The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem (U.S. House Committee on Financial Services)

Hearing	The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem
Committee	U.S. House Committee on Financial Services
Date	June 13, 2023

 

Hearing Takeaways:

• Digital Assets Market Structure Discussion Draft Bill: The hearing largely focused on a recently proposed digital assets market structure discussion draft bill from U.S. House Committee on Financial Services Full Committee Chairman Patrick McHenry (R-NC) and U.S. House Committee on Agriculture Full Committee Chairman Glenn “GT” Thompson (R-PA). Committee Republicans, Mr. Allaire, Mr. Garrison, Mr. Sexton, and Dr. Sirer expressed support for the discussion draft bill and stated that it would bring much needed regulatory clarity, disclosure requirements, and consumer protections to the digital assets space. Some Committee Democrats and Mr. Kaplan expressed concerns however that the discussion draft bill would allow digital assets to avoid compliance with federal securities laws and asserted that the bill would undermine consumer and investor protections (including bans on proprietary trading). Full Committee Chairman McHenry stated that the discussion draft bill can still be modified and improved. He indicated that he expects the Committee to markup some version of digital assets legislation when Congress returns from its upcoming July 4th recess.
  • Classification of Digital Assets as Securities or Commodities: Committee Republicans, Mr. Garrison, and Dr. Sirer highlighted how this discussion draft bill would provide clarity regarding whether a digital asset constitutes a security or a commodity, which would dictate whether the asset would be overseen by the U.S. Securities and Exchange Commission (SEC) or the U.S. Commodity Futures Trading Commission (CFTC). They noted how this bill would specifically provide a framework for measuring a digital asset network’s decentralization and functionality, which would be used to determine whether the digital asset is a security or a commodity. They further stated that this framework would enable stakeholders and policymakers to determine when a digital asset changes from a security to a commodity (and vice versa). Some Committee Democrats and Mr. Kaplan argued that most digital assets should be regulated under federal securities laws and raised concerns that this bill would shift regulatory responsibly for many digital assets to the CFTC (which they view as a weaker regulator). They also disputed the claims that the SEC has not provided sufficient regulatory clarity to the digital assets space and stated that the SEC’s guidances and enforcement actions provide stakeholders with sufficient insights into the SEC’s regulatory approach. Rep. Tom Emmer (R-MN) further expressed concerns that the discussion draft bill would create a regulatory framework where a digital asset can be both a security and a commodity at the same time. He also stated that Congress should assert that a token is separate and distinct from an investment contract.
  • Viability of Existing SEC Registration Pathways for Digital Asset Firms and Projects: Committee Republicans and Mr. Garrison highlighted how the discussion draft bill would provide a pathway for digital asset firms to register with the SEC, which would enhance the SEC’s ability to detect and punish fraudulent actors and activities. They argued that digital asset firms cannot currently register their products and services with the SEC due to a lack of regulatory clarity and the fact that current SEC rules do not account for the unique features and offerings of digital assets. These unique features and offerings include instantaneous settlement, the potential for the trading of securities and non-securities on the same platform, and the lack of a need for intermediaries for various functions. They also alleged that the SEC failed to clarify questions from digital asset stakeholders, which further impedes registration attempts. Some Committee Democrats and Mr. Kaplan noted however that some digital asset firms have already registered with the SEC and questioned the need to establish new registration pathways that could weaken existing consumer and investor protections. Mr. Kaplan testified that his digital assets firm, Prometheum, has successfully registered with the SEC and asserted that companies are avoiding SEC registration because they do not wish to comply with federal securities laws. Committee Republicans and Mr. Garrison stated however that the digital asset firms that have registered with the SEC do not offer products and services to retail non-accredited investors and do not offer the most popular digital assets (including Bitcoin and Ether).
  • Regulation of the Spot Digital Commodities Market: Mr. Garrison and Mr. Sexton stated that this discussion draft bill would provide the CFTC with the authority to regulate the spot markets of digital asset commodity spot markets so that it could prevent fraud (rather than merely respond to it). They noted how the CFTC currently only has anti-fraud authority within the digital assets market.
  • Accounting for Digital Assets in Traditional Regulatory Structures: Rep. Ann Wagner (R-MO) and Mr. Garrison highlighted how this discussion draft bill would require the SEC to modernize many of its rules for alternative trading systems (ATSs) and broker-dealers to better account for digital assets. Mr. Garrison also stated secondary trading rules must be updated to acknowledge that not all intermediaries are necessary within the context of digital assets.
  • Customer Fund Segregation Requirements: Committee Republicans, Mr. Allaire, and Mr. Garrison stated that this discussion draft bill would require digital asset firms to segregate customer funds from their assets. Some Committee Democrats and Mr. Kaplan expressed concerns that this bill could make it eaiser for digital asset firms to commingle customer and firm assets through not subjecting the firms to federal securities laws and through providing exceptions to the prohibition on commingling. Rep. Warren Davidson (R-OH) noted however that current law already permits some commingling of customer and firm funds within the context of swaps and futures. He stated that this discussion draft bill would merely apply existing regulatory structures to the digital assets space.
  • Provisional Registration Framework: Committee Republicans and Mr. Garrison discussed how this discussion draft bill would provide a provisional registration framework. This framework would bring digital asset firms into the remit of the SEC and the CFTC while a comprehensive regulatory framework for digital assets is being established. This framework would require prospective registrants to indicate their intention to fully register with the SEC once the rules are developed and to meet certain standards. Some Committee Democrats and Mr. Kaplan expressed concerns however that this framework would halt SEC enforcement actions against unscrupulous digital asset firms so long as they are pursing provisional registration. Mr. Garrison stated that the Committee work to clarify that provisional registrants under this bill are unable to perpetrate frauds during the provisional registration period.
  • Sale of Digital Assets to Non-Accredited Investors: Committee Republicans and Mr. Garrison expressed interest in how the discussion draft bill would create a limited exemption for non-accredited investors to participate in primary issuances of digital assets. This exemption would allow for a non-accredited investor over a 12-month period to purchase digital assets issued in a primary sale that equal 5 percent of the investor’s net worth or 5 percent of the investor’s income (whichever is greater). They stated that consumer protections and disclosure requirements would accompany these offerings.
  • Treatment of Digital Assets Created as Part of Network Functions: Rep. William Timmons (R-SC) and Mr. Garrison noted how the discussion draft bill would acknowledge that some digital assets are created through the normal functioning of digital asset networks and that federal securities laws should not apply to these assets.
  • Role of Self-Regulatory Organizations (SROs): Mr. Sexton testified that his SRO, the National Futures Association (NFA), would be able to work with the CFTC to implement the discussion draft bill’s new regulatory requirements for digital asset commodities. Mr. Kaplan argued however that the SEC and the Financial Industry Regulatory Authority (FINRA) could better oversee the digital assets space because the SEC and FINRA have significantly more employees than the CFTC and the NFA.
• Stablecoin Discussion Draft Bill: The hearing also focused on a recently proposed stablecoin discussion draft bill from U.S. House Committee on Financial Services Full Committee Chairman Patrick McHenry (R-NC). Committee Republicans and Mr. Allaire stated that this bill would provide consumer and investor protections regarding stablecoins and would support the U.S.’s global competitiveness within the stablecoin space. Rep. Wiley Nickel (D-NC) and Mr. Allaire further contended that this discussion draft bill would support the U.S. dollar’s global competitiveness, which will enable the U.S. to counter China’s efforts to create a digital currency. Some Committee Democrats and Mr. Kaplan raised concerns however that this bill is missing key protections. They also lamented how this bill lacks diversity and inclusion protections that had been present in previous stablecoin legislative proposals. Of note, several of these Committee Democrats expressed receptiveness toward pursuing federal stablecoin legislation if changes are made to the current discussion draft bill.
  • Capital, Liquidity, and Reserve Requirements: Mr. Allaire noted how this discussion draft bill would specify a “very narrow base” of important high quality liquid assets that must be held by stablecoin issuers on a fully reserved basis and would prevent the commingling of customer and issuer funds. He also noted how this bill contains recommendations for federal regulators to evaluate the capital adequacy and risks of stablecoin issuers. 
  • Role of the U.S. Federal Reserve and States in Overseeing Stablecoin Issuers: A key area of debate at the hearing involved the role that states should have in overseeing stablecoin issuers. Rep. Gregory Meeks (D-NY) and Mr. Allaire highlighted how this discussion draft bill would permit states to issue payment stablecoin licenses and supervise stablecoin issuers so long as they meet a minimum set of federal standards. They contended that this approach would ensure that consumers and investors receive adequate protections while also enable states to pursue policies that meet their unique needs. Some Committee Democrats and Mr. Kaplan expressed concerns however that this approach could lead states to adopt weaker stablecoin regulations to attract issuers (and thus more businesses and revenues to their states). They warned that weaker regulations could lead stablecoins to lose their pegs, which could result in systemic risks.
  • Stablecoin Issuance from Non-Financial Commercial Businesses: Some Committee Democrats and Mr. Kaplan expressed concerns that this discussion draft bill could enable non-financial commercial businesses to issue stablecoins. They warned that the failure to sperate banking and commercial activity could create conflicts of interests for the stablecoin issuer.
  • Stablecoin Issuer Access to U.S. Federal Reserve Services: Mr. Allaire suggested that the U.S. provide stablecoin issuers with limited rights to access basic U.S. Federal Reserve services to facilitate more timely redemptions and protect consumers and financial stability. He added that this approach would not require that stablecoin issuers have access to the U.S. Federal Reserve’s discount window.
• Other Digital Asset Policy Topics and Concerns: The hearing further considered various digital asset policy topics and various concerns involving the current digital assets space.
  • Custodying of Digital Assets: Committee Republicans, Mr. Allaire, Mr. Garrison, and Dr. Sirer expressed interest in developing federal rules for the custodying of digital assets. Rep. Warren Davidson (R-OH) expressed particular interest in ensuring that people can self-custody their digital assets and mentioned how he had proposed the Keep Your Coins Act to protect this ability. Rep. Bill Foster (D-IL) raised concerns however that the self-custody of digital assets could enable digital asset users to engage in illicit activities and evade monitoring. Dr. Sirer stated that the monitoring of ingress and egress points and cryptocurrency tracking tools could help law enforcement bodies to identify the parties behind illicit digital asset transactions. Rep. Foster still expressed doubts regarding the U.S.’s ability to fully trace the flows of digital assets that make use of newer anonymizing technologies. He indicated that these doubts are based on classified briefings.
  • Enforcement Actions Against Digital Asset Firms: Committee Republicans, Rep. Ritchie Torres (D-NY), and Mr. Garrison asserted that SEC Chairman Gary Gensler is relying upon enforcement actions against digital asset firms to effectuate his digital assets policy. They stated that this approach is punitive and fosters regulatory uncertainty. They also highlighted how many digital asset firms have explicitly requested that the SEC issue rules or guidance so that they would not be at risk of receiving an enforcement action. Rep. Stephen Lynch (D-MA) and Mr. Kaplan noted however that the SEC has been successful in all of its enforcement actions and that the written decisions associated with these enforcement actions provide guidance to the digital assets industry.
  • U.S. Global Competitiveness within the Digital Assets Space: Many Committee Members, Mr. Allaire, Mr. Garrison, and Dr. Sirer raised concerns that a lack of regulatory clarity within the digital assets space can undermine the U.S.’s global competitiveness (as well as national security). They highlighted how other jurisdictions, including European Union (EU), the United Kingdom (UK), Japan, Hong Kong, and Singapore, are developing their own rules for digital assets. They lamented how digital asset innovators are relocating from the U.S. to these foreign jurisdictions to pursue digital asset projects and asserted that the U.S. must work to counter this trend. Rep. Brad Sherman (D-CA) argued however that U.S. leadership in digital assets is not a desirable goal. He stated that digital assets undermine the U.S. dollar’s global supremacy and support sanctions and tax evasion activities.
  • Central Bank Digital Currencies (CBDCs): Rep. Bill Posey (R-FL) expressed concerns with the prospects of a U.S. CBDC. He stated that CBDCs undermine consumer privacy and can facilitate government overreaches. Mr. Allaire contended that a retail U.S. government-run and U.S. government-administered CBDC is not needed.
  • Identification (ID) of Parties Behind Digital Asset Trades and Transactions: Rep. Foster and Mr. Sexton remarked that regulators must be able to link the identity of digital asset users to transactions in order to protect against market abuses (such as frontrunning and wash trades) and illicit activities. They stated that digital asset users should possess a single ID mechanism linked to their various accounts in both spot and derivatives markets. 
  • Diversity of the Blockchain Industry: Rep. Al Green (D-TX) and Rep. Sylvia Garcia (D-TX) lamented the witness panel’s lack of gender and racial diversity and called on the Committee to have more diverse witness panels at its future hearings.
  • Prometheum’s Ties to a Chinese Firm: Committee Republicans raised concerns that a Chinese firm has an ownership stake in Prometheum. They warned that this ownership stake could provide China with access to critical digital assets technology and information, as well as provide China with undue influence over the digital assets sector. Mr. Kaplan noted that federal regulators have already approved China’s ownership stake in Prometheum and testified that Prometheum’s Chinese investors have no access to any of the company’s code, technology, system server data, or customer data. Rep. Ralph Norman (R-SC) called on the U.S. to prohibit Chinese entities from acquiring U.S. digital asset companies.

