Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem (U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion)

Hearing	Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem
Committee	U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion
Date	March 9, 2023

 

Hearing Takeaways:

• Merits and Concerns Regarding Digital Assets: The hearing included several debates regarding whether the U.S. should further pursue digital assets. Subcommittee Republicans, some Subcommittee Democrats, Mr. Belshe, Prof. Evans, and Mr. Grewal expressed optimism regarding the potential benefits of digital assets. Some Subcommittee Democrats and Mr. Reiners expressed reservations regarding the merits of digital assets.
  • Digital Asset and Blockchain Technology Applications: Subcommittee Republicans, Mr. Belshe, Prof. Evans, and Mr. Grewal expressed interest in how digital asset and blockchain technology could support numerous applications in finance and beyond. They especially expressed interest in the ability of digital assets to support payments (including international remittances) and noted how the technology could be applied to health care records, carbon credit tracking, supply chain management, and areas involving sensitive personal data. Rep. Sean Casten (D-IL), Rep. Brad Sherman (D-CA), and Mr. Reiners argued however that digital assets are not viable currencies given their volatility and the high fees associated with converting these assets in and out of fiat currencies.
  • Susceptibility of Digital Assets to Fraud and Manipulation: Subcommittee Ranking Member Stephen Lynch (D-MA) and Mr. Reiners expressed concerns that cryptocurrencies might be especially susceptible to fraud because they could be created out of nothing and are prone to high levels of price volatility. Rep. Casten and Mr. Reiners expressed further skepticism regarding the purported market capitalizations of many cryptocurrencies. They noted how any person or entity could create a cryptocurrency, sell a small number of the tokens, and hold most of the tokens for themselves. They commented that the person or entity engaged in this scheme could claim that their cryptocurrency has a high market capitalization based on the price of the tokens that had been sold and their possession of the remaining tokens.
  • Use of Cryptocurrencies in Illicit Activities: Rep. Sherman and Mr. Reiners also expressed concerns over how cryptocurrencies could facilitate various illicit activities, including ransomware attacks, sanctions evasion, tax evasion, bankruptcy law evasion, and terrorist financing.
  • Interaction Between Digital Assets and the Traditional Banking System: Subcommittee Ranking Member Lynch and Mr. Reiners expressed concerns that the increased adoption of digital assets could cause problems within the digital assets ecosystem to migrate over to the traditional banking system. Mr. Grewal suggested that transparency could help to address these concerns through enabling investors and market regulators to understand a bank’s risks and exposures. He also asserted that banks should possess prudent risk management plans to ensure that customer funds would be kept safe in the event of a failure or wind down.
  • Impact on Vulnerable and Minority Communities: Subcommittee Ranking Member Lynch further expressed concerns over how cryptocurrency companies have previously targeted low-income and minority communities and stated that many cryptocurrency companies have made misleading claims regarding their products. However, Prof. Evans suggested that digital assets could provide a wealth generation opportunity for minority investors. She expressed concerns that restrictions on these assets could perpetuate the U.S.’s racial wealth gap.
• Policy Landscape for Digital Assets: Subcommittee Members and the hearing’s witnesses highlighted how digital assets are subject to a myriad of international, federal, and state laws and regulations and debated how Congress should approach these assets.
  • Classification of Digital Assets: A key area of contention at the hearing involved whether certain digital assets ought to be classified as securities or commodities. U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has asserted that all digital assets aside from Bitcoin constitute securities under the test established in the U.S. Supreme Court’s SEC v. W.J. Howey Co. decision (known as the Howey test). Rep. Ritchie Torres (D-NY) and Mr. Grewal argued however that certain digital assets (such as Ether and stablecoins) should not be considered as securities under the Howey Test (and should therefore be considered commodities). Mr. Belshe, Prof. Evans, and Mr. Grewal called for new legislation that would clarify the taxonomy of digital assets and account for how the status of a given digital asset may evolve over time. However, Subcommittee Ranking Member Stephen Lynch (D-MA), Rep. Brad Sherman (D-CA), and Mr. Reiners expressed agreement with SEC Chairman Gensler’s view that most cryptocurrencies constitute securities and thus require SEC registration. Rep. Sherman and Mr. Reiners further called for new legislation to make the SEC the sole regulator of digital assets.
  • Perceived Lack of Guidance and Support from the SEC for the Digital Assets Industry: Another key area of contention during the hearing involved whether the SEC is making it easy for digital asset issuers and companies to register with the Agency. Subcommittee Republicans, Mr. Belshe, Prof. Evans, and Mr. Grewal argued that the SEC is not providing clear guidance or registration pathways for the digital assets industry. They accused the SEC of relying too heavily on enforcement actions for setting their digital asset policies. Subcommittee Ranking Member Lynch and Mr. Reiners contended however that the SEC’s enforcement actions are warranted and noted how the SEC has won all of the enforcement cases that it has brought. They asserted that the SEC is providing appropriate direction to the cryptocurrency industry and that many of the current complaints about the SEC’s registration pathway are attributable to the fundamental shortcomings of the digital asset projects being pursued.
  • Impact on the U.S.’s Global Competitiveness: Subcommittee Republicans, Mr. Belshe, and Mr. Grewal expressed concerns that the current uncertainty within the U.S. digital assets space is driving digital assets innovation abroad. They noted how other jurisdictions, including the European Union (EU), the United Kingdom (UK), Australia, Hong Kong, and Singapore are adopting regulatory frameworks that create high standards for cryptocurrencies and warned that the offshoring of digital assets would undermine the U.S.’s economic and national security. Mr. Belshe further raised concerns over how China maintains a central bank digital currency (CBDC) and is exporting this CBDC to Belt and Road Initiative countries. He stated that the U.S. must now pursue digital assets technology so that it can remain globally competitive with China.
• Recent Biden Administration Actions: The hearing considered several recent actions from the Biden administration relating to digital assets. Subcommittee Republicans and Mr. Gould expressed concerns that these actions are meant to prevent the cryptocurrency industry form accessing financial services and discourage financial institutions from engaging with digital assets. They warned that this discouragement is forcing digital asset users to seek out less sophisticated jurisdictions that are not equipped to manage potential risks.
  • The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks: Rep. Tom Emmer (R-MN) criticized the White House National Economic Council’s (NEC) Roadmap to Mitigate Cryptocurrencies’ Risks. He asserted that this Roadmap details how the Biden administration will “lawlessly abuse the administrative state” to push U.S. cryptocurrency firms and their U.S. customers to offshore, unregulated, opaque, and unsafe markets.
  • The U.S. Office of the Comptroller of the Currency (OCC), the U.S. Federal Reserve, and the U.S. Federal Deposit Insurance Corporation’s (FDIC) Joint Statement on Crypto-Asset Risks to Banking Organizations: Subcommittee Republicans and Mr. Gould criticized the U.S. Federal Reserve, the FDIC, and the OCC for their January 2023 statement that discouraged banks from holding cryptocurrencies or servicing cryptocurrency-related clients on a safety and soundness basis. Mr. Gould warned that recent guidance from federal banking regulators poses the risk of becoming self-fulfilling. He noted how this guidance warned of concentration risks and commented that this warning makes banks less willing to extend services to cryptocurrency customers. He stated that this dynamic would shrink the number of banks willing to service cryptocurrency customers, which would further concentrate the risks in the remaining banks that will service these customers. Rep. Emmer also criticized the U.S. Federal Reserve for its publication of a February 2023 notice in the U.S. Federal Register that he claimed had effectively turned the aforementioned guidance into a final rule. He commented that this action did not appear to follow the public comment process that is prescribed under the Administrative Procedure Act.
  • The OCC, U.S. Federal Reserve, and the FDIC’s Joint Statement on Liquidity Risks Resulting from Crypto-Asset Market Vulnerabilities: Full Committee Ranking Member Maxine Waters (D-CA) and Mr. Reiners praised the OCC, the U.S. Federal Reserve, and the FDIC for their February 2023 joint statement regarding the liquidity risks to banks resulting from crypto-asset market vulnerabilities. Mr. Reiners stated that the banking regulators are simply enforcing their safety and soundness mandate through their recent actions.
  • SEC Staff Accounting Bulletin (SAB) No. 121 Regarding the Accounting for Obligations to Safeguard Crypto-Assets an Entity Holds for Platform Users: Rep. Mike Flood (R-NE) and Mr. Gould expressed cocnerns over the recent SEC SAB No. 121, which asks public banks to hold custodied crypto assets on their balance sheets. Rep. Flood also warned that this approach would drive digital asset activities offshore and render U.S. investors less safe.
  • The SEC’s Proposed Custody Rule: Rep. Flood and Mr. Grewal also expressed concerns regarding the SEC’s recent custody rulemaking activities. Rep. Flood raised specific concerns that the SEC’s updated custody rules would undermine the ability of state-chartered banks to offer digital custodian services and would effectively prohibit the practice of self-custody and block new marketplace entrants.
• Additional Digital Asset Policy Proposals: Subcommittee Members used the hearing to consider several additional policy proposals related to digital assets. 
  • Attachment of Identity to Cryptocurrency Transactions: Rep. Bill Foster (D-IL) remarked that the U.S. should require that cryptocurrency transitions be associated with a traceable and legal identity from a country with which the U.S. has an extradition treaty. He commented that such a requirement would ensure that cryptocurrencies were not used to perpetrate illicit activities or harm. He also stated that this digital wallet registration could be secret and cryptographically obscured. He stated that the beneficial owners of digital wallets should only be revealed if a law enforcement body can obtain a warrant.
  • The Keep Your Coins Act: Subcommittee Vice Chairman Warren Davidson (R-OH) asserted that any new cryptocurrency rules must preserve the ability of Americans to self-custody their digital assets. He mentioned how he is working to reintroduce the Keep Your Coins Act to protect this ability.
  • The Financial Technologies Protection Act of 2023: Rep. Zach Nunn (R-IA) mentioned that he would introduce the Financial Technologies Protection Act of 2023, which would establish an independent financial technology (FinTech) working group to combat the use of digital assets in terrorism and illicit finance. He stated that this working group would conduct independent research on terrorism and the illicit use of new financial technologies. He also stated that this working group would develop legislative and regulatory proposals to address money laundering and illicit activities.
  • Proposal to Combine Oversight and Regulatory Responsibilities for Digital Assets into a Single Entity: Rep. John Rose (R-TN) expressed interest in considering proposals to combine the SEC and the U.S. Commodity Futures Trading Commission (CFTC) into a single entity. He noted how various federal agencies have studied this issue before and have reached differing conclusions. Mr. Belshe and Mr. Gould suggested that a principles-based and coordinated approach to the regulation of digital assets would be preferable given how different regulators tend to have different responsibilities. Prof. Evans and Mr. Grewal suggested that while a unified regulator might be preferable to the status quo, they acknowledged that the political prospects for establishing such a regulator are low. They stated that Congress should focus on promoting coordination between the SEC and the CFTC on their efforts to oversee digital assets. Mr. Reiners expressed support for establishing a unified regulator for digital assets.

