The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital Asset Markets (U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion, U.S. House Committee on Agriculture, Subcommittee on Commodity Markets, Digital Assets, and Rural Development)

Hearing	The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital Asset Markets
Committee	U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion, U.S. House Committee on Agriculture, Subcommittee on Commodity Markets, Digital Assets, and Rural Development
Date	May 10, 2023

 

Hearing Takeaways:

• The Current U.S. Digital Assets Landscape: The hearing largely focused on the U.S.’s current digital assets landscape and how the U.S.’s current digital asset policies (or lack thereof) are impacting this landscape. While several Members, Mr. Durgee, Mr. Kulkin, Mr. Santori, and Mr. Schoenberger expressed optimism that digital assets and blockchain technology can facilitate payments, provide investment opportunities, increase data privacy, enable property rights, and provide logistics capabilities, several other Members expressed concerns that digital assets can enable illicit activities and undermine investor and consumer protections.
  • Lack of Policy Clarity Surrounding the Taxonomy of Digital Assets: A key area of concern and debate at the hearing involved the uncertainty around when digital assets can be considered securities, commodities, or some other category. Several Members, Mr. Kulkin, and Mr. Santori stated that conflicting policies and actions from the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) further contribute to this confusion. They warned that this lack of policy clarity makes it difficult for stakeholders to comply with federal securities and commodities laws, which can chill innovation and undermine protections for U.S. investors and consumers. Financial Services Subcommittee Ranking Member Stephen Lynch (D-MA) disputed the claims that there exists a lack of policy clarity. He stated that the digital assets industry is making these claims as an excuse to evade compliance with existing federal laws.
  • Gaps in Digital Asset Disclosures: Several Members, Mr. Durgee, Mr. Santori, and Mr. Massad expressed concerns over the U.S.’s lack of disclosures for digital assets. Financial Services Subcommittee Chairman French Hill (R-AR) and Mr. Santori expressed concerns that the SEC’s current disclosure regime is ill-suited for many of the special characteristics of digital assets
  • Regulation of Digital Asset Exchanges: Rep. Sean Casten (D-IL) and Mr. Blaugrund raised concerns that existing digital asset exchanges have failed to register with the appropriate regulators, which can result in U.S. consumers and investors lacking key benefits and protections. Several Republicans and Mr. Santori raised concerns however that current federal policies are not providing digital asset exchanges with a viable pathway for listing digital assets on their platforms.
  • Enforcement Cases within the Digital Assets Space: Several Members and the hearing’s witnesses highlighted how the CFTC and the SEC have brought several successful enforcement cases against digital asset firms using their existing enforcement and regulatory authorities. Mr. Kulkin raised concerns however that the U.S.’s current legal and regulatory framework for digital assets limits the CFTC’s enforcement authority solely to fraud and manipulation in the digital commodities spot market. Rep. Brad Sherman (D-CA) also suggested that the cryptocurrency industry’s political influence has prevented the SEC from shutting down digital asset exchanges that list unregistered digital asset securities.
  • International Regulatory Landscape and Structures for Digital Assets: Several Members, Mr. Durgee, Mr. Santori, and Mr. Schoenberger expressed concerns that other countries and jurisdictions have more advanced regulatory structures for digital assets than the U.S. They expressed particular concerns over the European Union’s (EU) recently approved Markets in Crypto-Assets Regulation (MiCA), which will provide a comprehensive digital assets regulatory framework. They raised concerns that these foreign regulatory structures for digital assets could impede the U.S.’s international competitiveness in digital assets innovation and activity. They warned that many foreign jurisdictions lack the same values, consumer protections, and investor protections, which can ultimately result in a less safe digital assets environment. Mr. Massad argued however that these concerns are overstated and noted how regulatory clarity is only one factor for determining where to locate digital assets activity. He also stated that the EU’s MiCA will likely experience interpretation questions. Rep. Sherman argued that cryptocurrencies are not beneficial products and that the U.S. should therefore not seek to become a global leader in the digital assets space.
  • Incompatibility of Digital Assets with Existing Federal Crowdfunding Laws: Mr. Durgee raised concerns that that digital asset projects cannot effectively make use of the regulatory exemptions found in the Jumpstart Our Business Startups (JOBS) Act and the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure (CROWDFUND) Act (which is Title III of the JOBS Act). He stated that the inability of digital asset projects to make use of these exemptions prevents many retail investors from participating in potentially lucrative investment opportunities.
• Potential Federal Digital Assets Legislation: Most Members, Mr. Durgee, Mr. Kulkin, Mr. Santori, Mr. Schoenberger, and Mr. Massad expressed interest in developing bipartsian federal legislation to provide a regulatory framework for digital assets. They stated that federal legislation is necessary for supporting innovation, ensuring consumer protection, and ensuring CFTC and SEC coordination and collaboration. 
  • Taxonomy of Digital Assets: Most Members, Mr. Kulkin, and Mr. Schoenberg expressed interest in having federal digital assets legislation provide a framework for clarifying the asset type of digital asset tokens. These asset types could include commodities, securities, and utility tokens. They stated that this legislation could clarify the test for assessing an asset’s type under the U.S. Supreme Court’s SEC v. W.J. Howey Co. decision (known as the Howey test) and the point where an asset becomes sufficiently decentralized as to warrant a change in classification. Financial Services Subcommittee Ranking Member Stephen Lynch (D-MA), Mr. Massad, and Mr. Blaugrund argued however that Congress should not myopically focus on whether digital asset tokens are securities or commodities and stated that classification process reforms might result in more uncertainty and the creation of “loopholes.” Mr. Massad further remarked that a digital asset might possess features of both a commodity and a security and may therefore be regulated as both.
  • Investor Disclosures for Digital Assets: Several Members, Mr. Durgee, Mr. Kulkin, and Mr. Santori remarked that federal digital assets legislation could provide a disclosure framework for digital asset projects that is designed for the unique characteristics of said projects. They stated that these disclosures could include product certifications, commercial and source code details about the products, attestations that the products are not suspectable to fraud and manipulation, information about product financial integrity protections, and material about token supply and governance mechanisms. Mr. Durgee commented however that disclosure requirements for digital assets are counterintuitive. He elaborated that the goal of digital assets is to achieve decentralization and stated that most digital asset disclosure requirements involve centralized disclosures. 
  • Delegation of Authorities for Digital Assets Regulation: Another key area of conversation at the hearing involved how to delegate authorities across the CFTC and the SEC for regulating digital assets (and particularly the digital asset spot market). Several Members, Mr. Kulkin, and Mr. Santori stated that federal digital assets legislation should provide clear jurisdictional boundaries for these agencies to oversee the digital assets market. They noted how these agencies had previously worked together to successfully oversee the swaps market. Financial Services Subcommittee Ranking Member Lynch and Rep. Sean Casten (D-IL) noted however that the CFTC has significantly fewer employees than the SEC and raised concerns over the CFTC’s ability to oversee the digital assets market. Rep. Brad Sherman (D-CA) further contended that the SEC and the CFTC should be provided with overlapping jurisdiction over digital assets and stated that redundant oversight would best protect U.S. consumers and investors.
  • Establishment of a Novel Regulatory Framework for Digital Assets: Several Members and Mr. Blaugrund stated that the U.S. should not create an entirely novel regulatory structure for digital assets. They warned that a novel regulatory structure might enable digital asset firms to evade existing investor protections and orderly market requirements. Mr. Schoenberger expressed concerns however that the application of existing regulations to all digital assets would be inadequate for addressing emerging technologies.
  • Establishment of a Registration Pathway for Digital Assets at the SEC and the CFTC: Several Democrats, Mr. Massad, and Mr. Blaugrund expressed concerns that many digital asset firms are failing to register their products with the SEC and the CFTC and commented that this failure to register is enabling these firms to evade regulation. Several Members, Mr. Kulkin, and Mr. Santori stated however that there currently does not exist a viable registration pathway for digital assets (despite the claims of SEC Chairman Gary Gensler) and called on Congress to establish a workable registration pathway for digital assets. Mr. Blaugrund recommended that the SEC consider creating some form of on-ramp to allow for existing tokens to enter the regulatory system.
  • CFTC Resources: Democrats, Mr. Durgee, Mr. Kulkin, and Mr. Massad expressed concerns that the CFTC would be ill-equipped to assume new responsibilities regarding the digital assets market without receiving additional funding and resources. They stated that federal digital assets legislation must provide more funding and resources to the CFTC if it seeks to task the Agency with regulation and oversight of the digital assets market.
  • Self-Custody of Digital Assets: Financial Services Subcommittee Vice Chairman Warren Davidson (R-OH) and Mr. Santori expressed interest in ensuring that consumers will be able to self-custody digital assets as part of any federal digital assets legislation.
  • Digital Identity Requirements for Digital Asset Transactions: Rep. Bill Foster (D-IL) argued that digital asset wallets will need to be associated with a traceable government-issued digital identity to prevent frauds and illicit activities. He stated that governments should be able to view these identities through obtaining a warrant. Mr. Kulkin remarked that if the CFTC had regulatory authority over the spot market for digital assets, then the CFTC could require digital asset exchanges to conduct know your customer (KYC) surveillance as part of their onboarding processes.
  • Mr. Massad’s Proposal for Digital Assets Legislation: Mr. Massad argued that federal legislation to categorize digital assets would likely contain ambiguities and loopholes. He stated that Congress should instead pass legislation that would require that any trading or lending platform that uses or trades Bitcoin or Ethereum comply with a set of principles for all of its activities. He noted how Bitcoin and Ethereum are the most popular digital assets and that this proposal would effectively ensure that all major digital asset exchanges would provide investor protections. Rep. John Rose (R-TN) and Mr. Kulkin stated however that there exist nearly 10,000 digital assets and that Mr. Massad’s proposal’s narrow focus on Bitcoin and Ethereum would leave much of the digital assets market unregulated. Mr. Massad also recommended that Congress direct the SEC and the CFTC to develop joint-rules implementing the aforementioned principles for digital assets or create a self-regulatory organization (SRO) that would develop and enforce rules for digital assets. He commented that the advantage of an SRO is that it could be funded by the industry and indicated that this SRO would have its rules subject to SEC and CFTC approval. However, Mr. Kulkin expressed concerns that a new SRO would take time to implement and noted how there is already significant activity underway in the digital assets space.
• Additional Digital Asset Issues: In addition to the aforementioned topics, Members and the hearing’s witnesses used the hearing to raise several digital asset issues.
  • Congressional Investigation into FTX’s Recent Collapse: Financial Services Chairman French Hill (R-AR) indicated that the U.S. House Committee on Financial Services is continuing to investigate the collapse of digital assets exchange FTX in a bipartisan fashion.
  • Use of Digital Assets in Fraud and Illicit Activity: Several Democrats raised concerns over the prevalence of digital assets in fraud and illicit activity and highlighted how wash trades are prevelnt within the digital assets space. However, Mr. Santori expressed doubts that a significant volume of wash trades involving digital assets are taking place. He noted how there are transaction fees associated with blockchain-based trades and commented that wash trading would be very expensive to perform at a large scale.
  • Purported Financial Inclusion Benefits: Several Members and Mr. Durgee expressed interest in the potential financial inclusion benefits of digital assets. Mr. Durgee highlighted how digital assets provide early-stage investing opportunities that retail investors could not otherwise access. However, several Democrats disputed this claim and noted how digital assets have had worse financial performance in recent years relative to the S&P 500. Rep. Al Green (D-TX) also lamented the lack of gender and racial diversity of the hearing’s witnesses and questioned Congress’s commitment to ensuring that digital assets policy will actually promote diversity and inclusion.
  • Impact of Digital Assets on Climate Change: Rep. Andrea Salinas (D-OR) raised concerns over the digital assets industry’s impact on climate change and mentioned how her state of Oregon had enacted legislation to address the industry’s carbon dioxide emissions. Mr. Massad stated that while these climate change impacts are concerning, he stated that the U.S. does not typically address energy usage issues through financial regulation. Mr. Durgee stated that digital asset firms have a financial incentive to reduce their energy usage. Mr. Schoenberger stated that not all cryptocurrency firms and organizations consume excessive amounts of energy and testified that the Web3 Foundation’s Polkadot network has very low annual energy consumption.

Hearing Witnesses:

1. Mr. Andrew Durgee, Head of Republic Crypto, Republic
2. Mr. Matthew Kulkin; Partner and Chair, Futures and Derivatives Practice, Wilmer Cutler Pickering Hale and Dorr LLP; former Director, CFTC Division of Swap Dealer and Intermediary Oversight
3. Mr. Marco Santori, Chief Legal Officer, Kraken Digital Asset Exchange
4. Mr. Daniel Schoenberger, Chief Legal Officer, Web3 Foundation
5. Mr. Timothy Massad, Research Fellow, Harvard Kennedy School Mossavar-Rahmani Center for Business and Government and Director, M-RCBG DigitalAssets Policy Project
6. Mr. Michael Blaugrund, Chief Operating Officer, New York Stock Exchange

Member Opening Statements:

Agriculture Subcommittee Chairman Dusty Johnson (R-SD):

• He remarked that the U.S. House Committee on Agriculture and the U.S. House Committee on Financial Services will need to work together to meaningfully address the topic of digital assets.
  • He applauded the two Committees for their recent cooperation to provide certainty and develop a “sensible” compliance framework for the digital assets space.
• He stated that digital assets and blockchain technology hold “real promise” and noted how these technologies can facilitate payments, increase data privacy, and help manage supply chain logistics.
  • He commented that these technologies will empower individuals to make better business decisions.
• He remarked however that current federal laws and regulations provide few “rules of the road” for parties that want to engage with emerging digital asset technologies.
  • He commented that the current policy uncertainty surrounding digital assets does not serve digital asset marketplace participants well.
• He discussed how the CFTC and the SEC are continuing to debate whether certain digital assets should be considered either securities or commodities.
  • He asserted that these conflicting enforcement decisions create further confusion in the industry and the market.
• He remarked that collaboration between the two Committees will enable Congress to address digital asset questions and called Congressional action “essential” for providing legal clarity and robust oversight to digital asset market participants and intermediaries.
• He stated that digital asset market participants will benefit from the longstanding investor protections in securities and commodities markets and from new ideas, services, and opportunities that come from digital assets innovation.
• He discussed how governments around the world are working to address digital assets and expressed concerns that most Group of 20 (G20) countries have already developed more advanced policy frameworks for digital assets.
  • He commented that the U.S.’s lack of a policy framework for digital assets is enabling these other countries to establish themselves as hubs for the development of the digital assets ecosystem.
  • He mentioned how the EU had recently approved its MiCA and called this Regulation the world’s first comprehensive regulatory framework for digital assets.
• He remarked that Congress must provide clear direction as to how to best regulate the growing digital assets sector to ensure that the U.S. will remain the leader in financial and technological innovation.