Hearing Witnesses:

1. Mr. Jeremy Allaire, Co-Founder, Chairman, and CEO, Circle
2. Mr. Coy Garrison, Partner, Steptoe & Johnson LLP and former Counsel to Commissioner Hester M. Peirce
3. Dr. Emin Gün Sirer, Founder and CEO, Ava Labs
4. Mr. Thomas Sexton III, President and CEO, National Futures Association
5. Mr. Aaron Kaplan, Founder and Co-CEO, Prometheum, Inc.

Member Opening Statements:

Full Committee Chairman Patrick McHenry (R-NC):

• He remarked that digital assets are no longer a new technology and noted how digital assets are now used around the world.
• He stated that the U.S. has always been a leader in both technology invention and technology implementation.
  • He expressed concerns that the U.S. is at risk of falling behind other countries regarding digital assets innovation.
• He remarked that the Committee has engaged in an “unprecedented” joint effort with the U.S. House Committee on Agriculture to develop digital assets legislation.
• He mentioned how he had recently released a discussion draft bill to address digital assets through closing regulatory gaps related to federal securities and commodities laws and through providing clarity for these assets.
  • He indicated that he had worked on this market structure discussion draft bill with U.S. House Committee on Agriculture Full Committee Chairman Glenn “GT” Thompson (R-PA), U.S. House Committee on Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion Chairman French Hill (R-AR), and U.S. House Committee on Agriculture Subcommittee on Commodity Markets, Digital Assets, and Rural Development Chairman Dusty Johnson (R-SD).
• He described the market structure discussion draft bill’s proposed approach to digital assets as “same risk, same regulation” and stated that the bill would modernize federal regulations to account for digital assets.
  • He asserted that the discussion draft bill’s requirements for digital assets would be “much more onerous” than the current requirements for traditional financial intermediaries.
• He expressed interest in developing bipartisan digital assets legislation and stated that the current market structure discussion draft bill can be modified and improved.
  • He indicated that he expects the Committee to markup some version of digital assets legislation when Congress returns from its upcoming July 4th recess.
• He then discussed how the market structure discussion draft bill would require trading platforms to comply with “strict” requirements regarding the segregation of customer assets.
  • He commented that these requirements would be similar to the requirements currently imposed on most traditional financial intermediaries.
• He also stated that the market structure discussion draft bill would address how digital asset issuers raise capital for their projects.
  • He asserted that the discussion draft bill seeks to ensure that the U.S. maintains the deepest and most liquid capital markets in the world.
• He discussed how the market structure discussion draft bill would make digital asset disclosures fit for purpose and ensure that digital asset issuers provide users with necessary information.
  • He indicated that this information includes the number of tokens in circulation and the concentration of assets held by affiliates.
• He also stated that the market structure discussion draft bill would enhance the SEC’s ability to detect and punish fraudulent actors and activities.
  • He noted how the discussion draft bill would establish requirements for digital asset trading platforms to register with federal regulators, including the SEC and/or the CFTC.
• He remarked that the market structure discussion draft bill would provide regulatory clarity to digital assets that are offered as part of an investment contract (and therefore securities).
• He asserted that the central aspect of the market structure discussion draft bill is the provision of a “workable” timeframe for digital assets that start as part of an investment contract to transition to a digital commodity.
  • He commented that this transition is conditional on the digital asset’s network becoming functional and decentralized.
• He concluded that federal digital assets legislation is key to providing the U.S. with financial freedom, innovation, inclusion, competitiveness, and consumer protections.
  • He warned that a failure to enact such legislation could jeopardize the U.S.’s leadership of the global financial system.

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

• She noted how Full Committee Chairman Patrick McHenry’s (R-NC) digital assets market structure discussion draft bill under consideration at the hearing would rewrite U.S. securities and commodities laws and stated that Committee Democrats are taking a “serious and thoughtful” look at the legislative proposal.
  • She indicated however that the discussion draft bill is 160 pages long, is highly complex, and had only been made public about one week prior.
• She remarked that any comprehensive legislation to overhaul U.S. capital markets will require bipartisan cooperation.
  • She also stated that U.S. independent regulators, the Executive Branch, and stakeholders must have an opportunity to provide their analysis and views regarding such legislation. 
• She then expressed concerns that the market structure discussion draft bill would allow cryptocurrency firms being sued for violating federal securities laws to continue doing business through provisional registration.
  • She stated that the market structure discussion draft bill appears to halt any SEC enforcement actions against cryptocurrency firms (even when the firms have committed fraud).
• She also discussed how former cryptocurrency firm FTX had illegally commingled the funds of its customers to make undisclosed investments.
  • She indicated that the SEC has “ramped up” its enforcement against other cryptocurrency firms with the same misconduct.
• She noted how broker-dealers are prohibited from commingling the assets of their customers with their own assets and expressed concerns that the market structure discussion draft bill would undermine this prohibition.
• She then discussed how three cryptocurrency firms had recently received approval to operate legitimately under federal securities laws.
  • She mentioned how Franklin Templeton had received approval to offer a money market fund on the blockchain.
  • She also mentioned how OTC Markets had received approval to trade cryptocurrency securities.
  • She further mentioned how Prometheum had received approval to custody and trade crypto assets.
• She noted how SEC Chairman Gary Gensler has extended open invitations for cryptocurrency companies to register with the Commission.
  • She asserted that current federal securities laws are suitable for cryptocurrency firms.
• She then expressed encouragement with the Committee’s progress in developing bipartisan stablecoin legislation.
• She stated however that the current stablecoin legislative proposal under consideration at the hearing has several shortcomings.
  • She indicated that these shortcomings include a lack of diversity and inclusion protections, weak consumer protections, and “wholly insufficient” U.S. Federal Reserve oversight of state-chartered stablecoin issuers.
• She expressed interest in resuming negotiations with Committee Republicans regarding the stablecoin legislative proposal.

Full Committee Chairman Patrick McHenry (R-NC):

• He expressed interest in continuing to work with Full Committee Ranking Member Maxine Waters (D-CA) on both digital assets market structure legislation and stablecoin legislation.
  • He also thanked Full Committee Ranking Member Waters for starting the Committee’s legislative work on digital asset issues during her previous leadership of the Committee.

Full Committee Vice Chairman French Hill (R-AR):

• He mentioned how both the U.S. House Committee on Financial Services’s Subcommittee on Digital Assets, Financial Technology and Inclusion and the U.S. House Committee on Agriculture’s Subcommittee on Commodity Markets, Digital Assets, and Rural Development had developed legislation to establish a functional regulatory framework for digital assets with strong consumer protections. 
  • He commented that the two legislative proposals under consideration at the hearing are the result of this work.
• He stated that the market structure discussion draft bill under consideration at the hearing would prevent another FTX-like collapse from occurring.
  • He indicated that this discussion draft bill would ensure the protection of customer assets, provide robust guardrails to mitigate conflicts of interest, and establish clear oversight and supervisory authority for federal regulators to ensure that market participants (including dealers, exchanges, and custodians) are compliant with federal securities and commodities laws.
• He expressed interest in receiving feedback from Committee Members during the course of the hearing.

Rep. Stephen Lynch (D-MA):

• He remarked that he has “grave concerns” regarding both the digital assets market structure discussion draft bill and the stablecoin discussion draft bill under consideration at the hearing.
• He asserted that these legislative proposals will undermine the broader U.S. financial system through creating a new regulatory “carve out” dedicated to digital assets.
  • He commented that these proposals would create a “loophole” that would enable any non-bank security issuer to digitize or tokenize its products so that it can avoid compliance with existing investor protections and financial stability regulations.
• He also stated that these legislative proposals would reduce the SEC’s authority and hinder the SEC’s ability to pursue enforcement activities.
• He called on the Committee to take a critical view of the two legislative proposals and consider how these legislative proposals would inject insecurity and volatility into the traditional U.S. financial system.
  • He commented that this insecurity and volatility will undermine trust and confidence in the traditional U.S. financial system.