Hearing Witnesses:

1. Mr. Mike Belshe, CEO and Co-Founder, BitGo
2. Prof. Tonya Evans, Professor, Penn State Dickinson Law
3. Mr. Jonathan Gould, Partner, Jones Day
4. Mr. Paul Grewal, Chief Legal Officer, Coinbase
5. Mr. Lee Reiners, Policy Director, Duke Financial Economics Center, Duke University

Member Opening Statements:

Subcommittee Chairman French Hill (R-AR):

• He called it imperative for Congress to legislate on the issue of digital assets and asserted that no amount of enforcement actions or regulatory guidance can ever substitute for legislation.
• He stated that the hearing would examine the scope and significance of recent regulatory pronouncements and supervisory failures to inform the development of bipartisan legislation.
  • He commented that the ultimate goal of these efforts is to protect investors, foster innovation, and ensure U.S. leadership in the digital assets space.
• He applauded the recent calls from Full Committee Ranking Member Maxine Waters (D-CA) for the U.S. Department of the Treasury, the U.S. Federal Reserve, the CFTC, and the SEC to work with Congress to address the topic of digital assets regulation.
  • He asserted that the U.S. could not allow for Executive Branch agencies to “front run” the Legislative Branch.
• He mentioned how the Committee had made “good progress” on payment stablecoin legislation during the previous 117th Congress and expressed interest in working to continue these bipartisan efforts during the current 118th Congress.
  • He commented that the U.S. Department of the Treasury and the U.S. Federal Reserve had been “constructive partners” on these efforts and expressed hope that this cooperation would continue.
• He stated however that payment stablecoins are just one part of the broader digital economic system that the Committee must address.
• He also called on Congress to apply customer protections from the traditional financial system to digital assets and asserted that the U.S. must apply similar rules to similar activities with similar risks.
• He further remarked that the U.S. needs to support technological innovation within the digital assets space, ensure appropriate controls and accountability, provide no refuge to fraudsters, scammers, and criminals, and reinforce U.S. leadership in the global financial system.
  • He noted how President Biden’s Executive Order (EO) Ensuring Responsible Development of Digital Assets had outlined these principles.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• He stated that while innovation has the potential to increase the accessibility and affordability of financial products, he expressed some concerns that novel financial products pose risks to consumer financial data, contain hidden fees, lack transparency, and engage in misleading marketing practices.
• He also indicated that he possessed “some lingering concerns” regarding the volatility and risks posed by cryptocurrency assets.
  • He commented that these digital assets pose particular risks to low-income and underrepresented communities.
• He stated that the recent collapse of TerraUSD, Celsius Network, BlockFi, and FTX demonstrate the regulatory gaps within the cryptocurrency space, including a lack of corporate controls, poor liquidity levels, inadequate reserves, the commingling of assets, and irresponsible practices.
  • He expressed concerns that these practices exist throughout the cryptocurrency industry and stem from insufficient oversight and a lack of regulatory guidance.
• He commended the Biden administration for its reports, guidances, and EOs to “thoughtfully” examine the benefits and risks of cryptocurrency products.
• He also expressed concerns regarding the exposure of cryptocurrency companies to the traditional U.S. banking system.
  • He applauded U.S. prudential regulators for recommending a cautious approach for cryptocurrencies.
• He remarked that Silvergate Bank’s recent liquidation illustrates the need for a separation between digital assets and the traditional banking system.
  • He also commented that this announcement had demonstrated the need for guidance from the U.S. Federal Reserve, the OCC, and the FDIC.
• He discussed how the cryptocurrency industry had experienced “astounding” hype prior to its recent downturn and stated that cryptocurrency companies had deliberately misled consumers about the risks of their products.
  • He highlighted how some cryptocurrency companies had falsely claimed that their products had been FDIC-insured.
• He remarked that Congress must work to address the excesses of certain cryptocurrency companies.
• He then discussed how the cryptocurrency industry and the SEC have disagreements regarding how cryptocurrencies should be regulated.
  • He noted how SEC Chairman Gary Gensler has asserted that most cryptocurrencies should be regulated as securities under the Howey test.
• He asserted that cryptocurrency companies must come into compliance with existing securities laws that ensure that investors and markets are protected.
• He accused the cryptocurrency industry and many Congressional Republicans of falsely asserting that the SEC pursues regulation by enforcement and makes it impossible for companies to comply with U.S. laws and regulations.
  • He stated that the SEC is merely enforcing U.S. laws within the cryptocurrency space and is providing appropriate direction.
  • He also stated that these assertions conflict with arguments that the SEC did not take appropriate actions to prevent the collapse of FTX.
• He remarked that the cryptocurrency industry is attacking the SEC to evade compliance because the industry knows that it could not satisfy the SEC’s high standards.
• He further expressed concerns over how cryptocurrency companies have previously targeted low-income and minority communities and stated that many cryptocurrency companies have made misleading claims regarding their products.
  • He indicated that these misleading claims include the promises of faster payments, lower cost remittances, and wealth building vehicles.
• He asserted that the cryptocurrency industry’s “predatory inclusion” practices are not new and commented that these practices are common within the FinTech space.

Subcommittee Vice Chairman Warren Davidson (R-OH):

• He remarked that the absence of clear rules for centralized digital asset trading platforms that list non-security digital assets means that U.S. digital asset users are not adequately protected while participating in digital asset markets.
  • He asserted that Congress must develop an appropriate legal framework for digital assets and the cryptocurrency space.
• He stated that Congress must establish clear rules for trading platforms that provide Americans with the necessary protections and that ensure market integrity.
  • He commented however that these rules must be flexible enough to accommodate unforeseen innovations.
• He also asserted that any new cryptocurrency rules must preserve the ability of Americans to self-custody their digital assets.
  • He mentioned how he is working to reintroduce the Keep Your Coins Act to protect this ability.

Witness Opening Statements:

Mr. Mike Belshe (BitGo):

• He discussed how his company, BitGo, is an institutionally focused digital assets company and testified that BitGo is regulated by various federal and state regulators.
  • He indicated that these regulators include the SEC, the U.S. Financial Crimes Enforcement Network (FinCEN), the New York Department of Financial Services, and the South Dakota Division of Banking.
• He stated that BitGo is primarily known for being the first purpose-built digital asset custodian and noted how BitGo is a trust company.
  • He explained that trust companies are different from banks in that they are not depositories and do not lend assets.
• He testified that BitGo is solely focused on the technology and compliance related to the safekeeping of the assets of its clients in segregated accounts.
• He remarked that BitGo and all of the regulated firms building digital asset technologies and services in the U.S. are “absolutely and unequivocally” committed to preventing financial crime, providing robust investor protections, abiding by sanctions controls, building safety and soundness in their custodians and banks, and building stable market structures.
  • He stated that BitGo is not seeking to avoid regulatory oversight and not seeking to build speculative assets and markets.
• He then discussed how blockchain technology enables the instant transfer of value between anyone across the world.
  • He also noted how blockchain technology enables smart contracts and commented that these contracts have the potential to replace much of modern finance in a more transparent and fair manner.
• He stated that software tends to accelerate the pace of innovation in the industries that it enters and commented that this trend is occurring within the financial industry.
• He remarked however that the financial industry is somewhat unique due to its highly regulated nature and asserted that U.S. regulators must keep pace with the industry’s innovation.
  • He contended that a failure amongst U.S. regulators to keep pace with this innovation would lead foreign countries to surpass the U.S. in terms of financial capabilities.
• He recounted how BitGo had initially attempted to obtain a trust charter from the OCC in 2017 and noted how the OCC had refused to provide trust charters to digital asset businesses.
  • He indicated that the OCC’s refusal to grant BitGo a trust charter had led BitGo to become a state-chartered trust company.
• He then mentioned how BitGo had sought to obtain guidance from the SEC as to whether BitGo could be considered a qualified custodian.
  • He testified that BitGo had proactively and voluntarily approached the SEC in 2018 for guidance on how it could provide custody of assets to regulated firms under the Investment Advisers Act of 1940.
• He noted however that the SEC had ultimately declined to opine on BitGo’s no action letter and stated that the SEC had only just recently issued a draft amendment to its Custody Rule that would clarify how to custody digital assets under the Investment Advisers Act of 1940.
• He expressed frustration with how it had taken the SEC four years to address BitGo’s question and warned that the SEC’s slow response suggests that the U.S. will lack regulatory clarity for digital assets.
  • He warned that this lack of regulatory clarity will undermine the U.S.’s international competitiveness within the digital assets space.
• He then discussed how the 2022 downturn in the digital assets market had led digital asset opponents to assert that digital assets are unsafe for banks and the financial system.
  • He attributed much of these recent problems to the failure of U.S. digital asset regulators to keep pace with digital assets innovation, which has ultimately harmed investors.
• He also mentioned how the OCC had encouraged OCC-chartered custodians to participate in the digital assets market in 2020.
  • He noted however that these OCC’s policies had been short-lived and had been quickly reversed within one year.
• He remarked that Americans are moving toward weak digital asset opportunities that are managed offshore because U.S. digital asset regulations have failed to keep pace with innovation.
  • He commented that Americans would prefer not to pursue these offshore opportunities given how the opportunities are difficult and risky.

Prof. Tonya Evans (Penn State Dickinson Law):

• She expressed concerns over the U.S.’s leadership prospects within the digital assets space and stated that the U.S.’s piecemeal regulatory approach is not providing clarity to stakeholders.
  • She added that the U.S. is not providing good faith actors with an opportunity to understand the rules.
• She also stated that the U.S.’s regulatory approach to digital assets has resulted in a “tremendous” loss of wealth accumulation opportunities for communities of color.
• She noted how there currently exists disagreement as to whether particular digital assets constitute either securities or commodities and recommended that the Subcommittee reconsider bipartisan legislation to clarify the taxonomy of digital assets.
  • She further suggested that Congress consider empowering the CFTC to regulate spot cryptocurrency markets.
• She also remarked that the U.S. should ensure that all citizens (especially those that had been systematically marginalized) can safely and confidently operate within the digital assets space.
• She further called on the Subcommittee to request that SEC Chairman Gensler testify before Congressional oversight committees to explain how the SEC’s piecemeal approach to regulating digital assets comports with efficient and effective regulation.
  • She expressed interest in learning how the SEC’s actions within the digital asset space are meeting the Agency’s obligations to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
• She reiterated her concerns that systematically marginalized communities would be prevented from participating in the digital asset space due to consumer and investor protection rules and pressures from financial incumbents that view cryptocurrencies as threats to their power. 
  • She commented that this dynamic could result in wealthy early adopters and legacy financial institutions reaping the benefits of early digital asset adoption, which would perpetuate the U.S.’s racial wealth gap.
• She noted how many major financial institutions, including Deutsche Bank, Morgan Stanley, and J.P. Morgan, have all recognized the value proposition presented by cryptocurrencies and blockchain technology.
• She called on the U.S. to enable private markets to innovate in digital assets safely, legally, and with clarity.

