Examining Digital Assets: Risks, Regulation, and Innovation (U.S. Senate Committee on Agriculture, Nutrition, and Forestry)

Hearing	Examining Digital Assets: Risks, Regulation, and Innovation
Committee	U.S. Senate Committee on Agriculture, Nutrition, and Forestry
Date	February 9, 2022

 

Hearing Takeaways:

• The U.S.’s Oversight and Regulation of Digital Assets and Cryptocurrencies: The hearing focused on the U.S.’s current oversight and regulation of digital assets and cryptocurrencies, with a particular emphasis on the U.S. Commodity Futures Trading Commission’s (CFTC) role in this space. Committee Members and the hearing’s witnesses highlighted the fragmented nature of the U.S.’s regulatory framework for digital assets and expressed interest in working to provide more regulatory clarity within the space. There was a widespread view at the hearing that the CFTC would be well-suited to play a key role in overseeing the space given its experience as a market regulator and the fact the two cryptocurrencies that accounted for the majority of outstanding digital assets (Bitcoin and Ether) were considered commodities. Committee Members and the hearing’s witnesses contended that regulatory clarity would be key to ensuring that the U.S. remained a global leader in digital asset innovation and to attract digital assets innovation and activity to the U.S.
  • Classification of Digital Assets and Cryptocurrencies: A key area of discussion during the hearing was whether digital assets and cryptocurrencies should be considered to be commodities, securities, or some other asset class. The hearing’s witnesses highlighted how digital assets encompassed various asset types and that the asset type of a given digital asset might change over time. They also stated that many digital assets did not fit neatly into existing asset type categories and suggested that more regulatory clarity could help to address these edge cases.
  • Current Limitations of the CFTC’s Regulatory Authority: CFTC Chairman Behnam noted that the CFTC’s surveillance authority over the digital assets market was limited to fraud and manipulation. He stated that the digital asset market was “unregulated” and mentioned how the U.S. relied upon state money transmitter licenses to oversee the market. He highlighted how the CFTC’s enforcement actions within the digital assets space had largely relied upon tips and whistleblowers and stated that the CFTC lacked the necessary tools to proactively police the space. He called on Congress to make the digital assets market more transparent so that the CFTC could better surveil it.
  • Oversight of the Digital Asset Spot Markets: Committee Members and CFTC Chairman Behnam expressed broad interest in providing the CFTC with the authority to directly oversee digital asset commodity spot markets. Mr. Bankman-Fried remarked that the absence of a federal regulator for digital asset spot markets posed risks to consumers, fostered systemic financial risks, and created uncertainty for the digital assets industry. He stated that this lack of federal regulation had led to 95 percent of digital assets trading occurring outside of the U.S. He also noted how the majority of digital assets were not accessible from the U.S. CFTC Chairman Behnam remarked that the CFTC possessed a “general understanding” of how it should oversee cryptocurrency markets given its experience as a market regulator. He elaborated that cryptocurrencies tended to function and trade in marketplaces in similar manners to other types of assets. He acknowledged however that policymakers would need to address the unique characteristics of cryptocurrencies with regard to their underlying technology, traceability, and sourcing. He also stated that policymakers would need to define what would constitute a reportable transaction and set information collection standards that were similar and consistent with global standards.
  • Request to Provide the CFTC with More Authority and Resources: CFTC Chairman Behnam remarked however that the CFTC would require additional authority and resources if it were to take on oversight responsibilities of the digital assets spot market. He specifically stated that the CFTC did not currently have the technical capability to guard proprietary information and deal with cyberattacks in the cryptocurrency sector. He estimated that Congressional authorization of CFTC regulation of digital asset commodities would require the CFTC to receive an additional $100 million in appropriations from Congress. Mr. Bankman-Fried suggested that increased Congressional appropriations and contributions from the digital asset industry could support the CFTC’s efforts to license and regulate the industry. He predicted that other digital asset industry stakeholders would be willing to participate in a contributions system in order to support the CFTC’s expanded oversight efforts.
  • Upcoming Executive Order (EO) on Digital Assets: CFTC Chairman Behnam also testified that the CFTC had been working with the White House “quite frequently” to develop the EO on digital assets over the past several months. He stated that he did not know when the EO would be issued.
• Other Digital Asset, Cryptocurrency, and Blockchain Technology Policy Issues: Committee Members and the hearing’s witnesses expressed interest in other policy issues impacting the digital asset, cryptocurrency, and blockchain technology industries.
  • Risks of Digital Asset Scams for Consumers: Full Committee Chairman Debbie Stabenow (D-MI), CFTC Chairman Behnam, and Mr. Werbach raised concerns over the risks of digital asset scams for consumers. CFTC Chairman Behnam mentioned how the CFTC was using its Office of Customer Education and Outreach to release material to the public about the fraud, manipulation, and risks associated with digital assets. He stated that the single best action that Congress could take to support customer protections would be to bring a regulatory structure to the digital assets market.
  • Risks of Digital Assets Being Stolen Through Hacks Sen. Sherrod Brown (D-OH) and Mr. Werbach raised concerns over the potential for hacking of digital assets and cryptocurrencies. Mr. Werbach noted that while blockchain networks were very secure, he highlighted how the failure of consumers to fully secure their keys to blockchain networks had created opportunities for hacks. He commented that this dynamic meant that consumers could not rely on banks or intermediaries to provide them with total security (as was possible under the current financial system). Mr. Bankman-Fried stated that the CFTC and other federal agencies possessed sophisticated tools to help mitigate these risks and highlighted how the CFTC subjected their registrants to an extensive cybersecurity and anti-hacking program. He suggested that digital asset exchanges ought to be subject to the CFTC’s cybersecurity and anti-hacking program.
  • Risks of Digital Assets Being Used for Illicit Activities: Committee Members and the hearing’s witnesses further raised concern over the use of digital assets in illicit activities. Mr. Werbach mentioned how Chainalysis had found that cryptocurrency crime had reached an all-time high in 2021 with $14 billion being sent to known illicit addresses.
  • Impact of Cryptocurrency Mining on Climate Change: Committee Members and CFTC Chairman Behnam expressed concerns with the large amounts of energy that was consumed as part of the cryptocurrency mining process and testified that he had directed the CFTC’s Climate Risk Unit (CRU) and LabCFTC to examine the climate change implications of digital assets. He suggested that the development of climate change disclosures could help to discourage the use of carbon intensive cryptocurrency mining methods and shift this activity towards more renewable energy sources. Ms. Ro and Ms. Boring remarked however that cryptocurrency mining was driving demand for renewable energy sources as these energy sources tended to be cheaper than fossil fuel energy sources. They contended that this demand would make renewable energy sources financially viable, which would ultimately help to combat climate change.
  • Impact of Digital Assets and Cryptocurrencies on Efforts to Foster Financial Inclusion for Minority and Underserved Communities: Sen. Cory Booker (D-NJ) and Mr. Bankman-Fried expressed hope that digital assets and cryptocurrencies could help underserved and minority communities to access banking services promptly and without fees. Mr. Bankman-Fried specifically highlighted how digital asset platforms (like FTX) were unique amongst financial platforms in that they provided free access to data and the same levels of liquidity to all of their customers.
  • Prospects for a Digital U.S. Dollar: CFTC Chairman Behnam indicated that while he was not yet ready to conclude that the development of a digital U.S. dollar would ensure that the U.S. dollar remained the world’s reserve currency, he remarked that the U.S. government (particularly the U.S. Federal Reserve) was actively considering the feasibility of a digital U.S. dollar. He stated that the U.S. would need to be “deliberate” and “cautious” as it worked to implement digital U.S. dollar technology into the traditional financial system. He commented however that the U.S. needed to be prepared to implement a digital U.S. dollar if future technological developments necessitated it.
  • Digital Asset and Blockchain Applications within the Agriculture and Livestock Space: Both Sen. Roger Marshall (R-KS) and Sen. John Thune (R-SD) expressed interest as to whether digital assets and blockchain applications had specific applications within the agriculture and livestock space. CFTC Chairman Behnam stated that some cryptocurrencies could possibly be used as risk management tools against movements in the values of currencies or other commodities. He commented however that more information was required for determining how the values of cryptocurrencies moved relative to the values of currencies and commodities before using cryptocurrencies as risk management tools. Ms. Ro and Ms. Boring also mentioned how there were banks and companies working to use blockchain technology to track cattle throughout the beef supply chain.