Agriculture Subcommittee Ranking Member Yadira Caraveo (D-CO):

• She mentioned how the U.S. House Committee on Agriculture’s Subcommittee on Commodity Markets, Digital Assets, and Rural Development had recently held a hearing to consider the U.S.’s digital asset spot market regulatory gap, avenues to strengthen digital asset customer protections, and the need for sufficient resources and funding mechanisms at the CFTC.
  • She commented that any federal digital assets legislation must address these issues.
• She stated that the “sprawling” nature of the digital assets industry highlights the importance of cross-jurisdictional cooperation and communication.
• She mentioned how President Biden had issued his Executive Order (EO) on Ensuring Responsible Development of Digital Assets, which directs federal agencies to work jointly on issuing reports on various digital asset subjects.
  • She noted how this EO had spawned the October 2022 U.S. Financial Stability Oversight Council (FSOC) Report on Digital Asset Financial Stability Risks and Regulation.
• She then discussed how the scale of digital asset activities has increased “significantly” in recent years both in terms of market participation and use cases.
• She stated that while federal financial regulators have successfully made use of their existing enforcement and regulatory authorities, she noted how there remain charges of rampant and willful non-compliance with some of the biggest market participants.
  • She commented that providing clarity to the digital assets industry must support a robust enforcement regime and prioritize market participants.
• She lastly discussed how there are concerns as to whether the CFTC possesses sufficient resources to regulate the digital asset spot market.
  • She mentioned how the CFTC had previously had its authorities expanded under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to cover swaps.
• She stated that the CFTC has “dutifully” exercised its enforcement authorities in response to the growth of the digital assets industry.
• She contended that any federal digital assets legislation must include a funding mechanism for the CFTC to better support the Agency in overseeing the digital assets space.

Financial Services Subcommittee Chairman French Hill (R-AR):

• He remarked that Congress’s actions in 2023 will dictate whether the digital assets ecosystem can thrive within the U.S.
• He stated that the U.S. currently lacks a “workable” regulatory framework from either the SEC or the CFTC for digital asset issuers and intermediaries.
  • He disputed the assertion that the status quo of existing securities and commodities laws is sufficient and that digital asset firms are willfully avoiding compliance with existing laws.
• He asserted that there is bipartisan interest in developing federal legislation to provide legal and regulatory clarity for the digital assets space.
  • He mentioned how U.S. House Committee on Financial Services Ranking Member Maxine Waters (D-CA) had called for federal digital assets legislation in November 2022.
  • He also mentioned how U.S. House Committee on Financial Services’s Subcommittee on Subcommittee on Digital Assets, Financial Technology and Inclusion Ranking Member Stephen Lynch (D-MA) had stated that the circumstances surrounding FTX’s collapse demonstrate the need to develop “thoughtful” digital assets regulation to protect U.S. investors.
• He stated that FTX’s recent collapse demonstrates that the U.S. cannot trust offshore cryptocurrency exchanges.
• He called on the U.S. to develop federal legislation to provide legal and regulatory clarity for U.S. digital asset companies that will protect U.S. investors and consumers and prevent future turmoil within the digital assets space.
  • He warned that the U.S.’s failure to provide a “functional” framework for digital assets will cause risky activity to move abroad to less-regulated jurisdictions.
  • He commented that this result will harm U.S. investors, innovators, and consumers.
• He also highlighted how the U.S. House Committee on Financial Services had worked in a non-partisan way to get former FTX CEO Sam Bankman-Fried to testify before it prior to Mr. Bankman-Fried’s arrest in the Bahamas.
  • He emphasized that the Committee had not decided to cancel Mr. Bankman-Fried’s scheduled appearance before the Committee.
• He noted that FTX’s bankruptcy process will take a long time to resolve and added that Mr. Bankman-Fried’s criminal trial might experience delays.
  • He expressed the U.S. House Committee on Financial Services’s commitment to investigate and respond to FTX’s collapse in a bipartisan fashion.
• He reiterated his call for bipartisan legislation to address digital assets and asserted that the U.S. should establish a regulatory framework that spurs innovation, develops clear standards, sets jurisdictional boundaries, and protects consumers.
  • He commented that such legislation would neither exempt cryptocurrencies from existing rules or establish an entirely novel regulatory regime for digital assets.

Financial Services Subcommittee Ranking Member Stephen Lynch (D-MA):

• He raised concerns that a focus on determining whether cryptocurrencies constitute either securities or commodities and should be subject to either SEC or CFTC regulation may support a digital assets industry-driven narrative that there exists a “turf war” between the SEC and the CFTC.
• He disputed the digital assets industry’s claims that it lacks regulatory clarity and that its products are not well-suited for the U.S.’s existing regulatory systems.
  • He asserted that the digital assets industry is making these claims because they know that the current prevailing business models for cryptocurrency firms are not compatible with orderly markets or investor protection laws.
• He contended that the digital asset industry’s problem is not regulatory ambiguity and is instead “mass non-compliance” with existing laws.
• He stated that the establishment of a new regulatory structure for digital assets would likely undermine well-established laws and regulations.
  • He expressed concerns that the establishment of a new structure could be viewed as “light touch” and encourage other industries to modify their products so that they can evade investor protections and orderly market requirements.
• He noted how the U.S. has a longstanding and comprehensive framework of securities laws and rules designed to protect investors, promote market integrity, and facilitate capital formation.
  • He commented that this framework has long sustained “massive” innovation in the U.S. financial sector.
• He discussed how the SEC maintains important requirements to protect investors and the markets, which include laws governing securities, broker-dealers, security exchanges, and clearing and settlement agencies.
  • He indicated that these laws require that companies make certain disclosures, segregate customer funds, keep records, and protect customers.
• He stated that proposals that would create a “carve out” from these laws for digital assets would be redundant and unnecessary.
• He reiterated his assertion that Congress should not myopically focus on whether digital asset tokens are either securities or commodities and contended that Congress should instead examine the impact of the intermediaries that facilitate digital asset tokens.
  • He noted that these intermediaries include digital asset exchanges, lenders, and wallet holders.
• He stated that digital asset firms want to serve multiple functions and asserted that some of these firms want to flout the rules for exchanges, broker-dealers, and clearing and settlement agencies.
  • He mentioned how some digital asset firms have filed lawsuits against the SEC to avoid complying with these rules.
• He highlighted how the SEC has brought 130 enforcement actions against digital assets firms and has prevailed in every single enforcement action.
• He concluded that Congress should not establish a separate regulatory regime for digital assets.

Financial Services Full Committee Chairman Patrick McHenry (R-NC):

• He remarked that the hearing’s purpose is to develop digital assets legislation that will provide assurances to the digital assets marketplace and consumers, close regulatory gaps, and provide consistent regulation across asset classes.
  • He commented that this legislation is necessary to support innovation, ensure consumer protection, and ensure CFTC and SEC coordination and collaboration.

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

• She recounted how the Biden administration had raised concerns with the U.S. House Committee on Financial Services over the prospects of bank-like runs for stablecoins.
• She mentioned how she had worked to develop comprehensive stablecoin legislation with U.S. House Committee on Financial Services Full Committee Chairman Patrick McHenry (R-NC), the U.S. Department of the Treasury, and the U.S. Federal Reserve in response to the aforementioned concerns.
  • She commented that while “solid” progress had been made to develop bipartisan stablecoin legislation during the previous 117th Congress, she indicated that these efforts had ultimately proven unsuccessful.
• She also noted how the U.S. Department of the Treasury and U.S. financial services regulators have identified further oversight gaps in the cryptocurrency markets.
  • She highlighted how the SEC has limited authority to pursue frauds in the digital assets space (such as FTX).
• She stated that Congress should work to develop bipartisan legislation to address concerns related to digital assets.

Witness Opening Statements:

Mr. Andrew Durgee (Republic):

• He mentioned how his company, Republic, is a spinout of AngelList and noted how Republic had benefited from the JOBS Act.
  • He indicated that Republic is a U.S.-based company that employs over 300 people and serves U.S. retail investors, U.S. accredited investors, and financial institutions.
• He discussed how the JOBS Act the CROWDFUND Act (which is Title III of the JOBS Act) had created two new regulatory securities exemptions: Regulation CF and Regulation A+.
  • He explained that these exemptions enable a novel regulatory framework for retail investors to invest in a company prior to its initial public offering (IPO).
• He called Regulation CF and Regulation A+ “groundbreaking” and commented that these exemptions provide regular citizens with an opportunity to participate in the financial upside of early-stage companies.
• He noted that while financial regulators cite Regulation CF and Regulation A+ as functional compliance pathways for Web3 companies, he asserted that Web3 companies face challenges making disclosures and obtaining SEC approvals through these pathways.
  • He commented that the SEC’s disclosure rules are ill-suited for an industry that seeks decentralization.
• He discussed how an issuer is required to register with the SEC under Section 12(g) of the Securities Exchange Act of 1934 once a certain token holder threshold is reached.
  • He commented that this requirement limits access to investment opportunities for many eager investors and called it impossible for a Web3 company to pursue decentralization without triggering this requirement.
• He also mentioned how Republic had attempted to register a Regulation A+ security token with the SEC for the past three years and testified that Republic had been unsuccessful in obtaining this approval after 12 submissions and “countless” legal fees.
  • He highlighted how the SEC under the Biden administration has not qualified a single digital asset offering under Regulation A+.
• He noted that while Congress has largely focused on digital assets in their speculative form, he stated that Congress should view digital assets as a form of technical innovation.
  • He commented that one of the first use cases for digital assets that has operated at scale just happens to be digital currencies.
• He remarked that digital assets technology remains nascent and noted how most data transfer technologies take decades to be fully deployed.
  • He asserted that digital assets adoption is not a technology problem and is instead a human conditioning issue.
• He stated that the current generation will develop the initial digital assets infrastructure that future generations will adopt and build upon.

Mr. Matthew Kulkin (Wilmer Cutler Pickering Hale and Dorr LLP; former Director, CFTC Division of Swap Dealer and Intermediary Oversight):

• He remarked that digital asset rules and policies cannot be successfully developed by an individual Congressional Committee, legislative chamber, or federal agency.
• He stated that the largest digital assets traded in terms of market size and volume are commodities and noted how the statutory definition of the term “commodity” is intentionally broad.
  • He indicated that this definition covers almost all goods and articles, as well as services, rights, and interests in which futures trading takes place.
  • He noted how popular digital assets like Bitcoin and Ethereum already have CFTC-registered futures contracts trading on CFTC-registered exchanges.
• He highlighted how the CFTC has already successfully asserted anti-fraud and anti-manipulation jurisdiction over certain stablecoins as defined by Congress under the Commodity Exchange Act.
  • He noted however that the U.S.’s current legal and regulatory framework for digital assets limits the CFTC’s enforcement authority solely to fraud and manipulation in the digital commodities spot market.
• He asserted that the CFTC’s current enforcement authority is insufficient for adequately protecting customers.
• He stated that the current limits on the CFTC’s oversight of spot markets prevent market participants from receiving basic customer protections that the CFTC could provide through registration, regulation, examination, and enforcement.
  • He noted that these authorities already exist in the digital commodity futures markets.
  • He further noted how consumers lack protections related to the segregation of customer funds and rules governing how funds are held in the event of a bankruptcy.
• He called on Congress to expand the CFTC’s role to include the regulatory authority over the digital commodity spot markets.
  • He commented that such an expansion would introduce key features to the digital commodity spot markets that have long protected customers in the futures markets.
• He explained that this expanded regulatory authority would include requirements for the segregation of customer funds, financial resource reporting requirements for intermediaries, real-time trading activity surveillance requirements for exchanges, regular examination for compliance with CFTC rules, and enforcement for non-compliance with CFTC rules.
• He expressed confidence in the CFTC’s ability to carry out its mission to protect customers and to promote the integrity, resilience, and vibrancy of markets.
  • He discussed his previous experience at the CFTC and stated that the CFTC has strong experience working with SROs and the SEC to oversee financial markets.
• He recounted how Dodd-Frank had directed the CFTC to regulate swap markets and the SEC to regulate security-based swap markets and stated that the two financial regulators had successfully worked together to adopt and implement several important swap rules.
  • He commented that there are similarities between the implementation of Dodd-Frank’s over-the-counter (OTC) derivatives rules and the current discussion around digital asset markets.
• He remarked that Congress can play an important role in coordinating the CFTC and the SEC’s oversight of the digital assets market.
• He asserted that Congress should make clear that the CFTC is the primary regulator for digital commodities and that the SEC is the primary regulator for securities.
  • He commented that this approach would provide markets and market participants with a framework that respects existing laws, conventions, and market structures.
• He stated that Congress should build upon its precedents in a manner that best protects investors and that attracts and retains innovation in U.S. capital markets.