Mr. Jonathan Gould (Jones Day):

• He discussed how federal banking agencies have recently issued several guidance documents articulating their concerns about the risks associated with bank digital asset activities.
  • He stated that these guidance documents have expressed skepticism that these activities could be conducted in a safe and sound manner and impose procedural barriers to the activities.
  • He also commented that the pace and coordination of these guidance documents had increased in recent months.
• He remarked that bank supervision is by design confidential, particularized, and potent and noted how the application of the aforementioned guidance documents is not public.
  • He commented that while the confidential nature of the supervisory relationship facilitates the flow of information between banks and regulators, he acknowledged that this confidential nature could frustrate accountability and oversight.
• He also noted how federal prudential regulators tend to focus on safety and soundness in their work and asserted that safety and soundness can be subjective in nature.
• He mentioned how federal prudential regulators have issued “thousands” of pages of public non-binding guidance that detail their interpretations of safety and soundness in a variety of contexts.
  • He commented that this guidance is meant to help banks achieve safety and soundness objectives and to facilitate consistency in supervisory expectations and approach.
• He acknowledged that while regulatory agency guidance is technically non-binding, he noted that banks rarely challenge or disregard this guidance.
  • He commented that the practical consequences of resisting this guidance could be “significant” considering the supervisory process through which guidance is supplied.
• He remarked that generalized and negative statements from federal prudential regulators about particular industries must be made carefully, lest they be interpreted by the public or bank examiners as an outright prohibition.
• He stated that anecdotal evidence suggests that federal agency actions over the previous 18 months are having a “chilling effect” on the practical ability of banks to engage in digital asset activities.
  • He also stated that these actions are impacting the willingness of banks to entertain or maintain digital asset entities as banking customers.
• He remarked that the confidential nature of the supervisory relationship made it impossible for the public to evaluate the actual causal effect of federal agency actions on digital asset issues.
  • He suggested that the response of federal agencies to digital assets might be disproportionate.
• He stated that risk elimination strategies are often less effective over the long-term than risk management strategies.
  • He explained that risk elimination strategies tend to push financial risk into less visible areas of the economy.
• He also remarked that the actions of federal agencies might be “over broad” and could risk chilling innovative activities.
  • He commented that the preclusion of banks from exploring new technologies (such as distributed ledgers or decentralized networks) to achieve traditional banking activities (such as payments or deposit taking) could diminish the important role that banks play in the economy.
• He then stated that safety and soundness pronouncements reflect the risk tolerance of federal agencies for individual banks and the banking system as a whole.
• He asserted that Congress should have a key role in defining the risk tolerance of the U.S. banking system, especially when it involves industry specific attention (as is the case with digital assets).
  • He stated that Congress could and should act when it disagrees with the risk tolerance determinations of federal agencies.
• He lastly commented that while the confidential nature of bank supervision limits the ability of the public to assess the actual effects of federal agency guidance documents, he noted how Congress possesses oversight authority to examine the implementation and effects of these guidance documents.
  • He stated that Congress could use this information to make informed assessments of the propriety and prudence of federal agency actions and make policy changes when necessary.

 Mr. Paul Grewal (Coinbase):

• He discussed how his company, Coinbase, is the largest cryptocurrency trading platform in the U.S. and has been a public company since April 2021.
• He remarked that the U.S. must update its financial system and highlighted how 80 percent of Americans view the U.S. financial system as unfair.
  • He asserted that cryptocurrencies (and their underlying blockchain technology) should support these upgrade efforts.
• He noted how 20 percent of Americans currently hold cryptocurrencies and commented that this fact demonstrates the demand for a financial system that is easier, faster, and more efficient.
  • He commented that Americans are using cryptocurrencies for payments because these assets are cheaper and more secure.
• He also mentioned how Americans are using cryptocurrencies to send international remittances and highlighted how cryptocurrencies had helped to support Ukraine following Russia’s invasion of the country.
• He then warned that the U.S. would lose its position as a global leader in finance if it failed to adopt the rules that both permit and foster the next generation of cryptocurrency technology.
  • He noted how the EU, the UK, Australia, Hong Kong, and Singapore are adopting regulatory frameworks that create high standards for cryptocurrencies.
• He asserted that the U.S.’s failure to regulate cryptocurrencies would not result in the elimination of cryptocurrencies and stated that both consumers and innovators are demanding to use cryptocurrencies.
• He remarked that the U.S. must protect cryptocurrency consumers and discussed how Coinbase had taken actions to protect its users.
  • He stated that Coinbase protects its users through prioritizing prudent risk management, employing rigorous standards for listing digital assets, and fighting against illicit finance, market manipulation, and fraud.
• He testified that Coinbase “fully complies” with sanctions and all anti-money laundering (AML) laws in the U.S. and abroad and mentioned how Coinbase works with law enforcement agencies to help find and stop criminals.
• He also discussed how Coinbase protects its customers through transparency measures and noted how Coinbase makes quarterly disclosures as a public company.
  • He testified that Coinbase discloses its audited financial statements, methods for safeguarding financial assets, its business operations, and any risk factors.
  • He stated that Coinbase’s disclosures make it distinct amongst cryptocurrency companies.
• He remarked however that transparency alone for the cryptocurrency space is insufficient and called on the U.S. to adopt clear rules for the space.
• He mentioned how Coinbase had filed a petition for rulemaking with the SEC in July 2022.
  • He indicated that this petition had provided 50 questions that must be answered to create a registration pathway for cryptocurrency developers and trading platforms.
• He noted that while the SEC could use their existing authority to address uncertainties around cryptocurrency policy, he asserted that Congress should also act to address these uncertainties.
• He stated that cryptocurrency legislation should contain strong consumer and investor protection standards for digital asset intermediaries, create a registration pathway for offering digital asset securities and non-securities, and provide a comprehensive framework for stablecoins.

Mr. Lee Reiners (Duke Financial Economics Center, Duke University):

• He remarked that the cryptocurrency industry’s main problem is the underlying product (rather than the regulatory landscape).
• He asserted that cryptocurrencies are “wholly unconnected” to the purpose of finance, which is to help people, businesses, and governments to raise, save, transmit, and use money for socially and economically useful ends.
  • He described cryptocurrencies as an asset class with no fundamentals and that trades entirely on sentiment.
• He remarked that the cryptocurrency industry has argued that their salvation lies in the provision of regulatory clarity, despite the inherent flaws and fragilities with cryptocurrencies.
  • He asserted however that regulation alone would not address the underlying problems with cryptocurrencies.
• He stated that the cryptocurrency industry actually desires “light touch” regulation and favorable taxation.
• He remarked that the cryptocurrency industry has directed its ire toward the SEC for merely doing its job and commented that Congress had intentionally crafted U.S. securities laws to be principles-based.
• He noted how the U.S. Supreme Court’s SEC v. W.J. Howey Co. decision had found that the term “investment contract” embodies a flexible principle (rather than a static principle).
  • He elaborated that the U.S. Supreme Court had found that investment contracts are capable of adaptation to meet the countless and variable schemes devised by those that seek the use of the money of others on the promise of profits.
• He remarked that the SEC has been clear and consistent across administrations in its assertion that most cryptocurrencies constitute securities, which would necessitate that the cryptocurrencies register with the Agency.
  • He highlighted how the SEC has brought 130 cryptocurrency-related enforcement actions and indicated that the SEC had not yet lost any of these cases.
• He stated that the SEC is not a merit-based regulator and noted how anyone could raise money from the public (regardless of the quality of their business idea) so long as they register with the SEC and disclose their relevant risks to prospective investors.
• He indicated however that entities must have something to disclose if they want to register with the SEC and asserted that many token issuers and cryptocurrency firms do not have anything to disclose.
  • He applauded the SEC and other financial regulators for not permitting these offerings to move forward.
• He then indicated that while he agreed with SEC Chairman Gary Gensler’s assertion that most cryptocurrencies are securities, he stated that some cryptocurrencies most likely constitute commodities.
• He noted that while the CFTC regulates commodity derivatives, he emphasized that the CFTC does not regulate commodity spot markets.
  • He commented that the practical effect of this dynamic is that cryptocurrency exchanges in the U.S. are not being regulated at the federal level.
• He recommended that Congress carveout cryptocurrencies from the definition of commodity under the Commodity Exchange Act and have cryptocurrencies recognized as securities under a special definition.
  • He commented that this approach would provide the SEC with exclusive authority to regulate all aspects of the cryptocurrency industry.
• He acknowledged that while his proposal to provide the SEC with additional authority to regulate cryptocurrencies might be unpalatable to some Subcommittee Members, he stated that this new authority would provide long-term stability to the cryptocurrency industry.
• He lastly remarked that Congress should prioritize quality over speed in passing legislation to address cryptocurrencies.

