agreed upon definitions would benefit all parties within the digital asset ecosystem.
• Vice Ranking Member Wagner expressed agreement with Ms. Haas’s comments. She then remarked that digital assets could play a role in promoting financial inclusion. She asked Mr. Dixon and Mr. Allaire to discuss how digital assets and blockchain technology facilitate financial inclusion and benefit unbanked people both domestically and globally.
  • Ms. Dixon remarked that blockchain technology enabled money and value to flow seamlessly and quickly, which was especially useful in cross-border money transfers. She stated that blockchain technology would eliminate financial intermediaries (which delayed money transfers), reduce marketplace friction, and provide easy market access to users without bank accounts.
  • Mr. Allaire remarked that financial inclusion was a critical design goal for many digital asset companies. He testified that his company’s stablecoin enabled users to transfer U.S. dollars in a fraction of a second with a transaction cost that could be as low as one-twentieth of 1 cent and with the throughput of the Visa network. He stated that blockchain technology supported an open internet in which anyone (both domestically and globally) can access the financial system.
• Vice Ranking Member Wagner asked Mr. Brooks to address how the Committee could avoid hampering innovation within the digital asset space and increase financial inclusion.
  • Mr. Brooks called for parity in the treatment of traditional financial assets and internet-based financial assets. He stated that stablecoins that functioned as payment instruments ought to be treated the same as traveler’s checks and prepaid cards.

Rep. Nydia Velázquez (D-NY):

• Rep. Velázquez asked Mr. Allaire and Mr. Cascarilla to confirm that the stablecoins of their respective companies were almost entirely backed by cash reserves and U.S. Treasuries.
  • Mr. Allaire testified that 100 percent of the reserves that backed USDC were held in cash and short-duration U.S. Treasuries.
  • Mr. Cascarilla testified that 100 percent of the reserves that backed the USDP were held in cash and short-duration U.S. Treasuries.
• Rep. Velázquez asked Mr. Allaire and Mr. Cascarilla to explain why their respective companies had previously offered stablecoins that were not backed by fiat currencies and to address why their respective companies had moved away from these offerings.
  • Mr. Allaire explained how USDC was governed by the money transmission statutes throughout the U.S. and stated that the USDC had always complied with the various statutory requirements. He indicated that Circle had engaged in monthly reporting since it launched USDC in 2018.
  • Mr. Cascarilla remarked that Paxos had always only backed the USDP with either short-duration U.S. Treasuries, cash, or cash equivalents. He noted how the USDP was overseen by the New York Department of Financial Services, which sets the supervisory agreement with which his company can offer its products. He stated that his company was thus required to back its stablecoins with the aforementioned assets.
• Rep. Velázquez asked Mr. Allaire and Mr. Cascarilla to provide assurances that the products of their respective companies would continue to be fully backed by the U.S. dollar.
  • Mr. Allaire expressed Circle’s commitment to a 1:1 backing of its stablecoins. He also expressed Circle’s willingness to work with U.S. policymakers on determining appropriate reserve standards for stablecoins.
  • Mr. Cascarilla remarked that Paxos’s stablecoins would always be fully backed by U.S. dollars that were cash and cash equivalents.
• Rep. Velázquez recounted how a 2021 investigation from the New York Attorney General’s Office had found that the stablecoin Tether had deceived clients and markets for periods of time through failing to hold reserves to back their stablecoins in circulation. She asked Mr. Allaire and Mr. Cascarilla to indicate whether they would be supportive of requiring stablecoins to report their reserves to federal regulators and submit to regular examinations.
  • Mr. Allaire expressed support for federal supervision of stablecoins and reporting requirements for stablecoins. He stated that such supervision and reporting requirements were key to making stablecoins part of the mainstream financial infrastructure.
  • Mr. Cascarilla testified that Paxos was already a regulated trust company and indicated that Paxos already possessed a primary regulator that oversaw their issuance. He remarked that federal supervision of stablecoins was sensible, especially for firms that lacked a state regulator that oversaw their activities.
• Rep. Velázquez then discussed how digital asset trading platforms played an important role in the current functioning of stablecoins. She asked Ms. Haas and Mr. Bankman-Fried to describe the methods that their respective trading platforms used to determine the price for exchanging digital currencies for fiat currency.
  • Ms. Haas stated that Coinbase was an agency only platform and testified that Coinbase did not engage in proprietary trading on its platform. She noted that all prices established on the Coinbase platform were attributable to market makers. She explained that Coinbase customers could offer bids and asks on the platform’s offered currencies and stated that the market price was therefore determined by market participants.
• Rep. Velázquez asked Ms. Haas to indicate the stage of the transaction process that Coinbase provided an insurance of or a lock in of an execution price.
  • Ms. Haas noted that Coinbase maintained both a consumer product and a pro product that was more targeted towards institutions and advanced traders. She stated that consumers were free to choose either product. She testified that the price displayed for consumers was the price that Coinbase guaranteed for customers.

Rep. Frank Lucas (R-OK):

• Rep. Lucas discussed how the future of blockchain technology might include new areas of tokenization, such as property, titles, and people’s time. He asked Ms. Haas to discuss the trends that she was currently observing in blockchain technology and to address how new asset classes could arise through blockchain technology.
  • Ms. Haas remarked that any item of value could be tokenized. She noted how Web 3.0 involved three layers: the protocol layer, the infrastructure layer, and the application layer. She explained that Bitcoin, Ethereum, Stellar, and Solana constituted protocol layers and that applications could be built on top of these protocol layers. She noted how the trading of NFTs was already popular within gaming applications. She remarked that it remained too early to predict the types of applications that would be built upon nascent protocol layers.
• Rep. Lucas then asked Mr. Brooks to identify the fundamental differences between banks and stablecoin issuers that are important for Congress and regulators to understand when considering regulatory proposals.
  • Mr. Brooks stated that one key difference between banks and stablecoin issuers was that banks have historically been involved in multiple different kinds of financial intermediation and risk-taking functions. He noted how banks typically engaged in deposit taking, lending, and payments. He stated that the core feature of stablecoins was that they were a new payments technology. He discussed how banks had historically innovated in payments through check clearing, traveler’s checks, and prepaid cards. He remarked that stablecoins were simply a more modern and efficient means of supporting payments. He then stated that stablecoin issuers did not have all of the same risks as banks had. He elaborated that stablecoin issuers did not typically engage in lending activities. He remarked that this dynamic had led the OCC to consider providing bank charters to stablecoin issuers because these issuers were engaged in a core banking function.
  • Ms. Dixon remarked that there were several innovative blockchain technology applications being developed, including tokenized real estate assets and fractionalized interest in U.S. stocks. She then discussed how blockchain technology could expand access to banking services for unbanked individuals.
• Rep. Lucas then asked Mr. Bankman-Fried to respond the criticism that stablecoins were ripe for illicit financial activity and to compare the risks posed by stablecoins to the risks posed by other financial payment rails.
  • Mr. Bankman-Fried testified that FTX maintained advanced surveillance techniques to prevent financial crimes for all digital assets (including stablecoins). He stated that FTX adhered to KYC requirements and conducted blockchain surveillance on all users, deposits, and withdrawals on their platform. He further remarked that all “legitimate” stablecoin issuers conducted sophisticated KYC policies on all issuances and redemptions of those stablecoins. He stated that physical cash transactions did not typically involve KYC or AML surveillance. He concluded that the digital asset industry had set a strong standard for addressing illicit financial activity.

Rep. Al Green (D-TX):

• Rep. Green noted how the digital asset market had grown significantly over the previous year and commented that the market was rife with “extreme” volatility. He expressed concerns that the digital asset market had very easy credit via margin investing, a lack of transparency, and a lack of adequate financial disclosure. He asked the witnesses to indicate when policymakers ought to be concerned over the prospect of a bubble within the cryptocurrency market.
  • Mr. Brooks remarked that much of the current price volatility surrounding cryptocurrencies was attributable to the early stage of the market and the thinly traded nature of the asset. He stated that U.S. equity and debt markets tended to be more stable because there was more price discovery in these markets. He elaborated that the U.S. had regulated equity mutual funds, derivatives products, and futures products and commented that these products provided the market with indicators of what was occurring within the financial system. He remarked that similar tools did not exist within the cryptocurrency space yet, which meant that the cryptocurrency market could be very sensitive to a single actor’s actions. He further noted how the vast majority of Bitcoin holders have never sold a Bitcoin and stated that giant fluctuations within the cryptocurrency market were generally due to the activities of a small number of parties. He contended that the U.S. cryptocurrency market needed more liquidity and more price discovery in order to reduce market volatility.
  • Ms. Dixon remarked that the digital assets industry needed to focus more on consumer-oriented products that could support consumer literacy regarding the technology.
  • Mr. Bankman-Fried remarked that one innovative property of cryptocurrency markets was 24/7 risk monitoring engines. He noted how traditional assets had overnight risk, weekend risk, and holiday risk and commented that these risks were not present within the cryptocurrency markets. He stated that 24/7 risk monitoring engines enabled risk monitoring and the de-risking of positions in real time to help mitigate volatility. He testified that his company had been operating for several years with billions of dollars of open interest and had never experienced customer losses or claw backs (even during periods of volatility). He indicated that his company stored collateral from users to backstop positions, which he commented was not always done in the traditional financial system. He then discussed how the 2008 Financial Crisis was precipitated by several bilateral, bespoke, and non-reported transactions occurring between financial counterparties, which were subsequently repackaged and re-leveraged repeatedly. He stated that these repeated opaque transactions resulted in no one knowing exactly how much risk was present in the financial system until a crisis had occurred. He remarked that modern cryptocurrency exchanges by contrast provided complete transparency regarding the full open interest and the positions being held and applied robust and consistent risk frameworks. He expressed his company’s excitement to work with the CFTC to bring these benefits to U.S. customers.

Rep. Pete Sessions (R-TX):

• Rep. Sessions first expressed support for the digital assets industry. He then asked the witnesses to discuss how their respective companies and organizations worked to address fraud.
  • Ms. Haas testified that Coinbase adhered to KYC requirements as part of its customer onboarding process. She also discussed how Coinbase conducted a “robust” assessment of each of the assets that it offered on its platform in order to determine whether the assets were securities or scams, as well as whether digital assets were actually secure. She indicated that Coinbase did not list securities on its platform. She then mentioned how Coinbase maintained traditional exchange rules to protect against spoofing, wash trading, and other forms of market manipulation. She testified that Coinbase used third-party tools and employees with previous work experience at regulatory agencies and traditional financial companies to engage in 24/7 compliance monitoring. She then discussed how Coinbase monitored blockchains to identify illicit activity and file suspicious activity reports (SARs) when necessary. She concluded that the transparent nature of blockchains enabled Coinbase to actively pursue fraud.
• Rep. Sessions remarked that the U.S. government needed to support the digital assets industry in its effort to combat fraud.