Mr. Marco Santori (Kraken Digital Asset Exchange):

• He discussed how his company, Kraken, has grown into one of the world’s leading digital asset businesses and stated that Kraken is now interested in pursuing digital asset projects beyond financial services.
  • He commented that blockchains are transforming how people consume goods and services, secure data, and deal in property rights.
• He noted how Kraken’s primary business is operating an exchange to match buyers and sellers in digital assets and indicated that Kraken serves over 10 million customers around the world through a secure and transparent centralized platform.
  • He further mentioned how Kraken’s business has grown to include the world’s leading digital asset index provider, staking and futures trading in eligible jurisdictions, and a “first of its kind” state-chartered special purpose depository institution (SPDI).
  • He testified that Kraken’s global team of over 2,000 professionals is located in the U.S. and across more than 70 countries.
• He remarked that security and customer asset protection has been central to Kraken’s culture and business model from the company’s inception.
  • He testified that Kraken holds regulatory licenses in the U.S. and in foreign jurisdictions, including the United Kingdom (UK), the EU, Canada, and several other developed and emerging markets.
• He discussed how many countries are advancing effective, practical, and fit-for-purpose rules that govern digital asset market participants.
  • He highlighted how the EU and the UK have focused on assessing the specific real-world characteristics of digital assets and advancing risk-based rules to regulate them.
• He stated that these countries are crafting more effective rules from tested principles (instead of forcing new products into old regulatory frameworks).
• He remarked however that the U.S. has significant regulatory gaps for digital assets and commented that these gaps have spawned an “unending” docket of both public and private litigation.
  • He asserted that this litigation has not and will not protect consumers.
• He stated that Congress could address these regulatory gaps through clear mandates and commented that these efforts will improve markets, empower consumers, and ensure U.S. participation in digital assets innovation.
  • He first called on Congress to establish a functional standard and process for drawing clear jurisdictional lines for SEC and CFTC oversight.
  • He then called on Congress to develop a “workable” registration path for digital asset exchanges at the SEC and the CFTC.
  • He thirdly called on Congress to clarify the CFTC’s role over spot markets.
  • He fourthly called on Congress to provide clear direction for ongoing regulatory cooperation between the SEC and the CFTC.
  • He lastly called on Congress to establish workable transitional arrangements to avoid market disruptions in the interim.
• He mentioned how Congress had previously worked successfully to provide swaps market oversight and coordinate oversight over this space between the SEC and the CFTC.

Mr. Daniel Schoenberger (Web3 Foundation):

• He discussed how his organization, the Web3 Foundation, had not been established to build a new currency or smart contract platform and stated that the Web3 Foundation had been established instead to provide siloed blockchains with the ability to communicate with each other.
• He noted how the Web3 Foundation had created the Polkadot blockchain network to enable Layer 1 blockchains (such as Bitcoin and Ethereum) to communicate with seamless connection and interoperability.
  • He asserted that Polkadot’s infrastructure is critical for allowing this connection and interoperability.
• He indicated that the native token of the Polkadot network is a blockchain-based token known as DOT and described DOT as the orchestrating tool used to secure and govern the Polkadot network.
• He discussed how future DOT tokens had been sold privately between 2017 and 2019 to facilitate the creation of the Polkadot network.
  • He mentioned how the Web3 Foundation had treated DOT as a security in accordance with SEC Regulation S and SEC Regulation D and testified that the Web3 Foundation had confirmed the identities of DOT’s original buyers through KYC and anti-money laundering (AML) checks.
• He expressed the Web3 Foundation’s belief that DOT is no longer a security based on the Howey test and on the factors indicated in the Strategic Hub for Innovation and Financial Technology’s (FinHub) Framework for “Investment Contract” Analysis of Digital Assets.
  • He testified that the Web3 Foundation had engaged for three years with SEC staff to arrive at this conclusion.
• He stated that the Web3 Foundation views DOT as merely coordinating software based on DOT’s functionalities and properties.
  • He recommended that DOT be placed in a separate category, such as a class of utility tokens.
• He remarked that the Web3 Foundation’s most important regulatory concern is the classification of tokens.
  • He mentioned how both Switzerland and the EU have created a clear framework distinguishing between payment tokens, security tokens, and utility tokens.
• He stated that the U.S.’s current regulatory approach to digital assets forces tokens to fit into limited categories and commented that a token’s category is not always clear.
• He also noted how there exist certain tokens whose characteristics may change over time, which can impact their asset class.
  • He commented that this ability for the characteristics of tokens to evolve overtime is part of the nature and innovation of blockchain technology.
• He called it necessary for there to exist a process to reevaluate tokens and mentioned how the SEC’s staff had already outlined a path for evaluating the status of digital tokens.
• He recommended that Congress establish a procedure through legislation to authorize regulators to reevaluate the asset status of tokens.
  • He asserted that tokens used for fundraising purposes should be subject to all applicable laws and regulations.
  • He commented however that such tokens may serve a functional purpose devoid of speculative investment in the future.
• He expressed support for establishing a legally-binding process for token reclassification and applauded the Subcommittees for working to address this topic.
• He remarked that Congress should not simply apply existing regulations to all digital assets and commented that such an approach would be inadequate for addressing emerging technologies.

Mr. Timothy Massad (Harvard Kennedy School Mossavar-Rahmani Center for Business and Government and Director, M-RCBG DigitalAssets Policy Project):

• He discussed how the U.S. lacks a federal regulator that oversees non-security digital asset spot markets.
  • He commented that the classification debate surrounding the asset types of digital assets exacerbates cryptocurrency regulatory gaps.
• He raised concerns over proposals to rewrite federal securities laws as a means of addressing the current gaps in cryptocurrency regulation.
  • He asserted that this approach could create additional uncertainties (which will lead to litigation and confusion) and create unintended “loopholes.”
  • He further stated that the U.S. currently lacks the information needed to properly classify tokens into different asset classes.
• He remarked that Congress should instead pass legislation that would require any trading or lending platform that uses or trades Bitcoin or Ethereum to comply with a set of principles for all of its activities.
  • He indicated that these principles would include protecting customer assets, preventing fraud and manipulation, requiring risk management, requiring reporting, requiring trade transparency, and preventing conflicts of interest.
• He recommended that Congress direct the SEC and the CFTC to develop joint-rules implementing the aforementioned principles for digital assets or create an SRO that would develop and enforce rules for digital assets.
• He stated that this approach would provide the U.S. with jurisdiction over all important digital asset platforms without needing to rewrite federal securities laws.
  • He commented that the law’s focus on trading platforms that have Bitcoin and Ethereum activity would ensure that the major trading platforms will be covered.
• He also asserted that this approach would address the problems associated with spot market trading on centralized intermediaries and commented that eliminating spot trading on these platforms would be a big improvement.
  • He further stated that this approach would not require bifurcation of the existing digital assets market into a platform for trading commodity tokens and a platform for trading security tokens.
• He then discussed how the use of an SRO to execute this regulatory system would lead the digital assets industry to cover much of the system’s costs, which would reduce the system’s impact on the federal budget.
• He emphasized that his recommended approach would not involve rewriting securities and commodities laws and indicated that the SEC and the CFTC would retain their existing authorities under this approach.
  • He noted that the SEC could still bring cases claiming that a particular token is a security under this approach and that a successful claim would force the platform to stop trading the token or move the token to a registered platform.
• He remarked that his recommended approach would ensure that platforms could continue to operate on a responsible basis while Congress works to resolve classification issues for digital assets.
  • He also highlighted how this approach would provide for disclosures, which are important for investor protections and informing classifications.
• He acknowledged that his recommended approach is incremental in nature and stated that policymakers can build upon this approach overtime.
  • He also expressed optimism that this approach could garner bipartisan support and mentioned how he had formulated this approach with former SEC Chairman Jay Clayton (who served during the Trump administration).

Mr. Michael Blaugrund (New York Stock Exchange):

• He remarked that national securities exchanges, such as the New York Stock Exchange (NYSE), serve a “fundamental” role in the capital markets ecosystem.
  • He indicated that these exchanges provide a forum for companies to raise money and a venue for investors to buy and sell the securities of public companies at transparent prices in a fair and orderly manner.
• He stated that exchanges have an obligation to protect investors from fraud, theft, and manipulation across all technology evolutions.
  • He commented that the regulatory framework governing national securities exchanges brings transparency and a trusted environment for issuers and investors.
• He called it increasingly important for the U.S. to develop a regulatory framework for digital assets considering the growing investor demand for these assets.
• He remarked that the segregation of key functions within the financial markets ecosystem (including brokerage, exchange, clearing, and custody functions) mitigates inherent conflicts of interest, promotes transparency, and facilitates competition amongst service providers.
  • He commented that these benefits flow to investors and result in a more fair, efficient, and safe environment.
• He noted how investors that trade on the NYSE are represented by registered broker-dealers, have their trades cleared and settled by registered clearinghouses, and have their assets held by registered bankruptcy-remote custodians.
  • He indicated that these investors have recourse if they are harmed by any of their service providers and commented that this multilateral clearing reduces counterparty risk.
• He stated however that some current digital asset trading models commingle the aforementioned functions in a manner that raises serious questions of risk management, financial resources, and investor protection.
  • He commented that FTX’s recent collapse had demonstrated the dangers of this commingling.
• He remarked that many of the recent problems within the digital assets space would not have occurred if investors could trade digital assets in a similarly regulated trade environment.
• He described competition among securities and commodities exchanges as “fierce” and commented that new entrants are a regular occurrence within this space.
  • He noted how there exists a well-established process for launching a new registered exchange and indicated that these new exchanges could have unique listing concepts, trading protocols, operational features, or market segments.
• He stated that no digital asset trading platforms to date have followed the well-established process for launching a new exchange.
  • He asserted that there exists a dissonance between much of the current digital asset industry’s practices and the standards of investor protection established under the law and regulation for traditional markets.
• He remarked that the U.S.’s exchange regulatory framework represents an established and well-known foundation that can be adjusted to accommodate the marketplace for digital assets.
• He stated that the U.S. could take several actions to facilitate practical oversight for digital assets.
  • He first recommended that the U.S. provide a tailored registration process for investment contract tokens.
  • He then recommended that the U.S. replace the temporary SEC conditions for special purpose broker-dealers (SPBDs) to custody digital assets with a more permanent solution.
  • He thirdly recommended that the U.S. permit adjustments to applicable rules for national securities exchanges and clearinghouses to support securities and other digital assets that are not considered national market system securities.
  • He lastly recommended that the U.S. evaluate the potential for dual registration or substituted compliance between SEC and CFTC regimes.

Congressional Question Period:

Agriculture Subcommittee Chairman Dusty Johnson (R-SD):

• Chairman Johnson remarked that there exists a lack of clarity within existing law that is impeding digital assets innovation, undermining the U.S.’s global competitiveness, and failing to protect consumers in the broader marketplace. He asserted that Congress must take swift action to address this lack of clarity. He noted how one of the Howey test’s prongs involves whether a centralized group of decision makers have a substantial impact on the value of a given asset. He elaborated that an asset is more likely to be a security if a centralized group of decision makers can substantially impact the value of the asset. He highlighted how assets can become more decentralized over time. He asked Mr. Kulkin to explain why decentralization is an important characteristic for turning an asset from a security into a commodity.
  • Mr. Kulkin noted that the Howey test is employed at the moment when an asset is issued or sold. He stated however that an asset can have different characteristics years after its initial issuance and sale, such as a diminished expectation of profits from the efforts of others. He commented that such an asset could therefore later come to resemble a commodity as defined by Congress.
• Chairman Johnson asked Mr. Kulkin to indicate whether there exist particular factors or triggers that policymakers should consider when determining the asset types of digital assets.
  • Mr. Kulkin recommended that policymakers consider where derivatives markets already exist. He elaborated that an asset has likely been commoditized when it has futures contracts that have been certified by exchanges at the CFTC. He also recommended that Congress look at the actions of the CFTC and the SEC as bodies to get insights into whether assets are behaving as commodities or securities. He mentioned how the CFTC has taken action against certain stablecoins in the spot market on fraud and manipulation grounds. He commented that this action suggests that certain stablecoins may be becoming commodities.
• Chairman Johnson remarked that Congress could provide better guidance to regulators as to when a digital asset changes asset types. He asked Mr. Kulkin to provide additional recommendations for providing clarity to the digital assets space.
  • Mr. Kulkin acknowledged that it is very difficult to identify the specific inflection point at which a digital asset changes from a security to a commodity.
• Chairman Johnson noted how 71 percent of the market capitalization for digital assets involves products that are widely considered to be commodities. He stated that the CFTC can oversee most of the digital assets space except for digital asset spot markets. He noted how Mr. Kulkin’s testimony had suggested that the CFTC be provided with authority to oversee digital asset spot markets because these spot markets are different. He asked Mr. Kulkin to explain his claim that digital asset spot markets are different.
  • Mr. Kulkin noted how many digital asset commodities have a strong retail component, which makes them different from more traditional commodities (such as soybeans, oil, and interest rates). He commented that this strong retail component requires the benefits of customer protection. He also discussed how digital asset commodities are new and noted that regulators have very limited experience overseeing digital asset commodities.

 Agriculture Subcommittee Ranking Member Yadira Caraveo (D-CO):

• Ranking Member Caraveo noted how the CFTC is a smaller agency relative to other federal financial regulators and expressed concerns that this smaller size might limit the CFTC’s ability to pursue enforcement actions. She noted how Mr. Massad had served as CFTC Chairman during Dodd-Frank’s implementation and noted how this law had provided the CFTC with additional regulatory authority over the swaps market. She asked Mr. Massad to address whether there had existed concerns over the CFTC’s ability to oversee the swaps markets during Dodd-Frank’s implementation because of the CFTC’s size.
  • Mr. Massad indicated that there had existed concerns over the CFTC’s ability to oversee the swaps market during Dodd-Frank’s implementation. He stated that it is not possible for the CFTC (or any agency) to take on oversight responsibilities for a new area of jurisdiction without receiving additional resources. He testified that the CFTC had been forced to cut other activities in order to assume its new oversight responsibilities over the swaps market under Dodd-Frank.
• Ranking Member Caraveo emphasized the importance of adequate CFTC funding if the Agency is to take on new oversight responsibilities. She then asked Mr. Massad to identify measures that can be taken to ensure that the CFTC, the SEC, the U.S. Department of the Treasury, and other financial regulators work cooperatively to further digital assets industry compliance.
  • Mr. Massad remarked that his proposal for digital assets regulation would require collaboration between the CFTC and the SEC. He explained that his proposal would mandate that the CFTC and the SEC either develop joint-rules for digital assets or establish a SRO to develop digital asset rules. He asserted that this approach is preferable to rewriting federal securities laws to create new definitions for digital assets. He then disputed the previous comments that an asset that becomes commoditized will no longer be a security. He noted how a futures contract can still be a security. He also mentioned how the Tether stablecoin has futures contracts, which makes it a commodity. He noted however that the Tether stablecoin would become a security if it paid interest to its holders. He stated that these futures contracts do not impact the underlying asset status of Tether under this scenario.

