Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets (U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion)

Hearing	Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets
Committee	U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion
Date	September 18, 2024

 

Hearing Takeaways:

• The U.S. Securities and Exchange Commission’s (SEC) Approach to Digital Assets: The hearing largely focused on how the SEC (and particularly SEC Chairman Gary Gensler) are approaching digital assets. Subcommittee Republicans, some Subcommittee Democrats, Mr. Liftik, Mr. Gallagher, Mr. Fusaro, and Ms. Schulp argued that the SEC is fostering regulatory uncertainty within the digital assets market through refusing to provide clear rules and guidance to consumers, innovators, and investors. They further raised concerns that this regulatory confusion and uncertainty is driving digital assets activity and innovation abroad to jurisdictions that possess clearer digital asset regulatory frameworks. Most Subcommittee Democrats and Mr. Reiners asserted however that the SEC is merely applying existing securities laws to digital assets. They argued that the digital assets industry is seeking to evade existing investor and consumer protection policies through claiming that the SEC is engaged in regulatory and enforcement overreach.
  • The SEC’s Digital Asset-Related Enforcement Actions: Subcommittee Republicans, some Subcommittee Democrats, Mr. Liftik, Mr. Gallagher, Mr. Fusaro, and Ms. Schulp accused the SEC of pursuing enforcement actions against digital asset firms without providing the firms with a clear pathway for compliance. They argued that the SEC is pursuing enforcement actions in lieu of regulation and stated that the SEC’s enforcement approach harms well-meaning digital asset firms. Subcommittee Republicans and Ms. Schulp highlighted how federal courts have rebuked the SEC for their digital asset enforcement conduct in several high-profile instances. Rep. Frank Lucas (R-OK), Mr. Gallagher, and Ms. Schulp further raised concerns over the SEC’s Enforcement Division’s high staff turnover rate. Most Subcommittee Democrats and Mr. Reiners contended however that the SEC is addressing rampant illicit acti vity (and particularly fraud) within the digital assets space through its enforcement actions and that these enforcement actions are entirely legitimate. They noted how the SEC has won the vast majority of their digital asset-related enforcement cases. They further asserted that SEC Chairman Gary Gensler’s current enforcement actions involving digital assets are similar to the enforcement actions taken by previous SEC Chairmen under both Democratic and Republican administrations.
  • The SEC’s Current Registration Process for Digital Asset Firms: Subcommittee Republicans, Mr. Gallagher, Mr. Fusaro, and Ms. Schulp argued that the SEC currently does not maintain a clear and straightforward process that enables digital asset firms to register their products and services with the Commission. Mr. Gallagher recounted how his company, Robinhood Markets, had spent significant time and money on their efforts to register with the SEC and that these efforts were ultimately unsuccessful. He added that the company later received a Wells notice from the SEC, despite their efforts to register with the Commission. These members and witnesses noted that while the SEC maintains a special purpose broker-dealer (SPBD) registration regime for digital asset firms, they questioned the SPBD registration regime’s workability. They noted how only two digital asset firms had successfully pursued this pathway. Rep. John Rose (R-TN) and Mr. Gallagher further expressed concerns that Prometuem Capital (which had achieved SPBD registration) is asserting that non-securities can be deemed securities on their platform.
  • The SEC’s Restrictions on Registered Securities: Ms. Schulp raised concerns that the registration of digital assets as securities with the SEC may preclude other uses of the token. She indicated that these other uses may include facilitating the purchase and sale of goods or facilitating blockchain functionality.
  • The SEC’s Disclosure Rules: Rep. Bryan Steil (R-WI), Mr. Liftik, Ms. Schulp also expressed concerns regarding how SEC disclosure rules would apply to digital assets that register with the SEC as securities. They stated that these disclosure rules can be nonsensical or impossible to comply with for digital asset projects. They elaborated that the disintermediated nature of these projects makes information about digital asset issuers less relevant for potential investors.
  • The SEC’s Digital Asset Platform Rules: Ms. Schulp further remarked that the SEC’s existing regulations are ill-suited for digital asset marketplaces. She elaborated that the SEC’s rules mandate clearing agency rules and procedures, which she described as “inapt” for instantaneous blockchain settlements. She stated that the problems associated with inappropriate applications of SEC rules are particularly acute for decentralized platforms. She noted how decentralized platforms do not custody assets and settle transactions on open and auditable public blockchains.
  • The SEC’s Treatment of Digital Asset Custodial Arrangements: Subcommittee Vice Chairman Warren Davidson (R-OH) and Mr. Fusaro accused the SEC of limiting the ability of individuals and entities to self-custody digital assets. Mr. Fusaro specifically highlighted how current SEC rules prevent exchange-traded funds (ETFs) and exchange-traded products (ETPs) from using an in-kind process as a creation and redemption process. He commented that these policies result in slightly higher costs for end-users.
  • SEC Staff Accounting Bulletin (SAB) No. 121: Subcommittee Chairman French Hill (R-AR), Rep. Ritchie Torres (D-NY), Rep. Wiley Nickel (D-NC), and Ms. Schulp criticized SEC SAB No. 121 for requiring custodian banks to put digital assets on their balance sheets. They argued that this policy would make it more difficult for financial institutions to provide digital asset custody services for clients and would effectively ban the tokenization of real world assets. Rep. Nickel and Ms. Schulp further asserted that SAB No. 121 seeks to provide regulation through guidance (which fosters marketplace uncertainty). Subcommittee Ranking Member Stephen Lynch (D-MA) expressed opposition to efforts to overturn SEC SAB No.121.
  • The SEC’s Approval of Bitcoin and Ether ETPs and ETFs: Subcommittee Chairman Hill, Mr. Liftik, and Mr. Fusaro expressed frustration over the length of time it had taken for the SEC to approve Bitcoin and Ether ETFs and ETPs. They noted how companies had worked for over five years to achieve SEC approval for these ETFs and ETPs and commented that this delayed approval had caused many companies to leave the U.S. to pursue these offerings. Mr. Fusaro acknowledged that while the SEC had approved a Bitcoin futures-based ETF in 2021, he stated that futures-based products tend to have disadvantageous tax consequences, are more complex to run, and are more complex to manage. He stated that these future-based products have a higher level of difference between the performance of the fund and the underlying asset than would exist with a spot-based product. He also highlighted how the largest Bitcoin futures-based ETP has a management fee that is about five times greater than the average management fee for spot-based Bitcoin ETFs. Mr. Reiners raised concerns however that digital asset ETPs are now connecting the traditional financial system to the cryptocurrency system. He commented that this connection enables problems in one system to spread to the other system.
  • The SEC’s Treatment of Non-Fungible Tokens (NFTs): Rep. William Timmons (R-SC), Mr. Liftik, and Ms. Schulp expressed concerns that current federal securities laws are ill-suited for NFTs. They argued that NFTs should not be treated as financial instruments and noted how NFTs have various non-financial applications. Ms. Schulp elaborated that securities laws are focused on addressing information asymmetries between asset issuers and investors. She commented that these issues are not relevant for overseeing most NFTs.
• Potential Congressional and Regulatory Actions to Address Digital Assets: Subcommittee Republicans, some Subcommittee Democrats, Mr. Liftik, Mr. Gallagher, Mr. Fusaro, and Ms. Schulp expressed interest in several policies that Congress and the Executive Branch could pursue policies to provide greater policy certainty to the digital assets space. 
  • The Financial Innovation and Technology for the 21st Century (FIT21) Act: Subcommittee Chairman French Hill (R-AR) Rep. Wiley Nickel (D-NC), and Mr. Gallagher expressed support for the FIT21 Act and expressed hope that this legislation could eventually be passed into law. The FIT21 Act would provide statutory authority to the SEC and the U.S. Commodity Futures Trading Commission (CFTC) to establish registration regimes for digital asset companies. Subcommittee Chairman Hill criticized the SEC for failing to provide Congress with technical assistance on the legislation and for unilaterally coming out against the legislation before its vote in the U.S. House of Representatives. Subcommittee Ranking Member Stephen Lynch (D-MA) and Mr. Reiners asserted however that the FIT21 Act would reduce federal oversight of digital assets markets, which would ultimately harm consumers and investors. Mr. Reiners also warned that the legislation would provide digital assets with a “veneer of legitimacy,” which could create more financial system vulnerabilities.
  • The New Frontiers in Technology Act: Rep. William Timmons (R-SC) mentioned how he had proposed the New Frontiers in Technology Act, which would exempt non-financial NFTs from securities regulations. He explained that this legislation would classify NFTs according to their nature and function, which would provide clarity as to whether the NFTs should be considered financial instruments. He stated that this legislation would provide NFTs with regulatory certainty to innovate and necessary guidance for federal regulators to provide appropriate oversight of NFTs.
  • Determination of a Digital Asset’s Status as Either a Security or a Commodity: Rep. Ritchie Torres (D-NY), Mr. Liftik, and Mr. Gallagher raised concerns over the uncertainty surrounding the current process for determining whether a digital asset constitutes a security (and therefore must register with the SEC). Rep. Torres criticized SEC Chairman Gary Gensler for asserting that all digital assets except for Bitcoin constitute securities and raised concerns that this assertion would have Ether and tokenized collectables fall under the definition of a security. Mr. Liftik questioned the wisdom of using the test established under the U.S. Supreme Court’s SEC v. W.J. Howey Co. decision (known as the Howey test) as the frame of reference for cryptocurrency policy debates. He asserted that the Howey test is ill-suited for digital assets and described the SEC v. W.J. Howey Co. decision as an outdated decision that imposes a facts and circumstances inquiry on every single transaction at issue. He stated that the question of whether a digital asset constitutes a security should be a statutory question for Congress to decide. 
  • Use of the SEC’s Exemptive Relief Authority to Establish a Registration Regime for Digital Asset Firms: Subcommittee Republicans, Mr. Liftik, Mr. Gallagher, and Ms. Schulp argued that the SEC should use its broad exemptive authority under Sec. 36 of the Securities Exchange Act of 1934 to develop pathways to registration for securities, exchanges, and other digital asset entities. They suggested that the SEC could use this authority to develop registration requirements, books and records requirements, anti-fraud protections for consumers, custody requirements, and transaction reporting requirements for digital assets firms. Mr. Gallagher stated that the SEC should use this exemptive authority to establish a provisional registration and oversight regime while Congress considers more prescriptive standards. Mr. Liftik further suggested that the SEC could experiment with different approaches to rulemaking frameworks through a regulatory sandbox led by its Strategic Hub for Innovation and Financial Technology (FinHub) office.
• Digital Asset Industry Concerns: Several Subcommittee Democrats and Mr. Reiners expressed various concerns regarding the current digital assets industry and expressed interest in having Congress further explore and address these concerns.
  • Digital Asset Applications: Subcommittee Ranking Member Stephen Lynch (D-MA) and Mr. Reiners stated that cryptocurrencies and digital assets have not experienced widescale consumer adoption, despite existing for almost 15 years. Mr. Reiners asserted that digital assets do not currently provide any utility and that the primary motivation underlying digital asset purchases is speculation. He further contended that the digital asset industry believes that the adoption of regulatory reforms will result in demand for their products and services. Subcommittee Vice Chairman Warren Davidson (R-OH) argued however that Bitcoin’s large market capitalization suggests that many consumers view cryptocurrencies as valuable. He stated that Bitcoin’s utility is that it provides consumers with a secure way to store value and enables people to transfer value in a permissionless peer-to-peer manner.
  • Use of Digital Assets in Illicit Activities: Several Subcommittee Democrats raised concerns that bad actors are using digital assets to facilitate illicit finance, fraud, price manipulation, and illegal activities. They raised specific concerns that the anonymity features and digital nature of digital assets makes these assets useful tools for evading anti-money laundering (AML) laws. Mr. Gallagher testified that Robinhood Markets maintains a “very vibrant” AML and know your customer (KYC) function. He also testified that the company considers illicit finance concerns as part of its decision making process. Mr. Fusaro also discussed how the ETP industry uses a volume-weighted median price that includes inputs from multiple different cryptocurrency or Bitcoin trading platforms. He commented that this approach helps to minimize the impact of wash trading and front running on digital asset prices.
  • Political Influence of the Digital Assets Industry: Several Subcommittee Democrats and Mr. Reiners also raised concerns that the digital assets industry has engaged in extensive political influence campaigns to advance its agenda. They highlighted how the cryptocurrency companies have contributed $119 million to U.S. federal elections in 2024. They stated however that very few Americans own or use cryptocurrencies and argued that Congress is providing too much attention to digital asset policy issues.
  • World Liberty Financial: Several Subcommittee Democrats raised particular concerns over how former President Trump has become involved in the cryptocurrency venture World Liberty Financial. They asserted that former President Trump’s involvement in this project creates a conflict of interest given how former President Trump is seeking to become President again. Rep. Sean Casten (D-IL) also expressed concerns that World Liberty Financial has stated that it will only sell its governance tokens to accredited investors under the SEC Regulation D exemption. He noted that this use of the SEC Regulation D exemption enables the project to raise money without registering with the SEC.
  • Concentrated Control of Digital Asset Project Governance Tokens: Rep. Casten and Mr. Reiners further raised concerns the over how small numbers of people and entities can control large percentages of governance tokens for digital asset projects. They noted how governance token holders can significantly influence the operations of digital asset projects and argued that this dynamic undermines the assertion that these projects are truly decentralized. Rep. Casten further raised concerns over how 20 percent of World Liberty Financial’s governance tokens will be reserved for team compensation (which will include members of the Trump family). He called this 20 percent figure interesting given how the FIT21 Act sets the ownership threshold for a project to be considered decentralized at 20 percent. He commented that projects that exceed this 20 percent ownership threshold are subject to greater regulation.