Rep. Gregory Meeks (D-NY):

• Rep. Meeks discussed how communities of color often relied upon MDIs and community development financial institutions (CDFIs) for their banking needs. He mentioned how he had long supported efforts to enable MDIs and CDFIs to leverage new technologies so that they could better serve their communities. He noted how Circle had created an initiative to deploy and share USDC reserves into MDIs and CDFIs. He asked Mr. Allaire to provide the Committee with a status update regarding the initiative’s implementation and discuss the systems that Circle was deploying to ensure the initiative’s long-term success.
  • Mr. Allaire mentioned how Circle had recently launched its Circle Impact initiative, which included several actions meant to promote financial inclusion. He noted how this initiative would take the deposits backing the USDC and place them with MDIs and CDFIs. He highlighted how Circle was not in the lending business, which provided the company with an opportunity to work with banking institutions that could benefit from strengthened balance sheets. He indicated that the Circle Impact initiative had just launched and stated that Circle expected the first phase of this initiative to be in place by the end of the first quarter of 2022. He also remarked that Circle was looking to coordinate with federal banking regulators that had their own initiatives to support MDIs and CDFIs. He lastly remarked that digital currency technology’s frictionless nature and ability to support money transfers could bring “significant” benefits to underserved communities.
• Rep. Meeks then asked Ms. Haas to discuss the current safeguards that were addressing bad actors that sought to use cryptocurrencies to engage in illicit activity and to hide cash. He also asked Ms. Haas to provide her assessment of the U.S.’s global coordination to combat illicit cryptocurrency activity and to provide recommendations for U.S. policymakers to improve such global coordination.
  • Ms. Haas mentioned how Coinbase maintained KYC requirements and had a robust AML program. She stated that other U.S.-regulated cryptocurrency exchanges maintained similar controls. She remarked that regulation should be focused on addressing the marketplaces that did not maintain the aforementioned protocols.

Rep. Blaine Luetkemeyer (R-MO):

• Rep. Luetkemeyer noted how the average daily turnover value of the U.S. dollar constituted 88 percent of foreign exchange market transactions globally in 2019. He stated that the U.S. dollar’s dominance in the global marketplace was a key reason for the U.S. dollar remaining the world’s reserve currency. He asked Mr. Brooks to discuss how the U.S. could ensure that the U.S. dollar remained the world’s reserve currency as digital assets became more common within the global marketplace.
  • Mr. Brooks remarked that the secular reduction in U.S. dollar holdings as a percentage of global central bank holdings was “alarming” and commented that this trend had been occurring for over a decade. He stated that this trend indicated that the U.S. dollar could no longer take its primacy for granted and asserted that the U.S. dollar would need to compete globally on utility and features. He remarked that internet-enabled U.S. dollars would enable the U.S. dollar to compete on features. He then stated that U.S. dollar inflation could negatively impact the U.S. dollar’s attractiveness relative to other currencies. He asserted that the crypto economy would push the U.S. Federal Reserve to address U.S. dollar inflation, which would be beneficial.
• Rep. Luetkemeyer asked Mr. Allaire to elaborate on his testimony’s call to promote the U.S. dollar as the world’s primary reserve currency.
  • Mr. Allaire discussed how blockchains were currently proliferating globally and predicted that the ability to access and interact with these blockchain networks would reach billions of users over the next two to three years. He contended that stablecoins could play a key role in enabling the U.S. dollar to be the main currency of the internet. He further asserted that the U.S. should view making the U.S. dollar the reserve currency of the internet as a national security priority. He stated that the U.S. could achieve this status for the U.S. dollar through partnering closely with private companies and using open internet technologies.
• Rep. Luetkemeyer asked Mr. Allaire to confirm that Circle’s USDC was fully backed by U.S. Treasuries.
  • Mr. Allaire confirmed that Circle’s USDC was fully backed by U.S. Treasuries. He contended that the assets backing U.S. dollar-based digital currencies were far safer than the U.S. dollars in bank accounts because U.S. dollars in bank accounts were fractionally reserved.
• Rep. Luetkemeyer then asked Mr. Brooks to indicate his level of concern regarding the prospect that a party with outsized power could control the platform on which digital U.S. dollars were traded.
  • Mr. Brooks remarked that the point of cryptocurrencies was to have true decentralization and contended that successful projects would have such decentralization. He attributed Bitcoin’s success to its decentralized nature.

Rep. Ed Perlmutter (D-CO):

• Rep. Perlmutter discussed how cryptocurrency market exchanges were regulated through a “patchwork” of different state and federal agencies. He noted how some cryptocurrency market exchanges registered as money services businesses with FinCEN at the federal level and also received money transmitter licenses. He asked Mr. Bankman-Fried to answer how FTX was registered from a regulatory perspective.
  • Mr. Bankman-Fried testified that FTX had obtained money services business and money transmitter licenses in the U.S. He also testified that FTX was licensed by the CFTC. He indicated that FTX had a derivatives clearing organization (DCO) license, a designated contract market (DCM) license, and other licenses through the CFTC. He expressed FTX’s willingness to continue working with the CFTC and to work with other regulators on potential products within the U.S.
• Rep. Perlmutter highlighted how FTX appeared to be heavily involved in the derivatives market. He asked Mr. Bankman-Fried to indicate whether FTX was registered with the SEC.
  • Mr. Bankman-Fried noted how the main U.S. regulator of derivatives was the CFTC and indicated that FTX US Derivatives was registered with the CFTC. He testified that FTX had commenced discussions with the SEC. He noted that while FTX currently did not list securities on its platform, he expressed FTX’s interest in listing digital asset securities on its platform in the future under the guidance of the SEC. He also expressed support for a unified joint regime involving the CFTC and the SEC to create harmonious market regulations between spot markets, derivatives contracts, and other things.
• Rep. Perlmutter then discussed how blockchain technology was considered to be very secure. He asked Mr. Bankman-Fried to address how quantum computing could pose threats or provide benefits to blockchain technology.
  • Mr. Bankman-Fried noted that some cryptographic algorithms could be theoretically vulnerable to quantum computers. He commented however that such vulnerability would be entirely dependent on the specific quantum computing technology that becomes available. He stated that blockchain security algorithms ought to be resistant to quantum computing threats. He remarked however that quantum computing had the potential to create new cryptographic algorithms that were faster, more secure, and more efficient.

Rep. Andy Barr (R-KY):

• Rep. Barr asked Mr. Brooks to indicate whether Congress needed to introduce follow-up legislation to provide more definitional clarity with respect to digital assets. He also asked Mr. Brooks to provide any suggestions he might have regarding any such definitional clarity.
  • Mr. Brooks remarked that the current test for assessing whether a given digital asset constituted security was clear in the sense that it was known. He stated however that the fact that the test was a four-factor balancing test made it difficult for market participants to confidently apply it. He expressed frustration with how the SEC was unable to provide guidance as to whether a proposed new crypto project would constitute a security. He remarked that either legislation or regulation was needed to specify what exactly constituted a security.
• Rep. Barr noted how SEC Chairman Gary Gensler had previously asserted that the test for determining whether a crypto asset constituted a security was clear. He asked Mr. Brooks to explain the current process for determining whether a digital asset constituted a security.
  • Mr. Brooks remarked that the best test for determining whether a digital asset constituted a security was the test developed by the Crypto Rating Council. He compared the Crypto Rating Council’s test to the Motion Picture Association’s rating system for movies and stated that the test provided broad indicators of a digital asset’s risk level. He explained that the Crypto Rating Council test involved an objective quantitatively based process that asked several dozen questions about a digital asset across each of the dimensions of the Howey test. He stated that the Crypto Rating Council test provided a number score, which was indicative of a digital asset’s risk.
• Rep. Barr then expressed concerns that the federal government and federal regulators could stifle innovation within the digital assets space. He asked Mr. Brooks to provide an example of a potential overreach that could stifle innovation within the digital assets space.
  • Mr. Brooks criticized federal regulators for not providing licenses to stablecoin issuers when traveler’s checks were already permitted within the U.S. banking system.
• Rep. Barr then asked Mr. Allaire to describe the differences between stablecoins and CBDCs. He asked Mr. Allaire to identify advantages that stablecoins could provide that a CBDC could not provide.
  • Mr. Allaire discussed how stablecoins were currently operational, growing, and built on an open internet technology model. He stated that CBDCs by contrast were currently not operational and would likely be tightly administered and run by governments. He remarked that the private sector had driven most global payment system innovations and commented that stablecoins were a continuation of this trend.
• Rep. Barr interjected to ask Mr. Allaire to indicate whether stablecoins (including USDC) could address concerns related to Chinese currency advancements, the ability of the U.S. to enforce sanctions, and the U.S. dollar’s status as the world’s reserve currency.
  • Mr. Allaire answered affirmatively. He remarked that the U.S. dollar was currently winning within the global stablecoin marketplace and stated that the global growth of stablecoins had the potential to benefit the U.S. dollar, U.S. businesses, and U.S. households. He contended that it was a strategic national security and economic priority for the U.S. to develop global stablecoin infrastructure.

Rep. Juan Vargas (D-CA):

• Rep. Vargas asserted that the primary factor currently driving cryptocurrency investments was a belief among investors that cryptocurrencies would appreciate very rapidly. He stated that most cryptocurrency investors were unaware of the features underlying cryptocurrencies. He commented that this same dynamic had been present in the runup to the 2008 Financial Crisis and emphasized that the market crisis ultimately harmed investors. He expressed concerns that the massive size of the digital asset and cryptocurrency market could pose systemic risks to the financial system. He specifically raised concerns that cryptocurrencies could challenge the U.S. dollar’s status as the world’s reserve currency. He asked the witnesses to opine on this concern.
  • Mr. Allaire remarked that many investors in traditional equity markets often made investments in technology companies that they did not fully understand. He commented that the digital assets space had a very similar dynamic. He asserted that digital asset industry participants should ensure that they were providing investors with proper disclosures and supporting financial literacy around their products. He then remarked that the overwhelming majority of digital assets were commodities with utility that were used to power some type of technology, network, or protocol. He commented that this characteristic made these digital assets different from fiat currencies. He predicted that the aforementioned digital assets were unlikely to ever rival the U.S. dollar. He remarked that stablecoins and U.S. dollar digital currencies could lead to the U.S. dollar being used even more globally.
• Rep. Vargas interjected to note that there already existed a digital U.S. dollar. He stated that a key aspect of the digital U.S. dollar was that it was a fiat currency that was subject to the U.S. Federal Reserve’s control. He raised concerns over how illicit actors were making use of cryptocurrencies that could not be controlled. He expressed interest in making the digital U.S. dollar the most widely used digital currency. He then yielded back the remainder of his time.