Financial Services Subcommittee Chairman French Hill (R-AR):

• Chairman Hill recounted how Congress had passed a resolution in 1996 that stated that it would not tax and overregulate the internet and would instead focus on taxing and regulating what people do with the internet. He commented that this approach had fostered significant economic growth for the U.S. He stated that Congress should take a similar approach to blockchain technology. He discussed how the SEC’s disclosure regime is designed to provide “reasonable” investors with information needed to make informed investment decisions. He stated that if the existing disclosure regime for digital assets is not producing these results, then the ultimate purpose of U.S. securities laws is not being met from an investor protection and capital formation point of view. He noted however that current SEC disclosure requirements do not cover several features unique to digital assets that would be considered important to potential purchasers. He asked Mr. Santori to identify some of the features of digital assets that are not contemplated in the U.S.’s existing securities disclosure regime.
  • Mr. Santori remarked that the U.S.’s existing securities disclosure regime does not contemplate most of the characteristics of digital assets that make the assets rewarding for users. He also stated that the U.S.’s existing securities disclosure regime does not account for the characteristics of digital assets that can make the assets risky for users. He remarked that prospective digital asset users want information about the number of nodes operating on a digital asset’s network, the number of developers that are engaging with a digital asset’s network, whether a network’s developers are associated with a network or operating independently, and where nodes operate from on a network. He stated that this information is highly technical and specific to the context of digital assets and commented that there remains even more digital asset-specific information that could be disclosed to investors.
• Chairman Hill requested that Mr. Santori elaborate on specific digital asset disclosure gaps in writing for the hearing’s record. He then discussed how sufficiently decentralized digital assets (such as Bitcoin and Ethereum) do not have an issuer that can disclose relevant information regarding the digital assets. He asked Mr. Kulkin to indicate how an intermediary could provide disclosure to investors.
  • Mr. Kulkin first stated that an intermediary could provide disclosures to customers about how the intermediary conducts its business. He then discussed how the CFTC currently requires exchanges listing futures and swaps to certify their listed products, provide commercial details about the listed products, explain how the listed products are not readily susceptible to fraud and manipulation, and explain how the financial integrity of the listed products are being protected. He suggested that this model could be applied to exchanges listing Bitcoin and Ethereum. He asserted however that the effectiveness of disclosure is entirely dependent on the accuracy of the information being disclosed. He stated that the U.S. must therefore police exchanges for fraud.
• Chairman Hill mentioned how SEC Commissioner Hester Peirce had proposed a digital assets disclosure framework that would account for the unique characteristics of digital assets. He indicated that this framework would include disclosures related to source code, tokens supply, governance mechanisms, and other aspects unique to digital assets. He asked Mr. Santori to comment on the practicality of SEC Commissioner Peirce’s proposed disclosure framework for digital assets.
  • Mr. Santori called SEC Commissioner Peirce’s proposed digital assets disclosure framework thoughtful and well-tailored to the risks and rewards associated with digital assets. He stated that this proposed framework would constitute a significant improvement upon the status quo in terms of protecting consumers and would support domestic investments in digital assets activity.
• Chairman Hill lastly asked the witnesses to submit their views on the issue of token reclassification for the hearing’s record.

Financial Services Subcommittee Ranking Member Stephen Lynch (D-MA):

• Ranking Member Lynch first expressed receptiveness towards Mr. Massad’s proposed digital assets regulatory framework and expressed interest in working with Mr. Massad on this proposal. He then called the U.S. financial system the “envy of the world” and stated that it serves as a source for the U.S.’s international strength. He commented that the failure of digital asset firms (including FTX, Terra, Voyager Digital, Genesis, and Silvergate Bank) reduces trust in the U.S. financial system. He also highlighted how many criminal enterprises prefer to transact in digital assets given the anonymity that digital assets can provide to users. He stated that some policymakers are seeking to integrate digital assets into the U.S.’s traditional financial system and warned that this integration could result in instability, risk, and volatility. He noted how the CFTC only has around 600 employees while the SEC has around 4,500 employees. He raised concerns that shifting oversight responsibilities for the digital assets markets from the SEC to the CFTC could reduce the U.S.’s ability to oversee this space. He asked Mr. Massad and Mr. Blaugrund to discuss the measures that would need to be taken if the U.S. were to modify which federal agencies have jurisdiction over digital assets.
  • Mr. Massad remarked that the SEC and the CFTC will both need additional resources if they are expected to assume new oversight responsibilities for digital assets. He also stated that it remains unclear as to what expanded jurisdiction for the SEC and the CFTC would look like. He recommended that Congress require the SEC and the CFTC to work together (or through an SRO) to determine how they will oversee digital assets. He added that the key advantage of an SRO is that it would have the digital assets industry fund the industry’s regulation.
• Ranking Member Lynch asked Mr. Massad to indicate whether there exist examples of current SROs that might serve as models for a new digital assets SRO.
  • Mr. Massad first emphasized that the SEC and the CFTC would closely supervise an SRO for the digital assets space. He noted how the SEC and the CFTC currently supervise existing SROs, such as the Financial Industry Regulatory Authority (FINRA) and the National Futures Association (NFA). He then stated that there is precedent for having the SEC and the CFTC jointly recognize an SRO. He noted that his SRO proposal would require that any proposed SRO digital asset rules be approved by both the SEC and the CFTC. He called this approach a beneficial interim step that would bring regulation to the digital assets sector.
  • Mr. Blaugrund expressed receptiveness to an approach where regulators would not care about a digital asset’s specific asset type. He stated that dual registration of exchanges and broker-dealers with the SEC and the CFTC would allow for national securities exchanges to continue trading digital assets if the digital assets were later deemed to no longer be securities. He highlighted how Bitcoin and Ethereum currently account for most digital assets trading and commented that a change in their asset types could prevent securities exchanges from listing them.

Agriculture Full Committee Chairman Glenn “GT” Thompson (R-PA):

• Chairman Thompson remarked that the current process for determining whether a digital asset is a security or not is unclear, unworkable, and impractical. He stated that the CFTC lacks the essential regulatory authority over retail-serving intermediaries in the digital commodity spot markets and asserted that the treatment of customer assets held by intermediaries needs to be strengthened. He applauded that U.S. House Committee on Agriculture’s work thus far on the aforementioned issues and expressed interest in continuing this work in collaboration with the U.S. House Committee on Financial Services. He expressed hope that Congress will ultimately be able to develop bipartisan legislation to enable developers and users to engage with digital assets in a safe, compliant, and productive manner. He then noted how Mr. Massad had suggested that the CFTC and the SEC should establish a joint-SRO to regulate digital assets pursuant to core principles established by Congress. He asked Mr. Kulkin to indicate whether this proposed joint-SRO constitutes an efficient, effective, and practical solution.
  • Mr. Kulkin expressed concerns that creating a new joint-SRO between the SEC and the CFTC would take time to implement. He noted how more than 70 percent of digital assets currently being traded are commodities. He suggested that the U.S. expand the CFTC’s authority beyond enforcement authority (which is reactionary in nature) to regulatory authority for digital assets. He also suggested that the U.S. require digital asset exchanges and intermediaries to be registered, regulated, examined, and subject to CFTC enforcement. He commented that this approach would provide a quicker path to providing investor protections that are currently lacking in digital asset markets.
• Chairman Thompson asked Mr. Kulkin to discuss past instances where the CFTC and the SEC have shared jurisdiction over an area and whether there are any lessons learned from those experiences.
  • Mr. Kulkin recounted how the CFTC and the SEC had successfully shared jurisdiction over the swaps market following the enactment of Dodd-Frank. He noted how the SEC had asserted jurisdiction over security-based swaps while the CFTC had asserted jurisdiction over swaps. He indicated that the CFTC and the SEC had adopted joint-rules for the swaps markets. He attributed the success of this effort to the fact that Congress had provided direction to the two agencies regarding this topic. He stated however that the CFTC and the SEC have been less successful in joint-efforts regarding securities futures regulation. He noted how Congress has not provided the two agencies with direction regarding this topic.
• Chairman Thompson also mentioned how Mr. Massad cites the NFA as an example of a currently functioning SRO within the financial services sector. He asked Mr. Kulkin to discuss how the NFA functions as a joint-SRO between the CFTC and the SEC.
  • Mr. Kulkin mentioned how he had worked with the NFA during his previous tenure at the CFTC. He highlighted how the NFA has 500 employees and noted how NFA had constructed a complete registration and examination program for swap dealers “from scratch” following the enactment of Dodd-Frank. He commented that the NFA constitutes a successful SRO model for the financial services sector.

Agriculture Full Committee Ranking Member David Scott (D-GA):

• Ranking Member Scott raised concerns about the risks that cryptocurrencies pose to retail investors. He mentioned how the U.S. House Committee on Agriculture had previously held a hearing in May 2022 to consider FTX’s proposal to trade margin products through a non-intermediated model. He recounted how he had raised concerns over this proposal and commented that it would introduce new risks in the market. He stated that his concerns have proven correct. He remarked that he remains concerned about the vulnerability and volatility of cryptocurrencies. He noted how FTX’s recent collapse has revealed mismanagement, misappropriations of funds, a failure to adhere to basic measures of corporate controls, and corporate deceit. He stated that FTX is not alone among cryptocurrency firms in terms of unscrupulous activities. He highlighted how Binance Holdings is currently under investigation for violating U.S. sanctions laws. He stated that cryptocurrency offerings provide “little-to-nothing” in terms of disclosures to investors, which makes the investors vulnerable to exploitation. He asserted that cryptocurrency markets are rife with fraud, misuse, and volatility and commented that these markets pose significant risks and no rewards to retail investors. He stated that the purported benefits of digital assets have yet to materialize and commented that cryptocurrencies are currently not functioning as workable currencies. He further asserted that cryptocurrencies are not advancing economic inclusion as promised. He asked Mr. Massad to address how pushing consumers into opaque, risky, and volatile financial markets advance financial inclusion goals. (Note: Ranking Member Scott’s question period time expired here).

Financial Services Subcommittee Vice Chairman Warren Davidson (R-OH):

• Vice Chairman Davidson criticized SEC Chairman Gary Gensler’s approach to cryptocurrency regulation and argued that SEC Chairman Gensler is not providing sufficient clarity for cryptocurrency businesses. He stated that financial markets desire cryptocurrencies and commented that Congress must respond to these market desires. He then noted how Mr. Santori had recently stated in a Politico interview that an underrated attribute of the cryptocurrency space is the ability for consumers to exit intermediaries through self-custody. He also noted how Mr. Santori’s testimony discusses how Kraken Digital Asset Exchange complies with KYC and AML laws. He asked Mr. Santori to explain how it is possible to reconcile the idea of self-custody for cryptocurrencies while simultaneously adhering to KYC rules.
  • Mr. Santori remarked that the self-custody of cryptocurrencies and the adherence to KYC rules are compatible. He stated that digital asset exchanges (such as Kraken) are well-positioned to collect customer information for KYC rule adherence. He testified that Kraken Digital Asset Exchange collects KYC information for every customer that uses their exchange in the U.S. He remarked that a key feature of digital assets is the ability to self-custody assets. He indicated that Kraken does not offer self-custody products. He noted that other digital asset firms offer self-custody products. He described these self-custody products as “pure software” and asserted that the companies offering these products should not be required to collect KYC information. He noted how the U.S. does not require the collection of KYC information for every single transaction in the U.S. economy and commented that such a requirement would not make sense. He stated however that centralized digital asset exchanges should be required to collect KYC information from their users.
• Vice Chairman Davidson remarked that the ability for people to self-custody digital assets is very important. He also stated that capital gains taxes should not be triggered when a person moves their digital assets across custodians (including self-custody options). He then noted how Mr. Schoenberger had stated that the Polkadot network is a top ranked industry participant in terms of the protocol’s level of decentralization. He mentioned how his bill, the Token Taxonomy Act, would determine whether a given token is a security based on the degree of control that an issuer has over the digital asset (among other factors). He asked Mr. Schoenberger to indicate whether Congress should consider the level of decentralization that a protocol has when developing rules for distinguishing whether an asset constitutes a security.
  • Mr. Schoenberger remarked that Congress should consider a protocol’s level of centralization when developing rules for distinguishing whether a digital asset constitutes a security. He stated that community consensus is at the core of the idea of Web3. He described the DOT token as a piece of orchestrating software that helps users access and participate in the broader Polkadot network. He asserted that the U.S. should base its regulation for digital asset tokens on their functioning rather than on their names. He discussed how the Web3 Foundation had gradually ceded technical and governance control over the Polkadot network since the network’s launch.
• Vice Chairman Davidson remarked that policymakers must develop a way to measure when a digital asset becomes sufficiently decentralized. He mentioned how Protocol Labs and Filecoin had launched their own tokens and have gradually ceded their control over these tokens. He lamented however that these organizations remain unable to escape SEC jurisdiction, even when their tokens become sufficiently decentralized. He stated that Congress must address this issue.

Rep. Bill Foster (D-IL):

• Rep. Foster discussed how between 50 percent and 95 percent of Bitcoin transactions are estimated to be fraudulent. He asked the witnesses to indicate whether it is possible to conduct a well-regulated futures or derivatives market when the underlying asset is susceptible to a high level of market manipulation.
  • Mr. Kulkin stated that the CFTC currently has a limited ability to oversee the spot market for digital assets.
• Rep. Foster interjected to comment that the CFTC’s limited ability to oversee the spot market for digital assets underscores the need for the U.S. to address manipulation in the digital assets spot market. He then asked the witnesses to indicate whether both sides of every cryptocurrency transaction should be associated with traceable digital identities that are issued by governments with which the U.S. has extradition treaties and common concepts of financial fraud. He commented that the use of such digital identities could help to prevent wash trading, insider trading, frontrunning, money laundering, and ransomware.
  • Mr. Santori mentioned how Kraken monitors its exchange for abuses.
• Rep. Foster interjected to note that the Kraken Digital Asset Exchange accepts Bitcoin, which is traded anonymously on the dark web. He commented that Kraken serves as a portal to some illicit activity.
  • Mr. Santori expressed disagreement with Rep. Foster’s characterization of the Kraken Digital Asset Exchange. He asserted that Kraken plays an important “gatekeeper” role for the digital assets industry.
• Rep. Foster interjected to state that wash trades involving self-custodied digital assets are occurring and that Kraken cannot control these trades.
  • Mr. Santori expressed doubts that a significant volume of wash trades involving digital assets are taking place on the Kraken Digital Asset Exchange. He noted how there are transaction fees associated with blockchain-based trades and commented that wash trading would be very expensive to perform at a large scale. He also stated that forensic platforms are regularly detecting wash trades when they occur.
• Rep. Foster interjected to comment that forensic platforms can detect wash trades involving certain digital assets. He noted however that there exist digital assets where the identity of users is more difficult to trace. He predicted that bad actors will seek out these digital assets for engaging in their illicit activities. He remarked that the U.S. will ultimately need to apply KYC requirements to digital asset wallets in order to protect against illicit activity. He compared the imposition of these KYC requirements to digital asset wallets to the imposition of license plate requirements on vehicles that link vehicles to licensed drivers. He asked Mr. Kulkin to discuss the current proposals to establish digital forms of identity for digital asset wallets.
  • Mr. Kulkin remarked that if the CFTC had regulatory authority over the spot market for digital assets, then the CFTC could require digital asset exchanges to conduct KYC surveillance as part of their onboarding processes. He noted how the CFTC maintains similar requirements for futures and swaps markets. He stated that this arrangement would have the exchanges act as SROs that could supplement the oversight provided by the CFTC and the NFA.
• Rep. Foster lastly asked Mr. Schoenberger to provide his thoughts on Moxie Marlinspike’s 2022 article on Web3. He acknowledged that his question period time had expired and requested that Mr. Schoenberger provide his response to the question in writing for the hearing’s record.