Hearing Witnesses:

1. Mr. Michael Liftik, Partner, Quinn Emanuel Urquhart & Sullivan LLP
2. The Honorable Dan Gallagher, Chief Legal, Compliance, and Corporate Affairs Officer, Robinhood Markets, Inc.
3. Mr. Teddy Fusaro, President, Bitwise Asset Management
4. Ms. Jennifer Schulp, Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives, Cato Institute
5. Mr. Lee Reiners, Lecturing Fellow, Duke University

Member Opening Statements:

Subcommittee Chairman French Hill (R-AR):

• He highlighted the Subcommittee’s success in developing and advancing two bipartisan pieces of digital assets legislation: the Clarity for Payment Stablecoins Act of 2023 and the FIT21 Act.
• He expressed concerns however over the SEC’s approach to digital assets and described this approach as overly politicized.
  • He specifically criticized SEC Chairman Gary Gensler for releasing a statement opposing the FIT21 Act on the morning of the U.S. House of Representatives’s vote on the legislation and for refusing to provide technical assistance on the legislation as requested by the Committee.
  • He further stated that the SEC’s approach to the FIT21 Act differed from the White House’s approach to the legislation and noted how the White House had not issued a veto statement during the U.S. House of Representatives’s consideration of the legislation.
• He discussed how the SEC has a statutory mandate to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation.
• He asserted however that the SEC under Chairman Gensler has injected more confusion and uncertainty into digital asset markets.
  • He commented that this confusion and uncertainty harms market participants and consumers.
• He remarked that the SEC has created a poor digital assets environment for consumers, innovators, and investors through its politicized enforcement actions and its refusals to share its analyses regarding the legal classifications of digital assets.
• He stated that the SEC has pursued enforcement cases against companies for activities that were not clearly defined as securities violations.
  • He commented that these enforcement cases have resulted in a “heightened state of uncertainty” for investors and businesses.
• He also remarked that the SEC’s proposed rulemakings and guidances have often been overly broad and “impossible to implement” for digital asset market participants.
  • He asserted that these policies at best fail to provide any clarity for digital asst market participants on how to comply with the law and impose significant and non-sensical compliance burdens on digital asset firms.
  • He asserted that these policies at worst represent a de facto ban on the use of digital assets and blockchain technology in the U.S.
• He specifically criticized SEC SAB No. 121 and stated that this bulletin upends decades of legal precedent for the custody business.
• He contended that SAB No. 121 creates an “impermeable hurdle” for financial institutions seeking to provide digital asset custody services for their clients.
  • He commented that this bulletin particularly harms banks and bank trust departments that possess the authority, talent, and compliance procedures to offer digital asset custody services.
• He remarked that the SEC’s politicized, unworkable, and inconsistent approach to digital assets under SEC Chairman Gensler has made it challenging for blockchain technology businesses to operate within the U.S.
  • He asserted that this approach has caused many of these businesses to move to Singapore, the United Kingdom (UK), and the European Union (EU).
  • He mentioned how one report had estimated that the U.S. has lost around 14 percent of blockchain developers since 2018.
• He stated that the SEC’s recent approval of ETPs for Bitcoin and Ether had only occurred following SEC Chairman Gensler’s failure to legally defend the SEC’s rationale for approving a Bitcoin futures-based ETF while not approving spot-based Bitcoin products.
  • He commented that while these recent approvals constitute a positive development, he noted how these approvals had required “countless hours” of manpower, millions of dollars in legal fees, and failed SEC legal challenges to achieve.
  • He added that important questions remain regarding the precedents that this episode sets for future Commissions.
• He then remarked that supporters of the FIT21 Act and regulatory frameworks for digital assets do not oppose the SEC’s general efforts to pursue bad actors and to modernize existing rules to account for digital asset securities and other unique instruments.
  • He asserted that his concerns focus on the SEC’s abuse of its enforcement authorities and the SEC’s efforts to impede digital asset innovations from legitimate actors.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• He remarked that digital assets industry advocates are advancing a false narrative that the SEC has a politicized regulatory approach toward digital assets and is unfairly targeting cryptocurrency firms.
  • He called these allegations of politicization ironic given how cryptocurrency companies have contributed $119 million to U.S. federal elections in 2024.
• He stated that the U.S. has a long history of robust securities laws designed to protect investors and keep markets stable.
• He remarked however that current U.S. securities laws are not conducive to the business models of cryptocurrency companies.
  • He commented that cryptocurrency companies seek to remain unregulated so that they will not need to comply with these securities laws.
• He discussed how the U.S. maintains clear rules for investment companies (including exchanges, brokers, dealers, and clearing agencies) to follow in order to avoid conflicts of interest and to protect investors and consumers.
• He stated however that the digital assets industry is advocating for exemptions from U.S. securities laws and has filed numerous legal challenges to the SEC’s actions.
  • He commented that the SEC has had its conclusions validated through legal victories and noted how the SEC has consistently won enforcement cases against digital asset companies, including Telegram, Kik, BlockFi, and LBRY.
• He remarked that while most of the digital assets space has “collapsed,” he asserted that the remaining players in this space are working to facilitate illicit finance and illegal activities.
  • He commented that the lack of appropriate oversight due to non-compliance has made the digital assets space a “safe haven” for bad actors.
• He expressed opposition to the FIT21 Act and stated that this legislation would result in significant harms to consumers and investors.
• He then discussed how former President Trump is now supporting a cryptocurrency venture, which he described as “ill-conceived.”
  • He noted how former President Trump has pledged to make the U.S. the “crypto capital of the planet” if re-elected as President through pursuing “light touch” regulation and removing the SEC Chairman.
• He stated that the digital assets industry has been responsible for insolvency crises, mishandled user funds, rampant, rampant market manipulations, rug pulls, hacks, and market turmoil.
  • He warned that these problems will only continue if the digital assets industry is allowed to remain unregulated.
• He also expressed disappointment that the hearing would consider legislation that would prohibit regulators from requiring financial institutions to record crypto assets held in custody as liabilities on their balance sheets.
  • He commented that this legislation would codify opposition to non-binding SEC staff guidance.
• He mentioned how a 2023 U.S. Federal Reserve report had found that only 7 percent of U.S. adults had bought or held cryptocurrencies as an investment.
• He expressed frustration that the Committee has devoted significant attention to a small part of the financial sector.
  • He asserted that the Committee could have instead explored ways to have technology improve access to financial services.
• He urged the Subcommittee to not blindly advance the digital assets industry’s policy agenda and to not attack regulators for simply enforcing the law.