Rep. Roger Williams (R-TX):

• Rep. Williams asked Mr. Brooks to discuss the negative consequences that would arise if the U.S. government were to take a heavy-handed approach to regulating digital assets.
  • Mr. Brooks remarked that there were two approaches that policymakers could take to reduce the potential downsides of digital assets technology. He indicated that the first approach would be to prevent people from accessing the technology. He indicated that the second approach would be to make the technology safer. He discussed how the U.S. had previously made equity investments safer through creating mutual funds and sector funds. He criticized how the U.S. currently did not permit mutual funds for cryptocurrencies and noted how such cryptocurrency mutual funds currently existed in Canada, Germany, Singapore, and the United Arab Emirates (UAE). He remarked that the U.S. ought to make digital assets technology safer through mutual funds and other similar instruments.
• Rep. Williams then mentioned how the cryptocurrency industry was often described as being entirely unregulated. He called this description false and noted how the SEC, the CFTC, and states were regulating the cryptocurrency industry. He asked Mr. Bankman-Fried to discuss the different layers of regulation that FTX must abide by as an exchange and in order to uphold the deposits of customers in their digital wallets.
  • Mr. Bankman-Fried first noted that FTX operated in 190 regulatory jurisdictions outside of the U.S. He then discussed how states granted money transmitter licenses and indicated that FTX was regulated under these state licenses. He also mentioned how the CFTC regulated margin and derivatives-related transactions and indicated that this system involved CFTC licenses. He further noted how the SEC would regulate any digital assets that were considered to be securities. He lastly mentioned how there had been discussions surrounding additional regulatory regimes for stablecoins and other digital assets.

Rep. Sean Casten (D-IL):

• Rep. Casten asked Mr. Allaire to indicate whether he supported the recommendations of the PWG Report on Stablecoins.
  • Mr. Allaire indicated that he did not support all of the recommendations of the PWG Report on Stablecoins. He mentioned how the Report recommended that an insured depository institution ought to be in place around a large-scale U.S. dollar stablecoin issuer. He noted that an FDIC-insured bank required FDIC insurance because the bank was taking risks with deposits.
• Rep. Casten interjected to ask Mr. Allaire to indicate whether he supported efforts to ensure that U.S. dollar-backed stablecoins had the same risk and liquidity features of U.S. dollars.
  • Mr. Allaire answered affirmatively and expressed support for requirements that U.S. dollar-backed stablecoins have full reserves, disclosures, transparency, and liquidity. He elaborated that the U.S. ought to clarify whether fully reserved U.S. dollar-backed stablecoins should be FDIC-insured or subject to statutory reserve requirements.
• Rep. Casten commented that a stablecoin holder might falsely perceive that they were holding a currency when they were in fact holding something subject to numerous exogenous risks (which would make it more of a commodity). He asked Mr. Allaire to answer whether the U.S. ought to regulate stablecoins as commodities until proper stablecoin regulatory protections were in place.
  • Mr. Allaire answered no. He remarked that Circle’s USDC operated under the same stored value, electronic money, and electronic money transmission statutes that govern Square, Stripe, and PayPal. He stated that Circle’s USDC therefore had consumer protections and was subject to reserve requirements. He noted that these protections and requirements included 1:1 redeemability, AML requirements, surety bonds, and the segregation of client funds. He stated that policymakers ought to consider a new framework as stablecoins began to operate at global scales.
• Rep. Casten then discussed how countries that issued CBDCs would likely take different approaches to data monitoring. He posited a scenario in which there was a stablecoin that was backed to some extent by a CBDC that tracked user activities. He asked the witnesses to indicate whether it was feasible to design a stablecoin that would prevent the CBDC backing the stablecoin from tracking the stablecoin user.
  • Mr. Allaire noted how the code underlying stablecoins was public and open source, which provided transparency into the functioning of the stablecoins.
• Note: Rep. Casten’s question period time expired here.

Rep. Warren Davidson (R-OH):

• Rep. Davidson expressed frustration with the U.S.’s regulatory approach to the digital assets space over the previous several years. He stated however that Congress had become increasingly knowledgeable regarding digital assets over the past three years. He then recounted how Committee Members had held a meeting in the U.S. Library of Congress three years prior that included digital assets industry stakeholders. He noted how this meeting had sought to develop an approach for overseeing the digital assets industry. He stated that the meeting had identified the importance of establishing a bright line test to provide clarity to industry participants, investors, and regulators. He stated that this meeting had led to the development of a bright line test involving four parts for assessing whether an asset constituted a security. He indicated that the four parts involved whether a digital asset had already been created, whether a digital asset was recorded on a distributed, secure, and immutable ledger not controlled by a central authority, whether permissionless peer-to-peer transactions could be conducted without an intermediary, and whether a digital asset did not represent a financial interest in any entity. He also emphasized the importance of having clear parameters for overseeing digital assets. He expressed his hope that Congress could develop legislation based on the aforementioned bright line test proposal for overseeing digital assets. He then discussed how there currently existed multiple types of U.S. dollar stablecoins with a variety of regulatory and backing structures. He highlighted the importance of self-custody for these digital assets. He asked Mr. Brooks to discuss the importance of providing regulatory clarity for the self-custody of digital assets.
  • Mr. Brooks remarked that self-custody was a key way in which cryptocurrencies provided innovation over the current financial system. He discussed how cryptocurrencies sought to leverage technology in order to empower users to safeguard their own assets for free. He also stated that the self-custody features of cryptocurrencies provided consumers with a level of financial privacy. He concluded that self-custody (along with self-ownership and self-determination) were critical aspects of digital asset networks.
• Rep. Davidson then discussed how digital assets were often perceived as a potential stable store of value. He noted however that Bitcoin was very volatile and suggested that this volatility might be attributable to traders employing significant levels of leverage. He asked Mr. Bankman-Fried to discuss the role that leverage played in driving Bitcoin volatility.
  • Mr. Bankman-Fried stated that cryptocurrencies and digital assets had more volume traded in futures contracts than through the spot asset itself. He commented that this same dynamic was present in all other financial assets. He attributed this higher level of futures contract trading to the fact that futures contract trading was more efficient from both economic and capital perspectives. He called this futures contract trading an important part of the digital asset ecosystem. He also remarked that it was important to have robust risk engines that monitor the positions on digital assets.

Rep. Richie Torres (D-NY):

• Rep. Torres discussed how his Congressional District was very poor and stated that his immigrant constituents often paid “predatory” fees in order to send remittances back to their home countries. He asked Mr. Cascarilla to address how cryptocurrencies, blockchain technology, and Web 3.0 could help his immigrant constituents that frequently send remittances back to their home countries.
  • Mr. Cascarilla remarked that a key feature of digital asset and blockchain technology was their openness to all parties. He elaborated that parties did not need a bank account or to rely on any intermediaries in order to use the technology. He stated that parties could make international remittances using both cryptocurrencies and stablecoins through just downloading a digital wallet. He commented that these technologies democratized access to financial services, especially for parties that could not easily access bank accounts. He further noted how the transaction costs for cryptocurrency and stablecoin remittances were often very low (less than one penny in some instances).
• Rep. Torres asked Mr. Cascarilla to indicate how quickly cryptocurrencies and stablecoins could be internationally remitted.
  • Mr. Cascarilla emphasized how blockchains were always operating and stated that cryptocurrencies and stablecoins could therefore be internationally remitted instantaneously. He noted how the current lags in the transmissions of money could be very costly.
• Rep. Torres then asked Mr. Brooks to address how policymakers could enforce financial laws within a decentralized environment.
  • Mr. Brooks first remarked that the U.S. ought to work to bring in financial activities into its supervised system. He lamented how the OCC was unlikely to grant bank charters to stablecoin issuers and stated that having the OCC grant bank charters to stablecoin issuers would enable increased federal supervision. He also remarked that many decentralization protocols were meant to address the problems that created the need for enforcement in the first place. He stated that most enforcement within the securities and banking system was attributable to some combination of human error, human negligence, human greed, and human bias. He asserted that decentralized systems were meant to reduce or eliminate such error, negligence, greed, and bias.
• Rep. Torres then asked Mr. Brooks to indicate whether there existed a computer network that was more secure than the blockchain.
  • Mr. Brooks remarked that the key feature of the blockchain was its transparency (rather than its security). He commented that this transparency enabled parties to identify unusual activity on the blockchain. He stated that he was unaware of a computer network that was more secure than the blockchain.
  • Mr. Bankman-Fried remarked that he was unaware of any of the major globally used blockchains being less secure than any existing computer networks. He also commented that smaller blockchains tended to be less secure.
• Rep. Torres then expressed concerns that cryptocurrencies could present a challenge to the U.S. dollar’s current status as the world’s reserve currency. He noted however that the leading stablecoin issuers had chosen to peg their stablecoins to the U.S. dollar, which suggested confidence in the U.S. dollar. He asked the witnesses to opine on the relationship between the U.S. dollar and cryptocurrencies and to indicate whether the relationship could be complementary in nature.
  • Mr. Cascarilla asserted that the U.S. dollar and cryptocurrencies should not be viewed as being in conflict. He remarked that people around the world wanted U.S. dollar bank accounts and stated that tokenized U.S. dollars would support global demand for U.S. dollars. He also stated that these tokenized U.S. dollars would promote financial inclusion.

Rep. Bill Huizenga (R-MI):

• Rep. Huizenga first mentioned how Committee Republicans had recently released a set of principles for CBDCs and noted how one of these principles had emphasized the importance of the U.S. dollar remaining the world’s preeminent currency. He then asked Mr. Bankman-Fried to indicate how many regulators FTX currently engaged with.
  • Mr. Bankman-Fried stated that FTX engaged with dozens of regulators worldwide and added that this number would likely soon reach the hundreds range. He indicated that these regulators included various European and Asian regulators. He then discussed how FTX was currently working to obtain state money transmitter licenses, had obtained a CFTC for derivatives, and was engaging the SEC. He added that FTX would likely engage with additional regulatory agencies in the future.
• Rep. Huizenga expressed his interest in ensuring that the digital assets space was not being overregulated. He commented that overregulation imposes compliance costs on companies and prevented new companies from entering the space. He asked Mr. Brooks to explain why it was important for policymakers to first establish clear “rules of the road” for digital assets before they proposed additional regulations.
  • Mr. Brooks remarked that the most important reason that the U.S. needed clear policies for digital assets was to support its international competitiveness. He asserted that other countries maintained easier policy environments for digital asset companies. He highlighted how the UAE was working to lure Americans to build their digital asset products within their country and commented that these efforts were working.
• Rep. Huizenga asked Mr. Brooks to discuss how the UAE was viewing crypto assets differently than traditional assets.
  • Mr. Brooks discussed how other countries viewed crypto assets as being more similar to equities and debt than commonly believed. He stated that cryptocurrencies were a risk-on asset that people wanted to invest in for diversification purposes. He mentioned how other countries had built regulatory regimes in response to this investor demand and stated that the U.S. was the last country to establish such a regime.
• Rep. Huizenga then noted how Ms. Haas had testified that every asset listed on Coinbase’s platform was subject to a rigorous legal, compliance, and security review. He asked Ms. Haas to elaborate on Coinbase’s review process.
  • Ms. Haas testified that Coinbase assessed all assets on their platform using the Howey test. She indicated that Coinbase did this by employing the Crypto Rating Council’s framework. She acknowledged that while this process did not provide definitive answers as to whether assets constituted securities, she asserted that this process ensured that there would be a low risk that Coinbase would list securities on its platform. She then discussed how Coinbase conducted separate compliance reviews of the assets on their platform that looked at token developers and assessed whether the assets constituted scams. She lastly noted how Coinbase conducted a security review of the assets on their platform that involved looking at an asset’s underlying code. She indicated that Coinbase specifically considered whether Coinbase could provide security for the asset and whether the asset was at a heightened risk of attack.
• Rep. Huizenga lastly expressed hope that the Committee’s actions within the digital assets space would not harm financial inclusion opportunities for the unbanked and the underbanked.