Hearing Witnesses:

Panel I:

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

Panel II:

1. Ms. Sandra Ro, Chief Executive Officer, Global Blockchain Business Council – USA
2. Mr. Samuel Bankman-Fried, Founder and Chief Executive Officer, FTX – US
3. Ms. Perianne Boring, Founder and Chief Executive Officer, Chamber of Digital Commerce
4. Mr. Kevin Werbach, Professor, The Wharton School, University of Pennsylvania

Member Opening Statements:

Full Committee Chairman Debbie Stabenow (D-MI):

• She discussed how digital assets and cryptocurrencies aimed to democratize the U.S. financial system and offer new tools for individuals that lacked access to traditional banks and reliable currencies.
  • She noted how “thousands” of digital assets and cryptocurrencies have been developed since the creation of Bitcoin in 2008.
• She highlighted how cryptocurrencies were not backed by the full faith and credit of a central bank and commented that the volatility of cryptocurrencies often made them risky forms of payment and unreliable stores of value.
• She stated however that digital assets could foster a more inclusive financial system that would enable Americans to quickly and easily send money.
• She then raised concerns that many digital asset exchanges were either unregulated or held to lower standards than traditional financial institutions.
  • She commented that the current situation posed “unacceptable” risks to consumers and could lead to instability in the U.S.’s financial markets.
• She further alleged that some trading platforms were failing to prohibit abusive activities, such as insider trading.
• She mentioned how the value of digital assets had recently plummeted and noted how one-third of the Americans that traded digital assets had annual incomes of less than $60,000.
• She also raised concerns over how the mining of Bitcoin and other digital assets contributed to climate change due to the mining’s energy intensive nature.
  • She asserted that the environmental impact of digital assets technology must be addressed.
• She remarked that regulation and innovation were not mutually exclusive and called on Congress to work with regulators and the Biden administration to develop a regulatory framework for digital assets that protected consumers and the environment.
  • She commented that the CFTC would play a key role in this effort and noted how the CFTC already regulated digital asset derivatives and policed fraud in spot markets.

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

• He remarked that digital assets and blockchain technology would continue to impact the functioning of global markets.
• He discussed how digital asset spot markets were currently subject to a “patchwork” of regulations at the federal and state levels.
  • He mentioned how he had recently joined Full Committee Chairman Debbie Stabenow (D-MI), as well as U.S. House Committee on Agriculture Chairman David Scott (D-GA) and Ranking Member GT Thompson (R-PA), in sending a letter to CFTC Chairman Rostin Behnam that inquired about the scope and size of digital asset markets and whether the CFTC was working with other financial regulators to oversee the digital assets ecosystem.
• He expressed interest in using the hearing to help provide more certainty to digital asset industry market participants as to whether certain digital assets constitute securities or commodities.
• He further expressed interest in assessing whether expanding the CFTC’s regulatory footprint to oversee digital asset commodity spot markets would be possible and/or prudent.
  • He commented that Congress would need to obtain feedback from exchanges, consumer advocates, and other market participants in assessing this question.

Panel I Opening Statements:

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

• He remarked that the CFTC needed to understand underlying reference cash markets in order to ensure the integrity of derivatives markets.
• He noted that while the CFTC lacked direct statutory authority to regulate cash markets, he indicated that the CFTC possessed authority to address fraud and manipulation.
  • He stated that the CFTC employed its enforcement authority when it detected potential fraud or manipulation in an underlying cash market.
• He remarked that the digital assets market (which was currently most supervised by state money transmitter licenses) was unique and presented many novel issues for the CFTC.
• He stated that there did not exist a single regulator at either the federal or state levels that could fully police conflicts of interest and deceptive trading practices within the digital asset space that impact retail investors.
• He also noted that while the CFTC’s core responsibility was regulating the commodity derivatives market, he asserted that there were several unique elements of the digital asset commodity cash market that distinguished it from other commodity cash markets.
  • He commented that these unique elements suggested that the digital asset commodity cash market would benefit greatly from additional CFTC oversight.
• He highlighted how the cash market for digital assets was characterized by a high number of retail investors that were mostly engaged in price speculation.
  • He mentioned how many of these investors regularly assumed high levels of leverage when trading, which could lead to market volatility (especially during market downturns).
• He also noted how most cash market investors entrusted their digital assets to the platforms on which they traded and stated that these investors often failed to differentiate between the custody arrangements of the platforms and the arrangements offered by traditionally regulated banking institutions.
• He remarked that the aforementioned characteristics combined with the size, customer, operational, and financial stability risks associated with the cash market necessitated a “proactive” federal regulatory approach to digital assets.
• He emphasized how the digital asset industry did not fall under a single comprehensive U.S. regulatory regime and commented that the U.S.’s current regulatory regime for digital assets was very fragmented.
• He discussed how the CFTC had been “aggressive” in using its limited fraud and manipulation authority to oversee digital assets since 2014.
  • He testified that the CFTC had brought nearly 50 enforcement actions, was overseeing an increasing number of registrants offering digital asset-based derivatives products, and had established dedicated internal functions to stay abreast of technical innovations within the digital assets space.
• He stated that the digital assets sector was demanding an increasing amount of the CFTC’s attention and requested that Congress provide the CFTC with additional resources to address these increasing risks.
• He contended that the CFTC was “well-suited” to play a role in overseeing the cash and digital asset commodity market.
• He then discussed how the impact of digital assets technology extended beyond financial markets and to payments, custody, illicit activity, and national security.
  • He further raised concerns regarding the impacts of the energy use needed to mine cryptocurrencies.
• He stated that any regulatory responses to digital assets must include measures to bring additional transparency to the conduct that makes this innovation possible.
• He lastly testified that he had directed the CFTC’s Climate Risk Unit (CRU) and LabCFTC to examine the climate change implications of digital assets.

Congressional Question Period:

Full Committee Chairman Debbie Stabenow (D-MI):

• Chairman Stabenow noted how Chairman Behnam had stated that it was difficult for the CFTC to estimate how many market participants were trading digital assets due to the CFTC’s limited visibility into the digital assets market. She asked Chairman Behnam to discuss the CFTC’s ability to surveil the digital assets spot market for fraud and manipulation. She also asked Chairman Behnam to address the implications of the CFTC’s surveillance limitations.
  • Chairman Behnam remarked that the CFTC’s surveillance authority over the digital assets market was limited to fraud and manipulation. He noted how there existed several exchange-traded derivatives that were based on crypto assets on several CFTC-registered exchanges. He asserted however that the CFTC had limited visibility into the underlying digital assets market. He testified that the CFTC made use of its current surveillance tools to look into the futures products of digital asset market participants. He remarked that the digital assets market was “unregulated” and mentioned how the U.S. relied upon state money transmitter licenses to oversee the market. He highlighted how the CFTC’s enforcement actions within the digital assets space had largely relied upon tips and whistleblowers and stated that the CFTC lacked the necessary tools to proactively police the space. He called on Congress to make the digital assets market more transparent so that the CFTC could better surveil it.
• Chairman Stabenow expressed agreement with Chairman Behnam’s call for increased transparency for the digital assets market. She then discussed how the U.S. was experiencing an “explosion” of crypto asset advertisements that were being marketed towards retail investors. She also stated that it was becoming easier for people to buy and sell digital assets through mobile applications. She expressed concerns that the U.S. was failing to sufficiently educate people about the risks associated with crypto asset trading. She asked Chairman Behnam to provide recommendations for customer protections as digital assets trading technologies became more accessible.
  • Chairman Behnam remarked that the CFTC was making use of its existing resources to protect consumers engaged in digital asset trading. He mentioned how the CFTC was using its Office of Customer Education and Outreach to inform the public about the fraud, manipulation, and risks associated with digital assets. He stated that the single best action that Congress could take to address customer protections would be to bring a regulatory structure to the digital assets market. He commented that such a structure would enable regulators to embed pre-trade and post-trade transparency into the digital assets market. He remarked that a regulatory structure for the digital assets market would foster confidence amongst market participants in the event of continued fraud, manipulation, and/or anti-competitive behavior.
• Chairman Stabenow asked Chairman Behnam to indicate whether the CFTC possessed the necessary resources to take on additional responsibilities with regard to the digital asset market.
  • Chairman Behnam remarked that the CFTC lacked the necessary resources to take on additional responsibilities with regard to the digital asset market. He recounted how the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) had provided the CFTC with the authority to regulate the over-the-counter (OTC) derivatives market and highlighted how this new authority had led appropriations for the CFTC to grow by about $100 million over ten years. He stated that Congressional authorization of CFTC regulation of digital asset commodities would likely require the CFTC to receive an additional $100 million in appropriations from Congress.