Congressional Question Period:

Subcommittee Chairman French Hill (R-AR):

• Chairman Hill remarked that disclosure requirements and the potential for malfeasance, fraud, and mismanagement both exist within regulated structures. He mentioned how the U.S. had experienced an internet company market bubble, even though the internet companies had been regulated by the SEC. He also noted how the 2008 Financial Crisis had involved mortgages, which are heavily regulated instruments. He asserted that the U.S. would be better off developing a regulatory structure for digital assets.  He noted however that SEC Chairman Gary Gensler had asserted that the SEC already has sufficient clarity to apply existing federal securities laws to digital assets. He also noted how Chairman Gensler had claimed that digital asset market participants could easily register their activities with the SEC. He asked Mr. Grewal to indicate whether digital asset companies could easily register with the SEC as a national securities exchange.
  • Mr. Grewal answered no and stated that Coinbase wants to register with the SEC. He testified that Coinbase does not currently list digital asset securities and expressed Coinbase’s interest in making these products and services available to interested Americans. He remarked that the SEC would need to permit Coinbase to register as a national securities exchange so that Coinbase could offer digital asset securities on its platform. He suggested however that Coinbase might be able to offer digital asset securities through a broker-dealer or an alternative trading system (ATS). He reiterated that Coinbase has not been able to successfully register with the SEC, despite the company’s best efforts.
• Chairman Hill asked Mr. Belshe to indicate whether BitGo could register with the SEC.
  • Mr. Belshe remarked that the challenges faced by cryptocurrency companies seeking to register with the SEC spanned both Democratic and Republican administrations. He stated that the SEC should clarify how parties subject to the Investment Advisers Act of 1940 could obtain custody of assets. He also criticized the SEC for relying too much on enforcement actions and failing to provide clear guidance and rules for market participants. He stated that the SEC’s recent enforcement actions around staking-as-a-service providers had fostered confusion within the cryptocurrency industry. He noted that while enforcement actions identify potential problems with a given product, he commented that market participants often cannot easily distinguish between the problematic elements and the acceptable behaviors that are part of a given enforcement action.
• Chairman Hill commented that the SEC’s claims that market participants could easily register with the Agency are overstated. He then noted how the American Bankers Association had stated that prudential regulators have instructed banks to proceed in the digital asset ecosystem with “extreme caution” and to obtain advanced supervisory notice and formal approval. He asked Mr. Gould to discuss how prudential regulators should consider risk elimination approaches versus risk management approaches.
  • Mr. Gould remarked that safety and soundness guidance provides insight into how banks could perform their activities in an approved manner. He stated however that much of the current guidance coming from prudential regulators is not providing insight into how banks could perform their activities in an approved fashion.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• Ranking Member Lynch asked Mr. Reiners to address why many cryptocurrency firms are unwilling to register with the SEC.
  • Mr. Reiners remarked that many cryptocurrency firms have refused to register with the SEC because such registration would make the firms unprofitable. He stated that the current structures of many cryptocurrency platforms are not permitted within traditional securities markets. He elaborated that these platforms are trying to simultaneously serve as the broker, the exchange, the market maker, the clearing agent, and the custodian, which is not permitted under current policies. He added that some cryptocurrency platforms have venture capital arms that invest in tokens that are then listed on the platforms. He stated that these cryptocurrency firms are attempting to convince policymakers and the public that the SEC is acting unfairly and arbitrarily when the firms are deliberately choosing to not abide by current policies.
• Ranking Member Lynch stated that both former SEC Chairman Jay Clayton and current SEC Chairman Gary Gensler have asserted that most cryptocurrencies should be classified as securities. He emphasized that these Chairmen are from different political parties. He stated that the SEC’s purpose is to address information, knowledge, and expertise asymmetries between investors and industry. He commented that disclosure requirements have been created in response to these asymmetries. He noted however that many cryptocurrency and stablecoin disclosures are very technical in nature and difficult for consumers to understand. He then discussed how many cryptocurrency industry stakeholders have claimed that FTX had been a bad actor and that its actions are not reflective of the broader cryptocurrency industry. He stated however that FTX had been viewed as an industry leader prior to its collapse. He asked Mr. Reiners to discuss the risks that could arise if cryptocurrencies are to remain unregulated.
  • Mr. Reiners remarked that FTX was just one of many bad actors within the cryptocurrency industry and asserted that the entire cryptocurrency industry is fundamentally corrupt. He stated that the U.S.’s failure to regulate the cryptocurrency industry would lead to more problems for U.S. retail investors. He asserted that cryptocurrencies had made FTX’s fraud possible and noted how the company had been able to grow to a $32 billion valuation within three years of its founding. He stated that FTX’s ability to mint cryptocurrency tokens out of nothing had enabled this explosive growth. He also highlighted how FTX’s FTT token had underpinned FTX’s fraud. He explained that FTX-affiliated hedge fund Alameda Research had borrowed customer assets from FTX and had used FTT tokens as collateral for this borrowing. He stated that FTX’s fraud had only been exposed when Binance CEO Changpeng Zhao had announced that he would liquidate his FTT tokens. He concluded that the unique nature of cryptocurrencies had enabled FTX to quickly grow and collapse.

Full Committee Ranking Member Maxine Waters (D-CA):

• Ranking Member Waters noted how Full Committee Chairman Patrick McHenry (R-NC) and Oversight and Investigations Subcommittee Chairman Bill Huizenga (R-MI) had recently sent a letter to SEC Chairman Gary Gensler demanding records and communications between the SEC’s Enforcement Division and the U.S. Department of Justice (DoJ) regarding charges against FTX founder and former CEO Sam Bankman-Fried. She expressed confusion regarding this request and stated that the bad actor in FTX’s collapse is Mr. Bankman-Fried and his colleagues. She mentioned how the Committee had regularly subpoenaed corporate executives during her tenure as Committee Chairman and stated that Full Committee Chairman McHenry should compel Mr. Bankman-Fried to testify before the Committee. She asked Mr. Reiners to indicate whether the SEC had been wrong to bring a civil enforcement case against Mr. Bankman-Fried for hurting U.S. investors.
  • Mr. Reiners answered no. He applauded the SEC and the CFTC for swiftly bringing enforcement actions against FTX. He also applauded the DoJ (and specifically the U.S. Attorney for the Southern District of New York) for swiftly bringing criminal charges against FTX founder and former CEO Sam Bankman-Fried.
• Ranking Member Waters then mentioned how the OCC, the U.S. Federal Reserve, and the FDIC had recently issued a joint statement regarding the liquidity risks to banks resulting from crypto-asset market vulnerabilities. She noted how the California Department of Financial Protection and Innovation had announced that Silvergate Bank (which is a prominent banking partner for cryptocurrency companies) has voluntarily begun the process of liquidation. She indicated that this liquidation had come following FTX’s collapse, which had led to a run on Silvergate Bank. She stated that the recent problems at FTX and Silvergate Bank validate the concerns of banking regulators regarding banks that dealt with digital assets. She asked Mr. Reiners to indicate whether he agrees with these concerns.
  • Mr. Reiners expressed agreement with the concerns of banking regulators regarding banks that dealt with digital assets. He stated that the banking regulators are simply enforcing their safety and soundness mandate through their recent actions.
• Ranking Member Waters recounted how the Committee had investigated Facebook’s attempt to launch a cryptocurrency during her tenure as a Committee Chairman. She noted how Facebook had attempted to partner with Silvergate Bank to launch their cryptocurrency. She indicated however that U.S. Secretary of the Treasury Janet Yellen had opposed Facebook’s effort to launch their cryptocurrency and noted that Facebook subsequently aborted this effort. She questioned whether the approval of Facebook’s pursuit of a cryptocurrency in partnership with Silvergate Bank would have caused millions of additional investors to lose their money. She asked Mr. Reiners to indicate whether regulations are overreaching in their cautious approach toward cryptocurrencies.
  • Mr. Reiners answered no and expressed appreciation for Ranking Member Waters’s focus on Facebook’s proposed cryptocurrency project. He attributed the attention surrounding Facebook’s proposed cryptocurrency project to Facebook’s scale. He noted how Facebook has over 2 billion monthly active users across its suite of products and commented this scale could potentially support a currency on the platform. He stated that Facebook had ultimately decided not to pursue its cryptocurrency project in response to political pressure (rather than legal or regulatory roadblocks). He recommended that the Committee work to ensure that large technology companies could not issue their own cryptocurrencies or stablecoins.
• Ranking Member Waters acknowledged that her question period time had expired and expressed interest in obtaining additional recommendations from Mr. Reiners.

Rep. Frank Lucas (R-OK):

• Rep. Lucas remarked that the SEC’s approach to digital assets has mainly involved enforcement actions. He stated that the SEC has claimed that digital intermediaries can easily register with the Agency. He asserted however that the SEC is not currently providing these intermediaries with any guidance or indication about how to register with the Agency. He asked Prof. Evans to address how the SEC’s current enforcement approach regarding digital assets fits with the Agency’s mandate to protect investors and to maintain fair, orderly, and efficient markets.
  • Prof. Evans remarked that the SEC has broad discretion in terms of their ability to pursue regulations and to encourage orderly markets through adjudication procedures and rulemaking. She stated that the SEC’s use of adjudication procedures on a select number of parties fosters industry-wide confusion. She commented that this approach does not result in the same level of regulatory clarity that rulemaking would provide.
• Rep. Lucas then discussed how many of the legislative proposals to provide clarity within the digital asset space would provide the CFTC with the authority to oversee the cryptocurrency spot markets. He noted how the CFTC has historically been a principles-based regulator. He stated that the flexibility associated with the CFTC’s principles-based approach has enabled the Agency to be an innovative and proactive regulator. He stated that the U.S. must consider whether providing the CFTC with the authority to oversee the cryptocurrency spot markets would benefit investors, consumers, and regulators. He asked Mr. Grewal and Prof. Evans to identify who should have the authority to oversee the cryptocurrency spot markets.
  • Mr. Grewal remarked that the absence of oversight authority for the cryptocurrency spot markets represents a gap in the overall cryptocurrency policy landscape. He expressed Coinbase’s support for legislation that would provide the CFTC with clear oversight authority for the cryptocurrency spot markets.
  • Prof. Evans remarked that there exists a “clear gap” in the U.S.’s ability to oversee cryptocurrencies and noted how cryptocurrencies could change between commodities and securities throughout their lifecycles. She called it critical for the U.S. to ensure that there does not exist a regulatory gap between derivatives markets involving commodities and the securities market.
• Rep. Lucas then mentioned how Silvergate Bank (which was a major lender in the cryptocurrency industry) had just announced that it will be liquidating its assets. He asked Mr. Grewal to address the concerns that problems within the cryptocurrency space will migrate over to the traditional banking system.
  • Mr. Grewal described the concerns that problems within the cryptocurrency space will migrate over to the traditional banking system as being real, important, and legitimate. He testified that Coinbase does not currently have any exposure to Silvergate Bank. He remarked that transparency could help to address these concerns through enabling investors and market regulators to understand a bank’s risks and exposures. He also asserted that banks should possess prudent risk management plans to ensure that customer funds would be kept safe in the event of a failure or wind down.