Rep. Al Lawson (D-FL):

• Rep. Lawson mentioned how he had led a letter to House Leadership that addressed proposals to expand the definition of a broker under the IRS reporting requirements to include cryptocurrency miners and other validators, as well as software and hardware digital wallet makers. He noted that the aforementioned parties did not engage in trading activities and should be beyond the scope of the definition for broker services. He asked the witnesses to opine on this policy proposal.
  • Mr. Brooks criticized the proposal highlighted by Rep. Lawson. He asserted that there existed a fundamental difference between centralized exchanges and decentralized algorithms and stated that there did not exist a well-situated party to provide tax reporting for decentralized algorithms.
  • Ms. Dixon expressed concerns that the proposal highlighted by Rep. Lawson might require validators without access to personal information to acquire access to such information.
• Rep. Lawson then asked Ms. Haas to indicate whether Coinbase had multiple lines of business, to address how each line of business was segregated, and to discuss how Coinbase worked to ensure that confidential information on their customers was not improperly used.
  • Ms. Haas discussed how Coinbase grouped many of its products together and commented that this grouping benefited their customers. She noted that Coinbase provided customers with digital wallets with trading capabilities and indicated that these integrated products were incorporated into a single legal entity. She stated that this offering was different from Coinbase’s cloud offering and testified that the cloud offering’s data was fully ringfenced. She noted that Coinbase had different engineers and legal entities for different groupings of products.
• Rep. Lawson asked Ms. Haas to indicate whether Coinbase levied withdrawal fees on parties that take crypto assets off of the Coinbase platform.
  • Ms. Haas testified that Coinbase did not levy withdrawal fees on parties that take crypto assets off of the Coinbase platforms.

Rep. French Hill (R-AR):

• Rep. Hill asked Mr. Brooks to identify areas that Members of Congress ought to be concerned about with regard to regulatory policy on digital wallets. He also asked Mr. Brooks to project how many digital wallet providers would exist. He further asked Mr. Brooks to comment on the recommendation of the PWG on Stablecoins that digital wallets be connected to banks.
  • Mr. Brooks remarked that the ability of people to self-custody their assets and to send them without intermediaries was at the core of digital assets technology. He stated that requiring digital wallets to be hosted by banks or regulatory institutions would result in no improvement over the status quo. He remarked that transactions that were permitted inside of banks ought to be technology agnostic. He discussed how technologists were currently building crypto-native identification protocols that would permit consumers to determine whether a digital wallet was safe to transact with and that would not collect the name and personal information of the digital wallet’s owner.
• Rep. Hill commented that the ability of digital wallets to anonymously confirm that other digital wallets were safe would be beneficial. He then mentioned how Coinbase had recently announced a partnership with a community bank to provide crypto banking services. He asked Ms. Haas to discuss the current regulatory environment for enabling community banks to provide crypto banking services.
  • Ms. Haas remarked that Coinbase offered tools to allow any bank to provide crypto banking services to their customers. She elaborated that Coinbase enabled banks to white label Coinbase tools for their customers. She stated that there needed to occur continued innovation and clarity for banks as to what constituted permissible activities within the crypto space. She mentioned how the banks that Coinbase partnered with were working with their various state and federal regulators in order to gain clarity as to what would be permissible for them to offer to their end consumers.
• Rep. Hill mentioned his experience working within the banking sector prior to entering Congress and stated that banks tended to be apprehensive regarding their regulatory burdens. He commented that banks tended to want regulatory certainty regarding their new offerings. He then asked Mr. Cascarilla to discuss Paxos’s view on partnering with banks.
  • Mr. Cascarilla mentioned how Paxos currently maintained several partnerships with banks. He noted how Paxos was an infrastructure provider and stated that banks were therefore an important customer set for the company. He remarked that the current financial system could be upgraded and highlighted how traditional assets (rather than just cryptocurrencies) could now be moved on blockchains.
• Rep. Hill asked Mr. Cascarilla to identify the most important regulatory issue for community banks seeking to offer crypto banking services. He requested that Mr. Cascarilla to respond to this question in writing.

Rep. Bill Foster (D-IL):

• Rep. Foster discussed the importance of having a secure digital identity for crypto asset transactions. He remarked that having all crypto transactions associated with a legally traceable identity would be key to preventing crypto assets from being used for ransomware and other criminal payments. He stated that while a person’s identity for crypto transactions could be pseudonymous for market participants and the public, he asserted that the transactions must be capable of being de-anonymized pursuant to the action of a court within a trusted jurisdiction. He asked the witnesses to indicate whether they disagreed with his previous statements, to which none of the witnesses answered affirmatively. He then discussed how crypto assets that were speculatively traded raised concerns over abusive trading practices. He stated that the identity of a beneficial owner ought to be known in these instances and that there would need to exist a uniquely identified beneficial owner in these instances. He asked the witnesses to indicate whether such beneficial ownership requirements were necessary in order to prevent wash trades and similar abuses.
  • Mr. Bankman-Fried answered affirmatively. He testified that FTX conducted KYC due diligence on all of its customers and was subject to CFTC oversight. He called for harmonized regulatory and market frameworks between different asset classes in order to support more consistent regulatory oversight.
• Rep. Foster expressed agreement with Mr. Bankman-Fried’s comments and mentioned how he had long worked to develop a unified regulatory regime for crypto assets between the SEC and the CFTC. He asked the witnesses to indicate whether they had held discussions with the U.S. House Committee on Agriculture regarding the prospects of establishing a single national regulator for crypto assets, to which none of the witnesses responded affirmatively. He then asked the witnesses to opine on a proposal to require digitally traded assets to be associated with a pseudonymized tax identification (ID). He commented that such a proposal would make it easy to assess taxes on crypto transactions and would not significantly burden startup companies.
  • Mr. Allaire remarked that the need for identity to be tied to digitally traded assets would have to be balanced with privacy and security concerns. He elaborated that policymakers ought to limit the potential for leakages of personal identifiable information (PII). He commented that blockchains could support assured data, as well as auditability and transparency. He stated however that there could be a risk of abuse if too much PII was linked to a blockchain entry.
• Rep. Foster interjected to state that the only PII he was proposing to link to digitally traded assets was a pseudonymous ID.
  • Mr. Allaire expressed support for Rep. Foster’s proposal. He stated that digital identity standards needed to be developed so that there could be proof that a party had been evaluated under KYC requirements.
• Rep. Foster expressed agreement with Mr. Allaire’s calls to establish digital identity standards and mentioned how legislation had been proposed on this subject.

Rep. Tom Emmer (R-MN):

• Rep. Emmer noted how FTX US Derivatives offered crypto commodity derivatives products, such as futures and options contracts. He indicated that FTX US Derivatives had needed to obtain at least four different licenses from the CFTC in order to offer these products. He asked Mr. Bankman-Fried to indicate whether there existed additional licenses that were required by the CFTC for FTX US Derivatives to obtain in order to be fully compliant with derivatives regulation.
  • Mr. Bankman-Fried stated that he did not believe that there existed any such additional licenses.
• Rep. Emmer asked Mr. Bankman-Fried to indicate where the price discovery for his company’s CFTC-regulated crypto commodity derivatives contracts primarily come from.
  • Mr. Bankman-Fried remarked that there was a “very large” number of market participants interested in CFTC-regulated crypto derivatives contracts. He further stated that there were hundreds of billions of dollars per day going into these types of products. He commented that his company therefore could not dictate pricing for these products and that the pricing was the result of a large number of parties.
• Rep. Emmer noted that 100 percent of the pricing of Bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME) came from just five U.S. crypto spot exchanges. He mentioned how the SEC had issued disapproval letters on multiple Bitcoin spot ETF applications. He indicated that SEC Chairman Gary Gensler had defended these disapprovals on the basis that Bitcoin spot markets were vulnerable to fraud and manipulation. He noted how FTX used surveillance trade technology to protect investors and to ensure sound spot markets. He asked Mr. Bankman-Fried to discuss FTX’s surveillance trade technology and any other tools that the company employed to protect spot markets from fraud and manipulation.
  • Mr. Bankman-Fried remarked that FTX conducted surveillance on unusual trading activity and manual inspections on activities flagged by automated and manual surveillance. He indicated that FTX did these inspections on deposits and withdrawals.
• Rep. Emmer applauded FTX’s efforts to combat fraud and manipulation on their platform. He noted how the SEC had approved several Bitcoin futures ETFs that obtained 100 percent of their pricing from U.S. crypto spot markets. He expressed confusion over how the SEC’s concerns regarding spot market vulnerability applied to Bitcoin spot ETFs and not to Bitcoin futures ETFs. He mentioned how he had been working on a bipartisan basis to address the SEC’s inconsistent treatment of crypto commodity ETFs. He lamented that this inconsistent treatment was preventing Americans from realizing capital formation opportunities.

Rep. Brad Sherman (D-CA):

• Rep. Sherman remarked that while both cryptocurrencies and stablecoins claimed to be challenging the status quo, he asserted that the advocates of these digital assets represented the most powerful people in society. He noted how some of the biggest advocates of cryptocurrencies and stablecoins included the large banks, credit card companies, hedge funds, and very wealthy Americans. He also stated that the witnesses present at the hearing were crypto advocates with financial interests in having digital assets be successful. He raised concerns that the crypto industry was too politically powerful and commented that this power would undermine Congress’s ability to provide meaningful oversight over crypto assets. He called on regulators to proactively oversee the crypto industry and to not wait for Congress to pass digital assets legislation. He then remarked that the top threat to cryptocurrencies were other cryptocurrencies and commented that upstart cryptocurrencies could displace incumbent cryptocurrencies. He stated that it was unfair to compare the current fiat currency landscape with the aspirational goals of cryptocurrency and highlighted how few merchants currently accepted cryptocurrencies. He then noted how a customer on Coinbase that bought a cryptocurrency on the platform and sold it for the same price a couple of days later would not receive what they had initially paid for the cryptocurrency.
  • Ms. Haas confirmed Rep. Sherman’s statement and noted that Coinbase imposed a 2 percent fee on its platform transactions.
• Rep. Sherman criticized Coinbase’s transaction fees and contended that the fees were too high. He then asked Mr. Allaire to indicate whether Circle’s reserves were all in instruments that yielded less than 0.1 percent.
  • Mr. Allaire confirmed that Circle’s reserves were all in instruments that yield less than 0.1 percent.
• Rep. Sherman asked Mr. Allaire to explain how Circle was able to pay 1 percent interest on some deposits if their reserves were in such low yielding assets.
  • Mr. Allaire testified that Circle did not pay interest on deposits.
• Note: Rep. Sherman’s question period time expired here.