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

• Ranking Member Boozman noted how Chairman Behnam had expressed the CFTC’s interest in obtaining additional authority to oversee digital asset spot markets. He asked Chairman Behnam to address why current state-based regulations were inadequate for overseeing digital asset spot markets. He also asked Chairman Behnam to discuss why the CFTC was uniquely positioned to regulate these markets.
  • Chairman Behnam mentioned how he had previously served in the Office of the Attorney General for the State of New Jersey and remarked that state financial regulators could play key roles in protecting customers. He stated however that there should be as few regulators as possible when it came to market oversight. He elaborated that regulatory fragmentation often led to price dislocations that could ultimately create risks for investors. He asserted that having a limited number of federal regulators oversee the digital asset spot markets would ensure that all market participants would be subject to the same set of rules.
• Ranking Member Boozman asked Chairman Behnam to respond to concerns that expanding the CFTC’s role for regulating digital assets would lead to “mission creep” by the CFTC into traditional commodity spot markets.
  • Chairman Behnam remarked that providing the CFTC with an expanded role for regulating digital assets should not be used to have the CFTC oversee a larger pool of cash commodity markets. He noted how many cash commodities (including in the agricultural space and the energy space) had existing federal regulatory oversight. He stated that the digital assets market was unique due to its significant retail-facing element and its current lack of oversight. He remarked that Congress could limit any potential expansion of authority for the CFTC to just digital commodity assets.
• Ranking Member Boozman then asked Chairman Behnam to propose cybersecurity and customer protection measures for adoption if the CFTC were to be provided with more regulatory authority over digital asset spot markets.
  • Chairman Behnam discussed how the CFTC took cues from federal agencies on cybersecurity issues and partnered with other agencies to address cyber threats. He remarked that the provision of additional regulatory authority to the CFTC over digital asset spot markets would not impact the CFTC’s cybersecurity coordination efforts. He noted how cyberattacks and cyber thefts were currently prevalent within the digital asset space. He stated that policymakers needed to consider the relationship between the CFTC and third parties and the relationship between registrants and the parties that they contract with. He elaborated that federal legislation should grant the CFTC with the authority to look into registrants (rather than only prescribe cybersecurity principles for the registrants).

Sen. Tommy Tuberville (R-AL):

• Sen. Tuberville first thanked Chairman Behnam for responding to his letter on the need to include state securities regulators in a working group on digital assets. He then remarked that the U.S. needed to ensure that the U.S. dollar would remain the world’s reserve currency. He asked Chairman Behnam to indicate whether the U.S. would need to develop a digital U.S. dollar in order to maintain the U.S. dollar’s world reserve currency status.
  • Chairman Behnam indicated that while he was not yet ready to conclude that the development of a digital U.S. dollar would ensure that the U.S. dollar would remain the world’s reserve currency, he remarked that the U.S. government (particularly the U.S. Federal Reserve) was actively considering the feasibility of a digital U.S. dollar. He stated that the U.S. would need to be “deliberate” and “cautious” as it worked to implement digital U.S. dollar technology into the traditional financial system. He commented however that the U.S. needed to be prepared to implement a digital U.S. dollar if future technological developments necessitated it.
• Sen. Tuberville then raised concerns that certain types of lawful businesses (including oil, gas, and firearms companies) were experiencing challenges when trying to access financial services. He mentioned how there were reports of financial regulators putting pressure on banks to cut off financial services to legitimate crypto businesses. He asked Chairman Behnam to indicate whether he was aware of these reports and to indicate whether such pressure was wrong.
  • Chairman Behnam testified that he was not aware of any reports that financial regulators were putting pressure on banks to cut off financial services to legitimate crypto businesses. He remarked that the U.S. should not be cutting off certain types of businesses from the traditional banking system. He stated however that federal policymakers needed to address climate change “as soon as possible” and commented that these efforts would involve managing the transition risk associated with moving away from carbon intensive energy sources.
• Sen. Tuberville then asked Chairman Behnam to address how foreign adversaries (such as China, Iran, and Russia) use crypto-related cybercrimes to harm U.S. citizens and U.S. national interests. He also asked Chairman Behnam to discuss how the CFTC was working to address these threats.
  • Chairman Behnam remarked that the CFTC’s limited scope of visibility into the cryptocurrency market hampered the CFTC’s ability to oversee the cryptocurrency market. He also mentioned how the U.S. Department of Justice (DoJ) had just seized $3.5 billion in Bitcoin from a hack that had occurred back in 2016 and stated that this seizure demonstrated the traceability of blockchain technology. He commented however that it took time to monitor and determine precise cryptocurrency flows. He remarked that increased transparency to financial markets through a regulatory structure would help both federal and state prosecutors to pursue illicit activity related to cryptocurrencies.
• Sen. Tuberville then mentioned how the White House was currently working to develop an EO on digital assets. He asked Chairman Behnam to indicate whether either he or his staff were involved in the development of the EO.
  • Chairman Behnam testified that the CFTC had been working with the White House “quite frequently” to develop the EO on digital assets over the past several months. He stated that he did not know when the EO would be issued.

Sen. Roger Marshall (R-KS):

• Sen. Marshall first requested that the Committee invite U.S. Secretary of Agriculture Tom Villsack to testify before it to address the recent increase in the price of fertilizer and the impact of this increased price on federal food programs. He then mentioned how numerous foreign officials had raised concerns with him about cryptocurrencies (specifically regarding the use of cryptocurrencies in human trafficking and drug running). He also noted how many companies (such as Coinbase) were purchasing CFTC-regulated exchanges in order to voluntarily subject themselves to regulation. He asked Chairman Behnam to discuss how the CFTC would regulate companies like Coinbase and ensure know-your-customer (KYC) disclosures.
  • Chairman Behnam noted that Coinbase would use its acquisition of a CFTC-regulated exchange in order to engage in derivatives trading based on his understanding. He stated that the CFTC maintained several onboarding processes and requirements to ensure that exchanges were abiding by anti-money laundering (AML) requirements, KYC requirements, and proper capital requirements. He expressed confidence in the robustness of the CFTC’s oversight of exchanges. He also highlighted how the CFTC worked closely with exchanges and self-regulatory organizations (SROs), including the National Futures Association (NFA), in order to identify bad actors.
• Sen. Marshall asked Chairman Behnam to indicate whether exchanges that were not subject to monitoring often did not know the identities of their customers.
  • Chairman Behnam answered affirmatively.
• Sen. Marshall asked Chairman Behnam to indicate whether there existed significant concerns that cryptocurrencies were being used for the purposes of human trafficking and drug running.
  • Chairman Behnam answered affirmatively.
• Sen. Marshall asked Chairman Behnam to address how the CFTC could further combat the use of cryptocurrencies in human trafficking and drug running if it were provided with additional authority.
  • Chairman Behnam remarked that putting cryptocurrency markets under federal regulatory supervision would help to address the human trafficking and drug running issues associated with cryptocurrencies. He asserted that having federal regulatory supervision over cryptocurrency markets would help to deter and combat illicit activity.
• Sen. Marshall then discussed how his farmer and rancher constituents used CFTC-regulated markets to manage their risks. He asked Chairman Behnam to address whether cryptocurrencies could provide these farmers and ranchers with additional risk management tools.
  • Chairman Behnam noted how some cryptocurrencies were marketed as stores of value. He also stated that some cryptocurrencies could possibly be used as risk management tools against movements in the values of currencies or other commodities. He commented however that more information was required for determining how the values of cryptocurrencies moved relative to the values of currencies and commodities before using cryptocurrencies as risk management tools.
• Sen. Marshall lastly asked Chairman Behnam to answer whether Bitcoin was a commodity.
  • Chairman Behnam noted how the U.S. District Court for the Eastern District of New York had ruled in 2018 that Bitcoin did constitute a commodity.