Rep. John Rose (R-TN):

• Rep. Rose noted how Mr. Massad’s proposal would exempt exchanges that do not list Bitcoin or Ether from regulation. He highlighted how U.S. digital asset exchanges collectively list around 400 digital assets. He also noted how the SEC has indicated that there are nearly 10,000 digital assets being traded on hundreds of platforms. He asked Mr. Kulkin to indicate whether it would be problematic for the U.S. to not regulate the trading of digital assets and exchanges that do not list Bitcoin or Ether for trading.
  • Mr. Kulkin noted how there exist numerous digital commodities beyond Bitcoin and Ethereum and predicted that this number will continue to grow. He stated that a regulatory approach that narrowly focused on digital asset exchanges that trade Bitcoin and Ethereum would likely require additional future action.
• Rep. Rose then noted how some Congressional Democrats have argued that the U.S. should treat all digital assets as securities. He asked Mr. Kulkin to indicate whether Congress should permit the SEC to assume full control over the digital assets space.
  • Mr. Kulkin answered no. He highlighted how the CFTC as a body has deemed nearly 70 percent of the digital assets currently being traded to be commodities. He stated that the U.S. should be thoughtful in addressing digital assets that are commodities.
• Rep. Rose criticized SEC Chairman Gensler for asserting that the SEC has exclusive jurisdiction over digital assets. He then noted how Mr. Massad had asserted that Congress should not create new asset classes under the jurisdiction of the CFTC or SEC because it would generate confusion and lead to disputes. He asked Mr. Santori and Mr. Kulkin to indicate whether he agreed with Mr. Massad’s position.
  • Mr. Santori expressed disagreement with Mr. Massad’s assertion that Congress should not pursue legislation creating new asset classes. He stated that the current regulatory framework for digital assets fosters significant confusion and complexity. He noted how the CFTC and the SEC are currently alleging contradictory positions over many digital assets. He contended that the status quo is untenable and fosters complexity and litigation, which results in consumers going unprotected. He further stated that this lack of policy certainty prevents digital asset firms (such as Kraken) from investing in the U.S.
  • Mr. Kulkin expressed his agreement with Mr. Santori’s response.
• Rep. Rose then called it essential for any market structure legislation to set rules for the custody of digital assets. He commented that such legislation would ensure that customers have confidence that their digital assets are located where the intermediary says they are located. He stated that digital assets raise several novel issues regarding custody that must be addressed. He asked Mr. Santori to provide recommendations for how Congress should address issues related to digital assets custody.
  • Mr. Santori asserted that custody is critical to customer protection within the digital assets space and an essential part of Kraken’s ethos. He stated that many recent digital asset firm failures are attributable to lax corporate governance controls (including custody deficiencies). He testified that Kraken does offer custody services for its users and segregates the funds and assets of its users. He stated that physical segregation on a blockchain does not exist due to the digital nature of the assets. He recommended that Congress prescribe uniform custody standards across market participants. He commented that these uniform standards would ensure that customers know how their assets are being custodied and that customers would have confidence in the custodial arrangements.

Rep. Nikki Budzinski (D-IL):

• Rep. Budzinski remarked that Congress must develop a regulatory framework for the digital assets industry to protect consumers and foster growth. She noted however that her constituents are not very concerned about digital asset issues. She asked the witnesses to address how decentralized finance (DeFi) may benefit Americans that may be underrepresented in the traditional financial system.
  • Mr. Massad acknowledged that digital assets are not a top priority for most Americans. He noted however that many Americans entered the digital assets space when cryptocurrency prices had spiked and highlighted how digital asset platforms contain significant risks. He stated that the U.S. has a responsibility to create an investor protection regime so that Americans will not be exploited and will not be vulnerable to scam, fraud, and risk.
  • Mr. Kulkin stated that most people do not realize that the CFTC has enforcement authority in the commodity spot market (which is reactionary by nature) and does not have regulatory authority in this market. He recommended that Congress expand the CFTC’s authority so that retail participants would have the protections that they may presume already exist.
  • Mr. Durgee noted how unaccredited retail investors could only participate in offerings that were in post-IPO phase until recently. He indicated that most of the larger investment gains occur in the pre-IPO phase. He stated that most retail investors do lack the ability to participate in these pre-IPO phase investment opportunities, which reduces financial access and inclusion. He asserted that the U.S.’s investor accreditation laws are driving wealth disparities. He remarked that digital asset markets provide retail investors with access to many promising investments that they could otherwise not access. He stated that clear regulatory frameworks and consumer protections for digital assets would provide consumers with more investment opportunities in a safer manner.
• Rep. Budzinski then asked Mr. Massad to discuss the resources that the CFTC had identified or invested in during his tenure as CFTC Chairman with regard to digital assets. She also asked Mr. Massad to identify additional resources that Congress should provide the CFTC for overseeing the digital asset space.
  • Mr. Massad stated that the digital assets market had been very small during his tenure as CFTC Chairman and mentioned how he had left the Agency in 2017. He indicated that the CFTC under his Chairmanship had not approved any futures products and that there had only been digital asset swaps trading on platforms with eligible contract participants. He noted how the digital assets market has grown significantly in the ensuing years and how there now exist several platforms trading digital assets derivatives. He commented that this growth makes digital assets oversight a greater challenge. He stated that the CFTC will only be able to sufficiently police the digital assets spot market if they are provided with adequate resources.

Rep. Frank Lucas (R-OK):

• Rep. Lucas mentioned how the EU had recently approved MiCA and how the UK is currently developing its own digital assets framework. He asked Mr. Santori to address how the development of these foreign regulatory frameworks for digital assets and the U.S.’s continued inaction on digital assets regulation makes it more difficult for the U.S. to effectively oversee digital assets.
  • Mr. Santori highlighted how other G20 jurisdictions are adopting regulatory frameworks for digital assets and commented that these jurisdictions already possess sophisticated financial services markets and sophisticated technology industries. He stated that the U.S. is “significantly behind” these jurisdictions in terms of developing a regulatory framework for digital assets. He stated that the U.S. should prioritize quality over speed in developing and deploying a regulatory framework for digital assets. He testified however that Kraken has made plans to invest in the EU and the UK as a result of these new digital asset frameworks. He stated that Kraken is currently limited in its ability to make investments in the U.S. because the U.S. lacks a comparable federal regulatory framework for digital assets.
• Rep. Lucas highlighted how the U.S. possesses the most efficient, most liquid, and deepest capital markets in the world and attributed these features to the U.S.’s willingness to embrace innovative technologies. He asked Mr. Blaugrund to elaborate on the difficulty and importance of balancing financial innovation with investor protection.
  • Mr. Blaugrund called the balancing of investor access and investor protection a “crucial” exercise. He stated that the regulatory framework for national securities exchanges may be well-suited for the nascent digital assets space. He specifically highlighted how national securities exchanges are required to segregate the roles of exchanges, brokers, clearinghouses, and custodians. He commented that this approach provides consumers and investors with confidence that they will not be exploited.
• Rep. Lucas noted how Mr. Blaugrund had discussed how financial regulators could choose to provide regulatory relief for exchanges that want to list digital assets. He asked Mr. Blaugrund to identify SEC and CFTC rules that should be altered to address digital assets.
  • Mr. Blaugrund noted how there are prospective digital asset issuers that are reluctant to pursue SEC registration because there do not exist national securities exchanges on which they could list their products. He stated however that national securities exchanges are reluctant to enter the digital assets space because there have been no listings that have been effective under the SEC. He recommended that the SEC consider creating some form of on-ramp to allow for existing tokens to enter the regulatory system.
• Rep. Lucas then noted how Mr. Santori had stated that a major barrier for digital asset trading platforms to register with the SEC is the fact that these platforms interact with retail investors directly (rather than interact with retail investors through broker-dealers). He asked Mr. Santori to identify necessary revisions to current law as it relates to broker-dealers so that a digital asset trading platform can successfully register with the SEC. He also asked Mr. Santori to discuss the characteristics of digital assets that make such registration necessary.
  • Mr. Santori remarked that the broker-dealer concept is sufficiently flexible to accommodate a “great deal” of trading in digital assets. He stated that broker-dealers can interact directly with consumers and investors and elect to operate as exchanges under Regulation ATS. He called this flexibility critical. He stated that this flexibility for broker-dealers can be contrasted against the “rigid” regulatory regime that exists for national securities exchanges. He noted that the regulatory regime for national securities exchanges requires intermediation, that assets not trade after hours due to price pressures, and transfer agents. He described transfer agents as “extractive” intermediaries and commented that digital assets and blockchains remove the need for transfer agents. He remarked that the SEC still has an oversight role for digital assets trading and suggested that the Regulation ATS regime would be an “excellent fit” for digital assets regulation.

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

• Ranking Member Waters mentioned how the U.S. House Committee on Financial Services had heard concerns from various witnesses about the need to address the discrete risks posed by stablecoins. She stated that stablecoins can experience bank-like runs. She also noted that the SEC is currently limited in its ability to pursue digital asset firms located abroad. She further noted that the CFTC currently lacks authority over digital asset spot markets. She stated however that there is a broader effort currently underway to establish an entirely new market structure for cryptocurrencies and their issuers. She contended that Congress should first consider whether existing securities and commodities laws are sufficient for addressing cryptocurrencies before it pursues the establishment of a new market structure. She highlighted how the NYSE and other market participants have been highly regulated for 90 years so that companies seeking capital can gain the trust of U.S. investors. She asserted that federal securities laws have played a key role in ensuring that the U.S. has the best capital markets in the world. She commented that federal securities laws and regulations help to protect investor assets through providing the markets with material information, eliminating conflicts of interests and risks to the financial system, and promoting fair competition. She asked Mr. Blaugrund to address whether cryptocurrency exchanges are “meaningfully different” from traditional exchanges such that cryptocurrency exchanges should warrant an entirely new legislative and regulatory framework. She also asked Mr. Blaugrund to project the impact of crafting a new and separate legal framework for cryptocurrency exchanges.
  • Mr. Blaugrund remarked that similar functions should be regulated in a similar fashion. He noted how digital asset trading platforms have commingled many of the functions (including brokerage, exchange, and custody functions) that are discretely regulated in the traditional markets. He asserted that this comingling of functions increases risks. He stated that applying the current standards for national securities exchanges to digital asset exchanges would therefore be appropriate. He then raised concerns over proposals to establish an alternative “light touch” treatment for digital assets. He warned that these proposals pose the risk of regulatory arbitrage, which would diminish investor confidence, market resiliency, and the transparency of traditional financial markets. He stated however that financial regulators should consider some adaptations for digital assets rules. He asserted that financial regulators currently possess the needed authority to pursue such adaptations.

Rep. Bryan Steil (R-WI):

• Rep. Steil called on Congress to develop rules for the digital assets space and asserted that the U.S.’s current “regulation by enforcement” approach to digital assets is not working. He mentioned how SEC Chairman Gary Genlser’s recent remarks before the U.S. House Committee on Financial Services did not provide significant insights into the SEC’s regulatory approach to digital assets. He also stated that the lack of transparency in the SEC’s registration process for digital assets is having a chilling effect on digital assets innovation. He expressed concerns that the U.S.’s insufficient process for digital assets regulation will lead digital assets innovation to move abroad. He warned that this movement will eliminate U.S. jobs and disadvantage U.S. retail investors. He asked Mr. Schoenberger to discuss how European regulators view blockchain technology and to compare Europe’s regulatory approach to digital assets to the U.S.’s regulatory approach to digital assets.
  • Mr. Schoenberger discussed how the Web3 Foundation had made a deliberate decision to establish its headquarters in Switzerland because Switzerland has long maintained a clear regulatory framework for digital assets. He explained that Switzerland’s regulatory framework for digital assets distinguishes between payment tokens, security tokens, and utility tokens. He also mentioned how the Swiss Financial Market Supervisory Authority (FINMA) had issued a no action letter to the Web3 Foundation in 2019.
• Rep. Steil asked Mr. Schoenberger to indicate whether Switzerland and Europe have taken a more “forward thinking” approach with regard to digital assets.
  • Mr. Schoenberger answered affirmatively. He stated that the Web3 Foundation had chosen to establish its headquarters in Switzerland because of the country’s clear regulatory framework for digital assets.
• Rep. Steil then mentioned how the EU had recently approved MiCA. He asked Mr. Durgee to identify lessons from the EU’s experience that can inform the U.S.’s development of digital asset market structure legislation.
  • Mr. Durgee stated that MiCA constitutes the first large-scale jurisdictional regulatory framework for digital assets from a major market. He noted how MiCA is very focused on retail investors and protecting them in the earlier stages of digital asset projects. He recommended that the U.S. not only focus on the EU’s actions within the digital assets space. He suggested that the U.S. also consider digital asset regulatory frameworks from Dubai, Singapore, and South Korea.
• Rep. Steil asked Mr. Durgee to indicate whether the jurisdictions that are establishing clear regulatory frameworks for digital assets are experiencing more digital assets investments and innovation.
  • Mr. Durgee answered affirmatively. He mentioned how he runs an early-stage venture fund in the digital assets space and testified that his venture fund has made a “huge shift” to offshore investments over the past three years. He indicated that his venture fund is making triple the investments offshore relative to its domestic investments.
• Rep. Steil then asked Mr. Santori to indicate whether the Howey test’s “efforts of others” requirement is triggered when a digital asset project involves the holders contributing to the development and success of a functional or decentralized network.
  • Mr. Santori answered no. He stated that one of the attractions of blockchain technology is the ability to coordinate between large and otherwise disorganized groups. He noted that while the efforts of these groups contribute to the code, he emphasized that these groups do not act as issuers or exercise managerial expertise over profits and losses. He commented that this arrangement is “very different” from the situation contemplated under the U.S. Supreme Court’s SEC v. W.J. Howey Co. decision.
• Rep. Steil called Mr. Santori’s response helpful.