Rep. Barry Loudermilk (R-GA):

• Rep. Loudermilk remarked that the Committee ought to proceed cautiously in its oversight of the digital assets sector. He then expressed his interest in cybersecurity issues and stated that a key principle of cybersecurity was not collecting unnecessary information. He elaborated that reducing the collection of unnecessary information would enable parties to focus on securing necessary data. He remarked that the decentralized nature of blockchains could help to address the aforementioned issues through reducing the amount of information that would need to be collected and stored. He asked Mr. Brooks to discuss how blockchains and distributed ledger technology (DLT) could enhance the U.S.’s cybersecurity posture.
  • Mr. Brooks remarked that blockchains were as much about transparency as they were about security. He discussed how it often took a long time to determine when cyberattacks had occurred due to the lack of transparency in information systems. He noted how blockchains had all of their blocks made publicly visible to their networks and were governed by consensus mechanisms. He stated that the aforementioned features of blockchains made it difficult for a single actor to make changes to a network and added that any changes made to a network would be fully visible.
• Rep. Loudermilk then asked Ms. Dixon to discuss how blockchain technology and DLT were being used to facilitate payments.
  • Ms. Dixon called the interoperability between the traditional financial system and digital asset networks “remarkable.” She commented that this interoperability was a cause for excitement and expressed optimism regarding the prospects for continued innovation within the payments space. She mentioned how the Stellar network offered fast business payment and remittance services for very low prices.

Rep. Cindy Axne (D-IA):

• Rep. Axne noted how FTX had recently purchased LedgerX, which was a CFTC-registered derivatives platform. She also noted how FTX had an exchange for Bitcoin and other tokens that was not registered with either the CFTC or the SEC. She indicated that while FTX was registered as a money transmitter, she asserted that money transmitters did not receive the same levels of oversight that were provided by a federal market regulator. She expressed concerns with the fact that the CFTC did not possess regulatory authority over the spot trading of commodities. She commented that this dynamic left consumers with inconsistent protections. She asked Mr. Bankman-Fried to indicate whether digital asset exchanges could develop their own investor protections and to confirm that these investor protections could vary across companies.
  • Mr. Bankman-Fried expressed agreement with Rep. Axne’s concerns. He stated that FTX maintained similar investor protections for both their spot markets and their derivatives markets. He expressed support for establishing a similar regulatory regime for both spot commodities markets and derivatives markets.
• Rep. Axne asked Mr. Bankman-Fried and Ms. Haas to indicate whether their companies reported their full order histories publicly. She also asked Mr. Bankman-Fried and Ms. Haas to indicate whether there existed standards to ensure that any such reporting would be accurate.
  • Mr. Bankman-Fried testified that FTX reported all of its public market data and order history. He indicated that the data was available on FTX’s website via an API. He stated that FTX did not charge anything for this information and did not intend to charge anything for this information in the future. He expressed support for making the disclosure of order histories a regulatory standard.
  • Ms. Haas testified that Coinbase made all of its public market data and order history data available and did not charge anything for the data.
• Rep. Axne discussed how there was CFTC oversight for the trading of Bitcoin futures and options and not for the trading of the Bitcoin currency itself. She expressed interest in this difference in protections and in working to ensure that there existed consistent protections across the categories. She asked the witnesses to indicate whether the digital assets industry could benefit over the long-term from having more regulation to protect investors.
  • Mr. Bankman-Fried remarked that more regulation that provided investor protections within the digital assets space would be beneficial. He stated that any regulation should be well-tailored to fit the products and the current structure of the regulators.
• Rep. Axne expressed agreement with Mr. Bankman-Fried’s comments. She asked the witnesses to address how regulations could help build trust among the public for cryptocurrencies.
  • Mr. Bankman-Fried mentioned how FTX had held numerous conversations with large institutional investors and indicated that a top concern for these investors was the cryptocurrency industry’s regulatory framework. He stated that a clearer regulatory framework for cryptocurrencies could make these investors more confident in cryptocurrencies.

Rep. Alex Mooney (R-WV):

• Rep. Mooney mentioned how the Cuban government had recently announced that their central bank would work on rules to officially recognize digital currencies. He expressed concerns that Cuba’s recent embrace of cryptocurrencies could be a way for the country’s communist regime to evade tough U.S. sanctions. He asked Mr. Bankman-Fried to discuss the process that FTX used to ensure that rogue and autocratic regimes could not use FTX’s digital assets exchange in order to evade U.S. sanctions.
  • Mr. Bankman-Fried testified that FTX ran sanctions checks on all of its users and conducted KYC surveillance on all of its users. He further mentioned how FTX conducted surveillance on the blockchain and fiat assets that transferred both into and out of its system.
• Rep. Mooney also asked Ms. Haas to discuss the process that Coinbase used to ensure that rogue and autocratic regimes could not use their digital assets exchange to evade U.S. sanctions.
  • Ms. Haas remarked that Coinbase maintained similar protocols to FTX to combat sanctions evasion on its platform. She testified that Coinbase ran U.S. Office of Foreign Assets Control (OFAC) tests on all of their customers during the onboarding process and then ran these tests on an ongoing basis. She also mentioned how Coinbase conducted transaction monitoring and partnered with law enforcement bodies on investigations.
• Rep. Mooney then discussed how bad actors and rogue states could use technologies, such as virtual private networks (VPNs), to provide false locations so that they could evade sanctions. He asked Mr. Brooks to discuss the importance of moving away from using Internet Protocol (IP) addresses and towards using verified locations. He also asked Mr. Brooks to discuss alternative ways for verifying the locations of internet users.
  • Mr. Brooks noted that while the use of VPNs was previously a very effective means for avoiding geofencing restrictions, he asserted that the industry has subsequently developed several technologies that made it more difficult for people to use VPNs to avoid geofencing restrictions. He mentioned how companies had developed tools to more accurately trace IP addresses based on probabilistic network information.
• Rep. Mooney expressed interest in working with the exchanges present at the hearing on ensuring that autocratic regimes (particularly Cuba) were not able to use digital assets to evade U.S. sanctions.

Rep. Josh Gottheimer (D-NJ):

• Rep. Gottheimer indicated that while he supported cryptocurrencies and their potential benefits within the digital payments space, he expressed concerns over the theft of cryptocurrencies and the potential use of cryptocurrencies for the financing of terrorism and illicit activities. He mentioned how he had introduced the Hamas International Financing Prevention Act in response to reports that cryptocurrency donations were being used to support Hamas. He asked Mr. Bankman-Fried to discuss the actions that cryptocurrency exchanges were currently taking to ensure that consumers were protected from both cryptocurrency hackings and thefts and to prevent bad actors (including Hamas) from accessing cryptocurrency markets. He also asked Mr. Bankman-Fried to address the context in which cryptocurrency exchanges would flag a transaction for law enforcement review. He further asked Mr. Bankman-Fried to indicate whether FTX had ever flagged a transaction for a law enforcement agency.
  • Mr. Bankman-Fried stated that FTX required that all of its users have two-factor identification for all of their accounts and remarked that FTX had a “very broad” suite of security practices that all users can access on their website. He also discussed how FTX conducted KYC surveillance on all of its exchange users and noted that this surveillance was done on all deposits and withdrawals for both blockchain and fiat currencies. He then testified that FTX worked cooperatively with both U.S. and global law enforcement bodies on tracking bad actors. He remarked that KYC surveillance coupled with the transparent nature of blockchains could support the tracking of illicit activity. He testified that FTX had helped to freeze the assets on its platform of illicit actors and expressed FTX’s willingness to continue to work with law enforcement bodies on combatting illicit activities.
• Rep. Gottheimer mentioned how the PWG Report on Stablecoins included a recommendation that all stablecoin issuers be required to become insured depository institutions. He noted that Circle had indicated its intention to become a bank and currently backed the USDCs in circulation through reserves held in partner banks. He mentioned how he was currently working on a bill to implement several of the recommendations from the PWG Report on Stablecoins into law. He asked Mr. Allaire to indicate whether it was necessary for stablecoin issuers to be insured depository institutions themselves or if it was sufficient for stablecoin issuers to partner with insured depository institutions. He asked Mr. Allaire to discuss the benefits and drawbacks with each model.
  • Mr. Allaire mentioned how Circle had decided to pursue a national bank charter and expressed Circle’s openness to becoming an FDIC-insured bank. He then stated that a full reserve digital currency model (such as the one used by USDC) where 100 percent of the assets were fully reserved in high quality liquid assets was not the same as a bank deposit in which a bank rehypothecated and lent their deposits out. He commented that FDIC insurance was meant to support fractional reserve lending. He remarked that while it could be powerful for a stablecoin issuer to receive a federal bank charter and access the U.S. Federal Reserve, he suggested that the form of insurance for these stablecoin issuers could be different given how stablecoin issuers did not always engage in lending activities. He noted how the FDIC was considering potential appropriate forms of insurance for stablecoin issuers. He remarked that U.S. statutes ought to support stablecoin issuers that were operating at state and federal levels and support both money services businesses and banks. He also stated that the barriers to entry within the stablecoin space should not be so high as to prevent startups operating as money services businesses from participating in stablecoin innovation.