Witness Opening Statements:

Mr. Jeremy Allaire (Circle):

• He mentioned how his company, Circle, had launched the U.S. Dollar Coin (USDC) five years ago and stated that USDC has become one of the largest U.S. dollar digital currencies in the world.
  • He noted how USDC powers “tens of thousands” of applications and has handled over $10 trillion in transactions.
• He remarked that the “core” of Circle’s mission is expanding the role of the U.S. dollar on the internet.
  • He commented that the demand for safe and secure U.S. dollars on the internet is real and growing and predicted that stablecoins and blockchain networks will become strategic infrastructure for the internet.
• He stated that the U.S. dollar currently faces a “profound” moment and discussed how currency competition is increasingly being defined by technological competition.
  • He highlighted how China had launched a digital Yuan that has embedded surveillance features.
• He asserted that the U.S.’s failure to respond to this currency competition could have “devastating” impacts and remarked that the U.S. must ensure that the U.S. dollar is the most competitive currency on the internet.
• He also stated that there must exist universal access to the safest and most secure digital U.S. dollars possible.
  • He commented that these digital U.S. dollars must be backed by the safest assets and that the world must possess the necessary safety and assurance to exchange value without fears of bank runs.
• He remarked that technological superiority must be central to U.S. efforts for keeping the U.S. dollar competitive.
  • He commented that this would entail leveraging the innovation made possible by software, the internet, and free market competition.
• He then expressed appreciation for the Committee’s bipartisan work to develop stablecoin legislation and asserted that passing such legislation should be a national priority.
  • He mentioned how other countries have already passed laws to regulate the use of U.S. dollar stablecoins.
• He remarked that the U.S. must lead the development of global rules for determining how the U.S. dollar moves around the world.
• He stated that the broad parameters of the stablecoin discussion draft bill under consideration at the hearing are strong and commented that the bill would provide robust supervision, strict reserve requirements, redemption rights, custody protections, and reporting requirements that protect consumers.
  • He added that the discussion draft bill would provide roles for both state and federal regulators and would support both bank and non-bank stablecoin issuers.
• He then remarked that Congress must ensure that states maintain a role in supporting the growth of well-regulated stablecoins.
  • He called for the creation of national standards for all stablecoin issuers and stated that federal regulators should be empowered to enforce these standards when appropriate.
• He also remarked that stablecoin issuers should hold reserves that are safer than the reserves held by banks and suggested that the U.S. provide stablecoin issuers with limited rights to access basic U.S. Federal Reserve services.
  • He commented that this approach would facilitate more timely redemptions and protect consumers and financial stability.
  • He added that this approach would not require that stablecoin issuers have access to the U.S. Federal Reserve’s discount window.
• He further stated that the cryptocurrency market challenges from 2022 demonstrate the importance of providing stronger protections for the custody of digital assets.
  • He suggested that the U.S. require stablecoin intermediaries to hold stablecoins with either a state- or federally-chartered qualified custodian. 
• He then recounted how proactive policies and private sector developments had enabled the U.S. to become the “uncontested” global leader in internet technology and stated that the U.S. now has a similar opportunity to become the global leader in digital assets technology.
  • He asserted however that the U.S. must act swiftly to secure its global leadership within the digital assets space and noted how China has become very technologically competitive.
• He remarked that the global currency competition is now part of technology competition and asserted that U.S. policymakers must support U.S. digital assets development in a manner consistent with U.S. values.

Mr. Coy Garrison (Steptoe & Johnson LLP; former Counsel to SEC Commissioner Hester M. Peirce):

• He remarked that Congress must bring sensible regulation to the digital assets industry and described the digital assets market structure discussion draft under consideration at the hearing as “thoughtful and measured.”
  • He commented that it would create a workable regulatory framework for the digital assets industry with “much needed” investor protections.
• He stated that the application of securities laws to digital assets is not always clear.
  • He asserted that “sweeping statements” that nearly all digital assets are or are not securities ignore the complexity of the analysis and distract from finding a workable solution to present challenges.
• He mentioned how Congress had defined the term “security” in 1933 through referencing more than 30 instruments.
  • He commented that digital assets are “unsurprisingly” not included in this list.
• He discussed how the process for determining whether a digital asset is a security is based on determining whether a digital asset is sold pursuant to an investment contract.
  • He mentioned how the U.S. Supreme Court had ruled in SEC v. W. J. Howey Co. that an investment contract is a contract, transaction, or scheme involving an investment of money in a common enterprise with a reasonable expectation of profit from the efforts of others.
  • He explained that the U.S. Supreme Court’s prescribed process for determining whether something is an investment contract is known as the Howey test.
• He remarked that the application of the Howey test is not always straightforward and mentioned how SEC staff had issued 2019 guidance on this topic that identified over 60 factors to consider.
• He also noted that a digital asset is not necessarily a security if it is sold pursuant to an investment contract.
  • He explained that the security would be the digital asset combined with the promises of the third party that constitute the transaction, contract, or scheme.
• He discussed how there currently does not exist any case law addressing the application of the Howey test to a secondary market transaction in an investment contract.
• He further noted how the SEC staff has asserted that a digital asset that at one point in time may represent a security may over time no longer represent a security if the digital asset’s network becomes sufficiently decentralized.
  • He indicated however that there does not exist any clear guidance as to how this change in status can occur.
• He then asserted that the SEC has refused to create a workable regulatory framework for digital assets and argued that Congressional action is therefore required.
• He remarked that digital asset trading platforms cannot register with the SEC under existing rules and commented that these existing rules are not designed based on the realities of how digital assets trade or operate.
  • He elaborated that existing equity market structure rules do not contemplate concepts made possible by digital assets, such as instantaneous settlement, the potential for the trading of securities and non-securities on the same platform, and the lack of a need for intermediaries for various functions.
• He stated that the SEC has shown “little interest” in changing existing rules and that the SEC has instead relied upon enforcement actions to pursue its policy goals.
  • He commented that some of these enforcement actions will take years of litigation and appeals to result in any binding judicial precedent.
• He warned that the status quo will likely persist for the foreseeable future absent a Congressional directive for the SEC to engage in rulemaking.
• He remarked that Congressional action is needed and asserted that the U.S.’s current lack of regulation of digital assets harms investors, responsible industry participants, and the U.S. economy.
  • He commented that the status quo fails to protect people that are trading digital assets.
• He noted that while there exist many responsible digital assets trading platforms that are appropriately safeguarding customer assets and monitoring against fraud and manipulation, he stated that some platforms have “notoriously” put the assets of their customers at “dramatic” risk and have caused significant losses.
  • He commented that while enforcement actions are important tools to hold wrongdoers accountable, he asserted that enforcement actions cannot replace sensible market regulation that can help to deter, identify, and mitigate wrongdoing.
• He remarked that the market structure discussion draft bill would help establish a responsible regulatory framework for digital assets and would address many of the aforementioned regulatory uncertainties.
• He stated that the market structure discussion draft bill would force the SEC to produce a more workable regulatory framework for digital assets and divide responsibility of the digital asset spot markets between the SEC and the CFTC.
  • He first noted how the discussion draft bill would create an exemption where a digital asset could be sold pursuant to an investment contract to non-accredited investors with important investor protections in place.
  • He secondly noted how the discussion draft bill would require the SEC to modernize its secondary trading rules to permit the trading of digital assets.
  • He thirdly noted how the discussion draft bill would provide a framework for how a digital asset network could become decentralized and would create a formal process for transferring regulatory responsibility for the network from the SEC to the CFTC.
  • He lastly noted how the discussion draft bill would provide the CFTC with the authority to regulate the spot markets of digital asset commodities in a responsible manner.
• He concluded that the market structure discussion draft bill would provide necessary regulatory certainty to ensure that the digital assets industry can innovate and grow the U.S. economy.
  • He thanked the Committee for its work on the discussion draft bill.

Mr. Thomas Sexton III (National Futures Association):

• He applauded the joint-work of the U.S. House Committee on Financial Services and the U.S. House Committee on Agriculture in developing the digital assets market structure discussion draft bill under consideration at the hearing.
  • He commented that this discussion draft bill contains “critical” customer protections and called on the Committee to adopt these protections.
• He mentioned how Congress had authorized the creation of registered futures associations (RFAs) in 1974 and indicated that his organization, the NFA, is the only such association.
• He also noted how Congress and the CFTC had delegated the responsibility of regulating firms engaging in exchange-traded derivatives to the NFA in 1982.
  • He indicated that the NFA has subsequently been entrusted with more responsibilities over spot retail foreign exchange (forex) markets and swaps markets.
• He stated that the NFA is solely a regulator and partners closely with the CFTC to perform its work.
  • He testified that the NFA currently has approximately 3,000 global firms and indicated that the CFTC requires these firms to be NFA members.
  • He also indicated that the NFA has 42,000 individual associate members.
• He also mentioned how the NFA has approximately 520 employees and has a budget of approximately $140 million.
  • He indicated that the derivatives industry pays for the NFA’s costs.
• He then discussed how the NFA monitors and examines its members for compliance with NFA rules and highlighted how one key oversight area relates to customer funds.
• He noted futures commission merchants (FCMs) by rule must hold customer funds in segregated accounts at qualified depositories.
  • He indicated that these customer funds must be held separate from the FCM’s proprietary and operational funds.
• He testified that the NFA receives daily reports from the depositories holding FCM customer funds to ensure that an FCM holds sufficient money to cover the amount owed to customers.
• He also discussed how the NFA investigates possible rule violations and “vigorously” enforces its own rules.
  • He testified that the NFA’s enforcement efforts are coordinated closely with the CFTC and law enforcement (if necessary).
  • He mentioned how nearly 25 individuals had gone to prison over the previous ten years due to criminal conduct initially investigated by the NFA.
• He then discussed how the NFA addresses customer abuses in the spot retail forex market and commented that forex dealers appear to function similarly to firms that offer digital asset commodities.
  • He elaborated that forex dealers solicit retail customers, accept customer funds, operate electronic trading platforms, and take the other side of customer trades.
• He recounted how Congress had provided the CFTC with anti-fraud and regulatory jurisdiction over spot retail forex transactions and their dealers in 2008.
  • He commented that Congress had “prudently” placed spot retail forex transactions under the Commodity Exchange Act (CEA) and had created a special registration category for forex dealers.
  • He noted how Congress had required that forex dealers be members of an RFA.
• He stated that the NFA and the CFTC currently impose “extensive” customer protection rules upon forex dealers.
• He then discussed how the NFA already has member firms that are engaging with spot digital asset commodities and stated that the NFA has proactively worked to oversee members engaged in this activity.
  • He recounted how the NFA had required its members to adopt enhanced disclosures and provide an investor advisory to customers in 2018.
• He also mentioned how the NFA had recently adopted a rule that imposes anti-fraud and supervision requirements on its members engaged in digital asset activity.
  • He indicated that this rule covers Bitcoin and Ether.
• He remarked that retail customers have suffered significant monetary harm in schemes involving digital asset commodities and stated that these retail customers deserve protection.
  • He asserted that only Congress can create a federal registration and regulatory regime for digital assets.
• He called on Congress to provide the CFTC with regulatory authority to complement its current anti-fraud authority over spot digital asset commodity markets.
  • He commented that this authority is necessary for enabling the CFTC to adopt the market structure decision draft bill’s customer protections, including those relating to customer assets, business conduct and disclosures, minimum capital requirements, and trade practices.
• He lastly expressed support for the market structure discussion draft bill’s provisions that would have RFAs partner with the CFTC to regulate the digital assets space.
  • He expressed the NFA’s willingness to assume additional responsibilities provided by Congress and the CFTC.