Rep. Don Davis (D-NC):

• Rep. Davis mentioned how Pew Research Center had found that 66 percent of minority U.S. adults had self-reported using or trading cryptocurrencies. He asked the witnesses to provide recommendations for how policymakers could best assess the current activity occurring within the digital assets space.
  • Mr. Massad raised concerns that many Americans are engaged in the digital assets space without being fully aware of the risks of digital assets. He commented that previous cryptocurrency price spikes suggest that many retail investors are entering this space. He remarked that this increased retail investor participation in the cryptocurrency markets demonstrates the need for the U.S. to create an improved retail investor protection framework for digital assets.
  • Mr. Santori remarked that the hearing’s discussion is not confined to people using digital assets and instead encompasses people using the products of digital assets. He elaborated that there exist numerous functional use cases for digital assets. He highlighted how blockchain-based networks are currently coordinating and incentivizing the transcoding process for videos so that end-users can view videos across various platforms with differing technical standards.
• Rep. Davis expressed interest in identifying trends within the digital assets space so that the U.S. can proactively protect consumers from frauds and scams. He asked the witnesses to identify any concerning trends within the digital assets space that should inform policymaking efforts.
  • Mr. Kulkin noted how market participants currently see press releases from regulatory agencies (such as the CFTC) regarding digital asset spot market enforcement cases. He noted how these enforcement cases often involve fraud and manipulation in Bitcoin, Ethereum, and stablecoin trading. He stated that these press releases often lead market participants to assume that the CFTC possesses full regulatory authority over digital assets spot markets. He noted however that the CFTC does not possess full regulatory authority over digital asset spot markets. He indicated that these market participants may later find out that digital asset firms are not segregating customer funds, that digital asset spot markets are not subject to surveillance, and that digital assets are not receiving protected treatment under the bankruptcy process. He suggested that Congress consider expanding the CFTC’s authority over digital commodity spot market trading and commented that this would support further education of the market.

Rep. William Timmons (R-SC):

• Rep. Timmons remarked that existing securities laws should not apply to digital assets. He discussed how blockchain technology enables digital assets to be created, stored, transferred, and transacted. He noted how some digital assets are cryptocurrencies that are intended for use as a means of payment. He noted how other digital assets are intended to represent traditional assets, such as equities, bonds, and derivatives. He further noted how some digital assets are digital tokens that are intended to provide access to and operate blockchain-based infrastructures. He also discussed how digital assets have different funding structures at their inceptions, different governance structures, different operational rules, and different marketed economic realities. He contended that existing securities regulations lack the appropriate flexibility to foster innovation and support blockchain technology use cases while also providing the necessary investor protections. He remarked that Congress must take action to clarify the current regulatory uncertainty for digital assets. He stated that digital assets will play a significant role in the future global economy. He asserted that the strength of the U.S. economy and the U.S.’s rule of law strongly positions the U.S. to lead in the global digital assets market. He then discussed how one of the hallmarks of a digital asset that has reached its full potential is being functional and decentralized. He asked Mr. Schoenberger to discuss how a digital asset can become functional and decentralized. He also asked Mr. Schoenberger to indicate why functionality and decentralization have become the end goal for so many digital asset projects.
  • Mr. Schoenberger stated that while the end goal of DOT and many digital asset projects is to achieve functionality and decentralization, he indicated that not all digital asset projects are pursuing these attributes. He commented that digital asset projects seeking community consensus cannot have a central entity controlling their network. He mentioned how the Web3 Foundation had ceded control over the Polkadot network to its community of users very soon after launching. He then discussed how functionality of tokens entails the tokens being more than simply a means of payment or a vehicle for investment. He noted how DOT tokens provide users with access to the Polkadot network, help to secure the Polkadot network, enable users to participate in the governance of the Polkadot network, and enable users to lease blockchains on top of the Polkadot network.
• Rep. Timmons also noted how Mr. Schoenberger’s testimony had described the Web3 Foundation’s removal of the Sudo key as a “pivotal” moment in decentralizing the Polkadot network. He asked Mr. Schoenberger to elaborate on the Web3 Foundation’s process for removing the Sudo key and to address how this removal had ensured that the Foundation could no longer control the Polkadot network.
  • Mr. Schoenberger explained that the Sudo key had provided the Web3 Foundation with very strong administrative powers. He noted how the Web3 Foundation had relinquished the Sudo key to the Polkadot network and indicated that a majority vote of the network would be required to reinstate the Sudo key.
• Rep. Timmons then discussed how Bitcoin is the most popular digital asset and noted how both the SEC and the CFTC are in agreement that Bitcoin is a commodity. He asked Mr. Santori to indicate whether it is possible for a national securities exchange to list Bitcoin and a security alongside each other under current securities laws.
  • Mr. Santori responded no. He noted how national securities exchanges are limited in terms of the assets that they can list. He stated that fundamental reforms would need to be made to national securities exchange rules to permit them to list Bitcoin. He highlighted how national securities exchanges have limitations on trading times and requirements that intermediaries, do not list additional assets. He commented that national securities exchange structures are not flexible.

Rep. Sean Casten (D-IL):

• Rep. Casten first requested that the witnesses limit their responses to cryptocurrencies and to not discuss the broader digital asset ecosystem. He then asked Mr. Durgee to indicate whether cryptocurrencies will help to close the U.S.’s wealth inequality gap.
  • Mr. Durgee answered affirmatively.
• Rep. Casten mentioned how a person that had invested in the S&P 500 index between 2017 and 2022 would have earned an almost 61 percent return. He indicated that there have been 12 cryptocurrencies that were in existence between 2017 and 2022. He indicated that a person that had invested in a basket of these 12 cryptocurrencies between 2017 and 2022 would have experienced a median return of -46 percent. He acknowledged that this figure accounts for the median cryptocurrency. He also mentioned how a recent Bank for International Settlements (BIS) report had found that between 73 percent and 81 percent of all Bitcoin traders had lost money between 2017 and 2022. He asked Mr. Durgee to indicate whether he would like to revisit his claim that cryptocurrencies will help to close the U.S.’s wealth inequality gap.
  • Mr. Durgee remarked that disparities in access to investment opportunities across accredited and unaccredited investors are driving the U.S.’s wealth inequality gap.
• Rep. Casten interjected to state that Mr. Durgee’s response is deviating from the subject of his question. He remarked that historical data indicates that cryptocurrencies do not support wealth formation. He raised concerns over claims that cryptocurrencies can serve as a responsible vehicle for wealth formation.
  • Mr. Durgee expressed interest in having the U.S. develop consumer protections for cryptocurrencies.
• Rep. Casten interjected to assert that cryptocurrencies will not help to address the U.S.’s wealth inequality challenges. He then expressed agreement with Mr. Blaugrund’s statement that investor protections, such as the segregation of roles between trading venues, market makers, and asset custodians, are a hallmark of regulated exchanges. He noted how former FTX CEO Sam Bankman-Fried had claimed that FTX segregated its various roles and how other cryptocurrency exchanges have made similar statements. He asked Mr. Blaugrund to indicate whether there exists a way to verify these statements from cryptocurrency exchanges.
  • Mr. Blaugrund remarked that he was unaware of any available third-party verification tool for assessing the veracity of the assertions made by digital asset trading platforms.
• Rep. Casten noted how the SEC’s current regulations require exchanges and brokers to issue and provide investors and market participants with fair, timely, and accurate information. He asked Mr. Blaugrund to indicate whether he would be able to definitively answer his previous question if cryptocurrency exchanges and cryptocurrency market participants were subject to the same regulations.
  • Mr. Blaugrund answered affirmatively.
• Rep. Casten lastly noted that the CFTC is the smallest of the U.S.’s financial regulators in terms of staff and resources. He stated that it is never easy to raise the amount of funding that goes to federal agencies. He asked Mr. Blaugrund to speculate why the cryptocurrency industry wants to be regulated by the smallest and least-resourced financial regulator.
  • Mr. Blaugrund commented that he does not wish to speculate on Rep. Casten’s question.

Rep. Marc Molinaro (R-NY):

• Rep. Molinaro remarked that the digital assets industry has been very innovative and has created opportunities for users to access capital and wealth. He commented that this industry both poses risks and provides opportunities for users. He expressed interest in developing a regulatory framework for digital assets. He then noted how Rep. Timmons had expressed interest in whether a national securities exchange could list Bitcoin and a security alongside each other. He asked Mr. Santori to indicate whether the SEC is working with trading platforms to account for different assets.
  • Mr. Santori remarked that he could not speak on behalf of other participants in the digital assets industry. He testified that Kraken had attempted to work with the SEC and characterized Kraken’s engagement with SEC staff as “good.” He stated that he would not provide additional details on Kraken’s engagement with the SEC because he wants to build trust between the digital assets industry and its regulators. He indicated however that these conversations between Kraken and the SEC had been terminated. He expressed his belief that the SEC staff had not been responsible for terminating these conversations. He testified that Kraken had tried to engage with the SEC and indicated that other digital asset market participants have also tried to engage with the SEC. He stated that he was not aware of any of these engagements between digital asset market participants being fruitful.
• Rep. Molinaro asked Mr. Kulkin to address how allowing a SEC-registered entity to list a commodity for trading would impact the CFTC’s existing enforcement authority.
  • Mr. Kulkin noted how commodities are currently not traded on stock exchanges or Alternative Trading Systems (ATSs). He stated that allowing a SEC-registered entity to list a commodity would create significant confusion. He noted how the CFTC can only look at the digital commodity spot market for fraud and manipulation and only has enforcement authority. He stated that the CFTC’s ability to conduct oversight for fraud and manipulation would likely be further restricted if a commodity’s trading were to occur on a SEC-regulated exchange.
• Rep. Molinaro asked Mr. Kulkin and Mr. Santori to indicate whether adaptations of existing rules could enable the CFTC to oversee commodities being traded on securities exchanges.
  • Mr. Kulkin noted how the CFTC is already monitoring spot commodity markets for fraud and manipulation. He indicated however that the CFTC lacks the same type of regulatory authority for spot markets as it has for futures markets. He stated that adaptations of existing rules would provide the CFTC with expanded jurisdiction to require registration, regulation, examination, and enforcement.
  • Mr. Santori expressed agreement with Mr. Kulkin’s response.
• Rep. Molinaro lastly asked the witnesses to indicate whether it is necessary for Congress to develop guidelines and regulations for the digital assets space.
  • Mr. Durgee answered affirmatively.
  • Mr. Kulkin answered affirmatively.
  • Mr. Santori answered affirmatively.
  • Mr. Schoenberger answered affirmatively.
  • Mr. Massad answered affirmatively.
  • Mr. Blaugrund answered no.

Rep. Greg Casar (D-TX):

• Rep. Casar noted how several courts have determined that certain digital assets meet the definition of a security under the Howey test. He also indicated that some digital assets (such as Bitcoin) fall under the definition of a commodity and are therefore subject to the CFTC’s jurisdiction. He noted how Kraken is a cryptocurrency exchange and asked Mr. Santori to indicate how many digital assets are listed on Kraken’s platform.
  • Mr. Santori stated that the Kraken Digital Asset Exchange supports “roughly” 200 assets globally.
• Rep. Casar asked Mr. Santori to indicate how many of Kraken’s listed digital assets are registered with either the CFTC or the SEC.
  • Mr. Santori stated that he was unaware of any of Kraken’s listed digital assets being registered with either the CFTC or the SEC.
• Rep. Casar asked Mr. Santori to explain why none of Kraken’s listed digital assets are registered with either the CFTC or the SEC.
  • Mr. Santori speculated that digital asset projects are not registering with either the CFTC or the SEC because there does not exist a “workable” registration regime for digital asset projects. He stated that any registration regime for digital asset projects would require intermediation through transfer agents. He asserted that these transfer agents would not provide consumer protection benefits and would make the working of a digital asset’s blockchains “untenable.”
• Rep. Casar asked Mr. Santori to indicate whether current law allows Kraken to list unregistered securities on its exchange.
  • Mr. Santori answered no.
• Rep. Casar asked Mr. Santori to indicate whether Kraken would not be able to list digital assets that are securities or commodities if such assets were unregistered with either the SEC or the CFTC.
  • Mr. Santori remarked that Kraken takes “great strides” to not list securities on its platform and testified that Kraken does not list securities on its platform. He stated that Kraken maintains “robust” processes to vet the assets that it does support. He indicated that Kraken reviews the business use cases, the functional use cases, and the cybersecurity vulnerabilities of its listed assets. He also stated that Kraken maintains processes to evaluate whether digital assets could be classified as regulated securities or regulated commodity derivatives.
• Rep. Casar then asked Mr. Blaugrund to indicate whether the NYSE can list unregistered securities on its platform.
  • Mr. Blaugrund answered no.
• Rep. Casar asked Mr. Blaugrund to indicate the consequences that the NYSE would face for listing unregistered securities on its platform.
  • Mr. Blaugrund stated that the NYSE would likely be subjected to a SEC enforcement action if it were to list unregistered securities on its platform.
• Rep. Casar stated that an exchange that wishes to be in compliance with federal law would need to delist any unregistered securities or commodities. He noted how there are digital assets that are considered securities and digital assets that are considered commodities. He indicated however that very few (if any) digital assets are registered with either the SEC or the CFTC. He raised concerns that this lack of registration poses risks to investors. He asked Mr. Massad to comment on this topic.
  • Mr. Massad expressed agreement with Rep. Casar’s concerns. He noted how the four largest digital asset platforms in the U.S. list around 400 different tokens and indicated that only about 60 tokens are commonly listed across these four platforms. He stated that the digital asset platforms are each making their own determinations as to what constitutes a security and expressed concerns regarding these discrepancies in interpretation.
• Rep. Casar interjected to remark that the U.S. must adopt consumer and investor protections for digital asset platforms to protect against the comingling of funds and to provide consumers with recourse against fraud and abuse.