Rep. Ted Budd (R-NC):

• Rep. Budd expressed concerns that U.S. regulators could drive innovation within the digital assets space outside of the U.S. due to a lack of understanding about the technology. He asked Mr. Brooks to estimate the point at which U.S. regulatory overreach would drive digital asset innovators to leave the U.S. and pursue innovations abroad.
  • Mr. Brooks mentioned how there existed some digital asset products that were legal in other countries and not legal in the U.S. He noted that cryptocurrency ETFs were an example of such a product. He stated that the developers of cryptocurrency ETFs therefore needed to go abroad in order to develop such products.
• Rep. Budd interjected to asked Mr. Brooks to explain why cryptocurrency ETFs could not be developed in the U.S.
  • Mr. Brooks stated that cryptocurrency ETFs could not be developed in the U.S. because the SEC had consistently refused to approve these products. He commented that the U.S. was therefore lagging other countries in the development of cryptocurrency ETFs.
• Rep. Budd then contended that SEC Chairman Gary Gensler was overstepping his regulatory authority when it came to digital assets. He asked Mr. Brooks to indicate what would constitute an appropriate approach for regulating digital assets.
  • Mr. Brooks discussed how the U.S. was unique among developed countries in terms of its fragmented approach to banks and stated that the U.S. would ideally have only one regulator to oversee financial services businesses. He remarked that the U.S. should not establish additional regulators given how the U.S. financial system already has an overabundance of regulators. He stated that the U.S. should instead provide regulatory parity between crypto activities and traditional finance activities. He asserted that regulators were treating cryptocurrencies differently simply due to the fact that they were nascent.
• Rep. Budd then mentioned how the Infrastructure Investment and Jobs Act was recently signed into law and stated that the law posed problems for digital assets. He asked Ms. Haas to discuss why the Infrastructure Investment and Jobs Act’s digital assets provisions would harm the crypto community.
  • Ms. Haas emphasized Coinbase’s support for tax payments on cryptocurrencies and stated that centralized entities (including Coinbase) ought to report tax information. She expressed concerns that Congress had not provided a sufficient opportunity for public comment when it had developed the Infrastructure Investment and Jobs Act’s digital assets provisions, which could lead the provisions to have unintended consequences. She expressed optimism that these digital asset provisions could still be fixed. She asserted that the law’s definition of a broker was “potentially overly wide” and could be interpreted to include cryptocurrency miners and digital wallets. She stated that miners and digital wallets lacked access to user tax information and had no ability to comply with tax reporting regimes, which could subject these entities to penalties. She further contended that the Infrastructure Investment and Jobs Act’s digital assets provisions raised privacy concerns and could apply to parties that were not necessarily intended to be covered under the provisions.

Rep. Stephen Lynch (D-MA):

• Rep. Lynch mentioned how FinCEN had issued a 2020 rulemaking proposal to require banks and money services businesses to submit reports and verify the identities of customers involved with digital wallets for virtual currencies. He noted how this particular rulemaking proposal focused on digital wallets hosted in low compliance jurisdictions and digital wallets that were not hosted by a financial institution. He commented that the rulemaking proposal’s requirements were similar to the requirements currently imposed on money transmitters. He noted how Coinbase and Circle were vocally opposed to FinCEN’s rulemaking proposal. He asked Ms. Haas and Mr. Allaire to explain why their companies were opposed to the rulemaking proposal when transactions involving digital wallets were quite similar to transactions involving money transmitters.
  • Mr. Allaire first stated that FinCEN did not provide the public with adequate time to comment on their rulemaking proposal for digital wallets. He then discussed the open nature of public blockchain infrastructures and noted how they enabled people to self-custody assets with hardware and software. He highlighted how such software could be downloaded from third parties and indicated that the software maker was not itself involved in facilitating a customer transaction. He stated that FinCEN’s rulemaking proposal was too blunt. He mentioned that Circle had instead argued that there needed to exist ways to provide proof of digital identities so that digital asset companies could verify that their users had been subjected to KYC requirements. He commented that this approach would combat illicit activity while preventing the unnecessary collection of PII. He stated that Circle had requested that FinCEN provide the digital assets industry with more time to develop technology that would enable secure digital wallet transactions to occur while still preserving user privacy.
• Note: Rep. Lynch’s question period time expired here.

Rep. David Kustoff (R-TN):

• Rep. Kustoff expressed interest in the Crypto Rating Council, which is an industry created body that determines whether digital assets resembled securities. He asked Ms. Haas to discuss how the Crypto Rating Council made its determinations and to indicate the parties that were involved in the determinations process.
  • Ms. Haas stated that the Crypto Rating Council was an independent entity that worked to serve industry participants (such as Coinbase) with an assessment of digital assets based on the Howey test. She noted that the Crypto Rating Council reviewed the white papers issued by new digital asset projects in order to make their determinations as to whether the digital assets constituted securities. She testified that independent law firms with expertise in U.S. securities law were administering the Crypto Rating Council’s tests.
• Rep. Kustoff asked Ms. Haas to discuss the extent to which the SEC and other stakeholders had been involved with the Crypto Rating Council’s framework.
  • Ms. Haas remarked that the SEC had not yet provided a clear definition as to what constitutes a security. She noted how the SEC had merely told industry stakeholders to make such determinations based on the Howey and Reves tests. She indicated that while cryptocurrency exchanges paid very close attention to ongoing litigation surrounding digital assets and other news, she stated that cryptocurrency exchanges were ultimately responsible for making determinations as to whether a given digital asset constitutes a security.
• Rep. Kustoff then asked Mr. Brooks to discuss the feasibility of tracking cryptocurrencies on blockchains.
  • Mr. Brooks noted that transactions through the traditional banking system involved multiple steps and intermediaries and commented that there existed the potential for losses and breaches in any of these steps. He stated that blockchain-based transactions by contrast did not involve any intermediaries and was very direct. He remarked that blockchains were very transparent and highlighted how this transparent nature had enabled the U.S. to find the bad actors behind the recent Colonial Pipeline hack.
• Rep. Kustoff suggested that the digital assets industry highlight the traceability of blockchain transactions to the public.
  • Mr. Brooks recounted how Coinbase had directly worked with law enforcement bodies during his previous tenure at the company.

Rep. Alma Adams (D-NC):

• Rep. Adams expressed concerns that stablecoins could pose risks to the financial system, especially in the event of perceived instability. She asked Mr. Cascarilla to respond to the assertion of the PWG on Stablecoins that a run on stablecoins could cause systemic instability.
  • Mr. Cascarilla remarked that the risks associated with a stablecoin were dependent on the asset backing the stablecoin. He stated that there would be no risk of a run on a stablecoin that was backed only by cash and cash equivalents. He remarked however that a stablecoin backed by other assets, such as loans, certificates of deposit (CDs), and other securities, could pose risks. He commented that these types of stablecoins resembled bank deposits or money market funds. He asserted that banking regulators or the SEC ought to oversee these types of stablecoins.
• Rep. Adams then mentioned how Coinbase had recently issued its Digital Asset Policy Proposal, which advocated for the creation of a new SRO. She asked Ms. Haas to address how Congress and the digital assets industry could work together to develop a regulatory framework for digital asset trading platforms.
  • Ms. Haas first noted that the Digital Asset Policy Proposal was calling for a single federal regulator for digital asset trading platforms and stated that this regulator could be an existing regulator. She then discussed how there was constant innovation occurring within the digital assets space and stated that an SRO could be very nimble in its ability to oversee the digital assets industry. She remarked that cooperation between policymakers and industry stakeholders could support prudent digital assets regulation and commented that industry stakeholders could help policymakers to better understand the technology underlying these assets.
• Rep. Adams lastly asked the witnesses to commit to sharing data about the racial and gender compositions of their companies, to which all of the witnesses answered affirmatively.

Rep. Trey Hollingsworth (R-IN):

• Rep. Hollingsworth first asked Mr. Allaire to define stablecoins.
  • Mr. Allaire remarked that stablecoins were intended to hold a stable value relative to some underlying reference asset.
• Rep. Hollingsworth interjected to ask Mr. Allaire to confirm that the reference asset underlying a stablecoin might be volatile.
  • Mr. Allaire confirmed Rep. Hollingsworth’s comment that the reference asset underlying a stablecoin might be volatile.
• Rep. Hollingsworth stated that a “non-trivial” portion of stablecoins were backed by U.S. dollars and could be easily exchanged into U.S. dollars. He asked Mr. Allaire to explain the value proposition to a consumer of owning stablecoins that could be converted into U.S. dollars as opposed to just owning U.S. dollars.
  • Mr. Allaire noted that stablecoins were virtual, which meant that they could travel more easily and more quickly than physical currencies. He further stated that well-designed stablecoins were safer than bank deposits because bank deposits were dependent on an underlying bank (which carried run and default risks).
• Rep. Hollingsworth asked Mr. Allaire to explain the transaction value of owning a stablecoin. He acknowledged that while stablecoins could enable cheaper transactions, he also stated that there was a cost associated with a consumer obtaining stablecoins.
  • Mr. Allaire testified that Circle did not charge a fee for institutions seeking to transfer U.S. dollars into USDC.
• Rep. Hollingsworth interjected to comment that a user seeking to obtain USDC would still need to create an account in order to transact.
  • Mr. Allaire confirmed Rep. Hollingsworth’s comment. He remarked that many consumers used stablecoins because stablecoins provided a very efficient payment medium.
• Rep. Hollingsworth asked Mr. Allaire to indicate whether the value proposition of stablecoins was that the network of parties accepting stablecoins would expand, which would in turn result in increased demand for stablecoins. He also asked Mr. Allaire to explain why the same technology underlying stablecoins could not eventually be used to run the payments system for U.S. dollars.
  • Mr. Allaire noted that U.S. dollar-based digital currencies (such as USDC) were protocols and were a form factor for a U.S. dollar. He commented that these protocols did have network effects. He then discussed how the current payments system involved multiple third parties, such as Visa and Fedwire. He stated that well-regulated stablecoins could provide an upgrade to these payment systems.
• Note: Rep. Hollingsworth’s question period time expired here.

Rep. Alexandria Ocasio-Cortez (D-NY):

• Rep. Ocasio-Cortez mentioned how Ms. Haas had previously told the Committee that Coinbase did not engage in proprietary trading on its platform. She noted however that Coinbase’s rules stated that Coinbase Inc. traded its own corporate funds on its exchanges. She provided Ms. Haas with an opportunity to clarify this discrepancy.
  • Mr. Haas indicated that Coinbase did have a corporate investment portfolio. She noted how Coinbase made investments in cryptocurrencies and added to its corporate balance sheet every month. She testified that Coinbase had not sold these cryptocurrencies and that Coinbase did not actively trade this portfolio. She indicated that the cryptocurrencies being purchased were pre-established and that Coinbase did purchase these cryptocurrencies on its own exchange.
• Rep. Ocasio-Cortez then discussed how a “substantial” portion of the buying and selling of cryptocurrencies was done with stablecoins. She noted how stablecoins were designed to be backed by certain reserve assets, such as U.S. dollars or cash equivalents. She commented that this backing was meant to reduce the volatility of the currencies.
  • Mr. Allaire remarked that Circle’s USDC was designed to be a payments instrument under electronic money law. He testified that USDC was backed by U.S. dollars and short-duration U.S. Treasuries.
• Rep. Ocasio-Cortez mentioned how Circle had recently announced that it would move to 1:1 backing in U.S. dollars for USDC after it was found that only 60 percent of the stablecoin was backed by U.S. dollars or cash substitutes. She posited a hypothetical scenario in which the cryptocurrency industry lost its ability to use stablecoins as a bridge to trade in and out of U.S. dollars. She asked Mr. Allaire to indicate whether this lost ability would negatively impact the functioning of cryptocurrencies.
  • Mr. Allaire remarked that stablecoins were very powerful because they were a superior form of settlement. He noted how the existing banking system was slow, had expensive fees, and had access issues. He indicated that blockchains by contrast operated continuously and were very fast. He stated that stablecoins were therefore essential for enabling fast payments and settlements.
• Rep. Ocasio-Cortez asked Mr. Allaire to respond to the contention that the innovations being discussed during the hearing would merely constitute extensions or expansions of the existing financial system.
  • Mr. Allaire expressed disagreement with the contention. He stated that blockchain technology would enable a new and open infrastructure layer on the internet that was designed around value exchange and economic coordination. He also remarked that this technology would enable fast, safe, and secure interaction amongst counterparties on the internet. He contended that blockchain technology would need to be well-integrated into the existing financial system in order to ensure its wide adoption.