Rep. Bill Foster (D-IL):

• Rep. Foster discussed how the U.S. could prevent the use of cryptocurrencies in ransomware payments, wash trades, and market manipulation schemes through requiring all cryptocurrency transactions be associated with a traceable and legal identity from a country with which the U.S. maintains an extradition treaty. He mentioned how the cryptocurrency industry leaders had expressed opposition to this proposed requirement in December 2021. He noted that these leaders had acknowledged that permitting self-custody and permissionless transactions would inherently lead to a risk of ransomware payments and wash trades. He asked the witnesses to indicate whether there have occurred any technological developments since December 2021 that would enable the U.S. to prevent cryptocurrencies from being used for illicit activities without requiring the transactions to have a traceable and legal identity associated with them.
  • Mr. Reiners stated that he was unaware of any such technological developments. He noted how the Financial Action Task Force (FATF) had issued guidance for preventing cryptocurrency’s use in money laundering, ransomware payments, and other illicit activities. He stated however that not all countries are following this FATF guidance. He also highlighted how most ransomware attacks using cryptocurrencies involve Russia. He noted that while the U.S. Office of Foreign Assets Control (OFAC) has increased its designation activity relating to Russian-based exchanges, he stated that it remains very easy for new Russian-based exchanges to be opened.
• Rep. Foster interjected to assert that the current lack of a requirement for cryptocurrency transitions to be associated with a traceable and legal identity from a country with which the U.S. has an extradition treaty is driving ransomware attacks. He analogized the need for such requirements for cryptocurrency transactions to the need for license and registration requirements for automobiles. He asserted that license and registration requirements for automobiles had not undermined innovation within the automobile sector and had instead driven innovation within the sector. He called for the adoption of similar license and registration requirements for digital wallets and commented that such requirements are technically feasible. He stated that this digital wallet registration could be secret and cryptographically obscured while allowing for legal recourse in the event of fraud or harm. He asked the witnesses to comment on his digital wallet registration proposal.
  • Mr. Grewal remarked that attribution capabilities are important for linking illicit activity (or other activity that is the subject of government or civil action) to individuals. He stated that court supervision or appropriate government oversight and extradition capabilities are key to supporting these attribution capabilities. He remarked that there likely exists a method for providing such attribution capabilities that does not involve the mass collection of personally identifiable information (PII). He stated that the U.S. must balance the need for personal privacy with the need to hold people accountable for their illicit activities.

Rep. Tom Emmer (R-MN):

• Rep. Emmer remarked that cryptocurrencies are shifting economic power from centralized institutions to people and asserted that this shift of economic power could be perceived as threatening to many federal policymakers. He mentioned how the U.S. Federal Reserve, the FDIC, and the OCC had issued a January 2023 statement that discourages banks from holding cryptocurrencies or servicing cryptocurrency-related clients on a safety and soundness basis. He also criticized the U.S. Federal Reserve for its publication of a February 2023 notice in the U.S. Federal Register that he claimed had effectively turned the aforementioned guidance into a final rule. He commented that this action did not appear to follow the public comment process that is prescribed under the Administrative Procedure Act. He further mentioned how the NEC had published the Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks in January 2023. He stated that this Report details how the Biden Administration will “lawlessly abuse the administrative state” to push U.S. cryptocurrency firms and their U.S. customers to offshore, unregulated, opaque, and unsafe markets. He accused the Biden administration of “weaponizing” the banking sector to remove access to financial services for legal cryptocurrency activities occurring within the U.S. He stated that FTX’s recent collapse demonstrates the risks posed by having cryptocurrency firms operate outside of the U.S.’s jurisdiction. He remarked that Congress had worked in a bipartisan fashion for eight years to address the cryptocurrency space. He stated that the OCC during the tenure of former Acting Comptroller Brian Books had understood the importance of unlocking access to financial services for cryptocurrency companies. He asked Mr. Gould to indicate whether the Biden administration’s regulatory posture toward digital assets is increasing or decreasing the willingness of financial institutions to offer services to cryptocurrency firms.
  • Mr. Gould stated that the Biden administration’s regulatory posture toward digital assets is discouraging financial institutions from offering services to cryptocurrency firms.
• Rep. Emmer asked Mr. Gould to indicate whether the Biden administration’s regulatory posture toward digital assets is increasing or decreasing the willingness of financial institutions to innovate themselves and to offer digital asset products and services to their clients.
  • Mr. Gould stated that the Biden administration’s regulatory posture toward digital assets is discouraging financial institutions from innovating themselves and offering digital asset products and services to their clients.
• Rep. Emmer asked Mr. Gould to project the potential impact of the Biden administration’s “negative” and “wide ranging” statements regarding safety and soundness on financial institutions engaging in digital asset activities.
  • Mr. Gould remarked that these statements from the Biden administration could drive digital asset activities into less visible areas of the economy, which would reduce the U.S.’s ability to monitor and manage the risks associated with the activities. He also remarked that these statements could increase the technology gap between larger and smaller banks. He noted how smaller banks tend to have less resources and are less able to pursue technology investments.
• Rep. Emmer asked Mr. Gould to provide an example of when an administration had previously taken a hostile regulatory posture toward an industry and to discuss the impacts of such a posture.
  • Mr. Gould remarked that many people are comparing the Biden administration’s approach to the digital assets industry to Operation Choke Point during the Obama administration. He asserted however that the Biden administration’s approach to digital assets is different from Operation Choke Point in several important ways. He stated that the Biden administration is being transparent regarding its views and concerns regarding digital assets. He also noted how Operation Choke Point had been focused on discouraging banks from offering financial services to certain industry sectors. He stated however that the Biden administration’s approach to digital assets is broader in scope in that it seeks to discourage banks from exploring new technologies (such as digital assets).
• Rep. Emmer remarked that the Biden administration is attempting to prevent the cryptocurrency industry from accessing financial services and financial institutions from offering digital asset products and services to customers. He asserted that these efforts are discouraging innovation and forcing digital asset users to seek out less sophisticated jurisdictions that are not well-equipped to manage potential risks.

Rep. Ritchie Torres (D-NY):

• Rep. Torres remarked that FTX’s collapse demonstrates how offshore, deregulated, centralized, and overleveraged cryptocurrency companies pose the greatest risks of losing customer funds and defrauding their customers. He asked Mr. Belshe to indicate whether the SEC is prioritizing enforcement actions against offshore, deregulated, centralized, and overleveraged cryptocurrency companies or prioritizing enforcement actions against onshore and regulated cryptocurrency companies.
  • Mr. Belshe stated that he did not believe that the SEC had taken any actions against either FTX or former FTX CEO and founder Sam Bankman-Fried prior to FTX’s collapse. He remarked that the SEC is therefore prioritizing enforcement actions against onshore and regulated cryptocurrency companies. He also suggested that the SEC’s approval of a Bitcoin exchange-traded fund (ETF) might have led U.S. customers to not seek out offshore and unregulated cryptocurrency companies (such as FTX) to obtain exposure to cryptocurrencies. He noted how the SEC had received over 25 valid Bitcoin ETF applications from reputable firms (including Invesco).
• Rep. Torres then commented that the SEC and the CFTC appear to be engaged in a “regulatory turf war” over digital assets. He noted how the CFTC had claimed that Ether is a commodity in a December 2022 court filing. He indicated however that SEC Chairman Gary Gensler had claimed in a February 2023 New York Magazine interview that all cryptocurrencies are securities with the exception of Bitcoin. He asked Mr. Grewal to indicate whether the “mixed messaging” from the SEC and the CFTC underscores the need for Congress to bring legal clarity to the status of digital assets.
  • Mr. Grewal answered affirmatively. He stated that the current disagreement between the SEC and the CFTC regarding whether a particular token constitutes a security or a commodity demonstrates how difficult it is for cryptocurrency stakeholders to comply with U.S. laws and rules.
• Rep. Torres noted how Bloomberg News opinion columnist Matt Levine had asserted that the SEC has been “ruthless and creative” in its exploitation of legal provisions to expand its powers over cryptocurrencies. He expressed disagreement with SEC Chairman Gensler’s assertions that Ether and stablecoins are securities and stated that these tokens should not be considered securities under the Howey test. He noted how the Howey test deems a security to involve an investment of money in a common enterprise with the expectation of profits to be derived from the efforts of others. He stated that stablecoins did not have an expectation of profit and noted how consumers purchase stablecoins to transact on blockchains. He asked Mr. Grewal to respond to his assertion that stablecoins do not constitute securities.
  • Mr. Grewal expressed agreement with Rep. Torres’s assertion that stablecoins come with no expectations of profit and should therefore not be considered securities.
• Rep. Torres asked Mr. Belshe to indicate whether Ether has a central entity that would qualify it as a security under the Howey test.
  • Mr. Belshe remarked that the status of many cryptocurrencies is not always straightforward and noted how a cryptocurrency’s level of decentralization could evolve over time. He mentioned how Bitcoin had been centralized at its time of founding and commented that Bitcoin is now fully decentralized. He suggested that policymakers consider some form of incubation period for assets to evolve from a centralized status to a decentralized status. He stated that this evolution of asset type is unique to digital assets.
• Rep. Torres asked Mr. Grewal to indicate whether there exist assets that could begin as securities and morph into other asset types as they become decentralized. He commented that Ether had likely been a security at its time of origin and has subsequently become more decentralized over time.
  • Mr. Grewal remarked that assets could change their characters over time. He also stated that it is possible for an asset that began as a commodity to evolve into a security. He remarked that an asset that becomes more decentralized over time might reach a stage where it should no longer be considered a security.

Subcommittee Vice Chairman Warren Davidson (R-OH):

• Vice Chairman Davidson expressed frustration with the inability of Congress and the Executive Branch to advance digital assets policies in recent years and stated that this inaction creates uncertainty for the cryptocurrency industry. He asserted that existing compliance tools are often poorly suited for digital assets given how these assets have different computing architectures. He then asked Prof. Evans to indicate whether the SEC regulates the payments system or securities.
  • Prof. Evans indicated that the SEC regulates securities.
• Vice Chairman Davidson remarked that the legal clarity that he is pursuing for digital assets seeks to ensure that SEC would not attempt to regulate the payments system. He then mentioned how Coinbase CEO Brian Armstrong had previously expressed support for allowing individuals to transfer cryptocurrency assets off of their exchanges and onto self-hosted wallets. He asked Mr. Grewal to indicate whether protecting a customer’s ability to eliminate third-party risk through self-custody constitutes an important first step in consumer protection.
  • Mr. Grewal answered affirmatively.
• Vice Chairman Davidson stated that the U.S.’s absence of digital asset regulations has led many Americans to become victims of fraud and abuse. He posited a scenario in which a centralized entity offering digital assets fails and an investor in these digital assets has self-custodied their assets. He asked Mr. Grewal to indicate whether this investor faced risks stemming from the failure of the centralized entity.
  • Mr. Grewal stated that the investor that had self-custodied their assets would face no risks stemming from the hypothetical failure of the centralized entity.
• Vice Chairman Davidson commented that the owner of self-custodied assets in his hypothetical scenario would face no risks in the event of a centralized entity failure because they fully own their digital assets. He acknowledged that while many people will not choose to self-custody their digital assets, he asserted that the U.S. should not prohibit the ability of people to self-custody their own digital assets. He then asked Mr. Grewal to discuss how Coinbase works to prevent market manipulation, fraud, conflicts of interest, and other issues that might impede the functioning of spot markets.
  • Mr. Grewal testified that Coinbase maintains policies and procedures to address each of the aforementioned concerns. He also mentioned Coinbase maintains transaction monitoring systems and monitors for insider activity. He stated that these policies and procedures are meant to identify behaviors that would create concerns for regulators, lawmakers, and Coinbase itself. He asserted that Coinbase’s entire business proposition is based on trust.
• Vice Chairman Davidson then attributed the recent failures of Silvergate Bank and FTX to fraud (rather than their cryptocurrency activities). He asked the witnesses to comment on the reasons underlying these recent failures.
  • Mr. Belshe remarked that FTX had then taken funds out of their exchange and sent the funds to their proprietary trading firm against the knowledge of their clients.