Witness Opening Statements:

Mr. Michael Liftik (Quinn Emanuel Urquhart & Sullivan LLP):

• He first discussed his professional experience working on digital assets issues as both a top official at the SEC and as a lawyer in private practice.
  • He testified that he has personally experienced challenges in advising clients on digital asset issues because of current policy uncertainty.
  • He indicated that his testimony is on his own behalf and is not on the behalf of his law firm or his law firm’s clients.
• He remarked that the SEC has missed the opportunity to become the leading global regulator of digital assets and blockchain technology.
  • He lamented how the SEC has refused to issue new rules or meaningful guidance related to digital assets.
  • He also asserted that the SEC has engaged in “whack-a-mole” enforcement and commented that the SEC views this enforcement as a substitute for rulemaking.
• He stated that the SEC’s current approach to digital assets has stifled innovation, drove companies to move abroad, and harmed the ability of U.S. consumers to engage reliably with the digital assets industry.
• He then questioned the wisdom of using the Howey test as the frame of reference for cryptocurrency policy debates.
  • He asserted that the Howey test is ill-suited for digital assets and criticized the SEC v. W.J. Howey Co. decision for imposing a facts and circumstances inquiry on every single transaction at issue.
  • He commented that the Howey test provides no predictability or certainty to market participants.
• He stated that the question of whether a digital asset constitutes a security should be a statutory question for Congress to decide.
• He also remarked that the SEC’s enforcement approach to digital assets has allowed for the laws governing digital assets to develop in a “haphazard” way.
  • He noted how judges from different federal districts have reached inconsistent conclusions on critical questions, such as whether secondary market transactions satisfy the Howey test.
• He then stated that the SEC’s refusal to engage in rulemaking within the cryptocurrency space has resulted in areas in need of appropriate regulation going undressed.
• He asserted that the SEC’s approach to digital assets results in the Commission “picking winners and losers” for all U.S. consumers.
  • He criticized the SEC’s delayed approval of a spot-based ETP for Bitcoin and commented that this delay had driven demand for these products outside of the U.S. where spot-based Bitcoin ETPs are available.
• He remarked that the U.S. must modify its time-tested regulatory regime to address the unique needs of the digital assets industry.
  • He suggested that the SEC could experiment with different approaches to rulemaking frameworks through a regulatory sandbox led by its FinHub office.
  • He also commented that the SEC could use its broad exemptive authority under Sec. 36 of the Securities Exchange Act of 1934 to develop pathways to registration for securities, exchanges, and other digital asset entities.
• He then stated that while the SEC’s Division of Enforcement must continue to combat fraud and pursue other violations of federal securities laws, he asserted that the SEC must also consider how its current enforcement program and priorities help investors. 
  • He commented that perpetual investigations and lengthy litigation into potential registration violations consume significant SEC resources and can harm the very people that the SEC is charged with protecting.
• He remarked that there exists a better way for the SEC to address digital assets, encourage innovators and market participants to operate within a defined regulatory regime, and preserve safe access to digital assets for U.S. consumers.

The Hon. Dan Gallagher (Robinhood Markets, Inc.):

• He discussed how cryptocurrency is a multi-trillion-dollar global market in which tens of millions of Americans participate.
  • He asserted that the technology underlying the cryptocurrency market could fundamentally transform finance.
• He stated however that the digital asset markets (and Americans seeking to participate in these markets) have long needed to contend with “innovation killing” federal regulatory uncertainty.
  • He highlighted how this regulatory uncertainty has largely been related to which digital assets are deemed to be investment contracts by the SEC (and thus require SEC registration) and how digital assets tokens and platforms can become registered with the Commission.
• He noted how digital asset industry participants have long requested that the SEC implement a “clear and workable” regulatory regime for digital assets and encourage Americans to engage with regulated U.S. firms to participate in digital asset markets.
  • He lamented that the SEC has not taken these actions.
• He stated that the SEC has engaged in regulation by enforcement and commented that this approach harms U.S. digital asset consumers, blockchain technology and digital assets industry innovation, and the U.S.’s global competitiveness in digital asset markets.
  • He expressed agreement with U.S. District Court for the District of Columbia Senior Judge Amy Berman Jackson’s assertion that the SEC’s use of litigation to police digital asset firms and tokens on a case-by-case basis risks inconsistent results that leave relevant parties and their potential customers without clear guidance.
• He remarked that the SEC has possessed the authority to establish a basic provisional regulatory regime for digital assets since 1996.
• He stated that the SEC’s rulemaking for digital assets could include registration requirements, books and records requirements, anti-fraud protections for consumers, custody requirements, and transaction reporting requirements.
  • He commented that all of these protections would have been helpful prior to FTX’s 2022 collapse.
• He remarked however that the current SEC has “wistfully” called on cryptocurrency platforms and token issuers to register with the Commission.
• He testified that his company, Robinhood Markets, had spent significant time, money, and effort to pursue registration with the SEC and that these efforts were ultimately unfruitful.
  • He noted how Robinhood Markets had subsequently received a Wells notice from the SEC stating that the Commission’s staff indicating a forthcoming enforcement action against the company.
• He remarked that Congress will ultimately be responsible for rectifying the SEC’s failure to register digital asset tokens and platforms and for providing clarity for digital asset tokens and platforms that do not require registration.
• He stated that while only Congress will be able to provide long-term regulatory clarity for digital assets, he asserted that the SEC could take actions using its existing authority to provide tailored relief to digital assets.
  • He indicated that this tailored relief could include a provisional registration regime.
  • He commented however that the SEC has deliberately chosen not to take such actions.

Mr. Teddy Fusaro (Bitwise Asset Management):

• He discussed how his firm, Bitwise Asset Management, is a digital asset and cryptocurrency asset management firm with over $4.5 billion in assets under management globally.
• He mentioned how his firm is the issuer of one of the U.S.’s largest Bitcoin ETPs and noted how the SEC had first approved these ETPs earlier in 2024.
  • He testified that his firm had worked on this project in conjunction with SEC staff for approximately five years and noted how his firm had first attempted to register its Bitcoin ETP with the SEC in 2019.
• He remarked that investors benefit from the ability to invest in cryptocurrencies and digital assets through ETFs (which he described as a familiar and widely accessible format).
  • He highlighted how many types of security and non-security investable assets (including stocks, bonds, currencies, commodities, and precious metals) are packaged into ETFs and ETPs.
• He stated that ETFs and ETPs provide investors with transparency, disclosures, and reporting requirements that come with regulated offerings while also enabling investors to use familiar financial channels (such as financial advisors and traditional brokerage accounts).
• He remarked that ETFs have constituted one of the most successful financial innovations of the previous 30 years and provide a “unique and mutually beneficial framework” through which digital assets can be brought inside the regulatory perimeter.
  • He asserted that investors would benefit if more digital assets were approved for trading and listing in such a manner.
• He also stated that the SEC’s approvals of Bitcoin ETFs had come too late and argued that the SEC’s delayed approval of these ETFs had caused many Americans to send money to unregulated and offshore-based cryptocurrency trading platforms.
  • He commented that some of these trading platforms had caused Americans “meaningful financial harm.”
• He remarked that while his firm is grateful for the SEC’s approval of Bitcoin and Ethereum ETPs this year, he called on SEC staff, SEC leadership, and the Subcommittee to consider ways to make these types of regulated investment vehicles more widely available and involve more types of digital assets.
  • He commented that these investment vehicles bring “meaningful” consumer protection benefits and provide much needed risk disclosures.
• He stated that all parties (and particularly retail investors) will benefit from the SEC’s approval of additional digital asset ETFs.
• He discussed how his firm had spent nearly six years applying for and advocating for the approval of spot-based Bitcoin and digital asset ETPs.
  • He testified that his firm had filed its first registration statement for a digital asset ETP in 2018 and its first application for a Bitcoin ETP in 2019.
  • He further testified that his firm had submitted “hundreds” of pages of research and studies to support this effort and has met with the SEC on numerous occasions since 2018.
• He also mentioned how his firm had recently acquired a London-based asset management company that issues ETPs in Europe and largely attributed this acquisition to the U.S.’s challenging regulatory regime for bringing new products to market.
  • He commented that European regulatory regime by contrast provides businesses with clarity and the ability to list and launch multiple types of digital assets ETPs.
• He expressed optimism that the commercial and consumer protection success of the U.S.’s recently launched digital asset ETFs represent the beginning of a positive trend for the U.S.’s regulation of digital assets.

Ms. Jennifer Schulp (Cato Institute):

• She remarked that the SEC’s approach to digital assets under Chairman Gensler can be characterized as an “enforce first, make rules never” strategy.
  • She asserted that the SEC’s current strategy effectively amounts to a ban on crypto activity within the U.S. because the SEC’s application of existing rules to digital assets is either uncertain or inappropriate.
• She stated that the SEC’s approach to digital assets has subjected parties that engage in digital asset activities to “extreme” regulatory and compliance risks.
  • She commented that digital asset developers and projects that might have otherwise chosen to locate in the U.S. or serve U.S. customers are likely choosing to operate elsewhere.
• She remarked that the SEC’s existing rules do not provide clear guidance to market participants as to whether the rules are even applicable to digital assets and how such rules can be complied with.
  • She asserted that the SEC has claimed essentially limitless jurisdiction over digital assets and has insisted on compliance with inapt rules.
• She discussed how the SEC’s registration rules require disclosures about an issuer’s balance sheet and cashflow.
  • She commented that such disclosures are often nonsensical or impossible for software projects that are fundamentally distributed recordkeeping systems lacking traditional assets or business lines.
  • She added that there might not exist parties that can make such disclosures when the development or operation of these software projects are decentralized or decentralizing.
• She also stated that these problems plague secondary trading because the securities treatment required if a digital asset is registered as a security may preclude other uses of the token.
  • She indicated that these other uses may include facilitating the purchase and sale of goods or facilitating blockchain functionality.
• She then remarked that the SEC’s existing regulations are ill-suited for digital asset marketplaces.
  • She noted how cryptocurrency platforms allow for users to transact directly with one another without the intermediation of a broker.
  • She also noted how these platforms can vertically integrate functions that must be separated under SEC rules.
• She asserted however that the SEC’s rules create compliance challenges for cryptocurrency platforms, even if platform functions were to be disaggregated.
  • She elaborated that the SEC’s rules mandate clearing agency rules and procedures, which she described as “inapt” for instantaneous blockchain settlements.
• She stated that the problems associated with inappropriate applications of SEC rules are particularly acute for decentralized platforms.
  • She noted how decentralized platforms do not custody assets and settle transactions on open and auditable public blockchains.
  • She asserted that traditional custody and market transparency rules are ill-suited for these circumstances.
• She expressed disappointment with the SEC for showing “little interest” in addressing the aforementioned issues.
  • She commented that the Commission has failed to undertake any rulemaking process and has refused to engage with any market participants seeking guidance.
• She remarked that the SEC has instead focused on digital asset-related enforcement actions and contended that the SEC’s “rulemaking by enforcement” approach is suboptimal.
  • She elaborated that this approach results in worse rules and fails to provide market participants with appropriate guidance.
• She stated that the SEC’s focus on digital asset-related enforcement actions creates a hostile regulatory environment when actions are brought against parties for failing to comply with rules for which the SEC provides no path to compliance.
• She remarked that the SEC’s own enforcement misconduct exacerbates this hostility and raises questions as to whether the Commission is acting in good faith.
  • She accused the Commission of making material misrepresentations to a U.S. district court and cited these misrepresentations as an example of the Commission’s enforcement misconduct.
• She stated that the SEC possesses the requisite tools (including exemptive authority) to undertake a better strategy toward digital assets and called on the Commission to make use of these tools.

