Oversight of Digital Commodities (U.S. Senate Committee on Agriculture, Nutrition, and Forestry)

Hearing	Oversight of Digital Commodities
Committee	U.S. Senate Committee on Agriculture, Nutrition, and Forestry
Date	July 10, 2024

 

Hearing Takeaways:

• Current U.S. Commodity Futures Trading Commission (CFTC) Oversight of the Digital Assets Market: The hearing considered the CFTC’s current oversight of the digital assets. Committee Members and CFTC Chairman Behnam expressed concerns that the U.S.’s current lack of a regulatory framework for digital assets has resulted in various regulatory gaps. They stated that these regulatory gaps can leave U.S. consumers and investors vulnerable to losses from fraud, theft, and abuse. Chairman Behnam commented the U.S.’s lack of regulation of non-security digital asset spot markets is significant given how these digital assets comprise between 70 percent and 80 percent of the digital assets market based on Bitcoin’s market capitalization.
  • Current Enforcement of Digital Asset-Related Crimes: Full Committee Chairman Debbie Stabenow (D-MI) and Chairman Behnam discussed how the CFTC only has anti-fraud and anti-manipulation authority, which means that the Commission can only respond to cryptocurrency-related crimes through enforcement actions (rather than take proactive steps to prevent the crimes). Chairman Behnam mentioned how the CFTC has brought 135 cryptocurrency-related enforcement cases and indicated that half of the CFTC’s enforcement cases in fiscal year (FY) 2023 were cryptocurrency-related. He called it “staggering” that the CFTC must allocate have of its resources to a market that it does not regulate and to a market that it does not receive appropriations to oversee. He stated that this situation puts both the cryptocurrency and non-cryptocurrency markets at risk. He indicated that most of the CFTC’s fraud enforcement actions are retail-oriented and noted how these frauds typically involve “pump and dump” and Ponzi schemes. He stated that the CFTC’s experience pursuing these retail fraud cases had led the Commission to build a robust Office of Customer Education and Outreach (OCEO) and to develop a strong network of state and local regulator and law enforcement partners.  
  • The CFTC’s Coordination with Other Federal Departments and Agencies: Chairman Behnam also discussed how the CFTC coordinates with the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DoJ) on both civil and criminal enforcement cases involving digital assets. He stated however that the CFTC does not coordinate as much with the SEC and the DoJ on regulatory matters because the CFTC currently lacks regulatory authority over the digital commodities spot market.
  • The CFTC’s Work to Ensure Robust Cybersecurity Measures within the Digital Assets Market: Sen. Sherrod Brown (D-OH) raised concerns over how some cryptocurrency platforms have experienced hacks that have resulted in losses totaling in the hundreds of millions of dollars. Chairman Behnam stated that the CFTC must consider the unique factors of the technology underlying cryptocurrencies (such as cybersecurity and operational resilience) when overseeing the market. He testified that the CFTC is working to ensure that both the CFTC and market participants prioritize cybersecurity and operational resilience.
  • The CFTC’s Oversight of Illicit Activity within the Digital Assets Space: Several Committee Members expressed concerns that the CFTC is limited in its ability to police illicit activities involving digital assets. They indicated that these illicit activities include money laundering and scams involving artificial intelligence (AI) technology. Chairman Behnam attributed the use of digital assets in illicit activity to the “borderless” nature of these assets (which makes them easy to transfer internationally) and the U.S.’s current lack of regulation for these assets. He noted how cryptocurrency exchanges are not subject to regulation from a federal regulator for non-security tokens. He indicated however that cryptocurrency exchanges do comply with various U.S. Financial Crimes Enforcement Network (FinCEN) requirements and state-level money transmitter requirements. These FinCEN requirements include anti-money laundering (AML), know your customer (KYC), and Combating the Financing of Terrorism (CFT) regulations. Chairman Behnam also mentioned how the CFTC has worked to solicit comments from industry stakeholders regarding how AI technology is being used in financial markets. He testified that the CFTC is currently reviewing these comments and deciding whether to pursue a rule, advisory, or guidance. He discussed how bad actors are using AI technology to track and identify vulnerable investors and individuals as targets for schemes. He testified that the CFTC is working with federal partners to address these AI technology-enabled scams.
• Federal Digital Commodities Legislation and Other Digital Commodities Policy Issues: Committee Members and CFTC Chairman Behnam expressed interest in developing bipartisan federal legislation that would provide the CFTC with regulatory authority over the digital commodities spot market. They argued that this legislation would be key to supporting U.S. digital assets innovation and global leadership and highlighted how other jurisdictions have already adopted regulatory frameworks for digital assets. Chairman Behnam stated that the CFTC already has significant experience with digital assets market through their regulation of futures contracts involving Bitcoin and Ether futures contracts, as well as based on their successful cryptocurrency-related crime enforcement actions. Full Committee Chairman Debbie Stabenow (D-MI) mentioned how she has worked with Full Committee Ranking Member John Boozman (R-AR) to advance bipartisan legislation that will provide the CFTC with regulatory authority over digital commodities. She indicated that she is working to provide specific legislative language on this subject to Committee Members by the end of the week for their review. Full Committee Ranking Member Boozman raised concerns however that the Committee’s current digital commodities legislation under development does not possess sufficient stakeholder support.
  • Establishment of Rules for Digital Commodities: Full Committee Chairman Stabenow contended that that federal digital commodities legislation should ensure cryptocurrency firms safeguard customer assets, hold sufficient capital reserves, and abide by rigorous cybersecurity standards. She commented that these rules should be equivalent to those governing traditional financial market participants. Chairman Behnam requested that Congress provide the CFTC with registration authority so that the Commission could register exchanges, custodians, and broker-dealers. He stated that such a registration system would include core principles regarding compliance with governance, financial resources, and the elimination of conflicts of interest. He discussed how these principles have been developed in the financial regulatory space and commented that these principles have enabled U.S. markets to be the most robust and desirable markets in the world. He stated that the CFTC will develop more prescriptive rules based on these core principles that will be informed by stakeholder input.
  • Requirement for U.S. Nexus for CFTC Digital Assets Regulation: Full Committee Ranking Member Boozman argued that federal digital commodities legislation must ensure that the CFTC’s regulatory authority over digital commodities located outside of the U.S. be limited to assets with a direct and significant connection to the U.S. He warned that the failure to adopt such a limitation could lead to foreign retaliatory actions, which would harm digital commodities market participants and users. Chairman Behnam contended that entities, individuals, and organizations should trigger U.S. nexus if their activities impact U.S. customers, regardless of the location of these entities, individuals, and organizations. He confidence that the CFTC could establish a strong process for establishing nexus within the digital assets market given the CFTC’s experience with implementing nexus rules for swaps under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
  • Establishment of a Disclosure Regime for Digital Commodities: Several Committee Democrats and Chairman Behnam expressed interest in establishing a disclosure regime for digital commodity registrants to ensure that investors have access to material information given the retail-oriented nature of the digital asset market. Chairman Behnam discussed how digital commodities differ from traditional commodities (such as wheat) and noted that these traditional commodities do not require scheduled disclosures and are very decentralized in nature. He stated that there would need to exist characteristic-driven disclosures around the digital commodity token itself. 
  • Establish of a Framework for Determining the Status of Digital Assets: Committee Members and the Chairman Behnam expressed interest in developing a framework that would enable the CFTC to confidently determine whether a given asset constitutes a security or a commodity. They expressed concerns that the absence of such a system could result in unnecessary litigation between the CFTC and the SEC when disputes arise regarding a digital asset’s status. Chairman Behnam remarked that federal digital assets legislation should provide a system for listing contracts that largely resembles the CFTC’s current listing system (which entails market participants self-certifying their assets). He also stated that this legislation should contemplate a relationship between the CFTC and the SEC that fosters efficient cooperation. He further asserted that there could exist a system for listing contracts that does not prolong or delay the listing of contracts in a regulated market.
  • Establishment of Suspicious Activity Reporting Requirements: Sen. Ben Ray Luján (D-NM) expressed hope that federal digital commodities would include provisions to address illicit finance concerns. He called it important for there to exist federal requirements for cryptocurrency exchanges to file suspicious activity reports (SARs) with law enforcement agencies. Chairman Behnam also stated that stated that federal digital commodities legislation should provide comprehensive authority for AML, KYC, and customer identification programs.
  • Provision of Sufficient Funding to the CFTC to Oversee and Regulate the Digital Commodities Market: Committee Members and Chairman Behnam remarked that federal digital commodities legislation must provide the CFTC with additional funding if Congress is going to task the Commission with overseeing and regulating the digital commodities market. Chairman Behnam estimated that the CFTC would require an additional $30 million in its first year and $50 million in its second year to launch a regulatory regime for digital commodities.
  • Impact on States: Sen. Deb Fisher (R-NE) expressed interest in ensuring that federal digital commodities legislation would recognize state actions to address digital assets and not preempt strong and effective state digital asset laws. Chairman Behnam remarked that Congress should recognize the efficiency and liquidity benefits of a federal regulatory system for digital commodities while still permitting states to preserve rights regarding fraud, custody, and payments. He asserted that states remain important partners to the federal government in policing the digital assets market.
  • Regulation of Decentralized Finance (DeFi): Committee Members expressed interest in how the U.S. should approach the regulation of DeFi, which is a blockchain-based financial system that operates without intermediaries. Chairman Behnam remarked that the CFTC should prioritize regulating centralized exchanges because centralized exchanges currently pose greater challenges regarding customer protections, fraud, and manipulation. He stated that DeFi applications would be more challenging for the CFTC to address and testified that the CFTC has received complaints regarding DeFi applications. He acknowledged that while CFTC has nexus to address DeFi applications, he asserted that the CFTC and the Committee should engage in further consideration and discussion of DeFi issues before DeFi regulations are pursued.
  • Prohibition on Chinese-Owned Digital Asset Broker-Dealers, Custodians, and Exchanges: Sen. Tommy Tuberville (R-AL) mentioned how he had proposed bipartisan legislation with Sen. Kirsten Gillibrand (D-NY) that would prevent Chinese entities from acquiring U.S. digital asset broker-dealers, custodians, or exchanges. Chairman Behnam expressed appreciation for Sen. Tuberville’s legislation and called the legislation’s objective “very important” for preserving U.S. financial infrastructure.
  • Taxation of Cryptocurrencies: Sen. Tuberville also expressed concerns regarding the current taxation of cryptocurrencies. He noted how a person that mines cryptocurrencies is required to pay taxes on their mined cryptocurrencies, even if the person does not sell the mined cryptocurrencies. He indicated however that other assets are only taxed upon sale and argued that cryptocurrencies should be taxed the same as all other assets.
  • Energy Consumption of Digital Assets: Sen. Peter Welch (D-VT) expressed concerns regarding the significant amount of energy consumption associated with cryptocurrency mining and how this energy consumption impacts electricity ratepayers. Chairman Behnam stated that new legislation would be needed to require climate change-related risk disclosures for cryptocurrency mining operations. He expressed the CFTC’s willingness to work with Sen. Welch on developing such legislation.
• Other CFTC Policy Topics: Committee Members further used the hearing to raise CFTC-related policy issues and concerns with CFTC Chairman Behnam.
  • Reforms to the CFTC Whistleblower Program: Sen. Charles Grassley (R-IA) called on Congress to pass the bipartisan CFTC Whistleblower Fund Improvement Act of 2023. This legislation would make previously enacted reforms to the CFTC Whistleblower Program permanent (which are set to expire on September 30, 2024) and allow for the CFTC to hold as much money in fines as the SEC is permitted to hold. Chairman Behnam expressed support for this legislation and warned that Congress’s failure to make the reforms to the CFTC Whistleblower Program permanent would harm the CFTC’s ability to staff, fund, and publicize its Whistleblower Office.
  • Impact of the U.S. Supreme Court’s Loper Bright Enterprises v. Raimondo Decision on the CFTC: Sen. Joni Ernst (R-IA) expressed interest in how the CFTC plans to respond to the U.S. Supreme Court’s recent Loper Bright Enterprises v. Raimondo decision. This decision had overturned the practice of providing judicial deference to federal administrative agencies on ambiguous questions (which was known as Chevron deference). Chairman Behnam indicated that the CFTC is reviewing the U.S. Supreme Court’s Loper Bright Enterprises v. Raimondo decision and expressed the CFTC’s intention to comply with the decision. He stated that the Commodity Exchange Act provides a “fair amount” of discretion to the CFTC in certain areas. He indicated however that he could not provide an estimate regarding how many of the CFTC’s rulemakings would be impacted by this decision.
  • Impact of the U.S. Supreme Court’s SEC v. Jarkesy Decision on the CFTC: Sen. Ernst also expressed interest in how the CFTC plans to respond to the U.S. Supreme Court’s recent SEC v. Jarkesy decision. This decision had found that defendants are entitled to jury trials under the Seventh Amendment when the SEC seeks civil penalties for securities fraud. Chairman Behnam noted how the U.S. Supreme Court’s SEC v. Jarkesy decision impacts the CFTC’s administrative proceedings. He testified that the CFTC is currently reviewing the decision and working to ensure that its enforcement docket complies with the decision. He also expressed the CFTC’s commitment to providing defendants before the CFTC a jury trial when the Commission is seeking civil penalties and restitution.
  • CFTC’s Proposed Event Contracts Rule: Sen. Tommy Tuberville (R-AL) expressed interest in ensuring that the CFTC’s Event Contracts proposed rule would encourage innovation and would not prevent or limit event contracts. Chairman Behnam expressed his commitment to ensuring that any final rule from the CFTC regarding event contracts would support innovation.
  • Participation of CFTC Commissioners Under U.S. Senate Consideration in the CFTC’s Current Rulemakings: Sen. Tuberville also noted how two Democratic CFTC Commissioners are currently under consideration by the U.S. Senate for new roles. He expressed concerns that the continued participation of these CFTC Commissioners in the CFTC’s current rulemakings could pose conflicts of interest. Chairman Behnam argued that these Commissioners do not need to recuse themselves from ongoing CFTC rulemakings based on the CFTC’s legal analysis and the fact that these Commissioners are seeking positions in other federal government agencies He testified that the CFTC could not identify any conflicts of interest that would require these Commissioners to recuse themselves from becoming involved in ongoing Commission rulemakings.