Sen. Kirsten Gillibrand (D-NY):

• Sen. Gillibrand noted how cryptocurrency commodity exchange markets were unique in that they tended to have significant numbers of retail investors participating in them. She stated that cybersecurity must therefore remain a priority in the promulgation of cryptocurrency commodity exchange market regulations. She commented that cyberattacks could create “massive” swings in valuations, losses in intellectual property (IP), and significant market disruptions. She asked Chairman Behnam to discuss the CFTC’s current ability to effectively oversee the cryptocurrency marketplace and prevent cyberattacks.
  • Chairman Behnam remarked that the CFTC lacked sufficient authority to oversee the cash commodity digital asset marketplace. He contended that both regulators, customers, and financial institutions would benefit from a traditional market structure for digital assets (such as the structure implemented in the derivatives market). He elaborated that digital asset market participants would benefit from the transparency and enforcement that accompanied a traditional market structure.
• Sen. Gillibrand interjected to ask Chairman Behnam to indicate whether the CFTC possessed the ability to manage and guard proprietary information if it were to obtain the authority to oversee the cryptocurrency marketplace. She also asked Chairman Behnam to identify actions that the U.S. could take to prevent cyberattacks in the digital assets space if the CFTC were to obtain the authority to oversee the cryptocurrency marketplace.
  • Chairman Behnam discussed how the CFTC already handled private and confidential information as part of its oversight of derivatives markets. He also noted how the CFTC regularly interacted with market participants and registrants within the derivatives markets to ensure that personally identifiable information (PII) and market information were held securely. He acknowledged that while cryptocurrency technology posed new challenges and risks given its unique nature, he asserted that providing regulatory oversight over the technology could help to reduce these risks.
• Sen. Gillibrand asked Chairman Behnam to directly address whether the CFTC had the ability to guard proprietary information and deal with cyberattacks in the cryptocurrency sector.
  • Chairman Behnam stated that the CFTC did not possess the technical capabilities to guard proprietary information and deal with cyberattacks in the cryptocurrency sector.
• Sen. Gillibrand then expressed interest in having the U.S. promulgate regulations for cryptocurrencies that were consistent with the U.S.’s goals to stop climate change. She mentioned how a cryptocurrency mining operation in her state had recently reopened a power plant in order to support their mining efforts. She asked Chairman Behnam to address how the U.S. could ensure that there were proper incentives and regulations in place to support the growth of cryptocurrency technology without undermining current efforts to combat climate change.
  • Chairman Behnam mentioned how he had requested that the CFTC’s CRU look into the cryptocurrency industry’s impact on climate change and to develop policy proposals for addressing this impact. He also mentioned how he had requested that LabCFTC consider climate change-related issues. He further testified that the CFTC was soliciting proposals from stakeholders for addressing the cryptocurrency industry’s impact on climate change. He remarked that market disclosures have historically been successful in terms of addressing the negative externalities of certain activities. He stated that the development of climate change disclosures could help to discourage the use of carbon intensive cryptocurrency mining methods and shift this activity towards more renewable energy sources.

Sen. John Hoeven (R-ND):

• Sen. Hoeven asked Chairman Behnam to indicate whether he would characterize cryptocurrencies as commodities, currencies, or securities.
  • Chairman Behnam noted how there were likely hundreds of thousands of different digital assets and cryptocurrencies and stated that he could not characterize all of these cryptocurrencies the same. He indicated that a “large number” of cryptocurrencies were commodities, including Bitcoin and Ether. He also highlighted how there existed many cryptocurrencies that were securities. He remarked that policymakers should work to develop “rules of the road” that outlined what might constitute a commodity versus what might constitute a security.
• Sen. Hoeven asked Chairman Behnam to indicate whether there should be a lead agency for regulating cryptocurrencies.
  • Chairman Behnam discussed how the CFTC and the U.S. Securities and Exchange Commission (SEC) already coordinated on regulating various financial products and stated that both agencies had a “great relationship.” He asserted that it was possible to develop a regulatory framework that would enable both the CFTC and the SEC to oversee the cryptocurrency market.
• Sen. Hoeven asked Chairman Behnam to clarify whether he was calling for the CFTC, the SEC, and the U.S. Department of Treasury to all oversee the cryptocurrency market.
  • Chairman Behnam noted how the CFTC and the SEC were the federal government’s only market regulators and stated that those two agencies should serve as the only market regulators for digital assets. He remarked however that additional federal departments and agencies would likely need to address cryptocurrencies with regard to their illicit activity, national security, and trade implications.
• Sen. Hoeven asked Chairman Behnam to address how Congress could ensure that there existed a proper regulatory oversight structure for cryptocurrencies.
  • Chairman Behnam remarked that the CFTC needed authorization and a regulatory structure over cash digital assets. He commented that this authorization structure would not differ significantly from the markets that the CFTC currently oversaw. He acknowledged that the cryptocurrency market did pose novel questions related to custody and settlements given its digital nature. He stated that the U.S. needed to embed key market principles into the digital assets space, including pre-trade transparency, centralized and concentrated order books, and post-trade transparency. He further called for clear and consistent rules regarding custody, settlement, clearing, and other elements of the trading process.
• Sen. Hoeven asked Chairman Behnam to address whether the CFTC understood how it should approach cryptocurrencies given the nascency and complexity of cryptocurrencies.
  • Chairman Behnam remarked that the CFTC possessed a “general understanding” of how it should oversee cryptocurrency markets given its experience as a market regulator. He elaborated that cryptocurrencies tended to function and trade in marketplaces in similar manners to other types of assets. He acknowledged however that policymakers would need to address the unique characteristics of cryptocurrencies with regard to their underlying technology, traceability, and sourcing. He also stated that policymakers would need to define what would constitute a reportable transaction and set information collection standards that were similar and consistent with global standards.
• Sen. Hoeven lastly asked Chairman Behnam to project whether cryptocurrencies would continue to grow in popularity and serve as a pervasive means of executing financial transactions.
  • Chairman Behnam remarked that he was operating under the assumption that cryptocurrency transactions could continue to grow and become more intertwined into the traditional finance system. He asserted that the U.S.’s failure to oversee and build a regulatory structure for cryptocurrencies could lead to future financial stability and illicit activity challenges.

Sen. Amy Klobuchar (D-MN):

• Sen. Klobuchar noted how there were multiple regulators at the federal and state levels that oversaw digital asset trading. She asked Chairman Behnam to discuss the existing regulatory gaps between the CFTC and the SEC with regard to digital asset trading regulation. She also asked Chairman Behnam to provide recommendations for addressing these regulatory gaps. She lastly asked Chairman Behnam to address whether the CFTC was well-suited to assume a larger role in overseeing spot markets for digital assets.
  • Chairman Behnam remarked that the most noticeable regulatory gap involved the lack of clarity surrounding what constitutes a security versus what constitutes a commodity. He commented that this lack of clarity posed challenges to both regulators and market participants. He then discussed how the CFTC was a derivatives market regulator and did not regulate cash markets. He remarked that the CFTC would require more authority from Congress in order to regulate cash markets for digital assets and asserted that the CFTC was well-suited to regulate cash markets. He contended that the core principles of markets were similar across all asset classes and stated that the CFTC could develop expertise where necessary.
• Sen. Klobuchar asked Chairman Behnam to indicate whether there existed parallels between how Dodd-Frank had established a split regime for swap instruments and the current need for digital assets regulation.
  • Chairman Behnam highlighted how there had previously existed friction between the CFTC and the SEC in regulating swaps. He noted how Congress had provided the CFTC and the SEC with “clear directives” to oversee the swaps market and stated that the swaps market was now well-functioning. He remarked that jurisdiction over different types of digital assets could be split between the CFTC and the SEC.
• Sen. Klobuchar then discussed how the market capitalization of cryptocurrencies had grown significantly from $1.6 billion in 2013 to nearly $2 trillion today. She stated that the popularity of these assets was largely attributable to their ability to hedge against risks. She asked Chairman Behnam to discuss how the CFTC disseminated information to the general public about scams and bad actors within the cryptocurrency space in light of the growing popularity of cryptocurrency spot market trading.
  • Chairman Behnam noted how traditional scam methods, such as Ponzi schemes and pump-and-dump schemes, were currently present within the cryptocurrency space and mentioned how the CFTC had recently issued a notice about scams occurring within dating applications. He mentioned how CFTC was using its Office of Customer Education and Outreach to publicize the risks associated with both digital assets and related scams. He also noted how the CFTC was entirely reliant on tips and whistleblowers to bring fraud and manipulation cases, which limited their ability to fully oversee the cryptocurrency space. He raised concerns that the current opaqueness of the cryptocurrency market was causing fraud and manipulation to go unprosecuted.