Mr. Lee Reiners (Duke University):

• He accused the cryptocurrency industry of engaging in narrative politics over the previous year and asserted that the cryptocurrency industry is advancing a narrative that is simple, powerful, and false.
  • He described this narrative as asserting that there exist millions of single-issue voters focused on cryptocurrency policy that stand ready to support cryptocurrency-embracing political candidates.
• He discussed how the cryptocurrency corporations have spent $119 million to influence federal elections and indicated that this amount has accounted for nearly half of all corporate spending in the 2024 election cycle thus far.
  • He commented that this political spending has provided the cryptocurrency industry with political allies and asserted that this spending had caused former President Trump to change from being skeptical of cryptocurrency to being supportive of cryptocurrency.
  • He further mentioned how former President Trump had recently pledged to make the U.S. the “crypto capital of the planet” and to fire current SEC Chairman Gary Gensler if re-elected President.
• He also stated that the cryptocurrency industry’s political spending has resulted in the introduction of cryptocurrency industry-friendly legislation that would provide CFTC with oversight of cryptocurrency markets and undermine federal securities laws.
  • He commented that the U.S. House of Representatives’s recent passage of the FIT21 Act was a victory for the cryptocurrency industry in terms of achieving these policy goals.
• He remarked that the cryptocurrency industry has funded “astroturf” campaigns and commissioned dubious polls to provide policymakers with justifications for pursuing cryptocurrency industry-friendly laws and regulations.
  • He noted however that very few Americans own or use cryptocurrencies and asserted that cryptocurrency owners and users are not solely focused on cryptocurrency policy issues.
• He stated that the cryptocurrency industry has focused its efforts on developing narratives and engaging in aggressive political lobbying because the industry has not yet produced a product or service with genuine economic utility.
• He then compared the cryptocurrency industry’s activities to the ridesharing industry’s historical activities and recounted how ridesharing had initially been illegal in most cities when Uber was founded.
  • He commented that Uber had been able to overcome these legal issues through developing a product that consumers enjoyed and noted how Uber had built a large and vocal constituency of riders and drivers.
• He stated that Uber’s development of a constituency for its product ultimately forced policymakers to accommodate a new transportation business model.
• He remarked however that the cryptocurrency industry believes that regulatory change will compel the development of a great product.
  • He commented that this notion has led the cryptocurrency industry to become mired in policy debates and legislative efforts that only benefit their lawyers and lobbyists.
• He commended the SEC for resisting the cryptocurrency industry’s lobbying efforts and for upholding federal securities laws.
  • He mentioned how his written testimony discusses the Commission’s longstanding, consistent, and legally sound methods of cryptocurrency enforcement and regulation.
• He disputed the cryptocurrency industry’s assertion that current securities laws formulated long before the development of blockchain technology are ill-suited to the nuances of digital assets.
• He contended that the business models of cryptocurrency platforms are in fundamental conflict with federal securities laws.
  • He stated that the SEC is simply working to enforce federal securities laws and that these cryptocurrency platforms have no basis for opposing the enforcement of these laws.

Member Opening Statements (cont.):

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

• She expressed support for the SEC’s efforts to hold bad actors that use cryptocurrencies and other tools accountable.
• She then lamented how the federal government faces a shutdown in two weeks and blamed Congressional Republicans for this pending shutdown.
  • She criticized Congressional Republicans for jeopardizing the salaries of federal law enforcement agency employees (including SEC staff).
• She reiterated that the SEC should work to hold bad actors accountable, regardless of whether these bad actors use cryptocurrencies or other means.

Congressional Question Period:

Subcommittee Chairman French Hill (R-AR):

• Chairman Hill first thanked Committee Members, Committee staff, and the personal staff of Committee Members for their work on digital assets legislation in the 118th Congress. He then noted how SEC Chairman Gary Gensler has asserted that existing federal securities rules apply to digital asset companies in a straightforward manner and that these companies simply need to register with the SEC. He stated that SEC Chairman Gensler’s assertion leaves the impression that digital asset companies can easily register with the SEC. He remarked however that SEC staff under SEC Chairman Gensler’s leadership are suing digital asset companies that are working in good faith to register with the SEC. He mentioned how Robinhood Markets had received a Wells notice from the SEC related to the company’s U.S. cryptocurrency business. He highlighted how Robinhood Markets had received this Wells notice after attempting to register with the SEC as a SPBD. He asked Mr. Gallagher to discuss Robinhood Markets’s experience working with the SEC. He also asked Mr. Gallagher to indicate whether the process for digital asset companies to register with the SEC is straightforward.
  • Mr. Gallagher described SEC Chairman Gary Gensler’s call for digital asset companies to register with the SEC as confusing given that the SEC lacks an established registration regime for such companies. He stated however that Robinhood Markets had still attempted to register its cryptocurrency business with the SEC. He testified that the company had spent a year and a half on this effort, had engaged in approximately a dozen meetings with SEC staff, and had crafted a workable registration model for the SEC that relied upon the SEC’s SPBD registration regime. He noted however that his company’s proposed registration model did include modifications and commented that the SEC’s SPBD registration regime fails to account for digital assets. He indicated that his company had made recommendations to improve the SEC’s SPBD registration regime and had hoped to receive full regulation from the SEC. He testified that his company’s attempted registration process with the SEC had initially been fruitful and cordial. He noted however that his company subsequently received a perfunctory note from SEC Chairman Gensler’s office in early 2023 indicating an end to communications between the Commission and his company.
• Chairman Hill described the SEC’s current registration process for digital asset companies as “pretty frustrating” for the private sector and commented that this registration process involves significant legal fees and frequent delays. He also mentioned how the SEC possesses authorities under Sec. 36 of the Securities Exchange Act of 1934 to provide exemptive relief. He asked Mr. Gallagher to indicate whether the SEC could have used its existing authorities to modify its SPBD licensing requirements.
  • Mr. Gallagher answered affirmatively. He remarked that the SEC could have established a more workable SPBD registration regime proposal. He noted that the SEC’s SPBD registration regime was created through a No Action Letter and indicated that this regime technically does not constitute exemptive relief. He discussed how Congress had provided the SEC with the authority to exempt certain participants from federal securities law requirements under the National Securities Markets Improvement Act of 1996 (NSMIA). He asserted that the SEC’s use of exemptive relief authorities to modify SPBD registration regime requirements would be in the best interest of investors and the U.S. He stated that the SEC should use its exemptive relief authorities to establish a provisional registration and oversight regime while Congress considers more prescriptive standards.
• Chairman Hill interjected to highlight how Congress had developed a “fit for purpose” regulatory approach as part of its FIT21 Act. He noted that this legislation had provided statutory authority to the SEC and the CFTC to establish registration regimes for digital asset companies. He then mentioned how Mr. Reiners had asserted that the SEC must simply defend existing federal securities laws as part of its enforcement efforts. He stated however that the SEC has suffered multiple digital assets-related legal defeats in federal courts.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• Ranking Member Lynch remarked that the SEC’s investor protection regime is both preventive and prosecutorial. He stated that the SEC’s enforcement record involves a wide range of actions against a wide range of bad actors. He mentioned how the SEC had charged two individuals involved in the HyperFund cryptocurrency scheme earlier in 2024. He discussed how this scheme had raised approximately $1.7 billion from investors worldwide and indicated that most of these investors were from developing countries. He noted how the SEC alleges that HyperFund was a pyramid scheme. He also mentioned how the SEC had recently filed charges against NovaTech for being a pyramid scheme. He noted how the SEC has alleged that NovaTech had targeted investors using social media posts to appeal to their religious faiths. He asked Mr. Reiners to discuss how the cryptocurrency industry’s culture of disregard for securities laws has helped foster an environment where cryptocurrency-related scams are prevalent. He also asked Mr. Reiners to project the impact of having the SEC establish a permissive regulatory framework for the cryptocurrency industry that promotes domestic cryptocurrency activities.
  • Mr. Reiners remarked that the SEC is taking “countless” enforcement actions against cryptocurrency-related frauds and commented that these enforcement actions are occurring on a daily basis. He stated that while the SEC is fulfilling its enforcement obligations, he asserted that the sheer volume of available cryptocurrency tokens makes it difficult for the Commission to fully police the cryptocurrency space. He also noted how it is easy for bad actors to create new cryptocurrency tokens and to promote these tokens on social media. He raised concerns that the U.S.’s establishment of a “light touch” regulatory regime for digital assets would provide the false impression that the cryptocurrency industry is legitimate. He commented that this false impression would cause more retail investors to enter the cryptocurrency space where the retail investors would be vulnerable to scams.
• Ranking Member Lynch then noted how Mr. Reiners’s testimony had stated that there do not exist any cryptocurrency products or services that provide genuine economic utility to most Americans. He remarked that cryptocurrencies appear to operate as collectables and asserted that cryptocurrencies derive their value from the notion that other people want them. He warned that a decrease in confidence in cryptocurrencies will cause the assets to lose value. He asked Mr. Reiners to discuss how the U.S. could safely regulate assets that derive their value from speculation and that lack intrinsic value.
  • Mr. Reiners remarked that the primary motivation underlying cryptocurrency purchases is speculation and commented that cryptocurrencies lack intrinsic value. He mentioned how JPMorgan Chase had found that most of their checking account holders that had purchased cryptocurrencies had lost money on these purchases. He remarked that the U.S. should bring cryptocurrencies into its securities regulatory perimeter to ensure that the cryptocurrency space has basic investor protections.
• Ranking Member Lynch lastly noted how Bitcoin has been around for 15 years. He stated that cryptocurrencies have not experienced the same levels of adoption as other technological innovations.