Hearing Witnesses:

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

Member Opening Statements: 

Full Committee Chairman Debbie Stabenow (D-MI):

• She noted how the Committee had last held a hearing on digital assets in December 2022 and mentioned how investors had lost $2 trillion in the cryptocurrency market in 2022.
  • She also recounted how cryptocurrency losses from hacking had been at an all-time high in 2022 and that several high-profile cryptocurrency firms had gone bankrupt and had stolen customer funds.
  • She further mentioned how Binance (which is the largest cryptocurrency exchange in the world) and its CEO had been found guilty in 2023 of willfully evading AML laws and enabling the financing of terrorism.
• She stated however that these events have not dampened public interest in cryptocurrencies and noted how the cryptocurrency market has rebounded to near-record highs.
  • She highlighted how Bitcoin is trading at nearly $60,000 at the time of the hearing.
• She also discussed how the interconnection between cryptocurrency and traditional financial markets is increasing as institutional investors purchase Ether and Bitcoin derivatives and exchange-traded products.
• She noted however that no federal regulators oversee the trading of spot digital commodities (including Bitcoin and Ether).
  • She highlighted how digital assets that are not securities account for most of the value traded within cryptocurrency markets.
• She contended that the U.S. cannot wait any longer to regulate digital assets and called on Congress to take swift action to address this lack of regulation.
• She mentioned how she has worked with Full Committee Ranking Member John Boozman (R-AR) to advance bipartisan legislation that will provide the CFTC with regulatory authority over digital commodities.
  • She indicated that she is working to provide specific legislative language on this subject to Committee Members by the end of the week for their review.
• She remarked that there must exist “clear, commonsense rules of the road” that enable good actors within the cryptocurrency space to innovate and grow.
  • She commented that blockchain technology can help the U.S. to manage data and to move money in more efficient and transparent ways and asserted that these goals cannot be realized without comprehensive federal legislation.
  • She added that other countries are pursuing their own cryptocurrency policies, which underscores the need for federal action on the subject.
• She stated that Congress must protect the American public from bad actors that are exploiting digital assets for personal gain at the expense of their customers.
  • She asserted that the U.S. cannot solely rely upon enforcement actions to address these bad actors after the bad actors have stolen money from customers.
  • She commented that financial regulators require tools to stop abusive conduct before it occurs.
• She remarked that federal digital assets legislation must apply similar rules to similar risks for all assets.
  • She contended that cryptocurrency firms must safeguard customer assets, hold sufficient capital reserves, and abide by rigorous cybersecurity standards.
  • She commented that these rules should be equivalent to those governing traditional financial market participants.
• She also remarked that federal digital assets legislation should protect retail customers.
  • She stated that customers should have access to accurate information about their investments that is presented in a manner that is appropriate for their level of experience.
  • She also asserted that financial markets must be fair for all participants and not contain conflicts of interest.
• She further remarked that federal digital assets legislation must provide the CFTC with adequate permanent funding to oversee the digital commodities market.
  • She warned that the absence of such funding would impede the CFTC’s ability to oversee the evolving digital commodities markets and imperil the CFTC’s oversight and enforcement activities in derivatives markets.
• She expressed appreciation for the efforts of the U.S. House of Representatives to pass cryptocurrency market structure legislation.
• She noted that while the Committee’s legislation focuses on addressing regulatory gaps for digital commodities, she expressed confidence that Congress can pass legislation to bring greater integrity to the cryptocurrency markets.
  • She indicated that the hearing would include testimony from CFTC Chairman Behnam regarding how the CFTC is policing cryptocurrency markets for fraud and abuse and how limits to the CFTC’s authorities impede the Commission’s work to protect customers and markets.