Sen. Cory Booker (D-NJ):

• Sen. Booker called it urgent for the Committee to address the digital assets space and expressed concerns with how government policies could often not keep pace with technological developments. He stated that there already existed useful cryptocurrency applications and highlighted how minorities were overrepresented in the cryptocurrency market. He commented that cryptocurrencies could help to serve underbanked individuals. He asked Chairman Behnam to identify areas for optimism within the cryptocurrency space. He also asked Chairman Behnam to address why the CFTC would constitute the best agency for regulating cryptocurrencies.
  • Chairman Behnam remarked that cryptocurrencies created a potential avenue for quicker, better, and more efficient access to capital and peer-to-peer value transfers. He called on policymakers to be careful, cautious, and deliberative in approaching cryptocurrency technology. He stated that cryptocurrencies impacted how people could access and transfer capital, which disintermediated longstanding customer guardrails (such as AML and KYC requirements). He then highlighted how the CFTC was already a market regulator with significant experience. He also stated that the CFTC was very knowledgeable about market structures (including surveillance and enforcement principles). He remarked that the CFTC could use this knowledge and experience to inform its oversight of cryptocurrencies. He further mentioned how the CFTC had been “uniquely exposed” to digital assets over the previous six years, which was a significant amount of time when compared to other government agencies.
• Sen. Booker reiterated how minorities (including African Americans and Latinos) were overrepresented in cryptocurrency ownership. He expressed interest in having the Committee take bipartisan action on cryptocurrencies.

Panel II Opening Statements:

Ms. Sandra Ro (Global Blockchain Business Council – USA):

• She recounted her previous work experience at the CME Group where she had helped to develop some of the earliest regulated cryptocurrency products.
  • She testified that the CME Group had worked closely with the CFTC in developing these products and commented that this close relationship was “critical” to the CME Group’s ability to innovate effectively and responsibly.
• She then discussed how the 2008 Bitcoin White Paper had outlined a peer-to-peer electronic cash system using a consensus mechanism known as proof-of-work.
• She noted how transactions were arranged in consecutive blocks on the Bitcoin ledger and how the proof-of-work validation method required members of a network (known as miners) to solve mathematical puzzles in order to secure the network.
  • She indicated that the miner that is first able to solve the mathematical puzzle receives compensation in the form of a block reward (such as Bitcoin).
• She highlighted how a variety of other types of consensus mechanisms have been created since Bitcoin’s inception, including the popular proof-of-stake validation method.
  • She explained that the proof-of-stake validation method involved users offering their digital assets as collateral for a chance to validate a transaction.
  • She noted how the energy required to participate in a proof-of-stake validated network was estimated to be relatively low.
• She remarked that each type of consensus mechanism for blockchain networks had benefits and drawbacks.
• She noted how blockchains helped users to move data as value in a secure and lower cost peer-to-peer model, necessitated collaboration, facilitated the permanence of records, and were traceable.
  • She highlighted how most blockchain ledgers were pseudonymous, which made it possible for outside users to track transactions on blockchains.
• She then discussed several blockchain technology use cases currently being implemented.
  • She mentioned how the First National Bank of Omaha was working with a consortium of partners to create Cattle ID, which was a blockchain system that enables unique identifiers for cattle.
  • She mentioned how Circulor was tokenizing critical minerals and metals to track their journeys from mines to factories to recycling centers.
  • She mentioned how the InterWork Alliance, Microsoft, and other stakeholders were using blockchain technology to create transparent, functional, and voluntary carbon credit markets.
• She remarked that harnessing blockchain technology to address real world problems and expand economic opportunities would be a “generational” effort and asserted that the U.S. could play a leadership role in this effort.

Mr. Samuel Bankman-Fried (FTX – US):

• He noted how his company, FTX, was a global digital asset exchange and testified that roughly $15 billion in volume traded daily on FTX’s platform.
• He remarked that the digital asset industry provided equitable access to users and asserted that this feature was unique to the digital asset industry.
• He discussed how access to market data was traditionally very expensive for market participants, which meant that only the largest and most sophisticated trading firms generally had access to order book information.
  • He noted how financial intermediaries had traditionally obscured market data.
• He remarked that the cryptocurrency industry and FTX provided all of their market data for free to users, regulators, press, and other interested parties.
  • He testified that FTX did not charge licensing fees, registration fees, or data fees for this information.
• He also stated that most consumers did not have the same levels of access to liquidity as compared to sophisticated investors in traditional market structures.
  • He explained that most consumers were required to go through multiple intermediaries to place orders and highlighted how these intermediaries added latency, increased fees, reduced transparency, and reduced the flexibility of the orders that could be sent.
• He testified that FTX allowed all users to send orders directly to the exchange in the same way, regardless of whether the user is sending their orders through FTX’s website, mobile application, or application programming interface (API).
• He then discussed how FTX maintained a spot market that offered digital asset commodity transactions, as well as a CFTC-licensed digital asset derivatives exchange that offered futures and options on digital assets.
  • He testified that FTX’s digital asset derivatives exchange provided equitable access to users and free access to market data.
• He noted how FTX’s digital asset spot market business was not chiefly overseen by a federal markets regulators and indicated that this business was instead overseen by a “patchwork” of state money transmitter and money service business organizations.
• He remarked that the absence of a federal regulator for digital asset spot markets created risks to consumers, fostered systemic financial risks, and created uncertainty for the digital asset industry.
• He stated that this lack of federal regulation had led to 95 percent of digital asset trading occurring offshore.
  • He also noted how the majority of digital assets were not accessible from the U.S.
• He remarked that providing federal oversight and clarity for the digital asset market would help to move liquidity and business in the digital asset markets to the U.S. from abroad.
• He asserted that the CFTC was well-positioned to provide such oversight and clarity for the digital asset market.
  • He commented that the CFTC had “extensive” experience regulating digital asset markets, possessed a strong understanding of cash markets, and had “extensive” experience monitoring the cybersecurity of their registrants.

Ms. Perianne Boring (Chamber of Digital Commerce):

• She remarked that Bitcoin, digital assets, and blockchain technology were the U.S.’s best hope for achieving a sounder and more inclusive financial and monetary system.
  • She asserted that the distributed nature of these technologies ought to be embraced.
• She stated that digital assets technology would play a key role in the financial services industry and predicted that the technology would soon be considered critical financial infrastructure as the world move toward a digital economy.
• She mentioned how many foreign countries were currently competing with the U.S. to be the leaders in digital assets and blockchain technology and expressed concerns that the U.S. was failing to recognize the importance of global leadership within this space.
  • She highlighted how China had made blockchain technology a top national priority.
• She stated that history demonstrated the important role that the private sector played in supporting the U.S.’s global technological supremacy.
• She urged the Committee to consider two key issues for governing digital assets and blockchain technology: regulatory clarity and regulatory cohesion.
• She remarked that the U.S.’s current regulatory structure for digital assets was fragmented, which she asserted was hampering innovation and undermining the U.S.’s global competitiveness 
  • She noted how there were regulators that policed fraud and market integrity within the digital assets space, including the CFTC and the SEC.
  • She noted how there were consumer protection regulators within the digital assets space, including the U.S. Consumer Financial Protection Bureau (CFPB) and the U.S. Federal Trade Commission (FTC).
  • She noted how there were prudential and monetary bank policy regulators within the digital assets space, including the U.S. Federal Reserve, the U.S. Office of the Comptroller of the Currency (OCC), and the U.S. Federal Deposit Insurance Corporation (FDIC).
  • She noted how there were financial policy and anti-crime organization regulators within the digital assets space, including the U.S. Financial Crimes Enforcement Network (FinCEN) and the DoJ.
  • She further noted how there existed state-level regulators that oversaw digital assets.
• She testified that some members of her organization, the Chamber of Digital Commerce, had waited for regulatory action for over five years and then took their products abroad when such action did not occur.
• She urged the Committee to adopt the Chamber of Digital Commerce’s 2019 National Action Plan for Blockchain.
  • She noted how this proposal called for U.S. blockchain policy to take a “holistic” government approach with “clearly articulated” support for the private sector’s development of innovation.
• She also stated that the Congress should identify a lead regulator for digital assets and asserted that the CFTC was well-positioned to assume this role.
  • She commented that the CFTC was a market regulator with a long history of overseeing new and innovative products and had experience in enforcing fraud and manipulation cases.
  • She added that the CFTC already regulated Bitcoin and Ether, which accounted for about 60 percent of the current digital asset market. 
• She noted how the CFTC’s principles-based regime had a mandate to promote responsible innovation and stated that this principles-based approach would be effective for regulating new asset classes given the flexibility that the approach provides.