Rep. Frank Lucas (R-OK):

• Rep. Lucas mentioned how there are reports that the SEC has a high staff turnover rate and indicated that this problem is particularly acute within the SEC’s Enforcement Division. He asked Mr. Gallagher and Ms. Schulp to discuss how the SEC’s high staff turnover rate impacts the Commission and market participants.
  • Mr. Gallagher described the SEC’s Enforcement Division as “critically important” and raised concerns that this Division is experiencing high levels of staff attrition. He commented that these high levels of staff attrition damage the SEC’s reputation. He indicated that while he could not provide statistics regarding the SEC’s current staffing challenges, he testified that he had heard anecdotes of the Commission experiencing low staff morale.
  • Ms. Schulp described the SEC’s Enforcement Division as one of the “cornerstones” of the SEC’s functions. She noted how a 2023 SEC Office of the Inspector General (OIG) report had found that more than two-thirds of surveyed enforcement staff believed that they could not carry out their duties due to insufficient resources. She stated that staff turnover only exacerbates the SEC’s challenges related to rules enforcement.
• Rep. Lucas then mentioned how the SEC had approved 11 Bitcoin ETPs in January 2024. He also noted that there exist other regulated Bitcoin futures-based products. He asked Mr. Fusaro to explain the differences between these products. He also asked Mr. Fusaro to address why investors would want Bitcoin ETPs or futures-based products.
  • Mr. Fusaro noted how the SEC had approved a Bitcoin futures-based ETF in 2021. He indicated however that the SEC had not approved Bitcoin spot-based ETPs until earlier this year. He stated that futures-based products are generally more expensive for end-users. He elaborated that these futures-based products tend to have disadvantageous tax consequences, are more complex to run, and are more complex to manage. He stated that these future-based products have a greater difference between the performance of the fund and the underlying asset than exist with spot-based products. He noted how the largest Bitcoin futures-based ETP has a management fee that is about five times greater than the average management fee for spot-based Bitcoin ETFs. He also mentioned how the performance of the largest Bitcoin futures-based ETP has lagged the performance of spot-based Bitcoin ETFs by approximately 6.5 percent.
• Rep. Lucas asked Mr. Fusaro to discuss the consumer demand for Bitcoin spot-based ETPs since the SEC had approved the products.
  • Mr. Fusaro described consumer demand for spot-based Bitcoin ETPs as being “nothing short of remarkable.” He noted how the 11 approved spot-based Bitcoin ETPs have taken in net inflows of over $16 billion in 2024. He stated that these ETP launches have been the most successful ETP launches of all time. He mentioned how Invesco’s QQQ ETP had previously been the most successful ETP launch and indicated that this ETP had only raised $5 billion in its first year. He further noted how four of the recently launched spot-based Bitcoin ETFs are among the top 25 fastest growing ETPs of all time.
• Rep. Lucas indicated that his question period time had expired.

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

• Ranking Member Waters mentioned how the SEC has filed more than 100 cryptocurrency-related enforcement actions since SEC Chairman Gary Gensler assumed his role in April 2021. She noted how more than one-third of these actions had been fully settled at the time of filing. She highlighted how the SEC has collected more than $5.5 billion in monetary relief from these enforcement actions. She noted that this amount includes more than $800 million in civil penalties and more than $4.8 billion in disgorgement. She indicated that disgorged funds are generally returned to investors. She also mentioned how the SEC had previously taken at least 103 cryptocurrency-related enforcement actions under the tenures of former SEC Chairman Jay Clayton and former SEC Chairman Mary Jo White. She emphasized that these former chairmen were from both Republican and Democratic administrations. She asked the witnesses to indicate whether there exist any examples of wrongful cryptocurrency-related enforcement actions from the SEC.
  • Mr. Reiners remarked that he could not identify any wrongful cryptocurrency-related enforcement actions from the SEC. He noted that while the SEC had experienced a partial loss in their enforcement case against Ripple, he emphasized that the SEC had filed its enforcement action against Ripple during the Trump administration. He stated that SEC Chairman Gary Gensler has simply continued the enforcement approach of his predecessors. He further noted how several other federal district court judges have subsequently repudiated the ruling in the Ripple enforcement case. He concluded that the SEC has a “strong” record of cryptocurrency-related enforcement actions.
• Ranking Member Waters then asked Mr. Liftik to indicate whether he is a cryptocurrency attorney.
  • Mr. Liftik stated that he has been a securities lawyer for approximately 20 years and testified that a “decent” portion of his law practice involves blockchain industry clients.
• Ranking Member Waters then asked Mr. Gallagher to indicate whether he is advocating on behalf of Robinhood Markets at the hearing.
  • Mr. Gallagher answered affirmatively.
• Ranking Member Waters asked Mr. Gallagher to clarify whether Robinhood Markets is attempting to obtain licenses for its cryptocurrency business.
  • Mr. Gallagher testified that Robinhood Markets had attempted to register its cryptocurrency business with the SEC between 2022 and 2023. He stated however that SEC Chairman Gary Gensler’s office had ultimately told Robinhood Markets that the company could not register its cryptocurrency business with the Commission.
• Ranking Member Waters asked Mr. Gallagher to explain why the SEC had rejected Robinhood Markets’s attempt to register its cryptocurrency business with the Commission.
  • Mr. Gallagher testified that Robinhood Markets had never received an explanation from the SEC regarding the Commission’s rationale for rejecting the company’s registration application.
• Ranking Member Waters called it “odd” that Mr. Gallagher does not know why Robinhood Markets’s had its registration application rejected. She then asked Mr. Fusaro to explain his involvement with cryptocurrencies.
  • Mr. Fusaro indicated that he is the president of a digital asset and cryptocurrency asset management firm. He explained that his firm attempts to take digital assets and cryptocurrencies and package the assets inside regulated vehicles (such as ETFs) for public offering.
• Ranking Member Waters asked Mr. Fusaro to indicate whether there need to exist “serious guardrails” with cryptocurrencies to protect investors.
  • Mr. Fusaro answered affirmatively and asserted that ETPs and ETFs offer many of these investor protection benefits. He stated that ETFs provide investors with transparency and disclosures.
• Ranking Member Waters interjected to ask Mr. Fusaro to indicate whether he agrees or disagrees with the SEC’s previous cryptocurrency-related enforcement actions.
  • Mr. Fusaro stated that he is not a lawyer or a specialist regarding the SEC’s cryptocurrency-related enforcement actions.

Subcommittee Vice Chairman Warren Davidson (R-OH):

• Vice Chairman Davidson noted how the Bitcoin market is valued at over $1 trillion and how the cryptocurrency market is valued at over $2 trillion. He commented that many consumers thus view the cryptocurrency space as valuable. He then disputed Mr. Reiners’s claim that the SEC only had one failed enforcement action. He mentioned how a U.S. circuit court of appeals had upheld a lower court ruling in August 2023 that the SEC had violated the Administrative Procedure Act when it had denied Grayscale’s application to convert Grayscale Bitcoin Trust into a Bitcoin ETP. He noted how the SEC had then waited until January 2024 to approve Grayscale’s proposed conversion. He described the aforementioned court’s ruling in this case as a “pure rebuke” of the SEC’s actions. He also mentioned how the SEC had been unsuccessful in its case against DEBT Box. He remarked that there have been many cryptocurrency-related cases where federal courts have ruled against the SEC. He reiterated his assertion that Bitcoin has value and stated that many people view Bitcoin as a secure way to store value. He further remarked that people want to use Bitcoin to transfer value in a permissionless peer-to-peer manner. He then noted how the amount of the current outstanding Bitcoin that is self-custodied as compared to third party-custodied remains unknown. He asserted however that the SEC under Chairman Gary Gensler has “willfully” undermined the ability for anyone to custody digital assets. He stated that the SEC is seeking to push custody of digital assets to third parties that can be controlled and manipulated by the Commission. He asked Mr. Fusaro to discuss the problems associated with the SEC’s current regulatory framework for approving digital asset custodial arrangements.
  • Mr. Fusaro expressed concerns that larger and well-established custody banks that typically participate in collective investment vehicles are effectively barred from participating in digital asset custodial arrangements. He also discussed how the ETF and ETP structures typically have a creation and redemption mechanism that works through an in-kind process. He explained that the in-kind process involves a fund exchanging shares for the underlying asset itself. He stated that the inability of broker-dealers to handle cryptocurrencies prevents ETPs from having such a mechanism.
• Vice Chairman Davidson interjected to ask Mr. Fusaro to indicate whether the SEC is treating cryptocurrency-based ETFs and ETPs differently than traditional ETFs and ETPs.
  • Mr. Fusaro noted how overseas transactions permit in-kind transactions for cryptocurrency-based ETFs and ETPs. He stated however that the U.S. does not permit in-kind transactions for such ETFs and ETPs, which results in slightly higher costs for end-users.
• Vice Chairman Davidson commented that federal courts have found that cryptocurrency-based ETFs and ETPs are subject to different rules than other types of ETFs and ETPs. He then mentioned how the SEC had issued its SPBD framework in December 2020. He asked Ms. Schulp to indicate whether any broker-dealers had successfully used the SPBD framework to custody digital assets.
  • Ms. Schulp answered no. She indicated that the SEC has only approved two SPBDs (including one that was approved one week prior to the hearing). She noted how Prometheum Capital (which is the other SEC-approved SPBD) has not yet operated with most of its services and has just begun to offer partial services.
• Vice Chairman Davison indicated that his question period time had expired.

Rep. Ritchie Torres (D-NY):