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

• He remarked that the CFTC is the proper federal agency to regulate spot digital commodities.
  • He commented that the CFTC’s principles-based approach has proven effective in protecting consumers in the derivatives market and that this approach could be effective at protecting consumers in the digital commodities space.
• He also stated that the U.S. must protect innovation and provide regulatory certainty so that U.S. businesses can maintain their domestic operations.
• He mentioned how Full Committee Chairman Debbie Stabenow (D-MI) has been drafting legislation that would provide the CFTC with the authority to regulate spot digital commodity trading and indicated that his staff has worked closely with Full Committee Chairman Stabenow on this legislative proposal.
  • He expressed his commitment to continue working with Full Committee Chairman Stabenow on legislation to provide the CFTC with additional authorities to regulate spot digital commodities.
• He also remarked that the Committee should limit its policy proposals to the federal agencies under its jurisdiction, which includes the CFTC.
  • He emphasized that the Committee does not have jurisdiction over the SEC, the U.S. Department of the Treasury, or the U.S. Federal Reserve.
• He lastly stated that any federal digital commodities legislation must receive broad stakeholder support if Congress seeks to protect consumers and innovation.
  • He mentioned how he and his staff had engaged in numerous meetings with cryptocurrency stakeholders and commented that the current feedback suggests that the current legislative proposal lacks sufficient stakeholder support.

Witness Opening Statements:

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

• He discussed how he had observed the digital assets market evolve “significantly” during his almost seven-year tenure at the CFTC as both a Commissioner and Chairman.
  • He noted how the digital assets market had experienced expansions and contractions, periods of high volatility, scandals, and fraudulent activity during this period.
  • He also noted how both novice and sophisticated investors have become more interested in cryptocurrencies during this period and highlighted how many established financial institutions have built digital asset-focused businesses.
• He expressed concerns that the U.S. lacks a legislative framework governing digital assets, despite the prevalence of digital asset scams.
  • He highlighted his repeated advocacy for Congress to establish such a legislative framework for governing digital assets.
• He stated that his concerns are not unique and mentioned how a 2022 U.S. Financial Stability Oversight Council (FSOC) report had highlighted how there exists a gap in the regulation of the non-security digital assets spot market.
  • He commented that this gap for non-security tokens continues to constitute a majority of the digital asset market as measured by market capitalization.
• He remarked that the continuing integration of the digital asset market into traditional financial institutions would cause concerns regarding broader market resiliency and financial stability to ripen.
  • He warned that this current trajectory is not sustainable.
• He mentioned how the CFTC had brought its first enforcement action in connection with an illegal Bitcoin operation nine years ago and stated that the CFTC has subsequently been aggressive in using its “powerful, but limited” anti-fraud and anti-manipulation authority.
• He testified that the CFTC has brought over 135 digital commodities cases resulting in billions of dollars in penalties and restitution.
  • He highlighted how the U.S. District Court for the Northern District of Illinois had recently entered summary judgment in favor of the CFTC in a case involving fraud by an unregistered entity that had promised steady returns in digital asset commodities (such as Bitcoin and Ether).
  • He noted how this Court’s decision had reaffirmed that both Bitcoin and Ether are commodities under the Commodity Exchange Act.
• He testified that actions involving digital asset allegations comprised almost half of the CFTC’s enforcement docket in FY 2023.
  • He emphasized that the CFTC lacks authority and appropriated resources to regulate the digital assets market.
• He remarked that the CFTC’s decade of experience with digital assets has given Commission staff a “deep understanding” of the digital assets market and the underlying technology that supports this market.
  • He asserted that the notion that regulation provides legitimacy to asset classes (which he described as a “flawed notion”) should not detract from the CFTC’s responsibilities.
• He then indicated that there are several components of a successful regulatory framework for digital assets.
  • He first stated that the CFTC’s principles-based oversight model has served the Commission and its regulated markets well and commented that this model strikes an appropriate balance between clear outcomes-based requirements and measured flexibility.
  • He secondly stated that appropriate funding will be necessary to meet the mandate of any legislatively enacted regulatory program.
  • He thirdly stated that the CFTC should have authority to require registrants to provide a comprehensive disclosure regime to ensure that investors have access to material information given the retail-oriented nature of the digital asset market.
  • He fourthly stated that legislation should provide comprehensive authority for AML, KYC, and customer identification programs.
  • He fifthly stated that the Committee should consider a disciplined and balanced framework for determining whether tokens constitute commodities or securities.
  • He lastly stated that a comprehensive education and outreach program would enable the investing public to understand the risks and opportunities of digital assets technology.
• He expressed encouragement with the Committee’s continued efforts (dating back to 2022) to fill regulatory gaps within the digital assets space and prioritize customer protections and market stability.
  • He asserted that the Committee must pursue this legislation in a thoughtful and urgent manner.

Congressional Question Period:

Full Committee Chairman Debbie Stabenow (D-MI):

• Chairman Stabenow noted how Chairman Behnam had asserted that Congress should pass legislation that establishes federal oversight of non-security digital asset tokens. She asked Chairman Behnam to indicate whether any federal regulators currently have the authority to regulate the non-security digital asset market.
  • Chairman Behnam answered no. He noted how between 70 percent and 80 percent of the digital asset market involves non-securities based on Bitcoin’s market capitalization. He remarked that this gap in regulation ultimately puts customers at risk for losing money. He also stated that the CFTC’s enforcement authority is reactive in nature, which means that the CFTC can only address problems after they have occurred. He discussed how a typical regulatory framework involves registration and compliance with an existing set of rules. He noted how this regulatory framework provides market authorities with the ability to investigate registered entities (such as brokers, exchanges, custodians, and individual participants). He remarked that these regulatory tools enable market authorities to eliminate or significantly reduce market fraud and manipulation. He stated that while the CFTC has a successful enforcement record regarding digital assets, he emphasized that the CFTC can only address problems after they have occurred. He added that the CFTC’s lack of regulatory authority prevents the Commission from having a deterrent effect on the digital asset market.
• Chairman Stabenow then asked Chairman Behnam to further discuss the CFTC’s experience protecting retail customers.
  • Chairman Behnam acknowledged that a large portion of the CFTC’s oversight and regulatory activities involve institutional and wholesale markets. He remarked however that the CFTC has a growing participant pool of retail investors in futures. He noted how the CFTC oversees prediction markets, which are retail-oriented in nature. He also stated that a significant portion of the CFTC’s fraud enforcement activities is focused on retail investors. He noted how retail investors often are vulnerable to fraud involving metals (such as gold and silver) and foreign exchange (forex) markets. He remarked that the CFTC’s fraud enforcement efforts have enabled it to build a strong OCEO and a comprehensive program to distribute information to retail investors through the internet, social media, conferences, and other events.
• Chairman Stabenow lastly stated that the CFTC will require adequate funding if the Commission receives new authority to oversee spot digital commodities markets. She noted how the CFTC cannot begin to collect fees until it finalizes its rules and registers digital asset platforms. She asked Chairman Behnam to estimate how much funding the CFTC will require to establish a regulatory regime for spot digital commodities.
  • Chairman Behnam estimated that the CFTC would require between $50 million and $60 million during the first year and between $30 million and $35 million during the second year to establish a regulatory regime for spot digital commodities. He also indicated that the CFTC would require a correlated number of full time equivalent (FTE) employees. He further testified that the CFTC maintains estimates for its required resources for a third year. He expressed his willingness to share the CFTC’s analysis behind these estimates with the Committee.

Sen. Charles Grassley (R-IA):

• Sen. Grassley recounted how he had worked to enact temporary reforms to the CFTC Whistleblower Program during the 117th Congress. He indicated that these reforms would expire at the end of FY 2024 and commented that the expiration of these reforms would put the Program at risk. He mentioned how he had introduced the bipartisan CFTC Whistleblower Fund Improvement Act of 2023 to make these reforms permanent and to allow for the CFTC to hold as much money in fines as the SEC is permitted to hold. He warned that Congress’s failure to make these reforms permanent could jeopardize the success of the CFTC Whistleblower Program. He stated that this Program plays a critical role in the CFTC’s enforcement activities. He asked Chairman Behnam to discuss what would happen to the CFTC Whistleblower Office if Congress fails to address these expiring reforms before the end of FY 2024.
  • Chairman Behnam first thanked Sen. Grassley for his work to address the CFTC Whistleblower Program and highlighted how the CFTC Whistleblower Office originates many of the Commission’s cryptocurrency-related cases. He then warned that Congress’s failure to make the reforms to the CFTC Whistleblower Program permanent would harm the CFTC’s ability to staff, fund, and publicize its Whistleblower Office. He remarked that the CFTC Whistleblower Program has had “outstanding success” and noted how this Program has supported $100 million in whistleblower awards. He stated that the CFTC is limited in its ability to monitor its markets and asserted that the CFTC Whistleblower Program is essential for supporting transparent and fair markets. He requested that the Committee continue working to address the CFTC Whistleblower Program and expressed the CFTC’s willingness to provide the Committee with technical assistance on legislation. He noted how the CFTC Whistleblower Office’s payouts are continuing to grow and warned that these growing payouts could put the Office in jeopardy from staffing and resources perspectives.
• Sen. Grassley thanked Chairman Behnam for his statements regarding the need for Congress to pass the CFTC Whistleblower Fund Improvement Act of 2023. He asserted that Congress must pass this legislation before September 30, 2024.