Rep. Mike Flood (R-NE):

• Rep. Flood first applauded Mr. Durgee’s opening statement for highlighting how emerging technologies achieve mass adoption over a long period of time. He then remarked that the U.S. must develop its own regulatory regime for digital assets, especially following the recent fraud of FTX (which was based out of the Bahamas). He contended that the U.S. does not require more regulators for digital assets and instead must clarify when and where current regulators have jurisdiction over the existing digital assets market. He acknowledged that delegating responsibilities between the CFTC and the SEC over digital assets will be difficult. He then asked Mr. Santori to indicate whether Kraken maintains accurate books and records.
  • Mr. Santori answered affirmatively.
• Rep. Flood asked Mr. Santori to indicate whether Kraken makes its records available to regulators.
  • Mr. Santori answered affirmatively.
• Rep. Flood asked Mr. Santori to indicate whether Kraken makes appropriate disclosures to customers and ensures that the assets of their customers are protected.
  • Mr. Santori answered affirmatively.
• Rep. Flood asked Mr. Santori to provide recommendations for how the U.S. could ensure that all digital asset firms adhere to robust bookkeeping, disclosure, and asset protection standards.
  • Mr. Santori remarked that the U.S. needs harmonization of policies across digital asset providers and a set of clear rules for the digital assets industry. He commented that these policies would ensure that digital asset firms are keeping proper records, sharing records upon request with regulators and law enforcement, and making proper disclosures to their customers. He stated that FTX’s collapse had significantly impacted the digital assets market because of its large presence in the U.S. digital assets market. He asserted that the U.S.’s lack of clear standards and disclosure rules for digital assets had driven many Americans to use FTX to access the digital assets market. He stated that the lack of regulatory certainty surrounding digital assets leads digital asset exchanges to make less-informed compliance decisions and impedes their ability to develop compelling products.
• Rep. Flood then asked Mr. Kulkin to indicate whether the CFTC regularly assesses whether its registrants are maintaining adequate books and records, making appropriate disclosures, and protecting customer funds.
  • Mr. Kulkin answered affirmatively.
• Rep. Flood asked Mr. Kulkin to indicate whether any customers of LedgerX (which is the CFTC-registered clearinghouse owned by FTX) had lost any funds as a result of FTX’s collapse.
  • Mr. Kulkin answered no.
• Rep. Flood remarked that Congress is working to enable Americans to participate in the global digital assets market. He then asked Mr. Kulkin to describe the process for commodity exchange applicants seeking to self-certify the trade of a product under current CFTC rules.
  • Mr. Kulkin noted how futures exchanges seeking to list a product must currently file the product with the CFTC. He indicated that this filing must include information about the basic commercial components of the product’s contract. He also indicated that this filing must provide an explanation as to how the product is not susceptible to manipulation and describe the financial resources in place to facilitate the trading of the product. He stated that the CFTC have adopted a heightened scrutiny review for digital asset projects and noted that this review process has been in place for five years.
• Rep. Flood asked Mr. Kulkin to describe the recourse that the CFTC has against an applicant whose self-certification violates the Commodity Exchange Act.
  • Mr. Kulkin stated that the CFTC would reject a submitted product that does not comply with the Commodity Exchange Act and its rules. He indicated that this rejected product could not be listed for trading.

Rep. Andrea Salinas (D-OR):

• Rep. Salinas raised concerns over the digital assets industry’s impact on climate change. She mentioned how her state of Oregon had enacted legislation to address the industry’s carbon dioxide emissions. She asked the witnesses to indicate whether Congress should incentivize environmentally responsible practices and penalize carbon dioxide emissions from high energy use facilities as part of any federal digital assets legislation. She also asked the witnesses to provide recommendations for implementing a “climate-friendly” regulatory framework for the digital assets industry.
  • Mr. Massad described the energy usage of certain aspects of the cryptocurrency industry as a “real cause of concern.” He commented that while the U.S. would not typically address this energy usage through financial regulation, he stated that this issue will still need to be addressed. He mentioned how several states (including Oregon and New York) have worked to address the cryptocurrency industry’s energy usage and commented that state action might be a viable pathway for addressing this issue. He stated that the adoption of a financial regulatory framework for digital assets that includes investor protections and disclosures would be beneficial. He commented that policymakers could then decide the proper regulator for addressing energy concerns related to cryptocurrency activity.
  • Mr. Durgee remarked that the cryptocurrency industry is very aware of the problem of cryptocurrency-related carbon dioxide emissions and is “aggressively” moving toward cleaner energy solutions. He stated that there has been innovation in the cryptocurrency space related to reducing carbon dioxide emissions and that these innovations can save cryptocurrency firms money. He mentioned how some Bitcoin miners are using gas flares from oil mines to power their operations.
  • Mr. Schoenberger stated that not all cryptocurrency firms and organizations consume excessive amounts of energy. He noted how a neutral study had found that the Polkadot network has the least carbon dioxide emissions within the cryptocurrency industry. He indicated that the Polkadot network’s annual energy consumption equates to just seven Swiss households.
• Rep. Salinas then noted how there appears to be some consensus from the witnesses regarding the need to regulate digital assets based on utility. She raised concerns however that the use cases for digital assets remain “murky.” She also expressed concerns over the lack of digital assets that are registered securities. She asked the witnesses to indicate whether issuers are not able to describe the uses of their own products. She also asked the witnesses to indicate whether the potential product uses of digital assets are substantially broad and vague.
  • Mr. Massad commented that the answer to both questions is yes to some extent. He asserted that a key issue is the U.S.’s lack of a regulatory framework that requires disclosure. He commented that digital asset market participants can avoid regulation through claiming that their products are not securities. He applauded the SEC’s enforcement actions against fraudulent initial coin offerings (ICOs). He also stated that it is possible for a token to have utility and also be a security. He mentioned how the SEC had recently won a court case in which it proved that a token was a security, even though it had a utility component. He reiterated his call for the U.S. to develop a regulatory framework for digital assets. He mentioned how his proposed framework would not require the U.S. to rewrite its securities laws.
  • Mr. Durgee remarked that many of the disclosure requirements for digital assets (particularly as they relate to capital formation requirements) are counterintuitive. He stated that the goal of digital assets is to achieve decentralization and commented that most digital asset disclosure requirements involve centralized disclosures. He remarked that community-run digital assets often lack operating team information, audited financial information, and business plan information. He called on the U.S. to reform its disclosure framework for digital assets so that the assets can be viable.

Rep. Zach Nunn (R-IA):

• Rep. Nunn mentioned how SEC Chairman Gary Gensler had recently claimed that all tokens outside of Bitcoin fall under the SEC’s jurisdiction. He noted however that CFTC Chairman Rostin Behnam has asserted that Ethereum should be classified as a commodity. He asked Mr. Kulkin to indicate whether Ethereum should be considered a commodity or a security.
  • Mr. Kulkin remarked that Ethereum should be considered a commodity because there are futures contracts trading on Ethereum.
• Rep. Nunn remarked that the U.S.’s current regulatory structure for digital assets does not provide a definitive answer as to whether Ethereum should be considered a commodity or a security. He then asked Mr. Kulkin to indicate whether any federal regulator registers commodities listings.
  • Mr. Kulkin answered no. He also noted how the U.S. currently has no federal regulator tasked with overseeing the digital commodity spot market.
• Rep. Nunn then expressed interest in working to ensure that bad actors do not use cryptocurrencies for the purposes of avoiding enforcement actions. He mentioned how he had partnered with Rep. Jim Himes (D-CT) to introduce the Financial Technology Protection Act of 2023. He explained that this legislation would convene regulators and industry stakeholders to establish standards and regulations for digital assets. He asked Mr. Santori to address how this legislation’s proposed collaboration would benefit both regulators and the digital assets industry.
  • Mr. Santori expressed support for Rep. Nunn’s efforts to develop standards and regulations for digital assets. He stated that clear rules for digital assets would enable Kraken to file additional reports with the CFTC and the SEC. He indicated that such rules could provide guidelines to digital asset firms regarding which information should be recorded on customers, how long they should hold onto customer information, and how to share customer information with regulators. He testified that Kraken currently makes “thousands” of reports to regulators both domestically and abroad and commented that the lack of clarity around reporting requirements can make these reports difficult to prepare.
• Rep. Nunn mentioned how other jurisdictions (including the EU and the UK) are adopting their own regulatory frameworks for digital assets. He noted however that the U.S. is still working to develop its own regulatory framework for digital assets. He mentioned how the CFTC had recently charged a foreign digital assets exchange with fraudulent compliance efforts. He asked Mr. Santori to discuss how the compliance practices of Kraken differ from the compliance practices of foreign digital assets exchanges.
  • Mr. Santori remarked that the compliance practices of Kraken differ “dramatically” from the compliance practices of foreign digital asset exchanges. He testified that Kraken makes “abundant” reporting to law enforcement agencies and conducts KYC reviews of all of its users.
• Rep. Nunn interjected to commend Kraken’s compliance practices. He expressed concerns that a continued lack of regulatory clarity for digital assets will result in bad actors continuing to operate without oversight.

Rep. Ritchie Torres (D-NY):

• Rep. Torres remarked that many members of Congress have “anti-crypto derangement syndrome” that undermines federal policy towards cryptocurrency regulation. He disputed the assertion that a statutory framework for cryptocurrencies would undermine nine decades of federal securities laws and highlighted how the New York State Department of Financial Services maintains an alternate framework for regulating virtual assets. He asserted that the New York State Department of Financial Services has proven to be the most rigorous regulator of cryptocurrencies in the world. He also disputed the assertions that there is no need for the SEC to provide regulatory clarity and guidance to the cryptocurrency space and that calls for clarity and guidance are a pretext for evading lawful compliance. He noted that the SEC’s Investor Advisory Committee acknowledges that there is a need for more regulatory clarity for cryptocurrencies. He then disputed the assertion that it would not matter to the U.S. if cryptocurrency innovation is driven offshore. He remarked however that offshore, deregulated, and overleveraged companies (like FTX) have the greatest risk of losing customer funds. He further disputed the assertion that registration for cryptocurrency projects simply entails filling out an online form. He called this assertion “patently false” and noted how securities lawyers and cryptocurrency companies are spending millions of dollars on SEC registration and compliance. He then disputed the assertion that cryptocurrency technology has no utility and that the technology’s drawbacks outweigh its benefits. He remarked that the SEC is designed to be a merit-neutral regulator and that the SEC’s only role is to correct information asymmetries and mandate disclosures to protect investors. He then discussed how a digital asset can begin as a security and morph into another asset form over time as it becomes decentralized. He commented that Ether had been a security at the time of its ICO and has arguably transformed into a commodity during its subsequent years. He asked Mr. Kulkin to indicate whether there should exist a process under which a digital asset can transition from securities regulation to commodities regulation if the digital asset no longer has a central team from which investors expect to derive a profit from.
  • Mr. Kulkin first remarked that regulators should not make judgements regarding the merits of digital assets and should instead focus on ensuring that there is no fraud or manipulation present within financial markets. He noted how tokens can range the spectrum from something issued to raise capital to something that is a good or an article that is relatively fungible. He commented that it remains very challenging to identify the specific inflection point where a token moves from one category to another.
• Rep. Torres interjected to ask Mr. Kulkin to indicate whether a potential regulatory framework for digital assets will need to delineate the process for a token transitioning from a security to a commodity.
  • Mr. Kulkin answered affirmatively.
• Rep. Torres asked Mr. Kulkin to indicate whether he can think of a way to determine when a token transitions from a security to a commodity.
  • Mr. Kulkin remarked that the inflection point where a token transitions from a security to a commodity is dependent on facts and circumstances. He stated that digital asset products and markets are very different from traditional debt and securities products and markets. He expressed reluctance to identify a specific inflection point at which a token transitions from a security to a commodity.
• Rep. Torres then noted how digital assets tend to be viewed as either commodities or securities. He asked the witnesses to indicate whether those two categories are exhaustive or whether there exist other categories that digital assets could fall into.
  • Mr. Massad noted how Ether and similar products can be a commodity under federal law by virtue of the fact that there is a futures contract traded on it. He stated however that the fact that a futures contract is traded on a product does not necessarily mean that the product is not a security. He commented that a product can be both a commodity and a security. He stated that the law should account for whether there is an enterprise behind a token that impacts its value. He indicated that his response is not meant to assert that Ether remains a security and instead seeks to highlight that questions remain as to whether a digital asset still functions as a security. He stated that the law must determine when the securities laws related to capital formation stop applying to a given token.