• Rep. Torres stated that the SEC has a pattern of using the term “digital asset security.” He asked Mr. Gallagher to indicate whether the term “digital asset security” appears in any current federal statutes.
  • Mr. Gallagher stated that he is unaware of any appearances of the term “digital asset security” in current federal statutes.
• Rep. Torres asked Mr. Gallagher to indicate whether the term “digital asset security” appears in any SEC-promulgated rules.
  • Mr. Gallagher answered no.
• Rep. Torres asked Mr. Gallagher to indicate whether the term “digital asset security” appears in any U.S. Supreme Court decisions.
  • Mr. Gallagher stated that he was unaware of any mentions of the term “digital asset security” in U.S. Supreme Court decisions.
• Rep. Torres asked Mr. Gallagher to indicate whether the term “digital asset security” appears anywhere in the Federal Register.
  • Mr. Gallagher stated that he does not believe that the term “digital asset security” appears within the Federal Register.
• Rep. Torres asked Mr. Gallagher to indicate whether the SEC had invented the term “digital asset security.”
  • Mr. Gallagher stated that the SEC had created the term “digital asset security.”
• Rep. Torres interjected to ask Mr. Gallagher to confirm that the SEC had recently apologized for using the term “digital asset security” in a court filing because the term implies that a digital asset is a security.
  • Mr. Gallagher confirmed that the SEC had recently apologized for using the term “digital asset security” in a court filing.
• Rep. Torres noted how SEC Chairman Gary Gensler has asserted that all digital assets except Bitcoin are securities. He expressed interest in exploring whether Ether constitutes a security. He discussed how a share of a company’s stock is a “textbook example” of a security and noted how a stock investor expects to derive a profit from the managerial efforts of a company. He asked Mr. Gallagher to identify whose managerial efforts an Ether purchaser expects to derive a profit from.
  • Mr. Gallagher stated that he does not believe that there exists an entity whose managerial efforts an Ether purchaser would expect to derive a profit from.
• Rep. Torres noted how the U.S. Supreme Court’s SEC v. W.J. Howey Co. decision emphasizes that the SEC must consider the “economic reality of a transaction.” He stated that there does not exist an entity that centrally controls Ether in the same way that a traditional company centrally controls its stock. He asked Mr. Gallagher to indicate whether the economic reality of purchasing a decentralized digital asset (such as Ether) is qualitatively different from the economic reality of purchasing a security (such as a company’s stock).
  • Mr. Gallagher answered affirmatively.
• Rep. Torres then discussed how SEC SAB No. 121 requires custodian banks to put custodied digital assets on their balance sheets. He stated that SEC SAB No. 121 effectively bans the tokenization of real world assets. He asked Ms. Schulp to indicate whether it is customary for custodians to put custodial assets on their own balance sheets.
  • Ms. Schulp stated that it is not customary for custodians to put custodial assets on their own balance sheets under the Generally Accepted Accounting Principles (GAAP).
• Rep. Torres remarked that the SEC is asking custodian banks to violate GAAP rules and to treat digital assets differently from other types of financial assets. He asked Ms. Schulp to confirm that FTX had put custodial assets on its own balance sheet.
  • Ms. Schulp stated that she believed that FTX had put custodial assets on its own balance sheet.
• Rep. Torres interjected to call it ironic that SEC SAB No. 121 is asking banks to adopt the same practices as FTX. He then recounted how SEC Chairman Gary Gensler had told the Committee that the sale of a Pokémon card would not constitute a security transaction. He stated however that SEC Chairman Gensler had not provided a direct answer to the Committee when asked whether the sale of a Pokémon card via a blockchain constitutes a security transaction. He remarked that SEC Chairman Gensler appears to believe that the mere use of a blockchain can transform a commodity into a security. He noted how the U.S. Supreme Court’s SEC v. W.J. Howey Co. decision states that the economic reality of a transaction (rather than the form of a transaction) is key for determining whether the transaction involves a security. He asked Mr. Gallagher to indicate whether the economic reality of purchasing a collectable item (such as a Pokémon card) is qualitatively different from the economic reality of purchasing a security (such as a company’s stock).
  • Mr. Gallagher expressed general agreement with Rep. Torres’s statements. He remarked however that the purchase of a fractional share of a collectable might cause the transaction to become a securities transaction.
• Rep. Torres stated however that the value of a Pokémon card does not rely upon the managerial efforts of others and asserted that the Pokémon card is merely a collectible.

Rep. John Rose (R-TN):

• Rep. Rose discussed how securities that are not registered cannot be listed by U.S.-registered broker-dealers that are intending to market such securities to the public. He mentioned how Prometheum Capital (which is a SPBD) had recently stated that it will treat Ether, Uniswap, and Arbitrum as crypto asset securities on its platform. He stated however that the SEC has effectively acknowledged that Ether is not a security. He also noted that courts have not deemed Uniswap and Arbitrum to be securities. He asked Mr. Gallagher to indicate whether Robinhood Markets can list digital asset securities and digital asset non-securities on the same platform if there exists uncertainty about whether a given token is a security.
  • Mr. Gallagher answered no. He testified that Robinhood Markets had requested exemptive relief from the SEC on this matter as part of its application to become a registered special purpose broker with the SEC. He noted how the SEC’s current special purpose broker letter is limited to “so-called” digital asset securities and would not allow such a broker to handle non-securities. He remarked that he does not know all of the details regarding Prometheum Capital’s SPBD model. He expressed confusion regarding this specific model given the limitations contained within the SEC’s special purpose broker letter.
• Rep. Rose asserted that Ether, Uniswap, and Arbitrum are not securities. He asked Mr. Gallagher to explain how Prometheum Capital could legitimately argue that security tokens should be made available to the general public if the security tokens have not been registered with the SEC.
  • Mr. Gallagher remarked that non-securities cannot be made securities via fiat. He commented that he did not understand how Prometheum Capital could assert that non-registered securities should be deemed securities.
• Rep. Rose then remarked that the SEC needs to take a more thoughtful approach to enforcing federal laws regarding digital assets. He commented that this enforcement should involve the SEC’s exemptive relief authorities under Sec. 36 of the Securities Exchange Act of 1934. He asked Mr. Gallagher to indicate whether Robinhood Markets (or any U.S. broker-dealer) could list unregistered securities for the general public without exemptive relief from the SEC.
  • Mr. Gallagher called it impossible for a regulated broker to deal in both digital asset securities and digital asset non-securities. He stated that current custody, net capital, and customer protection rules do not accommodate blockchain technology infrastructure. He asserted that new rulemaking is therefore required for regulated brokers to deal with both digital asset securities and digital asset non-securities. He disputed the SEC’s assertion that digital asset companies can register their products and services with the Commission.
• Rep. Rose asked Mr. Gallagher to discuss the types of exemptive relief that the SEC would need to provide digital asset companies so that these companies could list digital assets.
  • Mr. Gallagher remarked that the SEC could use Sec. 36 of the Securities Exchange Act of 1934 to develop a registration regime for the digital assets space that would provide the “fundamentals” of oversight.” He commented that this exemptive relief should be on a provisional basis as Congress works to develop new digital assets legislation. He stated that the Securities Exchange Act of 1934’s provisions currently do not accommodate digital assets.

Rep. Sean Casten (D-IL):

• Rep. Casten noted how the SEC has pursued 173 cryptocurrency-related enforcement cases since 2013 and indicated that 100 of these cases had involved fraud. He stated that the cryptocurrency industry has often not worked to address the causes of this fraud. He stated that the industry has instead argued that it does not need to comply with SEC rules and disclosures given the decentralized nature of blockchain technology companies. He expressed specific concerns regarding World Liberty Financial, which he explained is a new decentralized finance (DeFi) project being promoted by former President Trump. He noted how World Liberty Financial has announced that it will create a governance token and indicated that 20 percent of these governance tokens will be reserved for team compensation (which will include members of the Trump family). He called this 20 percent figure interesting given how the FIT21 Act sets the ownership threshold for a project to be considered decentralized at 20 percent. He commented that projects that exceed this 20 percent threshold are subject to greater regulation. He asked Mr. Reiners to discuss how a venture capital firm or other party that owns 20 percent or less of a DeFi protocol’s governance tokens could still exert “considerable” influence over a digital asset security.
  • Mr. Reiners discussed how most DeFi protocols operate according to a decentralized autonomous organization (DAO) structure. He highlighted how this structure requires there to exist a governance token so that parties can participate in the execution of the protocol. He noted how these governance tokens are normally distributed to project developers and backers and indicated that these backers can include venture capital firms. He remarked that these DeFi project backers can exert some type of influence on the protocol. He stated that there have been instances where large venture capital firms have attempted to use their governance tokens to influence the outcomes for DeFi protocols.
• Rep. Casten also commented that a DeFi protocol may be designed in a manner that makes the protocol more susceptible to fraud. He then noted how World Liberty Financial has stated that it will only sell its governance tokens to accredited investors under the SEC Regulation D exemption. He explained that this exemption enables the project to raise money without registering with the SEC. He asked Mr. Liftik to indicate whether the founders of the World Liberty Financial project would be required under the SEC Regulation D exemption to disclose to investors that their most recent investment has lost 70 percent of its value since March 2024.
  • Mr. Liftik noted how SEC Regulation D applies to the private offering of securities.
• Rep. Casten interjected to ask Mr. Liftik to confirm that the World Liberty Financial project would not be required to disclose to investors that their most recent investment has lost 70 percent of its value since March 2024.
  • Mr. Liftik stated that the World Liberty Financial project would need to disclose all material information relating to the investment.
• Rep. Casten asked Mr. Liftik to answer whether the World Liberty Financial project would be required to disclose to investors that their most recent investment has lost 70 percent of its value since March 2024.
  • Mr. Liftik commented that he is not familiar with the specific details of the World Liberty Financial project.
• Rep. Casten interjected to ask Mr. Liftik to indicate whether the World Liberty Financial project would be required to disclose to investors that the project has ties to a failed DeFi protocol that had suffered a $2 million hack.
  • Mr. Liftik remarked that if a digital asset project chooses to proceed through a private offering of securities, then the SEC Regulation D pathways are “well understood” in terms of their disclosure obligations.
• Rep. Casten then mentioned how Chase Herro is involved with the World Liberty Financial project. He noted how Mr. Herro has made controversial statements regarding cryptocurrencies. He asked Mr. Liftik to indicate whether SEC Regulation D would require the disclosure of the parties involved in a cryptocurrency project.
  • Mr. Liftik noted how a private offering memorandum typically discloses all of the relevant people involved in a given project.
• Rep. Casten interjected to note how parties behind the World Liberty Financial project have stated that the project’s governance tokens will be non-transferable and not earn yield so that the project could avoid securities disclosure requirements. He remarked that parties with a history of fraud and money laundering would find this arrangement attractive. He expressed concerns that efforts to combat ventures that facilitate fraud and money laundering do not have bipartisan support.