Full Committee Chairman Debbie Stabenow (D-MI):

• Chairman Stabenow expressed agreement with Sen. Charles Grassley (R-IA) regarding the need for Congress to pass the CFTC Whistleblower Fund Improvement Act of 2023.

Sen. Sherrod Brown (D-OH):

• Sen. Brown stated that large financial institutions typically dominate the derivatives markets that the CFTC oversees. He asked Chairman Behnam to address how the CFTC would look out for consumers if Congress were to expand the CFTC’s jurisdiction.
  • Chairman Behnam remarked that the CFTC’s enforcement activities have largely focused on two activities: manipulation and fraud. He commented that non-compliance would fall under manipulation. He stated that the CFTC’s manipulation enforcement activities typically involve large financial institutions. He highlighted how the CFTC had originated the enforcement actions against financial institutions for their manipulation of the London Interbank Offered Rate (LIBOR) benchmark. He stated that the CFTC’s fraud enforcement activities are typically retail-oriented in nature. He elaborated that forex and physical commodity frauds (specifically involving gold and silver) tend to be retail oriented. He testified that most of the CFTC’s fraud enforcement actions are retail-oriented and noted how these frauds typically involve “pump and dump” and Ponzi schemes. He remarked that the CFTC’s experience pursuing these retail fraud cases had led the Commission to build a robust OCEO and to develop a strong network of state and local regulator and law enforcement partners. He acknowledged that the CFTC would need to modify how it interacts with retail investors if the Commission were to receive regulatory authority over spot digital commodities markets. He reiterated his assertion however that the CFTC already has strong experience pursuing retail fraud enforcement cases.
• Sen. Brown then mentioned how some cryptocurrency platforms have experienced hacks that have resulted in losses totaling in the hundreds of millions of dollars. He asked Chairman Behnam to discuss the lessons that the CFTC has learned from past breaches and hacks in cryptocurrency markets.
  • Chairman Behnam stated that the CFTC must consider the unique factors of the technology underlying cryptocurrencies (such as cybersecurity and operational resilience) when overseeing the market. He testified that the CFTC is working to ensure that both the CFTC and market participants prioritize cybersecurity and operational resilience.

Sen. Joni Ernst (R-IA):

• Sen. Ernst first expressed hope that the Committee would develop and pass a bipartisan Farm Bill. She then mentioned how the U.S. Supreme Court’s recent Loper Bright Enterprises v. Raimondo decision had overturned the practice of providing judicial deference to federal administrative agencies on ambiguous questions (which was known as Chevron deference). She also mentioned how the U.S. Supreme Court’s recent SEC v. Jarkesy decision had found that defendants are entitled to jury trials under the Seventh Amendment when the SEC seeks civil penalties for securities fraud. She asked Chairman Behnam to address how the CFTC plans to apply the Loper Bright Enterprises v. Raimondo decision to its activities.
  • Chairman Behnam indicated that the CFTC is reviewing the U.S. Supreme Court’s Loper Bright Enterprises v. Raimondo decision and expressed the CFTC’s intention to comply with the decision. He stated that the Commodity Exchange Act provides a “fair amount” of discretion to the CFTC in certain areas. He remarked that the CFTC will review its rules and ensure that the rules are complying with the Loper Bright Enterprises v. Raimondo decision. He stated however that the CFTC requires discretion in certain circumstances so that it can more nimbly respond to evolving markets.
• Sen. Ernst asked Chairman Behnam to estimate how many of the CFTC’s rulemakings would be impacted by the U.S. Supreme Court’s Loper Bright Enterprises v. Raimondo decision.
  • Chairman Behnam stated that he could not provide an estimate regarding how many of the CFTC’s rulemakings would be impacted by the U.S. Supreme Court’s Loper Bright Enterprises v. Raimondo decision. He reiterated that the CFTC is continuing to review this decision and assess how the decision would impact the Commission. He expressed his willingness to follow up with Sen. Ernst on her question once the CFTC completes its review.
• Sen. Ernst asked Chairman Behnam to indicate whether the CFTC had relied upon Chevron deference in rulemakings that are now subject to litigation.
  • Chairman Behnam indicated that the CFTC has open litigation on one matter in two different courts. He noted how the defendant in this litigation had filed a motion to dismiss the litigation based on the U.S. Supreme Court’s recent Loper Bright Enterprises v. Raimondo decision. He asserted however that the CFTC should be allowed to move forward with this case.
• Sen. Ernst then noted how Chairman Behnam had testified that the CFTC has brought over 135 digital commodity cases resulting in billions of dollars in penalties and restitution. She asked Chairman Behnam to indicate whether the CFTC is reviewing its civil enforcement procedures following the U.S. Supreme Court’s recent SEC v. Jarkesy decision.
  • Chairman Behnam answered affirmatively. He noted that the U.S. Supreme Court’s SEC v. Jarkesy decision does impact the CFTC’s administrative proceedings. He testified that the CFTC is currently reviewing the decision and working to ensure that its enforcement docket complies with the decision.
• Sen. Ernst asked Chairman Behnam to commit to providing defendants before the Commission with a jury trial when the Commission is seeking civil penalties and restitution.
  • Chairman Behnam expressed the CFTC’s commitment to providing defendants before the Commission with a jury trial when the Commission is seeking civil penalties and restitution.

Full Committee Chairman Debbie Stabenow (D-MI):

• Chairman Stabenow expressed her interest in passing a bipartisan Farm Bill. She mentioned how the Committee had developed a section-by-section summary of its Farm Bill proposal and expressed interest in receiving Committee Member feedback regarding this proposal. She commented that while she appreciated the U.S. House Committee on Agriculture’s Farm Bill proposal, she asserted that this proposal must still be improved.

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

• Ranking Member Boozman expressed interest in developing a bipartisan Farm Bill and commented that there currently exist disagreements regarding the Farm Bill’s policies. He expressed optimism however that the Committee could reach an agreement on a Farm Bill.

Sen. Ben Ray Luján (D-NM):

• Sen. Luján posited a scenario where a drug cartel was laundering its money from its illicit drug sales using cryptocurrencies. He asked Chairman Behnam to indicate whether there exist any federal regulations that would require cryptocurrency exchanges to report this illegal activity to law enforcement agencies.
  • Chairman Behnam noted how cryptocurrency exchanges are not subject to regulation from a federal regulator for non-security tokens. He indicated however that cryptocurrency exchanges do comply with various FinCEN requirements and state-level money transmitter requirements. He stated that cryptocurrency exchanges would therefore need to report the illegal activities of their users based on FinCEN and state-level money transmitter requirements.
• Sen. Luján interjected to ask Chairman Behnam to clarify where the cryptocurrency exchanges would need to report illegal activity to.
  • Chairman Behnam stated that cryptocurrency exchanges would need to report illegal activity at the federal level to FinCEN.
• Sen. Luján interjected to discuss how a financial institution involved in illegal activity must appoint somebody to monitor the institution’s activities. He indicated that the U.S. Department of the Treasury must approve this individual and that the individual must develop a report detailing how the financial institution should correct its behavior. He stated that the U.S. Department of the Treasury will then keep this report secret.
  • Chairman Behnam remarked that he cannot address how the U.S. Department of the Treasury handles its SARs and commented that the U.S. Department of the Treasury is better suited to comment on its practices. He reiterated however that a cryptocurrency exchange would be required to report any illegal activity to either FinCEN or states.
• Sen. Luján asked Chairman Behnam to clarify that cryptocurrency exchanges have inconsistent illegal activity reporting obligations.
  • Chairman Behnam commented that Sen. Luján’s questions highlight how there currently exist regulatory gaps regarding cryptocurrency exchanges.
• Sen. Luján interjected to ask Chairman Behnam to discuss why it is important for there to exist federal requirements for cryptocurrency exchanges to report suspicious activity to law enforcement agencies.
  • Chairman Behnam asserted that SARs are “extremely important” for regulators because these reports enable regulators to better identify illegal activity. He stated that while regulators may possess many tools to pursue their objectives, he commented that these tools are limited. He remarked that regulators therefore rely upon market participants for leads on illegal activities. He reiterated his assertion that SARs reports are “extremely important” and noted how some regulated institutions are required to file SARs. He highlighted how SARs are especially prevalent within the banking space and with entities that are subject to prudential regulatory supervision.
• Sen. Luján remarked that SARs can help to combat illicit finance and asserted that the U.S. does not provide enough attention to illicit finance. He mentioned how there have been reports of Chinese crime syndicates using cryptocurrencies to launder billions of dollars (including money raised from fentanyl sales within the U.S.). He expressed frustration that the U.S. is not sufficiently pursuing these illegal activities. He expressed hope that the Committee’s digital commodities legislation would include provisions to address illicit finance concerns.