Rep. Anthony Gonzalez (R-OH):

• Rep. Gonzalez disputed the contention that large technology and financial firms controlled the digital assets space. He remarked that Web 3.0, cryptocurrencies, and blockchain technology had the ability to solve many of the most difficult problems associated with the current version of the internet and the financial system. He noted how there currently existed a narrow set of platforms that controlled what people saw on the internet, how people communicated on the internet, and what people were able to purchase on the internet. He also indicated that millions of Americans were completely disconnected from the financial system. He asked the witnesses to discuss how Web 3.0 could address some of the challenges associated with the current version of the internet and the financial system.
  • Mr. Brooks remarked that the biggest critics of cryptocurrencies have been the biggest banks, which he attributed to two reasons. He first stated that cryptocurrencies would eliminate the “toll collector role” that traditional banks and broker-dealers played within the financial system. He noted how traditional banks and broker dealers employed large numbers of people to maintain ledgers of account and to allocate credit for a fee. He commented that cryptocurrencies were able to maintain ledgers of account without needing people and to allocate credit without fees. He also remarked that cryptocurrencies unlocked value that traditional economic structures did not provide. He elaborated that cryptocurrencies supported the creator economy and play-to-earn gaming models.
• Rep. Gonzalez asked Ms. Haas to outline a specific use case for Web 3.0 and to discuss how Web 3.0 could empower creators and artists over large technology platforms.
  • Ms. Haas discussed the concept of play-to-earn, which referred to the ability of a video game player to earn NFTs for their gaming activities. She noted that these NFTs were in-game experiences that could be sold for value. She stated that this dynamic enabled the payers of a video game to monetize their activities within the video game.
• Rep. Gonzalez then raised concerns that many Web 3.0 projects were moving outside of the U.S. He asked Mr. Bankman-Fried and Mr. Brooks to indicate the extent to which the current U.S. regulatory environment was driving Web 3.0 projects abroad.
  • Mr. Bankman-Fried remarked that the current U.S. regulatory environment had driven Web 3.0 projects abroad. He expressed optimism however that the U.S. would enact changes to its regulatory framework within the next couple of years that would lead the U.S. to develop the deepest and most liquid markets in the cryptocurrency ecosystem.
  • Mr. Brooks stated that there were certain cryptocurrency-related activities that were not permitted in the U.S. and were permitted in other G20 countries. He indicated that these activities had moved outside of the U.S. as a result.

Rep. Rashida Tlaib (D-MI):

• Rep. Tlaib raised concerns over the large amounts of energy needed to run cryptocurrency networks. She asked Ms. Dixon to explain why cryptocurrencies that relied upon proof of work mining models (such as Bitcoin) were so energy intensive.
  • Ms. Dixon noted how consensus was achieved in the Bitcoin network through very complicated math equations, which required significant energy usage to solve. She testified that Stellar’s consensus mechanism was significantly less energy intensive than Bitcoin’s consensus mechanism. She stated that a cryptocurrency network’s consensus mechanism played a key part in determining the network’s energy consumption. She remarked that policymakers and stakeholders ought to be cognizant of the sustainability concerns surrounding cryptocurrency networks.
• Rep. Tlaib raised concerns that previously idled and shut down coal plants were being brought back online to support cryptocurrency mining. She asked Ms. Dixon to indicate whether the world’s central banks and governments ought to take a more active role in monitoring and regulating cryptocurrencies in order to reduce energy consumption and carbon emissions.
  • Ms. Dixon remarked that the cryptocurrency industry must always be cognizant of its environmental impact and commented that the industry should not wait for regulation to address this issue. She stated that the cryptocurrency industry must work with governments on achieving net-zero carbon emissions.
• Rep. Tlaib asserted that the proof of work mining model was fundamentally incompatible with achieving net-zero carbon emissions. She asked Ms. Dixon to identify tools that policymakers could use to incentivize the transition away from carbon-intensive cryptocurrency mining models.
  • Ms. Dixon testified that the Stellar Development Foundation had engaged a third-party to assess the network’s energy consumption and to identify areas for improvement. She stated that similar work could be done for all of the existing cryptocurrency consensus mechanisms. She suggested that additional research and focus could help to make cryptocurrency mining more sustainable.

Rep. John Rose (R-TN):

• Rep. Rose asked Mr. Bankman-Fried to discuss FTX’s economic impact on the U.S.
  • Mr. Bankman-Fried remarked that FTX was working to expand access to financial services for previously underserved populations. He discussed how many consumers had difficulties navigating the large number of intermediaries involved in traditional financial transactions. He stated that FTX sought to simplify these transactions for consumers and made their services easily available via mobile phones.
• Rep. Rose asked Mr. Bankman-Fried to provide recommendations for how the U.S. could ensure that digital assets innovation occurred within the U.S. and not abroad.
  • Mr. Bankman-Fried expressed optimism that the U.S. could make the necessary regulatory modifications to significantly support domestic digital assets innovation. He stated that having a market framework with a single regulatory structure for both futures and spot digital assets could make the U.S. globally competitive from a regulatory perspective. He clarified that this single regulatory structure could still involve multiple regulatory agencies (including the SEC and the CFTC). He then stated that the U.S. should provide regulatory clarity for stablecoins on audit requirements for reserves. He also cautioned against overly restricting the number of institutions that can issue stablecoins. He lastly recommended that the U.S. move away from binary distinctions for asset classes and move towards a more flexible disclosure system for digital assets. He commented that these disclosures should be based on a digital asset’s issuance, supply, and anti-fraud measures.
• Rep. Rose then asked Mr. Brooks to provide his ideal regulatory framework for digital assets.
  • Mr. Bankman-Fried criticized the U.S.’s differential treatment of incumbent and new institutions and asserted that the U.S. ought to make it easier for blockchain-based platforms to participate in the traditional banking system. He remarked that the U.S. treated crypto assets differently from all other assets and called for more equitable treatment of these assets.
• Rep. Rose then asked the witnesses to indicate whether they were worried that quantum computing could eventually be used to compromise the security of blockchain technology. He requested that the witnesses submit their responses to this question for the hearing’s record.

Rep. Madeleine Dean (D-PA):

• Rep. Dean characterized the cryptocurrency market as growing and very volatile. She asked the witnesses to indicate whether there were warning signs that a bubble might be forming within the cryptocurrency market. She also asked the witnesses to address how the U.S. could ensure that the cryptocurrency industry would not threaten the overall stability of the U.S. financial system.
  • Mr. Brooks highlighted that while the general trend of the U.S. equities market had been positive since the country’s founding, he noted that the U.S. equities market had routinely experienced periods of volatility throughout its history. He stated that the cryptocurrency market resembled the U.S. equities market in that its general trend was positive and it had experienced significant volatility. He commented that while the U.S. needed to adopt disclosure rules and framework regulations for cryptocurrencies, he contended that the cryptocurrency market ought to be viewed very similarly to U.S. equities market.
• Rep. Dean then remarked that all digital assets did not neatly fit into the U.S.’s current financial regulatory frameworks. She asked Ms. Haas to indicate whether the U.S. ought to create an entirely new regulatory framework for cryptocurrency with a new regulator. She asked Ms. Haas to discuss Coinbase’s proposal calling for Congress to develop a new framework to oversee digital assets with a single regulator.
  • Ms. Haas remarked that there would be benefits associated with having a single regulator for digital assets. She stated that many new tokens that provided holders with a right to governance did not fall under the existing regulatory frameworks or definitions for either securities or commodities. She contended that the U.S. would therefore benefit from definition taxonomy, regulatory clarity, and an SRO that could more nimbly respond to digital asset innovations.
• Rep. Dean also asked Mr. Cascarilla to elaborate on his testimony’s assertion that a primary prudential state or federal regulator ought to regulate digital asset companies and their products.
  • Mr. Cascarilla discussed how Paxos operated using a trust company status because it did not make loans or take deposits. He stated that Paxos’s legal structure demonstrated how state regulators could oversee digital asset companies. He remarked that having a primary prudential regulator on either a state or federal basis would enable the consistent application of AML, KYC, reserve, and customer protection rules for digital asset companies. He stated that Paxos still faced regulatory uncertainty and noted that Paxos lacked explicit reciprocity across states given its trust company status.

Rep. Bryan Steil (R-WI):

• Rep. Steil mentioned how the U.S. House Select Committee on Economic Disparity and Fairness in Growth would soon be holding roundtables on financial inclusion and access to banking for underserved communities. He asked Mr. Brooks to discuss how the growth of digital assets and decentralized finance (DeFi) could drive financial inclusion and to address whether underserved communities could benefit from these developments.
  • Mr. Brooks attributed the significant number of underbanked people in the U.S to minimum balance fees and monthly account maintenance fees for bank accounts. He stated that cryptocurrencies and stablecoins did not have the aforementioned fees and enabled users to keep their assets in a tokenized bank deposit for free. He also remarked that cryptocurrencies constituted early-stage assets that anyone could easily access. He commented that other types of early-stage investment opportunities, such as initial public offerings (IPOs) of equities and venture capital, had limitations on who could participate. He contended that cryptocurrencies offered an opportunity for wealth creation for underrepresented communities and highlighted how there were currently more minority cryptocurrency investors than White cryptocurrency investors in the U.S.
• Rep. Steil commented that technology was generally a key tool for addressing underserved communities and expressed agreement with Mr. Brooks’s comments. He asked Mr. Brooks to identify the main regulatory impediments to further innovation within the digital assets space.
  • Mr. Brooks asserted that large banks were seeking to protect the advantages associated with their incumbency through impeding the adoption of digital assets. He commented that large banks made a lot of money from charging minimum balance fees and monthly account maintenance fees.
• Rep. Steil asked Mr. Brooks to identify the effective digital asset regulatory approaches being taken by other countries to attract digital asset businesses.
  • Mr. Brooks criticized the U.S. for failing to allow cryptocurrency ETFs and for its state-based approach for deciding which tokens could be sold.
• Rep. Steil then mentioned how the SEC had blocked Coinbase from launching its Lend product earlier in 2021. He noted how Coinbase chief executive officer (CEO) Brian Armstrong had expressed concerns over the process that the SEC had used to reach this decision. He asked Ms. Haas to indicate whether Coinbase had held further conversations with the SEC about why it was not allowed to offer its Lend product.
  • Ms. Haas testified that Coinbase had held further conversations with the SEC regarding their Lend product. She stated that Coinbase still lacked clarity as to why the Lend product had been unable to proceed.
• Rep. Steil asked Ms. Haas to characterize the conversations that Coinbase had held with the SEC.
  • Ms. Haas stated that Coinbase had provided the SEC with a lot of information and had not received clarity from the SEC as to why or why not it could offer a certain product.
• Rep. Steil expressed interest in having the Committee work to facilitate innovation within the U.S. He then asked Mr. Cascarilla to discuss how digital assets and Web 3.0 would help people living in countries with high levels of inflation and autocratic governments.
  • Mr. Cascarilla discussed how people living in the developing world faced challenges in terms of accessing the financial system. He stated that people living in the developing world wanted access to U.S. dollars and cryptocurrencies in order to protect themselves from political and economic instability. He remarked that the technology underlying digital assets and Web 3.0 would enable global economic connections and asserted that the U.S. ought to take advantage of this technology.