Rep. William Timmons (R-SC):

• Rep. Timmons discussed how federal securities laws governing the registration of securities and the broker-dealers that offer the securities were designed in the 1930s to regulate centralized entities issuing securities primarily to raise capital. He noted how this regulatory framework requires companies seeking to issue securities to make disclosures that are relevant to investors. He stated however that these disclosures fail to capture many of the unique qualities of digital assets. He discussed how NFTs create trusted and immutable records of digital ownership. He stated that NFTs have “endless” applications, including artwork, loyalty points, concert tickets, property titles, and video game items. He asserted that NFTs have “transformational potential” in almost every industry of the U.S. He remarked that blockchains and NFTs empower data transfer protocols that support both financial and non-financial use cases. He expressed concerns that the SEC is treating of all NFTs as speculative financial instruments. He mentioned how OpenSea (which is one of the largest NFT marketplaces) had recently received a Wells notice from the SEC and how the SEC had threatened to sue the company for hosting unregistered securities on their platform. He also mentioned how Flyfish Club had recently reached a settlement with the SEC related to an NFT offering that had allowed for exclusive restaurant access. He remarked that these SEC actions represent “severe” overreaches from the Commission and suggest that the Commission is engaging in “predatory” regulation by enforcement. He asked Mr. Liftik to indicate whether the SEC had articulated a standard for determining whether the sale of an NFT constitutes a securities transaction in the aforementioned enforcement cases.
  • Mr. Liftik remarked that the Howey test is ill-suited for digital assets and is particularly ill-suited for NFTs. He noted how SEC Commissioners Mark Uyeda and Hester Peirce had argued in their dissent in the Flyfish Club enforcement case that the intent of a buyer cannot transform something from a non-security into a security. He stated that NFTs often function as traditional collectable items and asserted that the SEC has not adequately considered this functionality. He reiterated his contention that the Howey test is ill-suited for considering NFTs.
• Rep. Timmons asked Mr. Liftik to discuss the impact of the SEC’s pursuit of enforcement actions against NFT companies without first providing clear and consistent rulemaking and guidance for these companies to follow.
  • Mr. Liftik remarked that consumers and companies do not know whether their NFT projects will draw scrutiny from the SEC. He noted how the Howey test involves a facts and circumstances-based assessment that applies to each transaction.
• Rep. Timmons asked Ms. Schulp to indicate whether most NFTs are consumer products that are outside the SEC’s purview.
  • Ms. Schulp remarked that there exist many NFTs that would not fall within the SEC’s purview.
• Rep. Timmons asked Ms. Schulp to indicate whether the regulation of NFTs should focus on the nature and function of the assets or treat all NFTs as financial instruments.
  • Ms. Schulp remarked that NFTs should not all be treated as financial instruments. She stated that the nature and function of NFTs is important. She noted how securities laws are focused on financial instruments and addressing information asymmetries between asset issuers and investors. She commented that these issues are not relevant for overseeing most NFTs.
• Rep. Timmons criticized SEC Chairman Gary Gensler for taking actions that stifle a growing technology industry through pursuing a “misguided power grab.” He mentioned how he had proposed the New Frontiers in Technology Act, which would exempt non-financial NFTs from securities regulations. He explained that this legislation would classify NFTs according to their nature and function, which would provide clarity as to whether the NFTs should be considered financial instruments. He stated that this legislation would provide NFTs with regulatory certainty to innovate and necessary guidance for federal regulators to provide appropriate oversight of NFTs. He asserted that this legislation would help ensure that NFTs are properly categorized, which will enable their regulation as both financial and non-financial products where applicable. He warned that Congress’s failure to pass this legislation will perpetuate a “flawed” system where U.S. innovators either face unpredictable SEC enforcement actions or pursue their NFT projects overseas.

Rep. Wiley Nickel (D-NC):

• Rep. Nickel described SEC Chairman Gary Gensler’s approach to digital assets as politicized and “downright wrong.” He asserted that this approach is harming consumers, innovation, U.S. competitiveness, and the Democratic administration. He mentioned how 71 House Democrats had supported the passage of the FIT21 Act. He stated that this legislation would regulate digital asset intermediaries, safeguard consumers, and ensure the U.S.’s global leadership in finance and technology. He also mentioned how Congressional Democrats had supported his Congressional Review Act (CRA) resolution with Rep. Mike Flood (R-NE) to rescind SEC SAB No. 121. He lamented how the SEC has not adjusted its approach to digital assets in response to these actions from Congress. He remarked that the SEC under Chairman Gensler has taken the most hostile, aggressive, and irrational approach to technology, despite the Commission’s claims of being “technology neutral.” He criticized the SEC for refusing to provide regulatory clarity for digital asset market participants and stated that the Commission has instead pursued a regulation by enforcement approach. He then noted how Robinhood Markets has been involved in the cryptocurrency space for six years and has just recently received a Wells notice from the SEC. He asked Mr. Gallagher to discuss how the U.S. could effectively regulate the cryptocurrency industry (which he described as quickly evolving). He also asked Mr. Gallagher to address how a more proactive regulatory approach from the SEC (such as the issuance of clear initial guidelines) would have changed his company’s trajectory.
  • Mr. Gallagher remarked that regulatory certainty is key for the cryptocurrency industry and commented that the cryptocurrency industry currently lacks such certainty. He asserted that the SEC’s regulation by enforcement approach does not provide regulatory certainty to the cryptocurrency industry. He stated that Robinhood Markets embraces regulation and seeks to comply with federal securities laws. He remarked that Robinhood Markets views its compliance with federal regulations as a competitive advantage. He lamented however that Robinhood Markets must operate in an environment with regulatory uncertainty. He called on the SEC to use its exemptive relief authority to develop a provisional regulatory regime for the digital assets space. He commented that this provisional regulatory regime should serve as a stopgap measure until Congress passes more prescriptive and comprehensive digital assets legislation.
• Rep. Nickel noted how Robinhood Markets had received a Wells notice from the SEC, despite working to engage the Commission to register its cryptocurrency business. He asked Mr. Gallagher to discuss the Robinhood Markets’s level of engagement and communication with the SEC. He also asked Mr. Gallagher to indicate whether the SEC has been responsive and transparent in their communications with Robinhood Markets.
  • Mr. Gallagher remarked that Robinhood Markets’s engagement and communication with the SEC was ultimately opaque and frustrating. He stated however that SEC staff had worked well with Robinhood Markets’s throughout their engagement and communication. He indicated that the SEC staff had been appreciative of Robinhood Markets’s sincere efforts to register its cryptocurrency business with the Commission. He remarked however that the outcome of Robinhood Markets’s engagement and communication with the SEC was ultimately “very frustrating.” He mentioned how Robinhood Markets had spent significant money and time working to register with the SEC before ultimately receiving a Wells notice.
• Rep. Nickel then remarked that the SEC has the authority to rescind SAB No. 121 and that there exists “ample precedent” for having the SEC revisit a SAB. He highlighted how the SEC Office of the Chief Accountant has worked with certain institutions to bypass balance sheet reporting requirements under certain circumstances. He asked Ms. Schulp to explain the SEC’s approach to SAB No. 121. He also asked Ms. Schulp to address the impact of the SEC’s “confusing” approach to SAB No. 121.
  • Ms. Schulp remarked that she could not provide insight into the SEC’s approach to SAB No. 121. She described the approach as confusing and as a poor means of regulation. She stated that SEC SAB No. 121 is non-binding staff guidance that has been updated via a non-binding staff speech that suggests the existence of exceptions to the guidance. She also noted how there have occurred one-off conversations with SEC staff and commented that these one-off conversations create further confusion surrounding SAB No. 121. She concluded that the SEC’s approach to SAB No. 121 provides no certainty for market participants.
• Note: Rep. Nickel’s question period time expired here.

Rep. Bryan Steil (R-WI):

• Rep. Steil mentioned how the SEC had recently amended its complaint against Binance, which involved the introduction of some procedural updates and legal modifications. He noted how the SEC had declared in this amended filing that the Commission’s use of the phrase “crypto asset securities” did not refer to the crypto asset itself as a security. He elaborated that the SEC’s assertion in this instance is that the crypto asset is the subject of the investment contract. He noted how the SEC’s amended filing had indicated that the Commission had used the phrase “crypto asset securities” as a shorthand phrase and that the Commission would no longer use the phrase. He asked Mr. Gallagher to discuss the SEC’s amended filing against Binance and its implications for market participants who may be under SEC investigation.
  • Mr. Gallagher called it “very odd” that the SEC had admitted issues with their use of the phrase “crypto asset securities.” He stated that the net result of the SEC’s amended filing against Binance is that a high emphasis will be placed upon secondary market transactions involving crypto assets. He noted how the court decision in the SEC’s legal case against Ripple had stated that secondary market transactions do not give rise to investment contracts.
• Rep. Steil interjected to ask Mr. Gallagher to indicate whether the SEC’s amended filing against Binance underscores the need for Congress to pass the FIT21 Act into law.
  • Mr. Gallagher remarked that Congress should pass the FIT21 Act into law.
• Rep. Steil then noted how SEC Chairman Gary Gensler has called on digital asset projects to register with the SEC. He commented however that the SEC’s registration process is not straightforward. He remarked that current disclosure requirements for stocks and other common investment vehicles are ill-suited for digital asset projects. He asked Ms. Schulp to provide an example of how these current disclosure requirements are ill-suited for digital assets.
  • Ms. Schulp mentioned how the SEC has previously engaged in rulemakings to address ill-suited registration requirements for assets. She specifically highlighted how the SEC had worked to modify its registration requirements for asset-backed securities. She discussed how the SEC’s current disclosure regime is focused on issuers and commented that issuer information may not be relevant for digital asset tokens. She also stated that the SEC’s current disclosure regime does not cover information that might be relevant to digital asset token purchasers, such as tokenomics, the token supply, and where tokens are being held back for project insiders. She remarked that digital asset investors are not receiving important information and that some of the information required under the SEC’s disclosure rules may not exist for digital asset projects.
• Rep. Steil asked Ms. Schulp to confirm that investors are not receiving relevant information from digital asset projects and are also receiving irrelevant information from these projects under current SEC disclosure rules.
  • Ms. Schulp confirmed that investors are not receiving relevant information from digital asset projects and are also receiving irrelevant information from these projects under current SEC disclosure rules.
• Rep. Steil asked Mr. Liftik to indicate whether he agrees with Ms. Schulp’s assessment of the SEC’s current disclosure requirements for digital asset projects.
  • Mr. Liftik expressed agreement with Ms. Schulp’s assessment of the SEC’s current disclosure requirements for digital asset projects. He further contended that there are risks associated with applying the SEC’s traditional disclosure regime to the digital assets space. He stated that this application could be misleading to investors because it assumes a connection between the digital asset issuer and the digital asset project. He elaborated that information about a digital asset issuer may have limited or no connection to the digital asset project.
• Rep. Steil then discussed how the SEC has taken enforcement actions against “practically all” U.S.-based digital asset trading platforms. He added that many of these digital asset trading platforms that have been subject to SEC enforcement actions have attempted to pre-emptively register with the SEC. He asked Ms. Schulp to discuss how the SEC’s enforcement actions against these digital asset trading platforms impact digital asset startup companies and developers that want to bring their products into the U.S.
  • Ms. Schulp remarked that the SEC’s enforcement actions against U.S.-based digital asset trading platforms discourage digital asset startup companies and developers from participating in the U.S. market.
  • Mr. Gallagher expressed agreement with Ms. Schulp’s response. He mentioned how Robinhood Markets had launched its cryptocurrency product in Europe last year because of the continent’s regulatory certainty for digital assets. He remarked that the company cannot grow or innovate within the U.S. because of the U.S.’s lack of regulatory certainty for digital assets.
• Rep. Steil called it important for Congress to promote domestic digital assets innovation. He also called it imperative for the U.S. to adopt a regulatory framework for digital assets.