Full Committee Chairman Debbie Stabenow (D-MI):

• Chairman Stabenow expressed interest in having the Committee address illicit finance concerns.

Sen. Deb Fischer (R-NE):

• Sen. Fischer remarked that her state of Nebraska has played a “leading role” in the state regulation of digital assets. She mentioned how Nebraska had passed legislation in 2021 permitting the creation of banks and divisions within existing banks for the purpose of trading in cryptocurrencies. She also mentioned how the Nebraska Department of Banking and Finance has used state laws and authorities from the Commodity Exchange Act authorities to provide robust oversight while fostering fair digital asset markets. She commented that state regulators serve a key role in preventing fraud and abuse in digital asset markets given their proximity to residents. She asked Chairman Behnam to indicate whether he has any concerns that federal digital assets legislation could preempt strong and effective state laws governing digital assets. She also asked Chairman Behnam to indicate whether the CFTC is equipped to address any possible regulatory gaps within the digital assets space.
  • Chairman Behnam remarked that the CFTC views states as very important partners. He highlighted how state regulators maintain robust oversight and regulatory capabilities and commented that these state regulators enable policing against fraud at a more granular level. He remarked that having a national market system is a more efficient and effective means for bringing liquidity and trading to a single point (as opposed to having various state-based market systems). He stated however that states should preserve rights regarding fraud, custody, and payments. He remarked that the U.S. should balance the need for a federal system while preserving the rights of states to oversee markets. He also testified that the CFTC has contacted Nebraska to discuss digital assets issues following his previous interaction with Sen. Fischer. He commented that Nebraska has had success and been a leader in overseeing digital asset markets.
• Sen. Fisher interjected to ask Chairman Behnam to indicate whether the CFTC has discussed digital asset issues with other states. She also asked Chairman Behnam to indicate whether states are taking more actions to address digital assets. She commented that the federal government often seeks to pre-empt state laws when it moves too slowly to address an issue.
  • Chairman Behnam acknowledged that while the CFTC has not discussed digital asset issues with every state, he testified that the CFTC has discussed these issues with “many” states. He noted how the CFTC participates in multiple multilateral organizations that include national-level state securities regulators. He also mentioned how the CFTC works closely with state securities regulators on enforcement matters. He remarked that the lack of federal action on digital assets has frustrated many states. He noted how many states have adopted enforcement and customer protection policies to respond to rampant fraud within the cryptocurrency market. He commented that states are proactively pursuing this fraud in response to government inaction. He also discussed how certain states with more robust and developed financial systems (such as New York) are establishing their own compliance and regulatory programs for digital assets.
• Sen. Fischer then noted how Chairman Behnam’s testimony had highlighted the need for the CFTC to receive appropriate funding to fulfill its mandate of new regulatory authorities. She specifically noted how Chairman Behnam had recommended a permanent fee-for-service model. She asked Chairman Behnam to recommend an appropriate funding level for the CFTC. She also asked Chairman Behnam to clarify whether this additional funding for the CFTC would be for administrative activities, staff, or information technology (IT) capabilities.
  • Chairman Behnam remarked that the CFTC would require additional funding for administrative activities, staff, and IT capabilities if it were to receive new regulatory authority over digital commodities. He also indicated that he had misspoke earlier and stated that the CFTC would require an additional $30 million in its first year and $50 million in its second year to launch a regulatory regime for digital commodities. He mentioned how the CFTC has conducted analyses on the costs and staffing needs associated with establishing a new regulatory regime for digital commodities. He expressed the CFTC’s willingness to share these analyses with Sen. Fischer. He noted that this funding would come from users and would go toward personnel and hardware (such as data and cybersecurity hardware). He stated that the CFTC would work with Congressional appropriators to set a funding level and to offset its funding requests through fees assessed on market participants.

Sen. Cory Booker (D-NJ):

• Sen. Booker mentioned how he had previously joined a bipartisan group of Senators to develop digital assets legislation. He lamented that Congress’s inaction on digital assets legislation has resulted in many problems within the cryptocurrency markets, which have imperiled consumers, businesses, and the financial system. He commented that this inaction has led the cryptocurrency marketplace to be rife with fraud, manipulation, and abuse. He noted that while the SEC, the CFTC, and DoJ continue to pursue bad actors within the cryptocurrency space, he stated that the SEC and the CFTC lack sufficient resources and tools to oversee the cryptocurrency market. He expressed appreciation for the CFTC’s enforcement efforts within the cryptocurrency space and highlighted how half of the CFTC’s enforcement cases are related to cryptocurrencies. He remarked however that Congress must act to build federal regulator capacity to create a system that works better for customers, entrepreneurs, and industries and to ensure that cryptocurrency activity occurs within the U.S. He discussed how millions of retail customers are engaging with the financial sector through digital assets and commented that this engagement exposes these retail customers to significant risks. He highlighted how African Americans and working-class Americans are overrepresented within the digital assets space and how these populations are often victims of cryptocurrency-related frauds. He remarked that Congress must prioritize the needs of retail cryptocurrency customers through robust customer protections. He also stated that Congress must strengthen the CFTC’s oversight authorities through funding the Commission at appropriate levels. He expressed appreciation for the Committee’s work to develop bipartisan digital assets legislation. He then discussed how the CFTC is already conducting some oversight of digital assets alongside other financial regulators. He asked Chairman Behnam to discuss the regulatory and oversight gaps that the CFTC continues to face within the digital assets space. He also asked Chairman Behnam to address why legislation that is based on the Digital Commodities Consumer Protection Act of 2022 is important and urgently needed.
  • Chairman Behnam mentioned how the CFTC has brought 135 cryptocurrency-related enforcement cases and indicated that half of the CFTC’s enforcement cases in FY 2023 were cryptocurrency-related. He called it “staggering” that the CFTC must allocate half of its resources to a market that it does not regulate and to a market that it does not receive appropriations to oversee. He stated that this situation puts both the cryptocurrency and non-cryptocurrency markets at risk. He also commented that this situation exposes the large amount of fraud present within the cryptocurrency space.
• Sen. Booker interjected to comment that this large amount of fraud within the cryptocurrency space demonstrates that there exists a “stunning urgency” for the U.S. to oversee and regulate this space.
  • Chairman Behnam expressed agreement with Sen. Booker’s comment. He indicated that while the CFTC has had success in taking enforcement actions within the cryptocurrency space, he stated that the CFTC has used a “powerful, but limited” authority to pursue these actions. He elaborated that the CFTC can only respond to fraud and manipulation within the cryptocurrency space after the fraud and manipulation has already occurred. He remarked that the CFTC currently cannot adopt a comprehensive regulatory regime for the cryptocurrency space that would involve the registration of exchanges and individuals. He stated that the compliance associated with this registration would significantly reduce the fraud occurring within the cryptocurrency marketplace. He also commented that this registration would enable the CFTC to be proactive (rather than reactive) in overseeing the cryptocurrency marketplace.
• Sen. Booker asked Chairman Behnam to identify specific tools that the CFTC could use to better oversee the cryptocurrency space.
  • Chairman Behnam requested that Congress provide the CFTC with registration authority so that the Commission could register exchanges, custodians, and broker-dealers. He stated that such a registration system would include core principles regarding compliance with governance, financial resources, and the elimination of conflicts of interest. He discussed how these principles have been developed in the financial regulatory space and commented that these principles have enabled U.S. markets to be the most robust and desirable markets in the world. He remarked that the CFTC is not attempting to create a new regulatory system de novo and is instead seeking to model its regulatory system for cryptocurrencies off already successful regulatory models.
• Sen. Booker asked Chairman Behnam to identify one realistic consequence that would result from the U.S.’s failure to pass digital assets legislation within the coming months.
  • Chairman Behnam remarked that the CFTC’s top priority and responsibility is to protect customers. He warned that Congress’s failure to provide the CFTC with regulatory authority over digital commodities would result in continued fraud and manipulation (which would cause Americans to lose money).
• Sen. Booker remarked that Congress must pass digital assets legislation and expressed appreciation for the Committee’s efforts to develop such legislation. He called on Congress to swiftly pass such legislation and warned that inaction would cause more Americans to be harmed. He commented that there exists bipartisan support for such legislation.