Mr. Kevin Werbach (The Wharton School, University of Pennsylvania):

• He remarked that digital assets had the potential to increase efficiency, improve equity, promote privacy and individual freedoms, and broadly create more competitive, fair, and transparent markets.
  • He asserted however that policymakers ought to be careful to distinguish between the aspirations and the realities of digital assets.
• He explained that digital assets were things of value that were represented through digital tokens that were used in valid transactions on a blockchain ledger.
• He stated that blockchains diffuse the trust that previously resided in centralized entities.
  • He asserted that this diffusion of trust should not be conflated with the elimination of trust and commented that blockchains only stored value if users believed in their validity.
• He contended that the absence of centralized trust in blockchain created some burdens for users.
  • He noted that a user that lost their cryptographic keys would be effectively unable to recover said keys.
  • He also mentioned how digital asset platforms (such as Coinbase and FTX) generally took custody of user assets because there were efficiencies associated with central intermediation.
• He remarked that decentralized finance (DeFi) presented several challenges to users and called on policymakers to examine where risks and opportunities for abuses arose.
• He then stated that “too much” of the policy conversation surrounding digital assets was based on the mistaken assumption that digital assets were currently unregulated.
  • He commented that the novel nature of digital assets should not invalidate the application of existing regulatory frameworks for derivatives and securities.
• He contended that the CFTC should be provided with authority to oversee digital assets where the market activity involved was something that it was well-suited to address.
• He further asserted that the divides between regulatory agencies should not be a reason for gaps in the regulatory regime for digital assets.
  • He commented that the only long-term way to promote trust in legitimate firms would be to distinguish and take down bad actors.
• He mentioned how Chainalysis had found that cryptocurrency crime had reached an all-time high in 2021 with $14 billion being sent to known illicit addresses.
  • He acknowledged that while this $14 billion amount only accounted for 0.15 percent of total cryptocurrency transaction volume, he commented that this amount was still significant.
• He also stated that practices that were “routinely” banned for other asset classes, including wash trading, pump-and-dump schemes, fake assets, and hidden conflicts, were widespread within the cryptocurrency space.
  • He highlighted how the stablecoin Tether continued to play an outsized role in the digital assets space, despite findings that it had lied about its backing assets and had engaged in other illegitimate practices.
• He remarked that the failure of investors and major firms to lose trust in untrustworthy platforms suggested that investors might not be rationally assessing risks within the cryptocurrency space, which could pose broader economic risks.
• He recounted his previous work developing the U.S.’s regulatory approach to the internet during the 1990s and noted that the Clinton administration had sought to avoid unnecessary restrictions on innovation while addressing the policy issues that did arise.
  • He highlighted how most internet activity during this period did not involve regulated activities and mentioned how regulators only took action in the limited instances where regulated activities were involved.
• He noted that while there existed claims that regulatory hurdles for digital assets would undermine the U.S. digital asset industry’s international competitiveness, he stated that the U.S. was currently home to a large, diverse, and growing industry of digital asset and blockchain firms and investors.
• He called on the Committee to ensure that the CFTC possessed the legal authority and resources to engage in fact finding, rulemaking, and enforcement activities within the digital assets space in concert with other federal and state regulators.

Congressional Question Period:

Full Committee Chairman Debbie Stabenow (D-MI):

• Chairman Stabenow noted how Mr. Bankman-Fried had supported increased regulation for the digital asset spot market. She raised concerns that failing to provide the CFTC with additional resources to provide such regulation would undermine the CFTC’s abilities to fulfill their traditional responsibilities. She asked Mr. Bankman-Fried to address how Congress should ensure that the CFTC possessed adequate resources to continue to fulfill their existing oversight responsibilities while also expanding their total responsibilities.
  • Mr. Bankman-Fried expressed support for having the CFTC play a more active role in licensing and regulating the digital assets space. He commented that this more active role would require Congress to provide the CFTC with more authority and more resources. He suggested that increased Congressional appropriations and contributions from the digital asset industry could support the CFTC’s efforts to license and regulate the digital asset industry. He stated that FTX would be willing to contribute to digital asset regulatory efforts so long as there existed a “reasonable framework” for these contributions. He predicted that other digital asset industry stakeholders would also be willing to participate in a contributions system to support the CFTC’s oversight efforts.
• Chairman Stabenow expressed receptiveness towards Mr. Bankman-Fried’s proposal to have the digital asset industry help to fund the CFTC’s oversight over the industry through fees. She then discussed how Bitcoin mining was “extremely” energy intensive. She noted how the U.S. was currently home to one-third of the world’s Bitcoin mining and how much of this mining activity was powered by fossil fuels. She raised concerns that this mining activity would threaten the U.S.’s ability to combat climate change and strain the U.S.’s electrical grid. She asked Ms. Ro to indicate whether cryptocurrency mining could become more sustainable and to provide recommendations for how Congress could encourage sustainable cryptocurrency mining.
  • Ms. Ro recounted how most cryptocurrency mining had been occurring in China and Russia five years ago and highlighted how these countries tended to use less environmentally friendly energy sources. She noted that this cryptocurrency mining activity had moved to the U.S., Canada, and the Nordic countries in the ensuing years because these countries offered cheaper energy. She called this development a “net positive” for the U.S. She remarked that the U.S. should encourage cryptocurrency mining firms to establish their operations in regulated environments and encourage these firms to make use of renewable energy sources to power their operations. She highlighted how private sector firms were already looking to adopt more renewable energy sources to power their cryptocurrency operations and subject themselves to energy caps during periods of high energy usage. She commented that these practices would help the U.S. to transition to renewable energy sources.
• Chairman Stabenow asked Ms. Boring to provide the Chamber of Digital Commerce’s view regarding the environmental sustainability of cryptocurrency mining.
  • Ms. Boring noted how Bitcoin mining currently consumed 0.12 percent of the world’s energy production. She commented that the elimination of Bitcoin mining would thus not eliminate the threat of climate change and energy usage challenges. She then noted how there existed “very strong” visibility into the energy usage and costs associated with Bitcoin mining as a result of the transparent nature of blockchains. She also stated that the Bitcoin mining sector was supporting the transition to renewable energy sources and highlighted how the industry received 59 percent of its power from renewable energy sources. She asserted that the Bitcoin mining industry was one of the world’s most environmentally sustainable industries.