Dr. Emin Gün Sirer (Ava Labs):

• He mentioned how his company, Ava Labs, is a blockchain software company with the mission to digitize the world’s assets.
  • He stated that Ava Labs had developed some of the most significant recent technological innovations in blockchain technology, including the biggest breakthrough in consensus protocols since Bitcoin.
  • He also indicated that he currently serves as a member of the CFTC’s Technology Advisory Committee.
• He discussed how the emergence of the internet had marked a “pivotal shift” from isolated local computing to global scale computing using client-server architectures.
  • He commented that this new paradigm had given rise to systems that catered to the entire world, created millions of jobs, and solidified the U.S.’s position as a global economic leader.
• He remarked that blockchains represent the next phase of network computer systems.
• He noted that while client-server systems rely upon point-to-point communication, he indicated that blockchains facilitate many-to-many communication.
  • He explained that many-to-many communication enables multiple computers to collaborate, reach consensus, act in unison, and share services through adverse network conditions.
• He stated that many-to-many communication enables the development of unique digital assets, more efficient financial services, programmable assets, computer games, and digital identity solutions.
  • He indicated that this list is not exhaustive and that his written testimony contains examples of blockchain technology applications that tangibly improve people’s lives.
• He remarked that the implications of blockchains are far reaching because blockchains provide for a redefinition of trust, ownership, commerce, recreation, and communications.
  • He commented that blockchains will ultimately transform how humans interact with digital systems and each other.
• He stated the determination of the regulatory regime for blockchains must start and end with the functionality of digital asset features and not the technology used to create the digital assets.
• He discussed how blockchains can build into their technological systems any set of rules that are then automatically applied to all relevant transactions.
  • He commented that this ability enables blockchains to build efficient and self-enforcing networks.
• He noted how the Avalanche public blockchain allows for anyone to build custom blockchains with creator-defined rule sets, including financial regulations.
  • He added that other blockchains are working on their own equivalent solutions.
• He remarked that decentralized networks are a desirable goal for many reasons that have nothing to do with regulations governing use cases and commented that decentralized networks are more resilient, secure, auditable, and available than traditional systems.
  • He stated that blockchain developers had not set out to develop technologies to evade laws and instead had set out to solve difficult computer science problems.
• He also remarked that tokenization was not created to evade laws and commented that tokenization is the natural product of blockchains and an improvement over traditional systems.
• He then stated that the U.S. must support blockchain technology and that this support will ensure that the U.S. remains at the forefront of innovation.
  • He also commented that this support will propel the next generation of internet technologies and usher in economic growth.
• He remarked that the U.S. had been the leader during the first wave of internet innovation because it had enabled the freedom to innovate responsibly.
  • He asserted that the U.S. must take a similar approach to blockchain technology through “sensible” regulation of blockchain technology applications and tokens based on implementation and use cases.
• He then stated that blockchain platforms should not be regulated at the protocol layer and that the tokens and smart contracts created with blockchains should not be grouped into homogenous and incompatible categories.
  • He asserted that tokens and smart contracts should instead be regulated based on their functions and features.

Mr. Aaron Kaplan (Prometheum, Inc.):

• He discussed how his company, Prometheum, and its subsidiaries are building a public market and custodial infrastructure for digital asset securities that is pursuant to federal securities laws.
  • He mentioned how Prometheum has developed proprietary technology within the U.S. integrating the requirements and investor protections of securities regulation and the efficiencies of distributed ledger technology (DLT).
• He testified that Prometheum’s subsidiaries are SEC-registered broker-dealers and FINRA members.
  • He noted that Prometheum ATS is an SEC-registered ATS that matches orders for buyers and sellers of digital asset securities under federal securities laws.
  • He also noted how Prometheum Capital had recently been approved as the first special purpose broker-dealer (SPBD), which means that it is the first SEC-registered custodian for digital asset securities under federal securities laws.
• He remarked that Prometheum provides Americans participating in the cryptocurrency and Web3 space with the investor protections of federal securities laws.
  • He commented that Prometheum accomplishes this through operating under the SEC’s established regulatory frameworks through registered entities overseen by the SEC and FINRA.
• He stated that Prometheum is developing a fair and orderly market and is ensuring that the assets of customers are properly segregated, secured, and custodied.
• He remarked that cryptocurrency is a financial instrument offered to the public as an investment in most cases.
  • He noted how intermediaries must be regulated by the SEC based on the services that they provide to the public.
• He stated that properly regulating cryptocurrency trading, clearing, settlement, and custody under federal securities laws provides a proven mechanism through which to allow and encourage responsible participation and innovation while concurrently ensuring that investors are protected.
• He then remarked that the key issue that policymakers should focus on the application of existing regulatory frameworks to the digital assets space.
  • He stated that federal securities laws have been tried and tested for almost 90 years and have allowed for the U.S. to establish the world’s most trusted and advanced financial markets.
• He also asserted that the SEC is “by far” the most capable financial market regulatory agency in the world and noted how the SEC relies upon FINRA, which is an SRO that regulates the securities markets.
  • He mentioned how the SEC and FINRA together employ approximately 8,000 employees to oversee securities.
• He stated that federal securities laws coupled with SEC and FINRA oversight have proven to be the most effective system for protecting investors, operating fair and orderly markets, and protecting the funds and assets of customers.
• He then mentioned how the SEC had issued a July 2017 report stating that digital assets and related services could and likely did implicate federal securities laws.
  • He noted how the SEC had subsequently created a marketplace framework through its July 2019 and September 2020 issuances.
  • He further noted how the SEC had created a framework for the clearance, settlement, and custody of digital asset securities in December 2020.
• He remarked that these aforementioned SEC issuances provide the framework for a compliant path forward for cryptocurrencies within the U.S.
  • He asserted that those that are calling for new digital asset laws are simply not willing to comply with existing and applicable securities laws and regulations.
• He contended that new digital assets legislation is not in the best interest of the investing public or the blockchain industry.
  • He commented that legislative efforts will take years to implement while the American public will continue to operate on “reckless and unlawful” platforms.
• He remarked that the protections afforded by current federal securities laws must remain in place for innovation to continue to thrive in the digital assets space.
  • He asserted that proper regulation under the federal securities laws is not a hindrance to innovation and should instead be viewed as a prerequisite for enabling innovation to flourish.

Congressional Question Period:

Full Committee Chairman Patrick McHenry (R-NC):

• Chairman McHenry asked Mr. Garrison to indicate how many foreign regulators have proposed new regulatory frameworks for digital assets.
  • Mr. Garrison estimated that between half a dozen and a dozen foreign regulators have proposed new regulatory frameworks for digital assets.
• Chairman McHenry asked Mr. Garrison to confirm that Europe had proposed a new regulatory framework for digital assets.
  • Mr. Garrison confirmed that Europe had proposed a new regulatory framework for digital assets.
• Chairman McHenry mentioned how U.S. venture capital firms are setting up offices in foreign jurisdictions (including Europe) to invest in digital assets companies. He asked Mr. Garrison to indicate whether other countries are implementing new regulations for digital assets.
  • Mr. Garrison answered affirmatively.
• Chairman McHenry asked Mr. Garrison to indicate whether the U.S.’s lack of clear rules for digital assets is leading U.S. consumers to be protected.
  • Mr. Garrison answered no.
• Chairman McHenry then asked Dr. Sirer to address how the threat of enforcement actions stymies innovations and prevent developers from pursuing new digital asset projects within the U.S.
  • Dr. Sirer remarked that the lack of regulatory clarity surrounding the issuance of digital asset tokens deters many innovators from residing in the U.S. He also mentioned how many digital asset innovators are leaving the U.S. and moving to jurisdictions with clearer regulatory frameworks for digital assets.
• Chairman McHenry asked Dr. Sirer to indicate whether the lack of regulatory certainty surrounding digital assets has put pressure on Ava Labs to leave the U.S.
  • Dr. Sirer commented that while Ava Labs is content with remaining in the U.S., he stated that other digital asset companies are facing pressures to leave the U.S.
• Chairman McHenry then asked Mr. Garrison to discuss the costs that a digital asset firm may face as a result of an enforcement action.
  • Mr. Garrison stated that the costs of an enforcement action for a digital asset firm can be hundreds of thousands of dollars. He added that some enforcement actions may cost digital asset firms millions of dollars.
• Chairman McHenry remarked that the Committee wants a “purpose-built” regulatory regime for digital assets. He commented that this regime should apply the same level of regulation to activities that carry the same levels of risk. He stated that the digital assets market structure discussion draft under consideration at the hearing would make decentralization the key factor for determining how digital assets are federally regulated. He noted how this discussion draft bill would treat digital assets that are decentralized and associated with functional networks as commodities. He asked Mr. Sexton to indicate whether the CFTC and the NFA would be able to serve as primary regulators of the digital commodities spot market.
  • Mr. Sexton remarked that the CFTC and the NFA could regulate the spot market trading of digital asset commodities under the market structure discussion draft bill’s regulatory framework.
• Chairman McHenry discussed how the U.S. maintains securities laws protections for consumers. He asked Mr. Sexton to indicate whether the U.S. maintains similar consumer protections within the commodities space.
  • Mr. Sexton answered affirmatively. He noted that these consumer protections for commodities involve customer fund segregation requirements, capital requirements, risk disclosure requirements, and exchange trading activity monitoring requirements. He stated that retail participants in the commodities space receive similar customer protections as retail participants in the securities space.
• Chairman McHenry then asked Dr. Sirer to discuss the end goal state of a functional decentralized network.
  • Dr. Sirer remarked that a decentralized network aims to provide a service where users receive safety and integrity guarantees. He noted that a decentralized network may still involve parties that act in an adversarial fashion. He stated that decentralized networks are more resilient than other computer network systems.
• Chairman McHenry remarked that the Committee is working to develop consensus around changes to the laws governing digital assets. He asked Mr. Garrison to indicate how he would advise an innovator seeking to develop digital asset innovations within the U.S.
  • Mr. Garrison stated that he would advise an innovator seeking to develop digital asset innovations within the U.S. that the U.S.’s laws for digital assets are “very uncertain.” He testified that many of his conversations with prospective digital asset innovators result in the innovators pursuing their digital asset projects offshore or the innovators forgoing their planned digital asset projects.
• Chairman McHenry then asked Mr. Allaire to indicate where Circle is currently regulated.
  • Mr. Allaire testified that Circle is currently regulated in several jurisdictions. He indicated that Circle is regulated across the U.S. by state payments and banking supervisors. He also mentioned how Circle is regulated in Singapore as a Major Payment Institution, is registered with the French government, and is regulated by the UK’s Financial Conduct Authority (FCA).
• Chairman McHenry asked Mr. Allaire to indicate whether Circle complies with anti-money laundering (AML) rules within the U.S.
  • Mr. Allaire testified that Circle maintains comprehensive Bank Secrecy Act (BSA) AML programs.
• Chairman McHenry also asked Mr. Allaire to indicate whether Circle is licensed within the state of New York.
  • Mr. Allaire indicated that Circle has a New York BitLicense. He also noted how Circle is licensed as a money transmitter within the state of New York.