Sen. Tommy Tuberville (R-AL):

• Sen. Tuberville described digital assets as the “future” and remarked that the U.S. must encourage digital assets innovation if it seeks to be the global leader within this space. He stated that this leadership would entail federal digital assets legislation and warned that the absence of such legislation would cause bad actors to dominate the digital assets space. He then discussed how many of his constituents use event contracts to hedge risks. He asked Chairman Behnam to provide assurances that the CFTC’s Event Contracts proposed rule would encourage innovation and not prevent or limit event contracts.
  • Chairman Behnam expressed his commitment to ensuring that any final rule from the CFTC regarding event contracts would support innovation.
• Sen. Tuberville then noted how two Democratic CFTC Commissioners are currently under consideration by the U.S. Senate for new roles. He asked Chairman Behnam to indicate whether these two Commissioners should recuse themselves from ongoing CFTC rulemakings as they undergo the U.S. Senate’s confirmation process.
  • Chairman Behnam testified that the CFTC has considered the appropriate roles for these CFTC Commissioners as these Commissioners undergo the U.S. Senate’s confirmation process. He stated that these Commissioners do not need to recuse themselves from ongoing CFTC rulemakings based on the CFTC’s legal analysis and the fact that these Commissioners are seeking positions in other federal government agencies.
• Sen. Tuberville interjected to ask Chairman Behnam to indicate whether allowing for these CFTC Commissioners to remain involved in ongoing CFTC rulemakings would create a conflict of interest.
  • Chairman Behnam remarked that recusals should occur in instances where a conflict of interest exists. He discussed how such recusals are most typically done in situations where a public official is transitioning to the private sector and the public official could make decisions that could benefit their future private employers. He noted that the two CFTC Commissioners in this particular situation are moving to other federal government agencies. He stated that the CFTC could not identify any conflicts of interest that would require these Commissioners to recuse themselves from becoming involved in ongoing Commission rulemakings. He expressed the CFTC’s willingness to review this decision and engage in dialogue with Sen. Tuberville’s office on this matter.
• Sen. Tuberville then mentioned how he had proposed bipartisan legislation with Sen. Kirsten Gillibrand (D-NY) that would prevent Chinese entities from acquiring U.S. digital asset broker-dealers, custodians, and exchanges. He asked Chairman Behnam to indicate whether he is supportive of this legislation.
  • Chairman Behnam remarked that the institutions that comprise financial markets are critical infrastructure and stated that attacks on these institutions would impact important economic sectors (such as agriculture and energy). He expressed appreciation for Sen. Tuberville’s legislation and called the legislation’s objective “very important” for preserving U.S. financial infrastructure.
• Sen. Tuberville then asked Chairman Behnam to opine on how mined crypto assets should be taxed. He noted how a person that grows corn is not required to pay tax on the corn until the corn is sold. He noted however that a person that mines Bitcoin is required to pay taxes on their mined Bitcoin, even before the Bitcoin is sold. He asked Chairman Behnam to indicate whether this situation is fair.
  • Chairman Behnam stated that he has not considered how crypto assets should be taxed. He commented that Sen. Tuberville’s analogy raises questions regarding the fairness of the U.S.’s current taxation of crypto assets. He noted however that the U.S. Internal Revenue Service (IRS) may have a valid rationale for how it taxes crypto assets. He suggested that the energy usage associated with cryptocurrency mining may impact the federal tax treatment of crypto assets. He expressed his interest in further exploring this topic and further discussing the topic with Sen. Tuberville. He commented however that he generally does not focus on the U.S. Tax Code.
• Sen. Tuberville interjected to note how people generally do not pay taxes on assets until the assets are sold. He stated however that the IRS will tax cryptocurrency miners immediately following their cryptocurrency mining activities. He asserted that Congress must address the taxation issues surrounding cryptocurrencies if it seeks to encourage people to become involved with cryptocurrencies. He argued that cryptocurrencies should be taxed the same as all other assets.

Sen. Raphael Warnock (D-GA):

• Sen. Warnock stated that while cryptocurrencies and digital commodities may be relatively new, he noted how basic consumer and investor protections are not new. He described these protections as the “pillars of a sound financial system.” He expressed appreciation for Congress’s bicameral and bipartisan work to address digital assets. He expressed interest in ensuring that any potential digital assets legislation would protect families and investors, help grow the U.S. economy, and protect consumers from being taken advantage of. He noted how critics of proposals to expand the CFTC’s regulatory authority to cryptocurrencies have argued that the CFTC lacks experience protecting retail investors. He also noted how these critics have argued that the CFTC lacks the staff experience and expertise to properly protect consumers. He asked Chairman Behnam to respond to these concerns and to address how the CFTC is properly equipped to oversee and regulate the cryptocurrency space.
  • Chairman Behnam discussed how the CFTC has a growing retail investor constituency and noted how these retail investors invest in futures contracts and event contracts. He also stated that the CFTC’s enforcement cases have historically been very related and oriented toward retail fraud. He noted how these enforcement cases often involve retail fraud in the forex and physical commodities markets. He commented that these retail frauds tend to involve Ponzi and “pump and dump” schemes. He stated that the CFTC’s experience pursuing retail fraud cases has led the Commission to build a robust OCEO and a vast network of local, state, and federal law enforcement partners. He acknowledged that the digital commodities market is a new market for the CFTC to oversee and that the CFTC would need to build up its resources and personnel. He stated however that the CFTC already has significant experience pursuing retail fraud enforcement cases and has a growing retail investor constituency. He contended that the CFTC could build off this experience if the Commission were to receive the authority to oversee and regulate digital commodities.
• Sen. Warnock also stated that any federal digital assets legislation must determine which assets the SEC should regulate and which assets the CFTC should regulate. He then noted how the CFTC had requested $399 million for the Commission’s FY 2025 budget. He indicated that this funding level would support 725 full-time staffers. He noted how the SEC by comparison had requested almost $2.6 billion for 5,703 full-time staffers. He asked Chairman Behnam to indicate whether the CFTC’s budget request is sufficient for the Commission to assume the new role of protecting consumers and investors who are trading digital assets. He further asked Chairman Behnam to indicate whether the CFTC requires additional funding and greater staff levels to protect consumers and investors who are trading digital assets.
  • Chairman Behnam stated that the CFTC’s current $399 million FY 2025 budget request is specifically for the Commission’s existing regulatory responsibilities. He emphasized that this funding is not for digital assets and indicated that this funding is instead meant to address futures, options, and swaps. He testified that the CFTC has conducted analysis regarding the CFTC’s funding needs if the Commission were to receive regulatory authority over digital commodities. He expressed his willingness to share the analysis with Sen. Warnock. He stated that the granting of this regulatory authority would lead the CFTC to make an additional budget request for more resources, more personnel, and new hardware systems. He commented that this additional funding request would be commensurate with any Congressionally imposed requirements.
• Sen. Warnock expressed interest in receiving the CFTC’s analysis regarding the additional costs associated with receiving expanded regulatory authority over digital assets.

Sen. Roger Marshall (R-KS):

• Sen. Marshall remarked that the U.S.’s “wide open” southern border with Mexico has resulted in a significant increase in fentanyl-related deaths and human trafficking. He also mentioned how the U.S. is experiencing significant illegal marijuana production. He stated that the organized crime associated with these activities is resulting in money laundering and commented that cryptocurrencies are facilitating this money laundering. He asked Chairman Behnam to address why criminals are choosing to use cryptocurrencies for their illegal activities.
  • Chairman Behnam described digital assets (including cryptocurrencies and stablecoins) as “borderless” and commented that these assets are easier than traditional fiat currencies to move internationally. He also stated that the current lack of digital assets regulation enables bad actors to more easily use digital assets for illegal purposes. He acknowledged that while there exist some state money transmission regulations and some federal AML, KYC, and CFT regulations, he commented that there remain regulatory gaps within this space.
• Sen. Marshall asked Chairman Behnam to indicate whether cryptocurrency companies should know the identities of their customers in the same way that banks know the identities of their customers.
  • Chairman Behnam answered affirmatively.
• Sen. Marshall then raised concerns that the SEC could have an outsized role in determining whether a given asset is a digital commodity. He also raised concerns that the CFTC could be sued if it were not to comply with the SEC’s determinations. He asked Chairman Behnam to indicate whether the SEC should determine which assets constitute digital commodities. He also asked Chairman Behnam to indicate whether it is wise to have two federal agencies fight over the designation of digital commodities.
  • Chairman Behnam answered no to both questions. He called it important for the SEC and the CFTC to work together to make determinations on assets that do not clearly resemble either securities or commodities. He noted how the SEC and the CFTC have a long history of working together to make such determinations.
• Sen. Marshall interjected to ask Chairman Behnam to indicate whether he has concerns that the CFTC could face lawsuits if a dispute arises regarding the status of a given digital asset.
  • Chairman Behnam acknowledged that the CFTC may face lawsuits if a dispute arises regarding the status of a given digital asset. He noted how the U.S. has extensive experience working to determine whether a given asset constitutes a commodity or a security. He called it important for the CFTC to preserve a core principle model and self-certification model for determining the status of assets. He also stated that the CFTC and the SEC should work together to find consensus around whether a given token constitutes a security or a commodity.
• Sen. Marshall remarked that Congress should pass digital assets legislation that provides full clarity regarding whether the SEC or the CFTC has jurisdiction over a given digital asset. He asked Chairman Behnam to indicate whether he has concerns that a lack of clarity in federal digital assets legislation might result in litigation.
  • Chairman Behnam remarked that federal digital assets legislation should provide a system for listing contracts that largely resembles the CFTC’s current listing system. He also stated that this legislation should contemplate a relationship between the CFTC and the SEC that fosters efficient cooperation. He further asserted that there could exist a system for listing contracts that does not prolong or delay the listing of contracts in a regulated market. He commented that the goal should be to swiftly get contracts and tokens listed on regulated markets to eliminate or reduce the risk of customer losses and enhance customer protections.
• Sen. Marshall asked Chairman Behnam to indicate whether the U.S. should make the CFTC the primary regulator of digital assets for the sake of simplicity.
  • Chairman Behnam remarked that the CFTC has the capacity, expertise, and experience to serve as the primary regulator of digital assets. He stated however that there might need to occur changes to the definitions of the terms “security” and “commodity” to accomplish this outcome.