Rep. Al Green (D-TX):

• Rep. Green remarked that not all financial innovation is beneficial. He asked Mr. Reiners to identify actions that U.S. policymakers could take to protect cryptocurrency investors.
  • Mr. Reiners remarked that the U.S. should impose the same standards and safeguards on cryptocurrency-related activities as have long been imposed on traditional securities markets. He specifically called for the segregation of cryptocurrency customer assets from cryptocurrency firm assets, disclosure and audited financial statement requirements for cryptocurrency firms, and prohibitions on conflicts of interest for cryptocurrency firms. He stated that Congress should provide one federal agency with sole authority over the cryptocurrency market. He contended that this federal agency should be the SEC given its investor protection mandate. He noted how the CFTC does not possess an investor protection mandate and discussed how the markets overseen by the CFTC are principally composed of large and sophisticated institutional investors. He commented that the CFTC does not have significant experience protecting retail markets.
• Rep. Green asked Mr. Reiners to respond to concerns that SEC regulation over the cryptocurrency market would thwart innovation and cryptocurrency business development.
  • Mr. Reiners remarked that U.S. capital markets are the “envy of the world” and attributed this status to the U.S.’s robust system of regulation. He noted this regulatory system includes information disclosure requirements and legal remedies. He contended that the cryptocurrency industry would require these same guardrails to achieve long-term sustainability. He stated that most Americans do not currently trust cryptocurrency firms and commented that this distrust is warranted. He remarked that a robust regulatory environment for cryptocurrencies would foster trust and confidence in the cryptocurrency industry among cryptocurrency users, which will enable the industry to grow.
• Rep. Green lastly discussed the prevalence of cryptocurrency ATMs in retail settings and raised concerns that many consumers might falsely perceive cryptocurrencies to be subject to a robust set of regulations and protections. He further expressed concerns that the cryptocurrency industry is more focused on making profits than on protecting investors.

Rep. John Rose (R-TN):

• Rep. Rose asked Mr. Grewal to describe the existing regulatory structures for digital asset trading platforms. He specifically asked Mr. Grewal to discuss the specific authorities of the SEC and the CFTC with respect to the regulation of digital asset trading platforms.
  • Mr. Grewal noted how Coinbase is a U.S.-regulated digital assets trading platform and indicated that the company possesses approximately 45 money transmission licenses across the U.S. He also mentioned how Coinbase has a BitLicense from the New York State Department of Financial Services. He stated that Coinbase is registered as a designated contract market (DCM) with the CFTC and added that Coinbase is currently seeking to register as a futures commission merchant (FCM) with the CFTC. He further mentioned how Coinbase is registered as a money services business (MSB) with FinCEN. He lastly noted how Coinbase has two registered broker-dealers with the SEC. He stated however that Coinbase could not use these broker-dealers because there do not exist any digital asset securities that are currently available for listing. He then remarked that the Coinbase did not have a viable path to registration as either a national securities exchange or as a broker-dealer ATS with the SEC. He suggested that legislation could provide such a path.
• Rep. Rose then discussed how there exists disagreement surrounding who would serve as the primary regulator for digital assets. He mentioned how previous Congresses have considered proposals to merge the SEC and the CFTC to provide more regulatory certainty. He noted how a 1995 U.S. Government Accountability Office (GAO) report had found that merging the SEC and the CFTC could yield several benefits. He indicated that these benefits include reducing regulatory uncertainty, enhancing market efficiency and innovation, and increasing regulatory effectiveness. He noted how current SEC Commissioner Hester Peirce had previously stated that an SEC and CFTC merger would be both politically difficult to engineer and a “reasonable step” towards “much needed” regulatory consolidation. He further mentioned how the U.S. Department of the Treasury under President Trump had considered proposals to merge the SEC and the CFTC and had ultimately opted to not pursue the policy. He asked the witnesses to opine on whether the digital assets industry would benefit from having a combined securities and derivatives regulator.
  • Mr. Belshe noted how the term “digital assets” encompass several types of assets, including stablecoins, cryptocurrencies, decentralized finance (DeFi) tokens, and digital property. He remarked that having a single regulator for these diverse asset types is suboptimal. He stated that the SEC should oversee digital assets that meet the definition of securities. He then remarked that the prospects of combining the SEC and the CFTC into a hybrid entity are very low. He contended that the U.S. should pursue a principles-based approach to digital assets regulation.
  • Prof. Evans remarked that the U.S. might create a hybrid entity to regulate digital entities if it were to develop a brand-new regulatory regime for digital assets. She noted how the enabling laws for both the SEC and the CFTC call for the agencies to work together. She commented however that the SEC and the CFTC have not always worked together. She suggested that Congress consider pushing the SEC and the CFTC to work together to oversee the digital assets space.
  • Mr. Gould discussed how the U.S. has multiple federal banking regulators and noted that these regulators serve different functions. He stated that the existence of these multiple regulators is valuable so long as there is constructive handling of the different missions and tensions across the regulators.
  • Mr. Grewal testified that Coinbase has previously called for the establishment of a unified regulator that would be responsible for securities, commodities, and other types of digital assets. He acknowledged however that the establishment of such a unified regulator would present political challenges. He remarked that the U.S. should focus on developing a unified regulatory framework for digital assets. He stated that this unified regulatory framework could involve separate regulators.
  • Mr. Reiners noted how former U.S. Federal Reserve Chairman Paul Volcker had called for the merging of the SEC and the CFTC. He expressed support for proposals to merge the SEC and the CFTC and stated that the current separation of regulatory entities has “bizarre” outcomes.
• Rep. Rose interjected to indicate that his question period time had expired.

Rep. Sean Casten (D-IL):

• Rep. Casten asked Mr. Reiners to estimate the total market value of all digital assets currently being traded.
  • Mr. Reiners noted how CoinMarketCap had listed the total market capitalization of all digital assets at over $1 trillion. He stated however that market capitalization constitutes a “troubling metric” for cryptocurrencies. He noted how any person or entity could create a cryptocurrency, sell a small number of the tokens, and hold most of the tokens for themselves. He commented that the person or entity engaged in this scheme could claim that their cryptocurrency has a high market capitalization based on the price of the tokens that had been sold and their possession of the remaining tokens.
• Rep. Casten commented that Mr. Reiners’s response to his previous question helps to explain FTX’s recent collapse. He discussed how FTX had issued its own tokens and that a sudden drop in demand for these tokens had caused a run on FTX’s exchange. He also stated that Silvergate Bank appears to have settled their cryptocurrency trades using U.S. dollars. He noted how a spike in demand for U.S. dollars had led to a run on Silvergate Bank. He asked Mr. Reiners to confirm his understanding of Silvergate Bank’s recent collapse.
  • Mr. Reiners expressed agreement with Rep. Casten’s description of Silvergate Bank’s recent collapse. He stated that Silvergate Bank had experienced a liquidity crisis. He noted how over 90 percent of Silvergate Bank’s deposits had been affiliated with cryptocurrency firms. He stated that the decline in cryptocurrency prices had led to a run on Silvergate Bank’s assets and noted how Silvergate Bank had needed to sell assets to fulfill the withdrawal requests of their customers. He highlighted how many of these assets had been fixed income assets that had decreased in value in response to the rising federal funds rate. He commented that these various pressures had caused Silvergate Bank to collapse.
• Rep. Casten noted how Silvergate Bank is considered one of the most important banks within the cryptocurrency space and is now in the middle of a $12 billion bankruptcy. He also noted how FTX was one of the major cryptocurrency exchanges and is now in the middle of an $8 billion bankruptcy. He further mentioned how additional cryptocurrency firms, including Celsius and Genesis, have filed for bankruptcy protection. He noted how these entities had accounted for approximately 3 percent of the nominal market capitalization for all digital assets. He commented that this situation suggests that the $1 trillion nominal market capitalization for digital assets is somewhat inflated. He also stated that the impact of these bankruptcies would likely be minimal given their relatively small size compared to the overall economy. He asked Mr. Reiners to indicate whether there exist any systemically important entities within the cryptocurrency space.
  • Mr. Reiners stated that the elimination of the cryptocurrency industry would likely have no impact on gross domestic product (GDP) or unemployment. He noted how the total market capitalization of cryptocurrencies had recently fallen by $2 trillion and commented that this decline had no discernible impacts on most Americans. He warned however that the cryptocurrency industry is working to become integrated with the traditional financial system. He called this ironic given how cryptocurrency had been invented to exist outside of the traditional financial system.
• Rep. Casten then asked Mr. Reiners to indicate whether there exist any strong arguments that cryptocurrencies should be used as currencies. He commented that cryptocurrencies are currently not widely accepted as a means for payment.
  • Mr. Reiners remarked that cryptocurrencies are too volatile to be used as mediums of exchange. He also dismissed the arguments that stablecoins could be used as currencies and stated that people used stablecoins to speculate on overseas exchanges and in DeFi.
• Rep. Casten stated that while blockchain technology is a fascinating technology with unknown potential, he expressed doubts that cryptocurrencies could be viewed as viable currencies.