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

• Ranking Member Waters expressed concerns that key investor protections are missing from the digital assets market structure discussion draft bill under consideration at the hearing. She stated that any commingling of investor funds with a digital asset firm’s funds must be strictly prohibited. She commented that much of the fraud and investor harms stemming from FTX’s collapse were due to its commingling of customer funds. She also stated that the market structure discussion draft bill appears to permit trading facilities to trade against their own customers and engage in other activities that are prohibited under current securities laws. She asked Mr. Kaplan to indicate whether the U.S. should prohibit the commingling of customer funds with a digital asset firm’s funds. She also asked Mr. Kaplan to indicate whether Prometheum would commingle the assets of its customers with its own assets.
  • Mr. Kaplan testified that Prometheum will not commingle the assets of its cusotmers with its own assets. He also stated that Prometheum does not engage in proprietary trading or market making activities. He commented that the assets of Prometheum’s customers will therefore not be commingled with the assets of Prometheum because it does not have firm assets. He further stated that Prometheum segregates the assets of its customers pursuant to SEC Rule 15c3-3. He then remarked that FTX’s collapse had demonstrated the dangers of not having the investor protections of the federal securities laws in place. He asserted that federal securities laws would have helped to prevent FTX’s collapse. He commented that these laws ensure fair and orderly markets, protect against manipulation, ensure that firms do not trade against customer accounts, and ensure that a customer’s funds are properly segregated from a firm’s assets. He noted how these problems had been present in FTX’s collapse and contended that proper SEC regulation and oversight could have prevented these problems. He remarked that existing federal securities laws ought to be applied to the digital assets space and stated that new digital assets legislation is not required.
• Ranking Member Waters asked Mr. Kaplan to indicate whether Prometheum is prohibited from engaging in certain activities as a SPBD that would be permitted under the market structure discussion draft bill. She also asked Mr. Kaplan to explain why federal securities laws prohibit these activities and to address how changing these prohibitions would impact investors.
  • Mr. Kaplan remarked that SPBDs are capable of custodying digital asset securities under federal securities laws. He discussed how SPBDs are subject to filing and disclosure requirements and indicated that these filings and disclosures must be submitted to the SEC. He explained that these filings and disclosures include firm financial information, possession and control reports, and information regarding a firm’s affiliates. He remarked that these filing and disclosure requirements (along with ongoing reporting, proper oversight, and investor protections under the federal securities laws) will ensure that market participants are properly protected. He added that these measures are the best means of protecting the American public moving forward.
• Ranking Member Waters also expressed concerns with the market structure discussion draft bill’s provisional registration framework. She expressed concerns that this framework would provide digital asset firms that are violating federal securities laws with a “get out of jail free card.” She further stated that this framework would block the SEC from continuing its investigations into Binance and FTX. She asked Mr. Kaplan to indicate whether he has concerns regarding the discussion draft bill’s provisional registration framework. She also asked Mr. Kaplan to project the impact of this framework on investors.
  • Mr. Kaplan expressed concerns regarding the market structure discussion draft bill’s provisional registration framework. He stated that this framework would leave Americans exposed to dangers while digital asset firms pursue full registration with the SEC. He remarked that the best system for protecting the U.S. public is the federal securities law system. He emphasized how the U.S. public had experienced the ramifications of FTX’s collapse. He noted that the SEC and FINRA have 8,000 employees combined while the CFTC and the NFA have only 1,300 employees combined. He asserted that the application of federal securities laws to the digital assets space therefore constitutes the best pathway forward for overseeing the digital assets space.

Full Committee Vice Chairman French Hill (R-AR):

• Vice Chairman Hill mentioned how the U.S. House Committee on Agriculture had recently heard testimony from CFTC Chairman Rostin Behnam and former SEC General Counsel Dan Berkovitz (who had served under current SEC Chairman Gary Gensler). He noted how both CFTC Chairman Behnam and Mr. Berkovitz had called for Congressional action to address the current gap in federal regulation for digital assets. He also mentioned how the U.S. Financial Stability Oversight Council (FSOC) had issued an October 2022 report recommending that the U.S. adopt a federal regulatory framework for digital assets. He further noted how U.S. Secretary of the Treasury Janet Yellen had reiterated her support for the FSOC report’s recommendation. He then discussed how the digital assets market structure discussion draft bill under consideration at the hearing would provide a provisional registration framework. He explained that this framework is a temporary provision meant to bring digital asset firms into the remit of the SEC and the CFTC while a comprehensive regulatory framework for digital assets is being established. He commented that this provisional registration framework for digital asset firms is based on the provisional registration framework for swap dealers under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). He asked Mr. Garrison to explain why a provisional registration framework for digital asset firms is needed. He also asked Mr. Garrison to discuss how a provisional registration framework for digital asset firms can provide customer protections while the U.S. establishes more permanent rules for digital assets.
  • Mr. Garrison remarked that the market structure discussion draft bill’s provisional registration framework is designed to acknowledge the current functioning of digital asset markets. He stated that there will be no rules governing these markets until new rules are written. He stated that the discussion draft bill’s provisional registration framework will require prospective registrants to indicate their intention to fully register with the SEC once the rules are developed and to meet certain standards.
• Vice Chairman Hill interjected to ask Mr. Garrison to confirm that these standards involve bookkeeping, recordkeeping, customer disclosures, and segregation of customer funds. He also asked Mr. Garrison to confirm that prospective registrants would need to adhere to these standards under the discussion draft bill’s provisional registration framework.
  • Mr. Garrison confirmed Vice Chairman Hill’s statements.
• Vice Chairman Hill asked Mr. Garrison to provide suggestions for further refining the market structure discussion draft bill’s provisional registration framework to benefit both market regulators and the market participants.
  • Mr. Garrison stated that there exists some uncertainty surrounding the ability of regulators to pursue fraud cases against provisional registrants under the market structure discussion draft bill. He recommended that the Committee work to clarify that provisional registrants under the discussion draft bill are unable to perpetrate frauds during the provisional registration period.
• Vice Chairman Hill then mentioned how the SEC had recently issued an enforcement action against Binance for failing to register as either a national securities exchange, broker-dealer, or clearinghouse. He also noted how the SEC had alleged that Binance had commingled the assets of their customers with their own assets and had misrepresented their controls to their investors. He criticized Binance’s alleged actions and asserted that the U.S. needs clearer rules for digital assets to prevent misconduct from digital asset firms. He asked Mr. Garrison to comment on the market structure discussion draft bill’s provisions relating to the commingling of customer assets with firm assets.
  • Mr. Garrison remarked that the market structure discussion draft bill would enable both the SEC and the CFTC to address the problem of commingling of customer assets with firm assets.
• Vice Chairman Hill also asked Mr. Garrison to indicate whether the market structure discussion draft bill would allow for conflicts of interest at digital asset firms to persist.
  • Mr. Garrison answered no.
• Vice Chairman Hill then noted how Mr. Kaplan had discussed Prometheum’s success in registering with the SEC. He asked Mr. Garrison to indicate whether the market structure discussion draft bill’s registration provisions should be modified.
  • Mr. Garrison answered no. He stated that the SBDC category is limited to a certain set of broker-dealers.
• Vice Chairman Hill interjected to note that his question period time had expired. He commented that Mr. Garrison could provide his full response to his question for the hearing’s record.

Rep. David Scott (D-GA):

• Rep. Scott discussed how Congress had created the U.S.’s securities laws 90 years ago to protect investors and to establish robust regulations against misrepresentation and fraud. He noted how legal precedents have been established during the ensuing decades and commented that these precedents have provided benefits to consumers and investors. He expressed concerns however that the digital assets market structure discussion draft bill under consideration at the hearing would undermine the U.S.’s approach to securities law and would harm investors. He specifically expressed concerns over how the discussion draft bill would shift regulatory authority from the SEC to the CFTC. He also noted how the discussion draft bill would exclude digital commodities and payment stablecoins from the definition of a security under federal securities laws. He contended that this change is antithetical to current law (where an asset can be both a commodity and a security). He stated that this discussion draft bill would eliminate the SEC’s ability to determine what is (or is not) as security. He asked Mr. Kaplan to discuss the consequences that may arise from this change and whether this change would lead to fewer protections for investors.
  • Mr. Kaplan remarked that the market structure discussion draft bill would reduce investor protections. He stated that the U.S.’s securities laws have been tried and tested over generations and involve case law, follow-on legal precedent, and additional regulations. He remarked that the establishment of a new regulatory regime for digital assets will create a temporary regulatory void because it will take time to develop the new rules governing digital assets. He stated that the U.S. already possesses a regulatory framework that is “purpose built” to protect investors, ensure proper disclosures, ensure fair and orderly markets, and ensure that customer funds and assets are properly segregated and secured. He cautioned that investors would lack sufficient disclosures, protections, and oversight while the U.S. sets up the new regulatory framework for digital assets prescribed under the discussion draft bill. He then remarked that the discussion draft bill’s provisional registration framework provides a “get out of jail free card” to digital asset firms because the bill bars the SEC from taking enforcement action against a provisional registrant for previous actions. He stated if FTX and Binance had received provisional registration status under the discussion draft bill’s proposed framework, then parties that had been wronged by these companies would not have legal recourse. He argued that this dynamic would not be in the best interest of the American public.
• Rep. Scott expressed agreement with Mr. Kaplan’s response. He asked Mr. Kaplan to provide recommendations for how the Committee should address the digital assets space.
  • Mr. Kaplan remarked that the U.S. should continue to apply existing federal securities laws to the digital assets space. He stated that these laws have been “tried and tested” over generations and are designed to protect retail investors.