Sen. Peter Welch (D-VT):

• Sen. Welch asked Chairman Behnam to confirm his view that the CFTC lacks the authority to regulate Bitcoin spot markets.
  • Chairman Behnam stated that the CFTC lacks the authority to regulate Bitcoin spot markets.
• Sen. Welch stated that if Congress were to expand the CFTC’s regulatory authority to encompass spot markets, then the CFTC’s enforcement authority would need to expand beyond mere anti-fraud authority. He asked Chairman Behnam to indicate whether the disclosure process for digital commodities should be the same as the current disclosure requirements for physical commodities.
  • Chairman Behnam indicated that his requested legislation from Congress would exclusively address commodity tokens. He noted how the CFTC’s disclosure regime for commodities is market-based and risk-based in nature (rather than about the commodity itself). He discussed how traditional commodities (such as wheat) do not require scheduled disclosures and are very decentralized in nature. He noted that the SEC’s disclosure regime for corporate disclosures by contrast involves centralized entities that have executive teams, boards of directors, audited financial statements, and material risks to their businesses. He stated that the SEC’s disclosure regime is meant to ensure that investors have enough information to make informed investment decisions regarding companies. He commented that these same dynamics do not exist in commodities markets. He remarked that the U.S. would therefore need to provide disclosures for digital tokens to investors related to their market and material risks. He commented that these disclosures for digital commodities would be very characteristic driven.
• Sen. Welch then discussed how digital assets consume an “astounding” amount of energy and noted how cryptocurrency mining had accounted for 2.3 percent of domestic electricity demand in 2023. He stated that the energy consumption of cryptocurrency mining would likely increase and commented that this energy consumption impacts electricity ratepayers. He raised concerns that the energy consumption associated with cryptocurrency mining will impact all Americans (including people that do not participate in the digital assets market). He asked Chairman Behnam to address whether the CFTC should consider requiring climate change-related risk disclosures for cryptocurrency mining operations.
  • Chairman Behnam stated that new legislation would be needed to require climate change-related risk disclosures for cryptocurrency mining operations. He expressed the CFTC’s willingness to work with Sen. Welch on developing such legislation. He testified that the CFTC is aware of the energy consumption of cryptocurrency mining and noted how this energy consumption has fluctuated over time. He highlighted how many cryptocurrency miners have pursued renewable energy sources to power their operations. He acknowledged however that the energy consumption associated with cryptocurrency mining operations have been “staggering” in some instances. He remarked that the U.S. should be cognizant of this energy consumption given its current high energy costs and expected growing demand for energy to power AI applications. He also mentioned how there have been legislative proposals directing federal agencies to study the energy consumption of cryptocurrency mining operations, the impacts of this energy consumption, and potential solutions to reduce this energy consumption or to shift this energy consumption to renewable energy sources. He reiterated the CFTC’s willingness to work with Sen. Welch on addressing this issue.

Sen. Kirsten Gillibrand (D-NY):

• Sen. Gillibrand noted how Chairman Behnam had previously told the Committee in September 2022 that the CFTC is the correct federal regulator to oversee the digital commodities market. She discussed how legislative efforts in both chambers of Congress seek to determine pathways to bring cryptocurrencies into the regulatory perimeter. She noted that many of these efforts would empower the CFTC to lead the regulation of digital commodities. She asked Chairman Behnam to indicate whether the CFTC is ready to assume this regulatory role over digital commodities.
  • Chairman Behnam remarked that the CTFC’s experience and expertise with cryptocurrencies is unmatched among federal regulators. He elaborated that this experience and expertise includes enforcement activities and the regulation of futures contracts involving Bitcoin and Ether. He stated that the CFTC has strong familiarity with cryptocurrency stakeholders and the cryptocurrency market. He then recounted how the CFTC had successfully implemented a global regulatory regime for the swaps market (which he highlighted is a multi-trillion-dollar global market) under Dodd-Frank. He stated that this experience demonstrates the CFTC’s ability to establish new regulatory regimes and expressed confidence in the CFTC’s ability to oversee the digital commodities market.
• Sen. Gillibrand asked Chairman Behnam to discuss the risks associated with U.S. inaction on digital assets and to address how federal legislation could provide additional regulatory and jurisdictional clarity for digital assets. She further asked Chairman Behnam to discuss how the CFTC coordinates with the SEC on digital assets regulation, registration, rulemaking, and enforcement.
  • Chairman Behnam remarked that his top priority is protecting customers and warned that Congressional inaction on digital assets would cause the CFTC’s enforcement docket to grow. He emphasized that the CFTC can only react to wrongdoings after the wrongdoings have occurred and noted that the CFTC cannot regulate, register, and surveille the digital assets market. He also discussed how there exist concerns surrounding the lack of regulatory certainty for digital assets, which impedes entrepreneurs and innovators. He mentioned how he serves as Vice Chair of the International Organization of Securities Commissions (IOSCO) and stated that the U.S. lags other countries in terms of regulating digital assets. He called it important for the U.S. to fill its current regulatory gaps regarding digital assets. He then discussed how the CFTC coordinates with the SEC and the DoJ on both civil and criminal enforcement cases. He stated however that the CFTC does not coordinate as much with the SEC and the DoJ on regulatory matters because the CFTC currently lacks regulatory authority over the digital commodities spot market. He expressed hope that Congress would provide the CFTC with regulatory authority over the digital commodities spot market.
• Sen. Gillibrand then mentioned how there exist lawmaker concerns regarding the safety and stability of digital commodities and digital assets. She asked Chairman Behnam to address how the CFTC balances its need to ensure consumer safety with its efforts to foster digital commodity innovation. She also asked Chairman Behnam to discuss how the Commodity Exchange Act’s core principles be applied to cryptocurrency markets and potential legislation to encourage consumer protection and market integrity moving forward.
  • Chairman Behnam remarked that the Commodity Exchange Act’s core principles provide an efficient, robust, and “well-worn” system. He indicated that these core principles include orderly and fair trading, assurances that products are not readily susceptible to fraud and manipulation, system safeguards regarding cybersecurity and operational risks, and assurances that entities have appropriate financial resources. He stated that the CFTC will develop more prescriptive rules based on these core principles. He commented that this model has worked well in all financial markets and asserted that this model should be applied to cryptocurrency markets. He then discussed how the CFTC maintains its Office of Technology Innovation (OTI) and numerous advisory committees to study innovation. He explained that these advisory committees are engaged with industry, solicit stakeholder feedback, and educate stakeholders on the existing capabilities of the CFTC. He stated however that the CFTC’s regulatory authority is currently limited to futures and commented that the futures market is relatively small. He remarked that the CFTC would work to engage with the digital assets industry to support innovation if the Commission were to receive regulatory authority over digital assets.