Rep. Sylvia Garcia (D-TX):

• Rep. Garcia mentioned how the Bank for International Settlements (BIS) had recently found that DeFi had grown to an estimated $250 billion worldwide. She expressed interest in how DeFi could support cross-border transactions. She mentioned how her state of Texas had a high proportion of immigrant workers and stated that many of these workers often faced challenges accessing the financial system. She added that language and cultural barriers compounded these access challenges. She asked Ms. Dixon to discuss how the DeFi sector could improve access to wealth and financial services for immigrants.
  • Ms. Dixon remarked that Stellar’s interoperability with the existing financial infrastructure meant that individuals that lacked bank accounts could still access the Stellar network. She mentioned how Stellar had a relationship with MoneyGram International, which meant that people could convert their cash into a digital asset and then send that digital asset over the blockchain both domestically and internationally. She asserted that DeFi was supporting unbanked and underbanked individuals across the world.
• Rep. Garcia asked Ms. Dixon to clarify how a recipient of an international blockchain transaction could convert the transfer into a local currency. She also asked Ms. Dixon to indicate whether there was a fee associated with such conversions.
  • Ms. Dixon remarked that the fees for blockchain transfers on the network layer were “very low” and noted that endpoints of blockchain transactions did charge fees. She commented that the low number of intermediaries involved in blockchain transactions resulted in “much lower” fees than those that existed within traditional financial infrastructures. She remarked that blockchain technology enabled underserved consumers to access digital assets and create value for themselves.
• Rep. Garcia interjected to indicate that she would follow-up with Ms. Dixon on how blockchain technology could enable money transfers for very rural and remote communities. She raised concerns that these rural and remote communities would still experience challenges in terms of converting U.S. dollars into digital assets for transfer. She then asked the witnesses to commit to providing transparent information regarding their employment numbers and information regarding their leadership teams (including salaries and wages), to which all of the witnesses expressed their willingness to provide such information. She also expressed interest in obtaining demographic and income data of the users of the companies and organizations testifying at the hearing.

Rep. William Timmons (R-SC):

• Rep. Timmons mentioned how there had occurred an “exponential” increase in ransomware attacks in recent years. He stated that the cryptocurrency industry believed that it played a key role in preventing illicit finance and ransomware. He asked Ms. Haas and Mr. Bankman-Fried to discuss how their exchanges worked with other stakeholders (including law enforcement bodies and other market participants) to respond to ransomware attacks. He also asked Ms. Haas and Mr. Bankman-Fried to address how the U.S. Federal Bureau of Investigation (FBI) had been able to retrieve a substantial portion of the ransomware payments made during the recent Colonial Pipeline hack.
  • Mr. Bankman-Fried testified that FTX was “constantly” responsive to law enforcement inquiries and conducted surveillance of deposits and withdrawals on its platform. He also stated that FTX often provided tips to law enforcement bodies on suspicious activity based on their surveillance of blockchain histories.
• Rep. Timmons asked Mr. Bankman-Fried to explain why law enforcement bodies and cryptocurrency exchanges could not recover 100 percent of the ransomware cryptocurrencies payments made to bad actors.
  • Mr. Bankman-Fried expressed his willingness to follow-up with Rep. Timmons on specific details regarding the Colonial Pipeline hacking. He stated that FTX could retrieve any assets on its platform. He also noted how many bad actors split up the ransomware payments that they receive, which could hamper the full recovery of the payments.
• Rep. Timmons asked Mr. Bankman-Fried to recommend tools that Congress could provide to cryptocurrency platforms that would help the platforms to recover a greater percentage of ransomware payments.
  • Mr. Bankman-Fried remarked that the ability of law enforcement bodies to quickly respond to ransomware attacks played a major factor in their ability to recover ransomware payments. He stated that standardized open lines of communication between his company and law enforcement bodies would be beneficial in enabling quick responses to ransomware attacks.
• Rep. Timmons then noted how cryptocurrencies were especially popular amongst younger and more diverse demographics. He asked Mr. Allaire to speculate on the reasons behind this popularity.
  • Mr. Allaire remarked that younger people were often more receptive to cryptocurrencies and digital assets given their higher familiarity levels with the internet. He also stated that democratizing access to financial markets was a key element of digital asset markets. He speculated that the democratic nature of these markets likely impacted digital asset adoption rates for minority communities and other demographics.

Full Committee Vice Chair Jake Auchincloss (D-MA):

• Vice Chair Auchincloss criticized the U.S.’s current “regulation by enforcement” regime for digital assets for being unfair, inefficient, and unconducive to U.S.-based innovation. He asserted that Congress needed to provide clarity and predictability to the digital assets industry via statute and expressed his interest in working to develop such a statute on a bipartisan basis. He remarked that the U.S. needed a primary crypto regulator that would be technology and market structure neutral. He stated that this regulator should have three imperatives: compelling disclosure and transparency, preventing fraud and abuse, and promoting the efficiency and resilience of the market. He also stated that this primary regulator ought to work with an SRO to establish a single “light touch” rulebook for spot and derivatives listings, custody requirements, token issuances, asset servicing, cross margining, settlements, KYC requirements, AML requirements, disclosures, auditing, and stablecoin standards. He then noted how Mr. Bankman-Fried had recently commented that stablecoin regulation would constitute a “substantial step forward” for enabling the continued global dominance of the U.S. dollar. He also mentioned how Mr. Bankman-Fried’s written testimony had proposed a seven-part framework for stablecoin regulation. He asked Mr. Bankman-Fried to identify the single most important thing that Congress could do immediately to regulate stablecoins in order to maintain the U.S. dollar’s global dominance.
  • Mr. Bankman-Fried remarked that policymakers ought to ensure that the purported reserves of a stablecoin matched the actual reserves of that stablecoin. He commented that this potential discrepancy posed both consumer protection and systemic financial risks. He specifically recommended requirements for stablecoin issuers to make daily attestations on their stablecoin reserves and have their stablecoin reserves periodically be subjected to third-party audits. He added that regulators should oversee these attestations and audits.
• Vice Chair Auchincloss provided the other witnesses with an opportunity to comment on Mr. Bankman-Fried’s response.
  • Mr. Allaire expressed support for Mr. Bankman-Fried’s recommendations. He remarked that clarity on stablecoin disclosure, reporting, reserve, and liquidity requirements would be “extremely valuable” in terms of fostering confidence within the market. He added that such clarity would enable U.S. dollar-backed stablecoins to flourish on the internet.
  • Mr. Cascarilla also expressed support for Mr. Bankman-Fried’s recommendation. He commented that consumers could not fully trust U.S. dollar-backed stablecoins, which he called unfortunate. He stated that putting U.S. dollars into blockchain environments would be beneficial and called it “crucial” for the U.S. to establish a clear regulatory framework that created parity across financial products. He remarked that having a primary regulator, clear reserve requirements, and enforcement of the reserve requirements would create a fair environment for U.S. dollar-backed stablecoins.
• Vice Chair Auchincloss remarked that Congress ought to designate a primary regulator for stablecoins that would set disclosure and auditing requirements for these assets.

Rep. Van Taylor (R-TX):

• Rep. Taylor mentioned how his state of Texas had recently enacted more favorable cryptocurrency and blockchain policies. He mentioned how Stellar had developed a partnership with MoneyGram International (which employed many of his constituents). He asked Ms. Dixon to further discuss this partnership between Stellar and MoneyGram International. He stated that MoneyGram International was one of the world’s premiere money transfer operations and noted how some countries had 20 percent of their gross domestic products (GDPs) transferred in through MoneyGram International.
  • Ms. Dixon remarked that Stellar’s partnership with MoneyGram International demonstrated the interoperability that blockchain technology had with the existing financial infrastructure and how blockchain technology could expand access to financial services for unbanked and underbanked individuals. She further highlighted how blockchain technology enabled instantaneous settlement for money transmitters. She testified that Stellar’s partnership with MoneyGram International was currently in the pilot phase and noted that it would allow consumers to transfer assets without a bank account. She stated that the most difficult aspect of blockchain technology was currently the ability of users to access on and off ramps without bank accounts. She stated that Stellar’s partnership with MoneyGram International would address this difficulty. She indicated that users with Stellar-enabled digital wallets from around the world will be able to transfer funds using the Stellar-MoneyGram International partnership. She explained that users could convert their fiat currencies at MoneyGram International locations into USDC, which could then be stored in a digital wallet or sent to other people. She noted that the partnership would be made global next year and would allow people in foreign countries to withdraw digital currencies from MoneyGram International locations and convert said currencies into local currencies. She concluded that the Stellar-MoneyGram International partnership would be very beneficial to users given how it leveraged blockchain technology’s speed and enabled users to access blockchain on and off ramps.
• Rep. Taylor then discussed how cryptocurrency companies currently needed to obtain licenses for every state that they operated in. He asked Ms. Dixon to indicate whether this state-based approach to overseeing cryptocurrency companies was effective.
  • Ms. Dixon indicated that Stellar did not require multiple state licenses because it only provided blockchain infrastructure. She stated that the companies that Stellar worked with did face challenges in terms of obtaining multiple licenses. She commented however that these companies did appear to be successful in terms of navigating the state-based licensing system.
• Rep. Taylor lastly asked the witnesses to indicate whether they believed that the digital assets industry was unregulated.
  • Ms. Dixon remarked that the cryptocurrency-related activities were heavily regulated. She stated that policymakers should not seek to create a new regulatory framework and should instead work to address regulatory gaps.
• Rep. Taylor expressed agreement with Ms. Dixon’s remark that the digital assets industry was heavily regulated.