Rep. Frank Lucas (R-OK):

• Rep. Lucas discussed how both the U.S. House Committee on Financial Services and the U.S. House Committee on Agriculture has held many hearings and roundtables in the lead up to the release of the digital assets market structure discussion draft bill under consideration at the hearing. He called it essential for Congress to pass federal digital assets legislation for the U.S. to be a global leader in digital assets technology. He mentioned how other jurisdictions (including the EU and Japan) have regulatory frameworks for digital assets and added that other countries (such as the UK) are currently developing their own rules for digital assets. He stated however that U.S. regulators have been in conflict on the issue of digital assets regulation. He noted that SEC Chairman Gary Gensler has asserted that new federal digital assets legislation is not needed while CFTC Chairman Rostin Behnam has asserted that such legislation is needed. He remarked that Congress should resolve this conflict through passing federal digital assets legislation that would provide regulatory clarity to the digital assets space. He asked Mr. Garrison to discuss how waiting to pass federal digital assets legislation will make it more difficult for the U.S. to establish clear rules for digital assets.
  • Mr. Garrison remarked that Congress’s continued failure to adopt federal digital assets legislation will leave the U.S. trading public in digital assets at risk. He also stated that the absence of regulatory certainty for digital assets will make it challenging for digital asset industry stakeholders to continue operating within the U.S., which will increase the risk that these stakeholders move offshore.
• Rep. Lucas also asked Mr. Allaire to discuss why it would be problematic for the U.S. to solely rely upon the SEC to oversee the digital assets space while other countries develop their own regulatory frameworks for digital assets.
  • Mr. Allaire discussed how governments around the world (including the EU, the UK, Japan, Hong Kong, and Singapore) are defining the rules for how digital U.S. dollars are issued and operate in those markets. He called this situation “astounding.” He stated that the U.S. is responsible for the U.S. dollar and lacks clear regulation for payment stablecoins and digital U.S. dollar issuance. He remarked that the U.S. must adopt stablecoin rules so that other jurisdictions are not regulating the U.S. dollar.
• Rep. Lucas then discussed how many of the consumer protection concerns in the current cryptocurrency market are reminiscent of the consumer protection concerns of the forex markets during the 2000s. He commented that the forex markets during the 2000s were rife with “get rich quick” schemes and faced an unclear regulatory framework. He mentioned how Congress had granted the CFTC with jurisdiction over leveraged spot retail forex transactions and stated that this granting of jurisdiction had provided tangible consumer protection results. He asked Mr. Sexton to address the importance of Congress passing digital assets legislation to protect consumers.
  • Mr. Sexton remarked that Congress’s previous work to provide regulation for the retail forex markets can inform current efforts to develop regulation for spot digital asset commodities. He noted how the CFTC has anti-fraud jurisdiction over digital asset commodities and stated that Congress must also provide the CFTC with regulatory jurisdiction over digital asset commodities. He asserted that it is far better to prevent fraud than to prosecute fraud.
• Rep. Lucas asked Mr. Sexton to discuss how the NFA would amend its compliance rules to account for the establishment of a classification for digital asset commodities.
  • Mr. Sexton remarked that the NFA’s process for addressing digital asset commodities would be similar to the NFA’s previous processes for addressing the retail forex and swaps markets when Congress had provided the CFTC with regulatory authority over these markets. He noted how the NFA currently maintains an anti-fraud rule for digital asset commodities that covers Bitcoin and Ether. He stated that the NFA would amend this rule to cover any new products that fall under future federal digital assets legislation. He also stated that the NFA would amend its rules to permit digital asset commodity brokers and dealers to be members of an RFA. He further indicated that the NFA would adopt compliance rules for the areas identified within the federal digital assets legislation and commented that the NFA would work with the CFTC on these rules. He elaborated that these compliance rules would address the segregation of customer funds and capital disclosures.
• Rep. Lucas indicated that his question period time had expired.

Rep. Nydia Velázquez (D-NY):

• Rep. Velázquez mentioned how the New York Department of Financial Services (NYDFS) has developed its own regulatory regime that provides for the legal issuance of stablecoins within New York state. She stated that the Committee has debated whether the federal government or the states should have primary regulatory authority regarding stablecoin issuance. She asked Mr. Allarie and Mr. Kaplan to provide their views on the role of the federal government vis-a-vis the states on stablecoin issuance.
  • Mr. Allaire remarked that both states and federal regulators should have strong roles in regulating stablecoins. He stated that the stablecoin discussion draft bill under consideration at the hearing makes “very strong progress” in establishing strong federal baseline standards for stablecoin requirements related to reserves, reporting, redemption, and disclosures, as well as in prohibiting the commingling of the assets of customers and stablecoin issuers. He also noted how the discussion draft bill would provide the U.S. Federal Reserve and federal banking regulators with the authority to develop rules regarding capital adequacy, core risk management, safety and soundness, and fitness of management. He indicated however that the discussion draft bill’s framework would still permit states to issue payment stablecoin licenses and supervise stablecoin issuers so long as they meet a minimum set of federal standards. He described this arrangement as a “good compromise” that allows for states (such as New York) to pursue their own innovative stablecoin regulatory regimes.
  • Mr. Kaplan expressed concerns that the stablecoin discussion draft bill could result in regulatory fragmentation. He noted that state-issued stablecoins can be used nationally and asserted that this national use of state-issued stablecoins should trigger federal oversight. He remarked that stablecoins pose systemic risks and called for proper federal oversight of stablecoins. He commented that this federal oversight would be uniform and prevent stablecoin issuers from engaging in regulatory arbitrage.
• Rep. Velázquez asked Mr. Allaire and Mr. Kaplan to indicate whether there should exist ongoing federal supervision and examination of state-licensed stablecoin issuers.
  • Mr. Allaire remarked that the U.S. Federal Reserve needs the ability to enhance rules for stablecoin issuers over time. He noted how the stablecoin discussion draft bill highlights the need to address capital adequacy, risk management, and safety and soundness. He stated that federal regulators must be able to monitor developments within the stablecoin market and pursue rulemakings to address these developments when necessary.
  • Mr. Kaplan expressed concerns that states can unilaterally expand the list of eligible reserve assets for a stablecoin without restriction at any time. He stated that this expansion of eligible reserve assets could increase the risk that stablecoins would lose their pegs.
• Rep. Velázquez then remarked that a key tenet of the U.S. banking system is the separation of banking and commercial activity. She asserted that the stablecoin discussion draft bill fails to recognize this separation for stablecoin issuers through enabling non-commercial businesses to own stablecoin issuers. She asked Mr. Kaplan to discuss how failing to separate banking and commercial activity within the stablecoin space could harm consumers and result in financial instability.
  • Mr. Kaplan remarked that the consolidation of consumer and banking activities can lead to conflicts of interest and create systemic risks.
• Note: Rep. Velázquez’s question period time expired here.

Rep. Bill Posey (R-FL):

• Rep. Posey asked Mr. Allaire to indicate whether there exist similarities between China’s digital currency and the CBDC considered under President Biden’s Executive Order (EO) on Ensuring the Responsible Development of Digital Assets.
  • Mr. Allaire discussed how the Chinese government is pursuing an entirely state-run and state-administered digital currency program and noted how this Chinese digital currency contains embedded surveillance capabilities. He stated that the Chinese government seeks to export its digital currency around the world as part of its desire to grow the global role of the Chinese Yuan. He then noted how President Biden’s EO on Ensuring the Responsible Development of Digital Assets had directed the federal government to study a potential U.S. CBDC. He contended that a retail U.S. government-run and U.S. government-administered CBDC is not needed. He stated however that there exist opportunities to make critical improvements in the U.S. dollar’s core infrastructure within the U.S. Federal Reserve system. He remarked that the U.S. should preserve the separation between institutions that deliver financial services directly to end customers and the government. He commented that this separation is necessary for privacy, security, and market competition reasons.
• Rep. Posey expressed concerns that private digital currencies will not be able to fairly compete with government-backed digital currencies. He also asserted that additional regulations would likely be insufficient for addressing fraud within the digital currencies. He further expressed concerns that government-backed digital currencies will undermine consumer privacy and enable tyrannical governments to control or even confiscate the funds of their citizens. He then asked Mr. Allaire to address how investors should evaluate the liquidity risks of digital assets compared to banks.
  • Mr. Allaire noted how the stablecoin discussion draft bill under consideration at the hearing would specify a “very narrow base” of important high quality liquid assets that must be held by stablecoin issuers on a fully reserved basis. He stated that a digital U.S. dollar that is held to these standards is “dramatically safer” than bank deposits. He explained how banks hold one-twelfth of their deposits and lend out the remainder of their deposits. He stated that the U.S.’s fractional reserve banking system contains risks and that there have been harms associated with the mixing of bank lending and payment system activities. He remarked that the discussion draft bill would define and create the safest digital U.S. dollar in the world. He stated the U.S. government should support the global export of domestically developed digital U.S. dollars.
• Rep. Posey asked Mr. Allaire to address how the U.S.’s regulations for stablecoins should compare to the U.S.’s capital regulations for banks and money market funds.
  • Mr. Allaire discussed how the stablecoin discussion draft bill contains recommendations for federal regulators to evaluate the capital adequacy and risks of stablecoin issuers. He called these evaluations appropriate. He noted however that stablecoins are different from banks in that the reserve assets of stablecoins are very narrowly held. He stated that this dynamic should lead the liquidity and capital buffer requirements for stablecoins to be lower than for banks. He commented that the discussion draft bill provides federal regulators with discretion to determine the appropriate liquidity and capital buffer requirements for stablecoins. He asserted that these requirements will be necessary for enabling the domestic development of stablecoins.