Rep. Bryan Steil (R-WI):

• Rep. Steil first asserted that stablecoins provide an opportunity for innovation and expressed his disagreement with Mr. Reiners’s criticism of stablecoins. He then contended that the U.S. should establish a robust policy framework for digital assets so that digital assets innovation would occur domestically. He highlighted how much of the current activity around digital assets is occurring offshores, which he commented is causing many Americans to get harmed. He discussed how FTX had been headquartered in the Bahamas and commented that the Bahamas maintains less robust regulations for digital assets than the U.S. He asserted that the U.S. should encourage digital assets businesses to engage in their activities within the U.S. so that digital asset users would have greater protections. He remarked that the SEC is failing to provide a clear framework for facilitating responsible U.S.-based leadership on digital assets. He mentioned how SEC Chairman Gary Gensler had recently dismissed concerns that the U.S.’s lack of digital asset regulations is causing digital assets businesses to move outside of the U.S. He noted how Chairman Gensler had asserted that the losses associated with a potential downturn in the cryptocurrency market would be greater than the losses associated with digital assets innovation moving abroad. He asked Mr. Grewal to respond to Chairman Gensler’s recent comments and to address how the offshoring of digital assets innovation would impact the U.S.’s desired investment outcomes.
  • Mr. Grewal noted how Coinbase is an American cryptocurrency exchange that is incorporated under the laws of the state of Delaware. He remarked that Coinbase thus has a “strong interest” in ensuring that U.S. cryptocurrency users receive robust protections. He discussed how other countries, including the UK, Australia, and Singapore, are pursuing their own “sensible” cryptocurrency policies and commented that these policies are attracting investments and creating foreign jobs. He stated that the U.S.’s failure to address the gap in cryptocurrency policies could raise national security concerns for the U.S.
• Rep. Steil then discussed how the SEC had engaged in a “flurry” of enforcement actions against cryptocurrency firms. He noted how SEC Chairman Gary Gensler had asserted that cryptocurrency firms knew how to comply with the SEC’s rules and policies. He stated that his interpretation of Chairman Gensler’s assertion is that digital assets firms could and should register with the SEC and that the failure of these firms to register with the SEC is intentional. He asked Mr. Grewal to provide his interpretation of Chairman Gensler’s assertion. He also asked Mr. Grewal to indicate whether it is easy for Coinbase to comply with the SEC’s rules and policies.
  • Mr. Grewal remarked that Coinbase is “eager” to offer digital asset securities within the U.S. under the supervision of the SEC and testified that Coinbase has pursued registration with the SEC under a variety of models. He stated that Coinbase has been unable to identify a path toward registration with the SEC to date. He asserted that the SEC’s current registration rules are ill-suited for digital assets.
• Rep. Steil noted how Coinbase had sent a petition to the SEC in Summer 2022 outlining a series of questions. He asked Mr. Grewal to characterize Coinbase’s interaction with the SEC and to indicate whether Coinbase had received any answers to its questions from the SEC.
  • Mr. Grewal mentioned how Coinbase had filed a formal petition for rulemaking under the Administrative Procedures Act in July 2022. He noted how this petition had requested that the SEC issue clearer rules for the digital assets space. He characterized Coinbase’s interaction with the SEC as “professional” and testified that Coinbase has not received any response to its petition.
• Rep. Steil commented that Coinbase’s lack of response from the SEC suggests that Congress should clarify the U.S.’s policies towards digital assets.

Rep. Wiley Nickel (D-NC):

• Rep. Nickel remarked that digital asset technology has “incredible potential” to expand access to financial services, reduce transaction costs, increase efficiencies, and support economic growth. He asserted however that proper regulation would be necessary to ensure that digital assets would not harm consumers. He stated that the U.S.’s failure to provide clear rules for digital assets would lead digital assets innovation to move abroad. He mentioned how he is a co-sponsor of the Keep Innovation in America Act and explained that this bipartisan bill would provide regulatory clarity for digital assets and would direct the U.S. Secretary of the Treasury to conduct a study on digital assets regulation. He asked Mr. Reiners to identify additional digital assets regulations that the U.S. should adopt to encourage domestic innovation and to protect consumers.
  • Mr. Reiners questioned whether the U.S. should embrace digital assets innovation. He noted how cryptocurrencies have existed for 14 years and commented that the harms associated with cryptocurrencies appear to heavily outweigh the benefits associated with cryptocurrencies. He discussed how cryptocurrencies facilitate ransomware attacks, sanctions evasion, and terrorist financing. He also mentioned how proof-of-work cryptocurrency mining has harmed the environment. He further highlighted how there had occurred numerous frauds, hacks, and scams associated with cryptocurrencies. He stated however that there have not been any benefits associated with cryptocurrencies. He called on federal policymakers to prioritize investor protection and to minimize risks to financial stability when considering digital assets policies. He also called on the U.S. to provide the SEC with exclusive oversight authority over the cryptocurrency space. He then stated that many rules that apply to traditional securities might be ill-suited for cryptocurrencies. He suggested that the U.S. consider developing a customized disclosure framework for cryptocurrencies and commented that cryptocurrency investors have different information demands relative to traditional equity investors.
• Rep. Nickel then mentioned how the U.S. Federal Reserve Board of Governors had issued a policy statement that confers new obligations onto state member banks regarding the permissibility of engaging in crypto asset-related activities. He commented that this policy statement appears to impact the ability of consumers to access the cryptocurrency ecosystem through safe and well-regulated outlets. He asked Mr. Grewal to address how this policy statement would harm consumers and innovation.
  • Mr. Grewal stated that this policy statement from the U.S. Federal Reserve Board of Governors could have unintended consequences or downstream effects. He expressed Coinbase’s support for rules governing disclosures to consumers and investors that would enable them to make informed investment and banking decisions.

Rep. Mike Flood (R-NE):

• Rep. Flood expressed interest in the SEC SAB No. 121 guidance document, which asks public banks to hold custodied crypto assets on their balance sheets. He asked Mr. Gould to address how the SEC’s regulatory approach to custody differs from the OCC’s regulatory approach to custody.
  • Mr. Gould stated that the SEC SAB No. 121 guidance document begs the question of what the appropriate regulatory capital treatment for digital assets is. He commented that the answer to this question remains unknown. He noted how the Basel Committee on Banking Supervision has proposed regulatory capital treatment for digital assets and described this proposed treatment as “highly punitive.” He indicated that he does not know about the contents of the instructions that banking regulatory agencies are sending to the banks that are attempting to custody digital assets. He stated however that the SEC SAB No. 121 guidance has a “chilling effect” on the willingness of banks to custody digital assets.
• Rep. Flood asked Mr. Gould to elaborate on how the SEC SAB No. 121 guidance document would impact the ability of banks to take custody of digital assets.
  • Mr. Gould remarked that a bank’s risk appetite and available capital would determine whether the bank would pursue the custody of digital assets. He commented however that custody activities have traditionally been less lucrative than other activities for banks.
• Rep. Flood raised concerns that investors would be poorly served by an environment where banks could not custody digital assets. He asked Mr. Gould to identify which other parties might emerge to provide digital asset custody services if banks could not provide such services. He asked Mr. Gould to indicate whether U.S. digital asset users might pursue offshore custody services if U.S. banks could not offer such services.
  • Mr. Gould stated that U.S. digital asset users might pursue offshore custody services if U.S. banks could not offer such services. He noted how banks have historically provided custody services for a wide variety of assets, including both physical assets and electronically stored assets.
• Rep. Flood noted that while SEC Chairman Gary Gensler has claimed that he wants the digital assets of investors to be protected, he asserted that the SEC has concurrently taken actions that have driven some of the safest and most highly regulated institutions out of the business of digital assets custody. He criticized this approach and warned that it would drive digital asset activities offshore and render U.S. investors less safe. He then expressed interest in the SEC’s recent custody rulemaking activities. He called it important for there to remain a pathway for custodians with a state charter to become a qualified custodian under the SEC’s custody rule under development. He mentioned how he had written and passed the Nebraska Financial Innovation Act when he had previously served in the Nebraska state legislature. He explained that this law permits Nebraska’s state-chartered banks to custody digital assets. He noted how other states (including New York and Wyoming) have their own pathways for becoming a digital assets custodian. He remarked that the SEC should not cut state-regulated custodians entirely out of the market. He also raised concerns that the SEC’s updated custody rules would effectively prohibit the practice of self-custody and block new marketplace entrants. He further stated that the SEC’s proposed rules would make it more difficult for registered investment advisors to register new types of cryptocurrency tokens. He commented that these rules could create significant barriers to entry for new cryptocurrency token issuers because it might take time for qualified custodians to build out the technical capabilities to custody new types of digital assets. He asked Mr. Grewal to address how these restrictions on the ability to custody assets would impact new cryptocurrency token issuers.
  • Mr. Grewal remarked that a lack of technical capabilities on the part of digital asset custodians would cause many cryptocurrency token issuer customers to remain unserved.
• Rep. Flood stated that the SEC’s proposed custody rule would expand the Agency’s scope beyond funds or securities to all types of assets. He asked Mr. Grewal to discuss how the SEC’s proposed custody rule would impact the marketplace for non-traditional assets, such as paintings, baseball cards, and non-fungible tokens (NFTs).
  • Mr. Grewal remarked that the broad scope of the SEC’s proposed custody rule would constitute a “dramatic expansion” of the very strict requirements that apply to qualified custodians. He called on policymakers to carefully consider the SEC’s proposal.

Rep. Brad Sherman (D-CA):

• Rep. Sherman contended that the Biden administration is not doing enough to address the problems associated with digital assets. He asserted that cryptocurrency investment is not beneficial and commented that this investment supports theft and adversarial countries (like North Korea). He asked Mr. Reiners to indicate whether the U.S. should extend its current incentives for investing in housing and businesses to the digital assets space. He also commented that digital assets could help to displace the U.S.’s dollar as the world’s reserve currency.
  • Mr. Reiners stated that the U.S. should not extend its current investment incentives to the digital assets space.
• Rep. Sherman also remarked that cryptocurrencies are meant to have their whereabouts concealed. He asked Mr. Reiners to identify parties that might seek out money that is less traceable in nature.
  • Mr. Reiners suggested that illicit actors would like to use money that is less traceable in nature.
• Rep. Sherman stated that cryptocurrencies enable the evasion of tax and bankruptcy laws. He noted how FTX founder and former CEO Sam Bankman-Fried had lobbied Congress to keep the SEC from regulating cryptocurrencies and stated that Congress should not advance Mr. Bankman-Fried’s legislative agenda. He commented that the cryptocurrency industry merely wants the “patina” of regulation without being subject to SEC regulation. He called the SEC the most effective business regulator. He then noted how a currency is meant to serve as a store of value, a medium of exchange, and a measure of value. He asked Mr. Reiners to indicate whether the U.S. dollar fulfills the three aforementioned criteria.
  • Mr. Reiners answered affirmatively.
• Rep. Sherman stated that U.S. dollars are difficult to hide from the U.S. Internal Revenue Service (IRS) and law enforcement agencies. He asked Mr. Reiners to identify any of the U.S. dollar’s flaws that cryptocurrencies could address. He also asked Mr. Reiners to indicate whether cryptocurrencies could support honest transactions that are in conformity with U.S. law.
  • Mr. Reiners remarked that he could not identify any benefits of cryptocurrencies that could address the flaws of the U.S. dollar.
• Rep. Sherman further disputed the assertion that cryptocurrencies provide a better payment system. He noted how consumers seeking to transfer cryptocurrencies must convert their existing fiat currencies into cryptocurrencies, which involves a fee. He also noted how these consumers would need to pay an additional fee if they want to convert their cryptocurrencies back into fiat currencies. He added that most vendors do not accept cryptocurrencies as a form of payment (which necessitates cryptocurrency to fiat currency conversions). He asked Mr. Reiners to indicate whether this constitutes an efficient payments system.
  • Mr. Reiners answered no and highlighted how cryptocurrency-related fees tend to be very high.