Sen. Amy Klobuchar (D-MN):

• Sen. Klobuchar noted how the market capitalization of digital assets has recovered to over $2 trillion since Chairman Behnam had last appeared before the Committee. She added that Bitcoin had recently hit a record high price of $73,000. She asked Chairman Behnam to indicate whether the CFTC requires more statutory authority to oversee the digital assets market.
  • Chairman Behnam answered affirmatively.
• Sen. Klobuchar remarked that Congress must work in a bipartisan manner to reinforce the CFTC’s authority and to ensure that the CFTC possesses the necessary resources to protect consumers and maintain market stability. She stated that this effort would involve the consideration of legislation to regulate digital assets while fostering innovation and ensuring a fair regulatory environment. She noted that Chairman Behnam had previously discussed how the CFTC maintains a “rigorous and deep” disclosure regime for commodities market participants. She highlighted how the U.S.’s disclosure regime for commodities differs from its disclosure regime for securities. She also called it important to ensure that consumers have sufficient disclosures regarding digital assets in addition to disclosures for market participants. She asked Chairman Behnam to indicate whether disclosures regarding digital assets are as important as disclosures regarding the entities trading the digital assets.
  • Chairman Behnam answered affirmatively.
• Sen. Klobuchar then discussed how AI technology is set to become one of the most significant technological advances of the current era. She stated that while AI technology can support significant innovation, she asserted that the U.S. must also adopt protections for this technology to guard against its misuse. She mentioned how Congress is currently working to develop legislation to address this technology. She recounted how the CFTC had issued a January 2024 advisory warning the risks of AI-driven cryptocurrency scams. She asked Chairman Behnam to discuss the kinds of fraudulent activities that he is observing with the use of AI technology in digital asset markets.
  • Chairman Behnam mentioned how the CFTC has worked to solicit comments from industry stakeholders regarding how AI technology is being used in financial markets. He testified that the CFTC is currently reviewing these comments and deciding whether to pursue a rule, advisory, or guidance. He then discussed how bad actors are using AI technology to track and identify vulnerable investors and individuals as targets for schemes. He discussed the prevalence of romance scams and noted how the U.S. Federal Bureau of Investigation (FBI) had found that these scams totaled $3 billion in 2023. He explained that these scams involve the stealing of money from people in search of partnership and friendship. He testified that the CFTC is working with federal partners to address these scams and commented that AI technology is driving much of this scam activity. He explained that these bad actors use AI technology to determine where users are located, identify people with money, determine where people are banking, and identify social patterns.
• Sen. Klobuchar then discussed how cryptocurrencies operate in two areas: on-chain decentralized users and off-chain centralized institutions. She highlighted how most of the federal digital asset legislative proposals under consideration focus on centralized platforms (rather than on on-chain activities). She asked Chairman Behnam to indicate whether on-chain and DeFi activities are more difficult to regulate. She also asked Chairman Behnam to provide recommendations for how Congress should approach DeFi activities.
  • Chairman Behnam discussed how many large and more sophisticated financial institutions are looking at on-chain technology as a means for making payment processing and settlement more efficient. He testified that the CFTC is working with industry and other partners on identifying how the Commission intersects with this technology. He noted how decentralization is a fundamental element of blockchain technology and stated that this decentralization raises “interesting” policy and legal questions. He remarked that the CFTC is cautious not to over-regulate this technology and commented that this technology could support innovations and efficiencies.
• Sen. Klobuchar indicated that her question period time had expired and that she would submit additional questions for the hearing’s record. She also expressed appreciation for the Committee’s work to develop federal digital assets legislation.

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

• Ranking Member Boozman discussed how multiple designated contract markets (DCMs) currently list futures contracts with an underlying digital asset. He noted that these contracts have all been listed through the self-certification process without CFTC intervention. He commented that the digital assets underlying these contracts have not caused any issues. He noted however that there exist concerns that the CFTC is too weak and ineffective to handle spot digital commodities self-certification. He asked Chairman Behnam to indicate whether the CFTC is equipped to handle spot digital commodities self-certification.
  • Chairman Behnam remarked that the CFTC is equipped to handle spot digital commodities self-certification. He stated however that if the Committee were to provide the CFTC with additional authority to regulate the digital commodities market, then the CFTC would also require additional funding to carry out this new responsibility. He asserted that the CFTC is well-positioned to regulate the digital commodities market from a policy and expertise perspective.
• Ranking Member Boozman called the CFTC’s request for additional resources sensible if it is to regulate digital commodities. He then noted how there are proposals to have the SEC first determine whether an asset constitutes a security and then have the CFTC follow up with its own determination on the asset’s status. He indicated that the CFTC could sue the SEC under this proposal in the event of a disagreement regarding an asset’s status. He noted how a similar process exists for novel derivatives products. He stated however that many industry participants argue that this proposal’s process is unworkable and that this process has “largely killed” the novel derivatives market. He also acknowledged that the Committee does not have jurisdiction over the SEC. He asked Chairman Behnam to indicate whether Congress should put the CFTC in the “losing position” of having to sue the SEC whenever disagreements arise regarding an asset’s status.
  • Chairman Behnam remarked that proposals that would require the CFTC to sue the SEC when disagreements arise regarding an asset’s status would put the CFTC in a difficult position. He added that the CFTC would be unlikely to pursue all of its disagreements with the SEC through litigation. He described the CFTC’s self-certification process a “well-worn” and noted how the self-certification process enables the listing of significantly more products. He stated that the self-certification process forces both the market participant and the regulator to be involved in the listing process and asserted that this process provides for an efficient system. He commented that Congress should use the CFTC’s current self-certification process as a model for digital assets legislation.
• Ranking Member Boozman then indicated that Congress has never held a hearing exclusively focused on DeFi applications to his knowledge. He stated however that there exist many policy proposals that impede the use of DeFi applications. He mentioned how the IRS’s recent final broker rule would exclude DeFi applications and how the European Union (EU) has not yet addressed DeFi. He asked Chairman Behnam to indicate whether the CFTC should focus on regulating centralized exchanges rather than pursuing regulations for DeFi applications. He commented that the CFTC lacks DeFi expertise.
  • Chairman Behnam remarked that the CFTC should prioritize regulating centralized exchanges. He mentioned how the CFTC has brought a few DeFi enforcement cases and has engaged with DeFi market participants. He stated however that centralized exchanges currently pose greater challenges regarding customer protections, fraud, and manipulation. He asserted that centralized exchanges currently have the most concerning regulatory gap. He stated that DeFi applications would be more challenging for the CFTC to address and testified that the CFTC has received complaints regarding DeFi applications. He acknowledged that while CFTC has a nexus to address DeFi applications, he asserted that the CFTC and the Committee should engage in further consideration and discussion of DeFi issues before DeFi regulations are pursued.
• Ranking Member Boozman then noted how Congress had made clear that the CFTC’s regulatory jurisdiction over swaps located outside of the U.S. is limited to swaps with a direct and significant connection with the U.S. He warned that unfettered regulatory overreach in this market could lead to foreign retaliation, which would harm U.S. market participants and swaps users. He also noted how Chairman Behnam had highlighted how the CFTC’s resources are limited during the hearing. He asked Chairman Behnam to address why the CFTC should act as “the world’s crypto police.”
  • Chairman Behnam remarked that the CFTC should not act as “the world’s crypto police.” He mentioned how he serves as Vice Chair of IOSCO and highlighted how many jurisdictions have established “well-built” regulatory systems for digital assets during his tenure as IOSCO Vice Chair. He stated that the U.S.’s failure to establish a regulatory system for digital assets harms U.S. enforcement and customer protection efforts. He also stated that the U.S.’s inability to compete with other jurisdictions on digital assets regulation undermines U.S. innovation and economic development. He commented that the U.S. has the benefit of being the world’s largest market and that the U.S. does not need to be the first mover in the digital assets space. He asserted however that the U.S. must move to establish a regulatory regime for digital assets. He then remarked that the CFTC must consider how digital asset activities impact U.S. customers. He contended that entities, individuals, and organizations should trigger U.S. nexus if their activities impact U.S. customers, regardless of the location of these entities, individuals, and organizations. He acknowledged that while the establishment of nexus is not always straightforward, he commented that the CFTC has been generally successful in setting rules for nexus through its implementation of Title VII of Dodd-Frank. He expressed confidence that the CFTC could establish a strong process for establishing nexus within the digital assets market.

Full Committee Chairman Debbie Stabenow (D-MI):

• Chairman Stabenow asked Chairman Behnam to explain how the CFTC would currently respond to situations where the SEC asserts that an asset constitutes a security.
  • Chairman Behnam remarked that the CFTC and the SEC have a long history of working “well” together. He stated that the two Commissions understand their missions, desired outcomes, and the importance of coordination. He noted how the assets that trigger classification disputes between the CFTC and the SEC typically involve narrow-based and broad-based indices. He discussed how the CFTC’s self-certification process for assets involves dialogue between the market registrant and the CFTC. He noted how this process can take months to complete and that this process ensures that the product adheres to the CFTC’s rules and regulations. He also noted that market participants will engage with the CFTC in instances where there exists uncertainty regarding their asset’s status as a commodity. He reiterated that the CFTC works closely with the SEC when disputes arise regarding the status of a given asset. He stated that the CFTC works to be respectful and mindful of the SEC’s beliefs and expressed the CFTC’s intention to continue this approach with respect to novel products. He remarked that federal digital assets legislation must develop a regulatory approach to digital assets that both provides efficiency and ensures that the SEC and the CFTC can reach consensus regarding the status of novel assets.
• Chairman Stabenow stated that while Congress should not establish a policy framework for digital assets that allows for industry participants to pick their regulators, she asserted that Congress should not establish such a policy framework that would prevent the CFTC from pursuing the regulation of commodities. She remarked that this policy framework for digital assets ought to be efficient, be focused, and support the public interest.