Rep. Erin Houchin (R-IN):

• Rep. Houchin remarked that establishing a clear and thoughtful regulatory framework for digital assets would benefit existing digital assets and technologies. She also stated that such a framework would facilitate the development of blockchain technologies, expand the uses of various tokens, and create safeguards for new domestically developed technologies. She contended that the U.S. should strive to become the global leader in digital assets technology. She then discussed how distributed ledger technology (DLT) has been described as a “foundational” technology. She stated that DLT’s adoption is gradual, incremental, and steady and that DLT is “utterly transformative” to the economy and society. She asked Mr. Schoenberger to discuss the potential of DLT and the digital assets that underlay it.
  • Mr. Schoenberger expressed agreement with the arguments that DLT is comparable to the internet. He elaborated that the internet’s open standards and protocols had led the internet to achieve widespread adoption and commented that a regulatory framework had been key to enabling these open standards and protocols. He asserted that Web3 technologies offer the same potential and benefits as the internet. He also stated that Web3 technologies are on the precipice of mass adoption and commented that the potential benefits of these technologies are unknowable. He remarked that the U.S. must provide legal certainty around DLT. He then responded to Rep. Ritchie Torres’s (D-NY) previous statements and testified that the Web3 Foundation had worked to transition DOT from a security to a non-security. He discussed how the Web3 Foundation had worked for three years with the SEC to obtain clarity that DOT was no longer a security and stated that the Web3 Foundation had ultimately not received clarity from the SEC. He asserted that Congress must pass digital assets legislation to provide legal clarity to digital asset market participants.
• Rep. Houchin then remarked that the ultimate purpose of federal securities laws is to address the problem of information asymmetry. She asserted that if an existing disclosure regime is not producing valuable information to digital asset purchasers, then the ultimate purpose of federal securities laws is not being met. She asked Mr. Durgee and Mr. Santori to indicate whether they agree with her assertion.
  • Mr. Durgee expressed agreement with Rep. Houchin’s assertion.
  • Mr. Santori expressed agreement with Rep. Houchin’s assertion.
• Rep. Houchin asked Mr. Durgee and Mr. Santori to address how the U.S. could establish a disclosure regime for digital assets that would address the problem of information asymmetry.
  • Mr. Durgee remarked that the U.S.’s current disclosure regime for digital assets is contradictory and impedes the formation of digital asset firms within the U.S. He stated that the lack of clarity in the U.S.’s current disclosure regime for digital assets is causing companies to pursue digital assets innovation abroad.
  • Mr. Santori mentioned how the EU’s MiCA provides clear disclosure rules for digital assets and stated that the EU had imposed disclosure requirements on the parties best-suited to make disclosures. He also noted how the EU requires digital asset exchanges to make disclosures available to users. He called MiCA’s approach sensible and commented that it is tailored to the actual risks of digital assets.
• Rep. Houchin then mentioned how the U.S. Federal Reserve Bank of San Francisco had determined in 2020 that one out of eight Americans had purchased digital assets. She noted how the U.S. Federal Reserve Bank of San Francisco had also found that Americans would prefer to engage with digital assets through regulated institutions. She stated that the U.S. Federal Reserve Bank of San Francisco’s findings indicate that digital assets are not a fad and that Americans wish to engage with the digital asset ecosystem in a safe manner. She asked Mr. Kulkin, Mr. Durgee, and Mr. Santori to address the need for Congress to act to establish a well-regulated digital asset marketplace.
  • Mr. Durgee remarked that the U.S.’s continued inaction on developing regulation for digital assets is diminishing the U.S.’s global competitiveness. He commented that other countries are currently making significant advancements over the U.S. in the digital assets space.
  • Mr. Kulkin also remarked that Congressional action to establish a well-regulated marketplace for digital assets is very important. He suggested that Congress could learn lessons from the SEC and the CFTC’s collaborative experience in overseeing the swaps market to inform its development of a regulatory framework for digital assets.
  • Mr. Santori expressed agreement with the previous responses. He asserted that swift federal action on digital assets policy would enable the U.S. and stakeholders to better plan for the future.

Rep. Wiley Nickel (D-NC):

• Rep. Nickel remarked that Congress must work to develop a bipartisan regulatory framework for digital assets to protect consumers and investors and harness the benefits of digital assets technology. He warned that continued inaction on digital assets regulation will exacerbate the risks associated with digital assets. He stated that current federal laws are ill-suited for addressing digital assets. He asked Mr. Durgee to discuss the current rules and requirements for securities exchanges that are incompatible with blockchain technology. He also asked Mr. Durgee to provide recommendations for improving these rules and requirements.
  • Mr. Durgee discussed how securities exchanges are currently evaluating blockchain technologies and noted how some securities exchanges are even implementing blockchain technologies. He stated however that securities exchanges will be limited in their capacities to innovate and to introduce more holistic blockchain technology products until the U.S. provides a clear regulatory framework for digital assets.
• Rep. Nickel then noted how SEC Chairman Gary Gensler has repeatedly stated that cryptocurrency firms should register their products with the SEC. He asked Mr. Santori to discuss the SEC’s registration process for cryptocurrencies. He also asked Mr. Santori to indicate whether Kraken has attempted to register its products with the SEC and to comment on the experience that Kraken and other digital asset exchanges have when attempting to register with the SEC.
  • Mr. Santori disputed SEC Chairman Gensler’s claim that the SEC’s registration process for cryptocurrency firms is straightforward. He contended that both digital asset market participants and the SEC itself do not have a clear understanding of what registration for digital asset exchanges entails. He noted how SEC registration typically entails a market participant filing SEC Form S-1, which can be very time consuming and expensive to complete. He asserted that SEC Form S-1 is incompatible with digital asset products and that there does not exist a “realistic path” for cryptocurrency firms to register with the SEC under existing policies. He called on Congress to clarify the SEC’s registration process for digital assets so that regulators can support fair and efficient digital asset markets. He stated that regulators are capable of implementing a registration pathway for digital assets and simply require the tools to do so.
• Rep. Nickel also noted how SEC Chairman Gary Gensler had not been able to definitively state whether Ether constitutes a security during a previous appearance before the U.S. House Committee on Financial Services. He asked Mr. Santori to discuss Kraken’s process for evaluating whether digital asset products constitute securities before listing them. He also asked Mr. Santori to indicate whether additional clarity from the SEC would be useful on this topic.
  • Mr. Santori remarked that Kraken maintains a “robust” vetting process for all of the assets that it supports on its exchange. He indicated that this vetting process includes an assessment of the business use case for their listed digital assets, a cybersecurity audit, and whether the digital assets fall under an existing regulatory regime (either domestically or abroad). He stated however that different digital asset exchanges often reach different conclusions as to whether a given digital asset constitutes a security. He commented that different digital asset exchanges should be able to reach the same conclusions as to whether a given digital asset constitutes a security.

Rep. Jonathan Jackson (D-IL):

• Rep. Jackson mentioned how his city of Chicago is home to the Chicago Mercantile Exchange, the Chicago Board of Trade, and the Chicago Board Options Exchange. He expressed interest in ensuring that digital assets technology remains in the U.S. He raised concerns that the EU’s MiCA puts the U.S. at a competitive disadvantage internationally with regard to digital assets. He asked the witnesses to provide recommendations for ensuring that the U.S. remains a competitive and viable marketplace for digital assets activity.
  • Mr. Durgee warned that the UK’s upcoming digital asset regulations will be even more robust than the EU’s MiCA. He also mentioned how other jurisdictions (including Dubai, Singapore, and Tokyo) have adopted their own digital assets regulations. He expressed concerns that digital assets might become the first emerging technology to develop primarily outside of the U.S. He noted that while digital assets technology remains nascent, he commented that digital assets technology is growing at an unprecedented pace. He warned that Congress’s failure to develop a regulatory framework for digital assets in the near term could lead other countries to make even greater advancements over the U.S. in the digital assets space.
  • Mr. Massad remarked that the U.S. maintains the strongest financial system and capital markets in the world for several reasons and commented that regulation is just one of these reasons. He called it important for policymakers to not exaggerate the risks posed by foreign regulatory frameworks for digital assets. He stated that the U.S. is likely not in jeopardy of losing its ability to be a leader in the global digital assets market within the near-term. He then remarked that the EU’s MiCA will likely experience interpretation questions. He noted how MiCA does not apply to financial instruments and commented that the EU’s definition of the term “financial instrument” is comparable to the U.S.’s definition for security. He stated that while the U.S. should move forward in developing a regulatory framework for digital assets, he downplayed concerns that the U.S. will become uncompetitive in digital asset markets if it does not swiftly adopt such a framework.
• Rep. Jackson mentioned how the U.S. had recently experienced several bank collapses, including Silicon Valley Bank and First Republic Bank. He highlighted how technology now enables depositors to quickly withdraw large amounts of funds from their banks. He commented that this ability increases the urgency of developing a federal regulatory framework for digital assets.
  • Mr. Durgee remarked that the U.S. will likely remain a “financial superpower” for the foreseeable future. He warned however that the U.S.’s failure to develop a regulatory framework for digital assets will lead digital assets technology innovation to occur abroad. He stated that this foreign digital assets technology innovation might put the U.S. at a global technological disadvantage and commented that much of this technological innovation might not be financial in nature.

Rep. Al Green (D-TX):

• Rep. Green noted how cryptocurrency proponents often claim that digital assets can provide diversity and inclusion benefits. He lamented the lack of gender and racial diversity of the hearing’s witnesses and questioned Congress’s commitment to ensuring that digital assets policy will actually promote diversity and inclusion. He then remarked that federal regulators will require additional funding and resources to adequately oversee the digital assets space. He noted however that there are currently Congressional proposals that would reduce funding levels for federal financial regulators. He asked Mr. Massad to indicate whether funding cuts would harm the CFTC and the SEC.
  • Mr. Massad answered affirmatively.
• Rep. Green asked Mr. Massad to indicate whether the CFTC and the SEC will need to receive more funding to oversee the digital assets space.
  • Mr. Massad answered affirmatively.
• Rep. Green asked the other witnesses to indicate whether they agreed with Mr. Massad’s response that the CFTC and the SEC will need to receive more funding to oversee the digital assets space.
  • Mr. Durgee answered affirmatively.
  • Mr. Kulkin answered affirmatively.
  • Mr. Santori remarked that the need for the SEC and the CFTC to receive additional funding would depend on the jurisdiction granted to the two agencies.
• Rep. Green indicated that his question period time had expired.

Rep. Brad Sherman (D-CA):

• Rep. Sherman lamented how there are no witnesses at the hearing that are raising questions as to whether the U.S. should pursue cryptocurrencies. He stated that the intended purpose of U.S. capital markets is to finance businesses, products, and jobs. He asserted however that cryptocurrencies do not support productive outcomes and are instead meant to support sanctions and tax evasion efforts. He dismissed concerns that the U.S.’s failure to adopt a regulatory framework for digital assets will make the U.S. uncompetitive in the global digital assets market and reiterated his assertion that cryptocurrencies are not beneficial products. He mentioned how the U.S. had previously banned the issuance of bearer bonds because of their ability to facilitate tax evasion and commented that the U.S. should similarly ban the issuance of cryptocurrencies. He further discussed how the cryptocurrency industry has significant political influence at the federal level. He noted how former FTX CEO Sam Bankman-Fried had sought to create a “patina” of federal regulation for the cryptocurrency industry through preventing the SEC from overseeing the space. He also stated that he was not against blockchain technology and described the technology as an accounting system. He then asked Mr. Massad to indicate whether an unregistered exchange where participants could buy and sell unregistered securities would violate federal securities laws.
  • Mr. Massad answered affirmatively.
• Rep. Sherman asked Mr. Massad to indicate why the SEC is unwilling to enforce federal securities laws within the digital assets space.
  • Mr. Massad noted that the SEC has brought several digital assets enforcement cases.
• Rep. Sherman interjected to note that the SEC has not shut down digital asset exchanges that are listing unregistered digital asset securities. He stated that the SEC would shut down exchanges that were listing unregistered equity securities. He asserted that this uneven enforcement demonstrates the strong political clout of the cryptocurrency industry.

Financial Services Full Committee Chairman Patrick McHenry (R-NC):

• Chairman McHenry asked Mr. Schoenberger to discuss the significance for the U.S. of the UK and the EU having more advanced regulatory structures for digital assets.
  • Mr. Schoenberger added that Switzerland has a more advanced regulatory structure for digital assets than the U.S. and noted how the Web3 Foundation’s headquarters is in Switzerland. He remarked that the Web3 Foundation had made a “very deliberate” decision to put its headquarters in Switzerland because of the country’s legal structure for digital assets. He stated that the U.S.’s less advanced regulatory structure for digital assets might lead other digital assets innovators to pursue their activities in other countries with more advanced regulatory structures for digital assets.
• Chairman McHenry commented that the U.S.’s less advanced regulatory framework for digital assets will lead digital assets innovation, value creation, and jobs to accrue outside of the U.S. He asked Mr. Kulkin and Mr. Santori to recommend the most important actions that Congress can take to address digital assets. He also asked Mr. Kulkin and Mr. Santori to indicate whether Congress must act urgently to address digital assets.
  • Mr. Kulkin recommended that Congress provide clarity that the CFTC has oversight of digital commodity spot markets. He stated that such action would bring several protections to both the digital commodity spot markets themselves and their participants. He indicated that these protections include segregation of customer funds, clarity on the treatment of customer property in the event of a bankruptcy, and surveillance of market activity.
  • Mr. Santori recommended that Congress establish a functional standard for digital assets, a process for drawing jurisdictional boundaries between the SEC and the CFTC, and a workable registration pathway for digital asset exchanges. He also stated that Congress should clarify that the CFTC does have oversight over digital asset spot markets. He further stated that Congress should provide workable transition arrangements for these new policies. He asserted that Congress must pursue the aforementioned actions with urgency. He stated that the current lack of clarity in the regulatory structure for digital assets undermines Kraken’s ability to establish procedures to protect consumers, make reports to law enforcement agencies, hire new personnel, and develop new tools.
• Chairman McHenry remarked that the current lack of regulatory clarity for digital assets undermines consumer protections and uncertainty surrounding the rights associated with digital assets.
  • Mr. Santori expressed agreement with Chairman McHenry’s remarks and commented that the current lack of regulatory clarity for digital assets harms consumers.
• Chairman McHenry interjected to comment that digital assets enable open and permissionless exchanges of value that law enforcement agencies can monitor. He stated that even if the aforementioned benefits had no value, he asserted that the U.S. would still want to have consumer protections and clear rules to enforce rights for digital assets.
  • Mr. Santori expressed agreement with Chairman McHenry’s remarks.
• Chairman McHenry further stated that digital assets enable innovation, job creation, and technical transmission of new value. He then remarked that the key takeaways from the hearing are that the SEC’s current approach to disclosure is incompatible with digital assets, that the CFTC needs additional authority over non-security digital assets, and that the SEC needs to modify its rules for broker-dealers and securities exchanges. He commented that the CFTC and the SEC cannot make the aforementioned reforms on their own and asserted that Congress must enact these reforms.

Financial Services Subcommittee Chairman French Hill (R-AR):

• Chairman Hill remarked that Congress is working to provide clarity, direction, and statutory authority to the SEC and the CFTC so that these agencies can carry out their missions more effectively.

Rep. Brad Sherman (D-CA):

• Rep. Sherman remarked that the SEC should be provided full jurisdiction over cryptocurrencies. He stated that the CFTC could also be provided with full jurisdiction over cryptocurrencies. He asserted that two layers of regulation for cryptocurrencies would be beneficial.