Rep. Bill Foster (D-IL):

• Rep. Foster noted how Mr. Gallagher had told the Subcommittee that Robinhood Markets has made “difficult choices” not to list certain cryptocurrency tokens and products. He asked Mr. Gallagher to describe the review process that Robinhood Markets follows for determining whether to list certain digital assets.
  • Mr. Gallagher discussed how Robinhood Crypto has a listing process and a listing committee that evaluates digital asset tokens for listing on its platform. He testified that the Robinhood Crypto platform currently has 15 tokens listed, including Bitcoin and Ether.
• Rep. Foster interjected to note that Robinhood Markets had stopped listing Cardano, Polygon, and Solana. He asked Mr. Gallagher to explain Robinhood Markets’s criteria for assessing which digital asset tokens can be listed on its platform.
  • Mr. Gallagher mentioned how the SEC had named Cardano, Polygon, and Solana in their complaint against Binance and Coinbase and noted how the SEC had asserted that these tokens were securities. He testified that Robinhood Crypto’s listing committee considers whether the SEC has publicly claimed that a token constitutes a security in making listing decisions. He stated that Robinhood Crypto’s listing meeting decided to change the listing status of the aforementioned tokens based on the SEC’s enforcement actions, even though the company disagrees with the SEC’s assertions that these tokens constitute securities. He testified that Robinhood Crypto has obtained memorandums from a national law firm supporting the contention that Cardano, Polygon, and Solana should not be considered securities.
• Rep. Foster asked Mr. Gallagher to indicate whether Robinhood Markets considers whether a digital asset is being used in illicit finance when making listing determinations for its platform.
  • Mr. Gallagher remarked that Robinhood Markets maintains a “very vibrant” AML and KYC function. He testified that Robinhood Markets considers illicit finance concerns as part of its decision making process.
• Rep. Foster discussed how the Committee has been concerned regarding the role of cryptocurrencies in ransomware and illicit finance. He stated that the anonymous, self-hosted, and permissionless nature of cryptocurrencies can enable ransomware and illicit finance. He added that chain hopping, privacy-enhanced coins, and cryptocurrency mixers can further enable ransomware and illicit finance. He asked Mr. Gallagher to indicate whether Robinhood Markets currently permits its users to transfer their cryptocurrencies from permissionless self-hosted digital wallets onto the company’s platform.
  • Mr. Gallagher stated that he did not know the answer to Rep. Foster’s question.
• Rep. Foster interjected to state that it is impossible to prevent anonymous self-hosted cryptocurrencies from being used for illicit purposes. He asked Mr. Gallagher to address how Robinhood Markets intends to stop cryptocurrencies involved in illicit finance activities from being onboarded to the company’s platform. He also asked Mr. Gallagher to provide an estimate regarding the effectiveness of Robinhood Markets’s policies to address illicit finance concerns. He requested that Mr. Gallagher provide these answers for the hearing’s record.
  • Mr. Gallagher expressed Robinhood Markets’s willingness to follow-up with Rep. Foster regarding his questions. He reiterated that Robinhood Markets maintains a dedicated group that conducts AML and KYC reviews across its platform.
• Rep. Foster then discussed how many of the frauds that the SEC is tasked with preventing (such as wash trades and front-running) have existed in pre-modern economies. He remarked that healthy markets are predicated on market participants being able to understand market prices. He noted how there are estimates that over half of all Bitcoin transactions are wash trades. He asked the witnesses to indicate how market participants can understand market prices for an object where most of the object’s transactions are demonstrably illegitimate. He also asked the witnesses to indicate whether there exist technological solutions to this problem.
  • Mr. Fusaro remarked that the ETP industry has an effective solution for determining the price of Bitcoin. He discussed how the ETP industry uses a volume-weighted median price that includes inputs from multiple different cryptocurrency or Bitcoin trading platforms. He explained that this approach involves taking in inputs from multiple trading platforms, discarding outlier inputs, and then averaging these inputs in time partitions.
• Rep. Foster interjected to ask Mr. Fusaro to indicate whether the platforms that support volume-weighted median price calculations are all SEC-regulated or may include offshore entities that are unregulated.
  • Mr. Fusaro stated that the platforms used to support volume-weighted median price calculations come from multiple jurisdictions.
• Rep. Foster interjected to comment that the fact that some of these platforms are from foreign jurisdictions means that the SEC lacks control over the platforms. He remarked that the existence of unregulated platforms makes it difficult to determine the actual market price of a digital asset. He asked Mr. Fusaro to indicate whether there exists a solution to this problem.
  • Mr. Fusaro discussed how a third-party calculates the volume-weighted median price and reiterated that this price includes inputs from multiple platforms. He stated that Bitcoin ETPs on U.S. regulated markets trade “very tightly” to the Bitcoin volume-weighted median price.

Rep. Brad Sherman (D-CA):

• Rep. Sherman remarked that cryptocurrencies do not work without self-hosted digital wallets and asserted that self-hosted digital wallets undermine the U.S.’s AML enforcement efforts. He further stated that cryptocurrencies facilitate money laundering because cryptocurrencies lack the same limit constraints as physical currencies. He then accused former President Trump of having a conflict of interest for his advocacy of cryptocurrency businesses while acting as the Republican Presidential nominee. He also criticized former President Trump for proposing that the U.S. invest in cryptocurrencies. He then thanked the SEC for its work to protect investors in the cryptocurrency space and asserted that the SEC is merely following Congressional and Biden administration directives. He noted how all of the SEC’s enforcement actions are brought in U.S. federal courts established under Article III of the U.S. Constitution. He asked Mr. Reiners to indicate whether the Article III federal courts are a proper venue for these cases. He also asked Mr. Reiners to indicate whether the Article III federal courts afford due process to defendants.
  • Mr. Reiners answered affirmatively.
• Rep. Sherman then remarked that the cryptocurrency industry is concurrently arguing that it seeks regulatory clarity regarding the status of digital assets and that the federal securities framework is ill-suited for digital assets. He stated that the U.S. has developed a regulatory system for all other types of securities that is well-functioning for a diverse range of assets. He commented however that the cryptocurrency industry does not want to apply this securities framework to digital assets and is making significant lobbying expenditures to prevent such an application. He asked the witnesses to indicate whether they would support federal legislation that would address the regulatory uncertainty surrounding digital assets through merely declaring that digital assets should be considered securities (and therefore subject to federal securities laws).
  • Mr. Reiners answered affirmatively.
• Rep. Sherman highlighted how only Mr. Reiners expressed support for his hypothetical legislation while the remaining witnesses (who he described as cryptocurrency industry advocates) had not expressed support for the hypothetical legislation. He then asked Mr. Reiners to indicate whether the Howey test makes it clear that DeFi lending platforms are securities.
  • Mr. Reiners noted how the Howey test is a facts and circumstances-based test and commented that he therefore could not answer whether the test would conclude that DeFi lending platforms are always securities. He noted however that the SEC and federal courts have found that many lending protocols are securities.
• Note: Rep. Sherman’s question period time expired here.

Rep. Al Green (D-TX):

• Rep. Green mentioned how Mr. Reiners had stated that the cryptocurrency industry claims that the U.S.’s failure to adopt a regulatory framework for digital assets will cause cryptocurrency businesses to move abroad. He asked Mr. Reiners to indicate whether he still supports this statement.
  • Mr. Reiners expressed his continued support for his statement.
• Rep. Green then noted how Mr. Reiners had stated that the U.S. should prioritize quality over speed in developing a regulatory framework for digital assets. He also noted how Mr. Reiners had stated that financial regulatory legislation tends not to change absent a future crisis. He asked Mr. Reinters to indicate whether he still supports these statements.
  • Mr. Reiners expressed his continued support for these statements.
• Rep. Green further noted how Mr. Reiners had warned that the U.S. could experience a financial crisis like the 2008 Financial Crisis if it adopts a defective regulatory framework for digital assets. He asked Mr. Reiners to elaborate on his warning.
  • Mr. Reiners remarked that digital asset tokens are entirely speculative in nature. He raised concerns that digital asset ETPs are now connecting the traditional financial system to the cryptocurrency system. He commented that this connection enables problems in one system to spread to the other system. He warned that a future collapse of a large digital assets firm (similar to the FTX collapse) could cause problems within the traditional financial system. He stated that the U.S. tends to enact financial regulatory laws after financial crises occur rather than periodically update its financial regulatory laws. He raised concerns that the passage of “light touch” digital assets regulatory legislation would provide a “veneer of legitimacy” to digital assets. He stated that this legislation would cause more Americans to enter the digital assets space, which could in turn cause financial system vulnerabilities stemming from a future crisis.
• Rep. Green remarked that criminality played a central role in the 2008 Financial Crisis. He asked Mr. Reiners to indicate whether the Subcommittee should be concerned about the prospects for criminality within the digital assets space under current digital asset regulatory regime proposals.
  • Mr. Reiners remarked that a significant amount of criminality is occurring within the cryptocurrency industry. He attributed the 2008 Financial Crisis to “speculative mania” involving housing-related assets and stated that similar speciation has occurred within the cryptocurrency space.
• Rep. Green interjected to note how Mr. Reiners had mentioned former FTX CEO Sam Bankman-Fried. He highlighted how Mr. Bankman-Fried had been involved in criminal activity.
  • Mr. Reiners noted how former FTX CEO Sam Bankman-Fried had been convicted of criminal activity. He stated that cryptocurrencies had enabled Mr. Bankman-Fried’s criminal activity. He noted how Mr. Bankman-Fried had allowed an FTX-affiliated hedge fund to borrow FTX customer assets that were secured via tokens that FTX had created from nothing.
• Rep. Green asked Mr. Reiners to indicate whether more cryptocurrency-enabled crimes could occur if Congress does not properly regulate the digital assets space.
  • Mr. Reiners answered affirmatively.
• Rep. Green then asked Mr. Gallagher to indicate whether the potential harms associated with the U.S.’s failure to swiftly adopt a regulatory regime for digital assets would outweigh the potential benefits associated with the U.S. taking a more deliberate approach in adopting such a regulatory regime.
  • Mr. Gallagher remarked that the SEC currently has no regulatory regime for digital assets. He asserted that the SEC’s regulation by enforcement approach to digital assets constitutes an improper regulatory approach. He called on the SEC and Congress to adopt a proper regulatory regime for digital assets.
• Rep. Green indicated that his question period time had expired. He reiterated his concerns regarding the potential for criminality within the digital assets space and expressed agreement with Mr. Reiners’s concerns.