Rep. William Timmons (R-SC):

• Rep. Timmons remarked that recent “aggressive” actions from regulators demonstrate the need for Congress to enact digital assets legislation. He stated that the SEC appears to want to classify all digital assets (with the exception of Bitcoin) as securities. He expressed concerns that the SEC’s regulatory approach to digital assets could undermine innovation within this space. He asked Mr. Grewal to discuss some of the potential use cases for digital assets technology outside of the finance space. He commented that the greatest promise for digital assets technology appears to exist outside of the finance space.
  • Mr. Grewal discussed how digital assets could support payments and remittances and noted how cryptocurrencies enable people in the U.S. to transfer money abroad in a faster, cheaper, and more secure manner. He then noted how blockchain technology could help to track carbon credits and other environmental remediation credits. He also stated that blockchain technology could support digital health records with greater information portability and strong information protections. He then discussed how blockchain technology could enable decentralized identification capabilities. He commented that these capabilities could facilitate attribution of activities online without the collection of highly intrusive and voluminous PII.
• Rep. Timmons asked Mr. Grewal to indicate whether the aforementioned innovative use cases for digital assets would ever be realized if the U.S. were to regulate all cryptocurrency tokens as securities.
  • Mr. Grewal remarked that the regulation of all cryptocurrency tokens as securities would reduce the likelihood of the U.S. developing innovative use cases for digital assets technology outside of the finance space. He stated that federal securities laws impose significant burdens on issuers (which he acknowledged are sometimes appropriate). He stated however that many cryptocurrency tokens are not securities and asserted that applying federal securities laws to these tokens would yield very little benefit. He commented that the application of federal securities laws to these non-security tokens would instead disincentivize productive economic activity.
• Rep. Timmons also asked Prof. Evans to identify any potential use cases for digital assets technology outside of finance and to address the impact of having the U.S. regulate all cryptocurrency tokens as securities.
  • Prof. Evans expressed interest in the use cases for digital assets technology related to identity. She stated that this technology could enable consumers to only share relevant data for a given transaction (such as age information). She commented that the current requirement for people purchasing alcohol to inadvertently share their address information poses security risks. She also stated that digital assets technology has many health care and supply chain management applications.
• Rep. Timmons then noted how the market capitalization of cryptocurrencies is over $1 trillion and commented that other regulators might want to act swiftly to address the risks associated with cryptocurrencies. He raised concerns over the recent joint-statement regarding bank liquidity risks resulting from cryptocurrency market vulnerabilities and the U.S. Federal Reserve’s recent rule that prohibits state member banks from holding digital assets. He noted how only a few banks are willing to provide financial services to digital assets companies. He asked Mr. Gould to address how Silvergate Bank’s recent problems demonstrate the problems associated with overconcentration.
  • Mr. Gould warned that recent guidance from federal banking regulators could become self-fulfilling. He noted how this guidance warned of concentration risks and commented that this warning makes banks less willing to extend services to cryptocurrency customers. He stated that this dynamic would shrink the number of banks willing to service cryptocurrency customers, which would further concentrate the risks in the remaining banks that will service these customers.

Rep. Erin Houchin (R-IN):

• Rep. Houchin remarked that digital assets have shown “immense potential” in recent years and noted how the market capitalization of cryptocurrencies now exceeds $1 trillion. She also stated that blockchain technology and stablecoins are changing how Americans interact with the financial sector. She commented however that many digital asset companies face challenges in seeking to grow domestically. She attributed these challenges to the U.S.’s lack of regulatory clarity and the Biden administration’s “restrictive” approach to digital assets. She asked Mr. Belshe to project the impacts on the U.S.’s global competitiveness if the U.S. does not update its current regulations to account for developments within the digital assets space.
  • Mr. Belshe remarked that the U.S. is currently on track to drive the cryptocurrency industry entirely from the U.S. and called this trend concerning. He noted how 20 percent of Americans are interested in having digital assets and stated that the use cases for digital assets are continuing to grow. He further asserted that many of the potential use cases for digital assets technology are currently unknowable. He warned that the elimination of the U.S.’s digital assets technology sector would have “devastating” impacts for the U.S.
• Rep. Houchin asked Mr. Belshe to indicate whether the U.S.’s failure to establish clear guidance and rules for digital assets would pose risks to the U.S.’s global leadership and competitiveness (as well as to the stability and global preeminence of the U.S. dollar). She highlighted how other countries are pursuing their own policy frameworks for digital assets.
  • Mr. Belshe remarked that the U.S.’s failure to establish clear guidance and rules for digital assets would impact the U.S.’s global political standing (in addition to its global economic standing). He noted how China maintains a CBDC and is exporting this CBDC to Belt and Road Initiative countries. He stated that the U.S. must now decide whether it wants to pursue digital assets technology so that it can remain globally competitive with China.
• Rep. Houchin asked Mr. Belshe to indicate whether the movement of cryptocurrency activities abroad could have been avoided if the U.S. had adopted a regulatory strategy for digital assets.
  • Mr. Belshe answered affirmatively and noted how federal regulatory agencies have altered their postures toward digital assets in recent years. He called these regulatory changes across administrations problematic.
• Rep. Houchin noted how several countries and international organizations (including the EU) have begun to introduce and implement regulatory frameworks for digital assets. She asked Mr. Grewal to discuss how the efforts of the UK, Japan, China, and the EU will impact the regulatory environment for digital assets within the U.S. She also asked Mr. Grewal to identify what has prevented the U.S. from leading efforts to establish a global framework for digital assets regulation.
  • Mr. Grewal remarked that “tremendous” creativity and progress has occurred in the regulation of digital assets throughout the world. He stated that this progress and creativity did not involve removing all rules for digital assets and noted how these foreign jurisdictions have adopted robust know your customer (KYC) and AML rules. He raised concerns that the U.S. is failing to provide the same robust rules and regulations for its own digital assets industry.
• Rep. Houchin expressed her agreement with Mr. Grewal’s concerns over the U.S.’s current failure to compete with other countries on digital asset issues. She stated that the U.S. must address digital assets to ensure its global leadership, ensure national security, and support innovation within its financial markets.

Rep. Byron Donalds (R-FL):

• Rep. Donalds remarked that Congress should first determine whether the SEC and the CFTC possess the necessary technical capacity or know-how to regulate the digital assets industry before it empowers these agencies to regulate the industry. He mentioned how the U.S. had enacted new regulations for the financial sector following the 2008 Financial Crisis through the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). He asserted Dodd-Frank had imposed significant burdens on community banks. He stated that the Biden administration’s recent fiscal year (FY) 2024 proposed budget had called for more government programs to support small businesses and contended that the U.S. should instead focus on streamlining financial regulations to help these small businesses. He then asked the witnesses to indicate whether federal agencies currently possess the technical capacity needed to adequately regulate digital assets. He also asked the witnesses to indicate whether Congress should create a regulatory sandbox so that the digital assets industry could use their technical capacity to build a robust regulatory environment.
  • Mr. Belshe remarked that a principles-based approach to digital assets regulation would provide needed flexibility. He stated that empowering existing regulators to oversee digital assets would likely perpetuate existing market structures. He commented that the existing market structures are imperfect and contain inefficiencies. He stated that the U.S. should foster innovation to improve upon existing market structures and to take advantage of technological benefits of digital assets (including their ability to settle transactions in real-time without the use of intermediaries).
  • Prof. Evans remarked that federal regulators must have technical capacity to properly oversee the digital assets space.
• Rep. Donalds asked Prof. Evans to indicate whether the SEC and the CFTC possess a strong understanding of digital assets technology.
  • Prof. Evans remarked that it was difficult for her to state whether the SEC and the CFTC possess a strong understanding of digital assets technology without knowing the inner workings of the agencies. She suggested that increased education could address these concerns regarding how the agencies understand digital assets technology.
• Rep. Donalds noted how digital assets technology is very nascent and expressed doubts that the staffers at the SEC and the CFTC have a robust understanding of the technology. He then acknowledged that his question period time had expired.

Rep. Zach Nunn (R-IA):

• Rep. Nunn remarked that the U.S. must work to define the global standards for digital assets. He asserted that the Biden administration’s regulatory enforcement approach to digital assets has failed to provide adequate protections for the digital assets market. He then mentioned that he would introduce the Financial Technologies Protection Act of 2023, which would establish an independent FinTech working group to combat the use of digital assets in terrorism and illicit finance. He indicated that this working group would be chaired by the U.S. Secretary of the Treasury and would involve senior officials from the DoJ, the U.S. Secret Service, FinCEN, and the U.S. Federal Bureau of Investigation (FBI). He further noted how this working group would include appointed industry stakeholders. He stated that this working group would conduct independent research on terrorism and the illicit use of new financial technologies. He also stated that this working group would develop legislative and regulatory proposals to address money laundering and illicit activities. He then discussed how there are concerns that cryptocurrency activities would move outside of the U.S. in response to the U.S.’s current treatment of digital assets. He asked Mr. Grewal to discuss the downsides associated with having cryptocurrencies move abroad and how such moves could pose terrorism concerns.
  • Mr. Grewal first emphasized that the Coinbase is a U.S.-incorporated company and stated that Coinbase intends to remain in the U.S. He remarked that the emergence of regulatory clarity in foreign jurisdictions made it attractive for digital asset investors and companies to move their money, jobs, and activities to such jurisdictions. He stated that the development of digital asset technologies outside of the U.S. would harm the U.S.’s national security because this foreign development would undermine the U.S.’s ability to execute its sanctions program.
• Rep. Nunn also stated that the U.S.’s failure to engage with existing digital assets could result in the emergence of new digital assets that are not subject to any U.S. influence. He asked Mr. Belshe to address the national security implications associated with the emergence of such new digital assets.
  • Mr. Belshe noted that while the U.S. could ban the use of digital assets within its borders, he commented that such a ban would not prevent these assets from being used outside of the U.S. He stated that the U.S. could either work to bring digital assets under its supervision and help to influence the rules governing digital assets or delegate the development of digital asset rules to a foreign party. He recommended that the U.S. pursue the former option.
• Rep. Nunn concluded that the U.S. should work to develop digital assets policies that would help to grow the U.S. economy and support innovation. He raised concerns that the U.S.’s failure to engage on this topic could lead adversarial countries to control the global digital assets landscape.