Sen. Sherrod Brown (D-OH):

• Sen. Brown first commented that the fact that less cryptocurrency mining was occurring in China was not on its own enough to address the climate change concerns associated with cryptocurrency mining. He then raised concerns that digital assets posed significant risks to consumers and mentioned how the U.S. Senate Committee on Banking, Housing, and Urban Affairs was working to address this issue. He noted how digital assets facilitated transactions outside of the purview of regulations meant to prevent illicit actors from making use of the traditional financial system. He mentioned how the DoJ had recently announced an investigation into two individuals involved in a stolen Bitcoin laundering scheme. He asked Mr. Werbach to address how the U.S. could ensure that digital assets were subject to the Bank Secrecy Act (BSA) and AML requirements.
  • Mr. Werbach noted how digital assets were often involved in illicit activities. He remarked that the U.S. needed to bring digital assets within existing frameworks for overseeing illicit finance and to identify new technological means to provide such oversight. He stated that these efforts would involve finding ways for regulated entities to know the identities of their customers, communicate these identities with law enforcement bodies, and provide surveillance capabilities for regulators. He mentioned how the Financial Action Task Force (FATF) had adopted the Travel Rule for communicating information between virtual asset exchanges. He noted how the digital asset industry was working to develop the necessary technologies to implement the Travel Rule in a manner that was consistent with existing regulations. He remarked that market regulators would ultimately need to have oversight of digital asset exchanges given how digital assets were often involved in illicit activities.
• Sen. Brown then discussed how cryptocurrency companies were heavily advertising their products to consumers. He mentioned how hackers had recently stolen $320 million from the cryptocurrency platform Wormhole. He noted that while the trading firm behind Wormhole was able to restore these stolen funds, he commented that the U.S. could not always rely on trading firms to restore the funds of consumers when hacks occurred. He also mentioned how Crypto.com had recently experienced a $30 million hack. He asked Mr. Bankman-Fried to answer whether it was “reckless” for cryptocurrency companies to make money through selling Americans dangerous and risky products.
  • Mr. Bankman-Fried remarked that the potential for cryptocurrency companies to be hacked demonstrated the need for federal oversight of the cryptocurrency industry. He noted how most cryptocurrency hacks and scams occurred within unregulated venues. He stated that the CFTC and other federal agencies possessed sophisticated tools to help mitigate these risks and highlighted how the CFTC subjected their registrants to an extensive cybersecurity and anti-hacking program. He suggested that digital asset exchanges ought to be subject to the CFTC’s cybersecurity and anti-hacking program. He then expressed support for a federal registration regime for digital assets that would involve the same level of disclosure and anti-fraud protection as was currently present for securities. He acknowledged that there did exist some nuanced differences between digital assets and current assets and commented that policymakers would need to account for these differences when developing a registration regime for digital assets.

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

• Ranking Member Boozman noted how there existed over 17,000 digital assets. He asked Ms. Boring to explain what digital assets were generally used for and how digital assets were regulated. He also asked Ms. Boring to discuss the real-world applications of digital assets (particularly Bitcoin and Ether).
  • Ms. Boring discussed how the internet was supposed to serve as a platform for peer-to-peer transfers and commented that the internet did not support peer-to-peer value transfers. She elaborated that it generally did not matter if a sender involved in the online transfer of a certain type of item (e.g., communications) maintained a copy of said item for their personal records. She noted however that someone sending money or another item of value online would traditionally require an intermediary to ensure that the sender did not have access to the money or item of value post-transfer. She stated that Bitcoin solved this issue (known as the “double spending problem”). She discussed how financial services were previously retrofitted to function on the internet’s structure prior to the advent of blockchain technology. She remarked that the financial services sector was now just beginning to take advantage of blockchain technology, which enables peer-to-peer direct value transfers. She noted how cryptocurrencies were one such application of this technology. She indicated that Bitcoin was the cryptocurrency with the largest market capitalization and served as a digital store of value. She noted how other cryptocurrencies (including Ether and proof-of-stake networks) supported smart contracts. She commented that stores of value and smart contracts were very different in nature.
• Ranking Member Boozman then asked the witnesses to indicate whether it was necessary for Congress to provide market participants with greater certainty with regard to the regulation of digital asset spot markets. He also asked the witnesses to identify considerations for the regulatory framework for digital asset spot markets.
  • Ms. Ro remarked that Congress should provide the CFTC with the necessary authorization, resources, and funding to oversee certain parts of the digital assets market. She stated that the definition of commodities and the application of the definition to digital assets would be a key aspect of any regulatory framework for digital asset spot markets. She emphasized that not all digital assets were commodities.
  • Mr. Bankman-Fried remarked that having Congress provide clarity on the regulatory framework for digital asset spot markets would be appropriate and helpful for the digital asset industry and the U.S.’s oversight capabilities. He also stated that the U.S. could take certain actions to address the digital asset spot markets that would not require new legislation. He commented that the CFTC already possessed some regulatory authority over retail commodity spot transactions that involved some amount of financing. He stated however that Congressional action would be beneficial for addressing spot markets more generally.
  • Ms. Boring remarked that the Committee should provide regulatory clarity and regulatory cohesion with regard to the digital asset space. She called for the establishment of a joint working group between the CFTC, the SEC, and the digital asset industry and mentioned how there already existed bipartisan support for this proposal. She also highlighted the Chamber of Digital Commerce’s National Action Plan for Blockchain, which included eight regulatory principles. She expressed the Chamber of Digital Commerce’s willingness to work with policymakers on adopting these principles. She also stated that the CFTC was well-positioned to be a lead regulator in the digital asset space.
  • Mr. Werbach expressed support for providing the CFTC with the authority to oversee digital asset spot markets. He remarked that Congress needed to more broadly examine where there existed gaps within the regulatory structure for digital assets and noted that many of these gaps were not under the Committee’s jurisdiction. He stated that these gaps involved stablecoins, central bank digital currencies (CBDCs), energy use and climate change issues, and tax issues. He further remarked that Congress might need to begin considering broader reforms to the U.S.’s financial regulatory system given the innovations and changes that could be spurred by digital assets and blockchain technology.

Sen. Cory Booker (D-NJ):

• Sen. Booker expressed support for having the U.S. develop a clear regulatory framework for digital assets. He asked Ms. Boring and Mr. Bankman-Fried to discuss how the U.S. was currently losing out on opportunities within the digital assets space and how digital assets innovation was occurring overseas. He also asked Ms. Boring and Mr. Bankman-Fried to address how the U.S.’s lack of a clear regulatory framework for digital assets was driving this activity outside of the U.S.
  • Ms. Boring remarked that digital assets technology was global by its nature and stated that companies would operate in areas where they had legal certainty. She testified that the Chamber of Digital Commerce had member companies that did not feel comfortable operating within the U.S. due to the U.S.’s lack of regulatory certainty. She contended that legal and regulatory certainty was “absolutely essential” for the digital asset industry and stated that the Committee had a key role to play in providing such certainty. She then discussed how the U.S.’s regulatory framework for digital assets was very fragmented and asserted that there was no shortage of regulations for digital asset firms. She remarked that this regulatory fragmentation imposes compliance burdens on digital asset businesses (especially small and medium-sized businesses).
  • Mr. Bankman-Fried noted how 95 percent of cryptocurrency trading volume was offshore and stated that most tokens were traded exclusively offshore due to the U.S.’s lack of regulatory clarity. He expressed his hope that this trading activity would return to the U.S. He then noted how the majority of digital asset transactions were conducted via U.S. dollar-backed stablecoins. He expressed concerns that different currencies could be used to back stablecoins if the U.S. did not establish a clear oversight framework for digital asset transactions. He further expressed concerns that the U.S.’s lack of regulatory clarity for digital assets could cause digital innovation more broadly to leave the U.S. He then remarked that digital assets could play a key role in serving unbanked and underbanked populations. He highlighted how digital assets enabled people to instantly access their funds and provided clear and real-time information to holders. He then expressed optimism that blockchain technology could have applications in other areas, such as social media. He elaborated that blockchain technology could provide an agnostic messaging protocol that would allow for interoperability between social media platforms. He commented that such interoperability would reduce market entry barriers for new social media platforms.
• Sen. Booker interjected to ask Mr. Bankman-Fried to discuss how digital assets could empower underserved and minority communities.
  • Mr. Bankman-Fried remarked that digital assets could provide direct, clear, and equitable access to financial services for minority and economically disadvantaged communities. He stated that digital assets provided financial services via a technology that did not have discrimination built into it. He further stated that digital assets provided consumers with clear transparency into their holdings.