Rep. Brad Sherman (D-CA):

• Rep. Sherman first expressed frustration over how the Committee had held numerous hearings on cryptocurrencies in 2023 and no hearings on diversity, equity, and inclusion. He remarked that the Committee’s hearings on cryptocurrencies all are premised on the notion that the U.S. is becoming globally uncompetitive within the digital assets space. He asserted however that the U.S. should not strive to be a global leader in the digital assets space. He then remarked that the digital assets market structure discussion draft bill under consideration at the hearing would remove the SEC’s regulatory jurisdiction over cryptocurrencies and provide a “patina” of federal regulation for digital assets. He also stated that the stablecoin discussion draft bill under consideration at the hearing would allow for the states with the weakest regulations to oversee stablecoins. He warned that the stablecoin discussion draft bill would provide states with a strong incentive to adopt weaker stablecoin legislation because attracting stablecoin issuers could provide states with increased revenues. He remarked that the cumulative effect of both discussion draft bills would be weaker regulations for the digital assets space and would achieve the policy objectives of former FTX CEO Sam Bankman-Fried. He also discussed how several cryptocurrency industry leaders have stated that cryptocurrencies can undermine the U.S. dollar’s global supremacy and support sanctions and tax evasion activities. He then asserted that the SEC has already provided regulatory clarity to the digital assets space. He noted how the SEC has determined that cryptocurrencies are securities and argued that cryptocurrencies should therefore adhere to current securities rules. He stated that the cryptocurrency industry is seeking to undermine this regulatory clarity through legal challenges and lobbying campaigns. He also accused Ava Labs of peddling unregistered securities to retail investors. He mentioned how the Avalanche token’s market capitalization had fallen from $40 billion to $4 billion. He asked Dr. Sirer to indicate whether Ava Labs had filed a registration statement with the SEC. He also asked Dr. Sirer to indicate whether Ava Labs had sold unregistered Avalanche tokens or a future right to Avalanche tokens to raise capital.
  • Dr. Sirer stated that Ava Labs has complied with every regulation to the best of the company’s abilities.
• Rep. Sherman interjected to ask Dr. Sirer to indicate whether Ava Labs had filed a registration statement with the SEC.
  • Dr. Sirer indicated that he does not know the correct answer to Rep. Sherman’s question and noted that he is a technologist. He stated however that he does not believe that Ava Labs had filed a registration statement with the SEC.
• Rep. Sherman highlighted how musician Taylor Swift had rejected cryptocurrency endorsement deals because she had deemed these deals to involve unregistered securities. He then asked Mr. Kaplan to indicate whether Prometheum can comply with SEC regulations and carry on its business.
  • Mr. Kaplan answered affirmatively.
• Rep. Sherman asked Mr. Kaplan to indicate whether Prometheum had filed registration statements with the SEC.
  • Mr. Kaplan testified that Prometheum had obtained a license from the SEC.
• Rep. Sherman remarked that functioning digital assets would undermine the power of the American people.
• Note: Rep. Sherman’s question period time expired here.

Rep. Blaine Luetkemeyer (R-MO):

• Rep. Luetkemeyer discussed a recent Wall Street Journal article that reported that Prometheum is a strategic partner and joint-venture with Shanghai Wanxiang Blockchain and its affiliate, HashKey. He noted how Shanghai Wanxiang Blockchain is a spinoff of Wangxiang Group, which has “deep ties” to the Chinese Communist Party (CCP). He expressed concerns over Prometheum’s relationship with a CCP-affiliated company. He asked Mr. Kaplan to indicate the percentage of Prometheum that is owned by a Chinese entity.
  • Mr. Kaplan testified that approximately 20 percent of Premetheum is owned by a Chinese entity.
• Rep. Luetkemeyer asked Mr. Kaplan to indicate how much influence Prometheum’s Chinese owners have over the company.
  • Mr. Kaplan stated that Prometheum’s Chinese owners have the same rights as other shareholders.
• Rep. Luetkemeyer asked Mr. Kaplan to indicate how much access Prometheum’s Chinese owners have to the company’s intellectual property (IP).
  • Mr. Kaplan testified that Shanghai Wanxiang Blockchain has no access to any of Prometheum’s code, technology, system server data, or customer data.
• Rep. Luetkemeyer asked Mr. Kaplan to explain his previous response in light of the fact that Shanghai Wanxiang Blockchain serves on Prometheum’s board of directors.
  • Mr. Kaplan testified that Prometheum had changed its corporate bylaws in a November 2021 filing with the SEC. He indicated that these bylaws limit who has access to the company’s data and that these limits apply to the company’s directors.
• Rep. Luetkemeyer asked Mr. Kaplan to indicate where Prometheum currently stores its data.
  • Mr. Kaplan testified that Prometheum stores its data within the U.S.
• Rep. Luetkemeyer asked Mr. Kaplan to confirm that Prometheum does not store any of its data in China.
  • Mr. Kaplan confirmed that Prometheum does not store any of its data in China.
• Rep. Luetkemeyer then noted how Prometheum has a designation as a digital asset broker-dealer. He asked Mr. Kaplan to confirm that this designation entails that Prometheum hold a large amount of client personally identifiable information (PII).
  • Mr. Kaplan confirmed that Prometheum holds a large amount of client PII.
• Rep. Luetkemeyer asked Mr. Kaplan to indicate whether the Chinese have any access to the PII of Prometheum’s clients.
  • Mr. Kaplan answered no. He remarked that Prometheum is an American founded, developed, and controlled company. He stated that there is no foreign influence or control over Prometheum’s systems, code, servers, or customer data.
• Rep. Luetkemeyer remarked that the CCP and the Chinese government influences all companies with which they have an ownership stake in or involvement with. He asked Mr. Kaplan to discuss the safeguards that Prometheum has in place to ensure that the CCP or the Chinese government do not take valuable information from the company.
  • Mr. Kaplan testified that Prometheum had been subjected to both a Committee on Foreign Investment in the United States (CFIUS) inquiry and a SEC investigation where it had been required to disclose all of its communications.
• Rep. Luetkemeyer interjected to ask Mr. Kaplan to indicate the benefits that China receives from Prometheum if China cannot access Prometheum’s information or technology.
  • Mr. Kaplan remarked that Chinese firms had invested in Prometheum based on a belief in the business idea that digital assets are securities and should be properly regulated as such. He indicated that this view entails that digital assets be traded on intermediaries that are properly registered under U.S. securities laws.
• Rep. Luetkemeyer asked Mr. Kaplan to indicate whether Prometheum’s Chinese investors believe that their involvement with Prometheum would provide them with any helpful information.
  • Mr. Kaplan answered no.
• Rep. Luetkemeyer asked Mr. Kaplan to explain why Prometheum had taken on Chinese firms as investment partners and had not decided to take on U.S. investment partners.
  • Mr. Kaplan stated that Prometheum was founded as a small startup company and that Shanghai Wanxiang Blockchain had provided Prometheum with an opportunity to establish a relationship with a large established entity. He commented that Prometheum would have probably pursued a partnership opportunity with a U.S. firm if such an opportunity had been available.
• Rep. Luetkemeyer described China’s investment in Prometheum as “troubling.” He discussed how China often seeks to identify small innovative companies for investment because these companies need growth, capital, expertise, and technology. He stated however that these investments provide China with control and influence over these companies. He questioned why the SEC is not further scrutinizing Prometheum over its ties to Chinese investors.

Rep. Gregory Meeks (D-NY):

• Rep. Meeks remarked that the NYDFS has created a “best in class” licensing regime for virtual currency businesses. He noted how the NYDFS is the only prudential regulator with virtual asset-specific authority in the U.S. He stated that the NYDFS has assembled the largest team of expert virtual currency regulators in the U.S. and has taken the strongest supervisory and enforcement actions of any regulator. He asked Mr. Allarie to indicate which body constitutes Circle’s primary regulatory.
  • Mr. Allaire stated that Circle is regulated similarly to every other major electronic payment innovator in the U.S. He noted how many different state regulators throughout the U.S. regulate Circle and commented that Circle’s regulatory situation is similar to the regulatory situations of PayPal, Apple Pay, Venmo, and Cash App. He stated that Circle is an electronic stored value money transmission application, which requires Circle to comply with the U.S. Department of the Treasury’s BSA AML requirements and to be subject to licensing and supervision throughout the U.S. He also mentioned how Circle has international supervisors that are central banks and market supervisors. He further mentioned how Circle has a BitLicense from the NYDFS and indicated that Circle was the first company in the world to receive a BitLicense in 2015. He testified that Circle adheres to New York’s reserve and disclosure requirements for stablecoins and described these requirements as “some of the best available to the market today.”
• Rep. Meeks asked Mr. Allaire to confirm whether Circle currently possesses a virtual currency license within any of the U.S.’s domestic jurisdictions.
  • Mr. Allaire testified that Circle has a BitLicense, which is New York’s virtual currency license. He also mentioned how other states maintain specific enhancements to their money transmission statutes that deal with virtual assets and their interactions with the banking system. He further mentioned how Circle is supervised by international banking regulators, including the Monetary Authority of Singapore and the UK FCA.
• Rep. Meeks asked Mr. Allaire to indicate whether states have a “vital” role to play in overseeing the stablecoin space.
  • Mr. Allaire answered affirmatively.
• Rep. Meeks asked Mr. Allaire to explain why the existence of a state pathway for stablecoin registration should not be considered a “race to the bottom.”
  • Mr. Allaire remarked that payment stablecoins have the potential to be very large scale and more used than other payment technologies. He noted how this anticipated growth in stablecoin use has led many bodies (including the U.S. Department of the Treasury and the White House) to recommend the establishment of national standards for payment stablecoins. He stated that federal regulators should be empowered to define baseline national standards for payment stablecoins so that states would not seek to offer weaker regulations to attract stablecoin issuers. He remarked that the best states should be able to issue stablecoin licenses and supervise stablecoin issuers according to these baseline national standards. He commented that the stablecoin discussion draft under consideration at the hearing would accomplish this objective.
• Rep. Meeks then expressed agreement with Mr. Garrison’s concerns that the U.S.’s lack of clear rules for digital assets is making the U.S. globally uncompetitive. He noted how many U.S. digital asset companies have told him that the U.S.’s lack of regulatory clarity for digital assets is causing them to consider leaving the U.S. for jurisdiction with more favorable regulatory environments. He asked Mr. Garrison to further discuss these concerns. He also asked Mr. Garrison to indicate the near-term and long-term impacts of having digital asset companies leave the U.S.
  • Mr. Garrison remarked that regulatory uncertainty impedes business growth. He stated that many digital asset businesses want to comply with U.S. laws and simply want clarity regarding the applicable laws. He remarked that these digital asset businesses experience frustration when they face the constant prospect of enforcement actions without a pathway for compliance.
• Note: Rep. Meeks’s question period time expired here.