Sen. John Thune (R-SD):

• Sen. Thune expressed interest in having the U.S. regulate digital assets technology in a manner that did not stifle innovation and that appropriately reflected the risks associated with these assets. He asked Mr. Werbach to discuss what a risk-based approach to digital assets regulation would look like.
  • Mr. Werbach remarked that regulators should provide market participants with some level of general guidance, oversight, and surveillance and then allow for entities to devise risk-based structures that best met their individual needs. He noted how the digital asset market was very diverse and involved a variety of assets and exchanges. He asserted that a very prescriptive approach would therefore be ill-suited for the digital asset market.
• Sen. Thune then asked Mr. Bankman-Fried and Ms. Ro to discuss why other countries were more attractive to digital asset companies than the U.S. and to address whether the digital asset regulatory frameworks of other countries had made these countries more attractive to digital asset companies.
  • Mr. Bankman-Fried first commented that many countries did not have attractive regulatory frameworks for digital assets. He then contended that the key issue regarding digital assets regulation was not whether the regulation was stringent or lax and was instead whether the regulation was clear or unclear. He commented that countries that had successfully attracted digital asset companies tended to provide regulatory clarity surrounding digital asset licenses, regulating bodies, and registrations. He stated that the U.S.’s “patchwork” of digital asset regulations meant that there were paradoxically too many digital asset regulators and not enough oversight over the digital asset space. He concluded that the U.S. needed a clear regulatory framework for digital assets that identified responsible regulators and provided pathways for licenses and registrations.
  • Ms. Ro recommended that the U.S. consider emulating Switzerland’s proactive approach in defining whether assets constituted utility tokens, security tokens, or other types of tokens. She also noted how Switzerland had been proactive in defining different types of digital asset activities and whether these activities should be subject to oversight. She further indicated that Switzerland was one of the first countries to create a licensing regime for cryptocurrency funds. She stated that Switzerland’s proactive approach had led many cryptocurrency companies to establish operations in the country. She then discussed how Estonia had the e-Residency Program that allowed people to establish businesses within the country digitally so long as they proved their identities and had the requisite capital to invest in the businesses. She noted how the e-Residency Program even permitted encrypted signatures for legal documents. She recommended that the U.S. identify lessons from Estonia’s e-Residency Program so that it could better attract digital asset businesses.
• Sen. Thune then noted how Ms. Boring’s testimony had mentioned how there existed blockchain technology applications within the agriculture space (including for livestock ownership recordkeeping). He asked Ms. Boring to discuss these blockchain technology applications within the agriculture space and how these applications impacted American farmers and ranchers.
  • Ms. Boring remarked that blockchain technology was providing security and transparency to supply chains. She mentioned how there was a company called BeefChain that used blockchain technology to track cattle through unique RFIDs. She explained that these RFIDs included various information about the cattle, including the location of birth, whether the cattle had received hormones, locations of sale, and times of sale. She stated that blockchain technology was helping to make supply chains more efficient, increase trust in the agricultural products and livestock being bought and sold, support the achievement of sustainability goals, enhance food freshness and safety, and prevent fraud and food waste.

Sen. Mike Braun (R-IN):

• Sen. Braun remarked that the U.S.’s consistently high annual budget deficits drove interest in non-sovereign currencies as these deficits undermined confidence in the U.S. dollar’s stability. He then asked Ms. Boring to address whether it was possible to eventually reduce the energy needed to power cryptocurrency networks. He highlighted how Tesla CEO Elon Musk had recently announced that Tesla would no longer accept certain cryptocurrencies as forms of payment due to the energy usage associated with the cryptocurrencies.
  • Ms. Boring first noted that while Tesla had stopped accepting certain digital assets, she highlighted how Tesla still holds a large amount of digital assets. She then discussed how there were concerns regarding the energy usage of certain digital assets (especially those involving proof-of-work validation methods). She remarked that the cryptocurrency mining industry was leading the transition to renewable energy sources. She mentioned how several Chamber of Digital Commerce companies were partnered with renewable energy plants and stated that these partnerships were providing new investments into renewable energy sources.
• Sen. Braun expressed hope that cryptocurrency mining would drive interest in renewable energy sources. He then asked Mr. Werbach to compare the emergence of blockchain technology with the previous emergence of the internet. He also asked Mr. Werbach to address the long-term safety and security of blockchain technology.
  • Mr. Werbach discussed how cybersecurity concerns amongst consumers were very prevalent during the early years of the internet and remarked that subsequent technological developments had helped to address these concerns. He also stated that industry regulations and consumer protections had helped to make consumers more comfortable to transact online. He commented that consumer adoption of blockchain technology would also be dependent on consumer trust in the technology. He noted that while blockchain networks were very secure, he highlighted how the failure of consumers to fully secure their keys to blockchain networks had created opportunities for hacks. He commented that this dynamic meant that consumers could not rely on banks or intermediaries to provide them with total security (as was possible under the current financial system). He remarked that the blockchain industry needed to work to identify technologies and best practices for consumer cybersecurity. He also stated that the U.S. required oversight and regulatory mechanisms to ensure that there existed basic cybersecurity standards within the blockchain technology space.

Sen. Tommy Tuberville (R-AL):

• Sen. Tuberville called it “critical” for the U.S. to be the global leader in digital assets. He raised concerns that the Biden administration was overregulating the digital assets industry and contended that the Biden administration’s regulatory approach toward digital assets could drive digital assets innovation abroad. He asked Mr. Bankman-Fried to provide recommendations for how policymakers could keep digital asset companies (such as FTX) operating within the U.S. He also asked Mr. Bankman-Fried to address how policymakers could encourage more domestic digital asset innovation.
  • Mr. Bankman-Fried noted how 95 percent of digital assets trading volume occurred outside of the U.S. and expressed interest in working to return this trading volume to the U.S. He remarked that the U.S. needed regulatory clarity in order to keep digital asset companies operating within the U.S. He asserted that digital asset businesses would prioritize having regulatory clarity over being subject to large amounts of regulations. He specifically called on the U.S. to provide regulatory clarity on cryptocurrency spot markets and stated that the CFTC would be an appropriate regulator for these markets. He also requested that the U.S. provide regulatory clarity on the token registration process and commented that the U.S.’s current lack of a token registration process was driving digital asset activities abroad. He acknowledged that the registration process for tokens would need to be different from the registration processes for other types of assets (such as securities). He suggested that the U.S. establish a principles-based system for token registration that accounted for the unique aspects of digital assets. He further called on the U.S. to establish a regulatory framework for stablecoins. He suggested that this regulatory framework for stablecoins could include an auditing process.
• Sen. Tuberville then asked the witnesses to estimate the percentage of current digital assets that were commodities versus the percentage of current digital assets that were securities.
  • Ms. Ro remarked that the term “digital asset” encompassed a very large swath of assets, including CBDCs, tokenized physical items (e.g., tokenized real estate and tokenized gold). She stated that many digital assets were commodities. She indicated that while she could not provide a percentage as to how much of the current outstanding digital assets were commodities, she stated that the classification of digital assets could be a useful exercise for policymakers for developing such an estimate.
  • Mr. Bankman-Fried remarked that the “vast majority” of digital assets could be considered commodities if weighted by volume or market capitalization. He stated however that focusing on the number of tokens would result in a different assessment of the digital asset market’s composition. He elaborated that many tokens were commodities while many tokens had properties of multiple asset classes (and therefore did not neatly fit into any single asset class).
  • Ms. Boring expressed agreement with Mr. Bankman-Fried’s response. She highlighted how Bitcoin and Ether currently composed over 60 percent of the capitalization of the entire digital asset ecosystem and noted that the CFTC had defined both of these cryptocurrencies as commodities. She then mentioned how there existed intentional digital asset securities, which she commented was a nascent and emerging piece of the digital asset ecosystem. She stated that the current lack of regulatory clarity surrounding digital assets had left intentional digital asset securities unrecognized.
  • Mr. Werbach remarked that digital assets did not possess a fundamental attribute and asserted that the key question involved how digital assets were used. He noted how the “vast majority” of digital assets were used to support fundraising efforts, which would make them securities based on the U.S. Supreme Court’s test under their SEC v. W. J. Howey Co. decision. He stated that there existed digital assets that did not clearly fit into certain asset classes. He noted that while the CFTC now deemed Ether to be a commodity, he suggested that Ether might have originally been a security at its time of issue. He stated that Bitcoin was more clearly a commodity because there was no entity that was issuing Bitcoin in exchange for money. He remarked that the nature of the activity underlying a digital asset would dictate its asset class type and asserted that a given digital asset might not have a clear asset class type.

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

• Ranking Member Boozman remarked that the current gap in the oversight of digital assets posed dangers to U.S. consumers and could threaten the resiliency of U.S. financial markets. He asserted that regulation and innovation were not mutually exclusive in nature.