Rep. Ann Wagner (R-MO):

• Rep. Wagner applauded the efforts of Full Committee Chairman Patrick McHenry (R-NC) and Full Committee Vice Chairman French Hill (R-AR) in developing the digital assets market structure discussion draft bill under consideration at the hearing. She stated that this discussion draft bill would provide regulatory clarity to market participants, promote innovation, and protect investors. She also called the discussion draft bill critical for ensuring that the U.S. remains the leader in technological and financial innovation. She expressed concerns however that SEC Chairman Gary Gensler is seeking to regulate the digital assets space through enforcement actions. She asserted that the SEC is pursuing these enforcement actions within the digital assets space without clear authority from Congress and without providing a clear regulatory framework for digital asset firms. She also mentioned how the CFTC has pursued their own enforcement actions within the digital assets space and noted how some of these actions involve digital assets that the SEC claims are securities. She then discussed how one of FTX’s most egregious actions had been its commingling of customer funds with firm assets. She asked Mr. Allaire to indicate whether the legislative proposals under consideration at the hearing would fix the problems that had been present at FTX prior to its collapse.
  • Mr. Allaire remarked that both the digital asset market structure discussion draft bill and the stablecoin discussion draft bill under consideration at the hearing would address problems related to the commingling of customer funds and firm assets. He commented that prohibiting the commingling of customer funds and firm assets is important.
• Rep. Wagner then mentioned how the SEC had recently issued an enforcement action against Coinbase alleging that the company was operating as an unregistered broker-dealer, exchange, and clearinghouse. She noted how this enforcement action came after several requests from Coinbase (including a petition for rulemaking) to amend the federal securities laws so that the company could register with the SEC. She asked Mr. Garrison to indicate whether the SEC’s inaction on valid requests from Coinbase and subsequent imposition of “harsh” penalties against Coinbase inhibits other digital asset companies from making good faith efforts to register with SEC.
  • Mr. Garrison answered affirmatively. He remarked that the U.S.’s lack of a regulatory framework for digital assets makes it very difficult to operate digital asset businesses within the U.S. He stated that the U.S.’s regulatory framework for digital assets should acknowledge certain unique elements of the digital assets market, such as instantaneous settlement and the ability to trade digital asset securities alongside digital asset non-securities. He commented that the market structure discussion draft bill would acknowledge these elements and would direct the SEC to begin establishing a regulatory framework for digital assets.
• Rep. Wagner noted how the market structure discussion draft bill would require the SEC to modernize many of its rules to better account for digital assets. She indicated that these rules include those governing ATSs and broker-dealers. She asked Mr. Garrison to discuss how the SEC could update these rules to accommodate digital assets and to project the impact of these rule updates on the digital assets ecosystem.
  • Mr. Garrison remarked secondary trading rules must be updated to acknowledge that not all intermediaries are necessary. He commented that digital assets make it possible for trades to occur without the use of intermediaries. He highlighted how the market structure discussion draft bill would require the SEC to immediately act to update their secondary trading rules.
• Rep. Wagner then stated that development within the blockchain technology space is accelerating rapidly. She commented however that current federal regulations make it difficult for retail investors to participate in initial offerings. She noted how the market structure discussion draft bill would provide a limited exemption for non-accredited investors to better participate in these initial offerings. She asked Mr. Garrison to discuss how the discussion draft bill’s limited exemption for participation in initial offerings would benefit retail investors.
  • Mr. Garrison remarked that improving investor choice is an important part of investor protection.
• Rep. Wagner interjected to ask Mr. Garrison to indicate whether the market structure discussion draft bill contains protections for retail investors participating in initial offerings.
  • Mr. Garrison answered affirmatively. He noted how the discussion draft bill includes disclosure requirements for initial offerings, provides individual investment limits, provides aggregate offering limits, and provides limits on secondary trading from corporate insiders.
• Rep. Wagner noted that her question period time had expired. She expressed interest in identifying other potential protections that should be added to the market structure discussion draft bill.

Rep. Stephen Lynch (D-MA):

• Rep. Lynch expressed concerns that the digital asset market structure discussion draft bill under consideration at the hearing would enable digital asset firms to avoid compliance with the Securities Act of 1933, the Securities Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Sarbanes–Oxley Act of 2002. He noted how all of these laws had been enacted in response to financial crises and were meant to restore investor trust in the U.S. banking and financial systems. He asserted that the disclosure of public information to investors is a key element of fostering investor trust. He stated that Prometheum had been able to comply with the aforementioned laws. He asked Mr. Kaplan to project the consequences of providing new companies with a choice as to whether they will be regulated. He expressed particular concerns that a state-based regulatory system could enable companies to choose less stringent regulators.
  • Mr. Kaplan remarked that providing new companies with a choice as to whether they will be regulated will harm the American public. He stated that the U.S. should apply federal securities laws to the digital assets space to ensure that digital assets investors are sufficiently protected. He then disputed the assertions that the SEC has not provided sufficient regulatory clarity to the digital assets industry. He mentioned how the SEC had issued a July 2017 report indicating that federal securities laws apply to the digital assets space. He also noted how the SEC had released compliance frameworks for the trading and custody of digital assets. He stated that parties arguing that there exists a lack of regulatory clarity for digital assets are doing so because they cannot comply with the existing federal regulations for digital assets.
• Rep. Lynch mentioned how the SEC has been successful in all of its 130 enforcement actions against digital asset firms. He also noted how each of these enforcement actions involves a written decision explaining why the digital assets firm receiving the enforcement action had been found in non-compliance with U.S. laws and regulations. He asked Mr. Kaplan to indicate whether these written decisions are instructive to digital asset companies as to what actions are and are not permitted under U.S. laws and regulations.
  • Mr. Kaplan remarked that the SEC’s releases, enforcement actions, and statements provide clear indications that federal securities laws apply to the digital assets space. He asserted that there should be no confusion regarding the SEC’s regulatory positions toward digital assets. He stated that the digital assets industry has chosen to ignore these clear indications because they view it as advantageous to not be regulated under the federal securities laws.
• Rep. Lynch asked Mr. Kaplan to explain how digital asset firms can register with the SEC and come into compliance with existing federal securities laws. He also asked Mr. Kaplan to indicate whether this process is onerous.
  • Mr. Kaplan stated that the steps that digital asset firms need to undertake to register with the SEC are difficult, complex, and time consuming. He asserted however that these features of the registration process are necessary to protect customer funds and assets.
• Note: Rep. Lynch’s question period time expired here.

Rep. Andy Barr (R-KY):

• Rep. Barr commented that Mr. Kaplan appears to be arguing that all digital assets except for Bitcoin are securities and that existing securities laws are perfectly applicable to digital assets. He asked Mr. Garrison to explain why existing securities laws cannot always be clearly applied to digital assets and to address how the Howey test may fail to account for innovations within the digital assets space.
  • Mr. Garrison noted how the federal statute listing examples of securities does not include digital assets. He stated that digital asset firms must therefore determine whether a given digital asset constitutes an investment contract (which would thus render the digital asset to be a security). He noted how the U.S. Supreme Court’s SEC v. W. J. Howey Co. decision finds that an investment contract is a contract, transaction, or scheme involving an investment of money in a common enterprise with a reasonable expectation of profit from the efforts of others. He indicated that a digital asset at times can be sold pursuant to an investment contract. He stated however that this sale does not necessarily mean that the digital asset itself is a security for all of time. He discussed how digital asset tokens may operate differently over time and noted how consumers will purchase digital assets for a variety of reasons. He indicated that a person may purchase a digital asset for use on a network. He stated that a digital asset may no longer bear the characteristics of a security when the digital asset’s network is fully decentralized and fully functioning. He asserted that the application of securities laws to these digital assets would be so overly burdensome as to render the use of the network moot.
• Rep. Barr asked Mr. Garrison to respond to Mr. Kaplan’s argument that existing federal securities laws are sufficient for regulating the digital assets space.
  • Mr. Garrison expressed disagreement with Mr. Kaplan’s argument that existing federal securities laws are sufficient for regulating the digital assets space. He stated that while existing federal securities laws can regulate parts of the digital assets space, he contended that these laws cannot regulate all of the digital assets space.
• Rep. Barr then called it essential for any digital assets market structure legislation to set rules for the custody of digital assets. He commented that custody rules would provide customers with confidence that their digital assets are stored where an intermediary says they are stored. He stated that digital assets raise several novel issues related to custody that policymakers must address. He asked Mr. Garrison to discuss some of the key questions regarding the application of the SEC’s requirements to the custody of digital assets.
  • Mr. Garrison discussed how there exist several questions related to the types of intermediaries (including broker-dealers and investment advisors) that may custody digital assets. He stated that a key question for the SEC involves how one demonstrates exclusive possession of a digital asset. He explained how digital assets use private keys for security purposes and noted how these private keys may be shared with other parties and placed into different groups. He mentioned how the digital assets industry has proposed several solutions to this issue and stated that the SEC has not yet reached a conclusion on this issue, despite considering the issue for years.
• Rep. Barr remarked that the U.S.’s current regulatory approach toward digital assets is “unacceptable” and asserted that this approach is stifling innovation within the U.S. He also stated that the SEC and banking regulators are discouraging the safe custodying of digital assets. He then asked Mr. Allaire to discuss how the U.S. can develop its stablecoin regulatory regime to elevate its global leadership in the stablecoin space without jeopardizing the access of Americans to freedom, privacy, and apolitical private capital. He also asked Mr. Allaire to address how U.S. stablecoins differ from Chinese digital currencies. He highlighted how the digital Chinese Yuan has embedded surveillance features. He further asked Mr. Allaire to address how a regulatory framework for U.S. dollar-denominated stablecoins is an effective alternative to a CBDC or a digital U.S. dollar that will preserve the U.S. dollar’s global dominance.
  • Mr. Allaire remarked that private sector innovation with strong regulation at the national level for digital U.S. dollars provides the best pathway for enabling the U.S. to compete with China. He commented that the stablecoin discussion draft bill under consideration at the hearing would provide such strong regulation.

Rep. Al Green (D-TX):

• Rep. Green expressed interest in ensuring that the blockchain industry is diverse. He asked the witnesses to indicate whether they believe that the blockchain industry should be diverse, to which all of the witnesses answered affirmatively. He then asked the witnesses to indicate whether there are capable, competent, and qualified women that could testify at Congressional hearings on blockchain technology, to which all of the witnesses answered affirmatively. He noted how all of the hearing’s witnesses are males and lamented how there are no female witnesses at the hearing. He asked Mr. Allaire to indicate whether it would have been beneficial for hearing to have had a female witness.
  • Mr. Allaire answered affirmatively.
• Rep. Green reiterated his view that the Committee must do more to include female witnesses at its hearings. He then asked Mr. Kaplan and Mr. Sexton to indicate whether their companies and organizations employ any women.
  • Mr. Kaplan answered affirmatively.
  • Mr. Sexton answered affirmatively. He testified that 40 percent of the NFA’s employees are women and mentioned how two women had helped to prepare him for the hearing. He commented these women would be capable of testifying at the hearing.
• Note: Rep. Green’s question period time expired here.

Rep. Tom Emmer (R-MN):

• Rep. Emmer applauded the digital assets market structure discussion draft bill under consideration at the hearing. He specifically commended U.S. House Committee on Financial Services Chairman Patrick McHenry (R-NC) and U.S. House Committee on Agriculture Chairman Glenn “GT” Thompson (R-PA) (as well as their staffs) for their work on the discussion draft bill. He then remarked that digital assets will thrive, regardless of whether the U.S. participates in the technology. He stated that the Committee’s work seeks to ensure that digital assets technology will be designed by Americans and contain U.S. values. He remarked that U.S. digital asset innovators and entrepreneurs require regulatory clarity, certainty, confidence, and competitiveness. He stated however that the Biden administration has abused its regulatory powers within the digital assets ecosystem and commented that this abuse has harmed the American people. He accused SEC Chairman Gary Gensler of providing inconsistent responses to Congress. He noted how SEC Chairman Gensler had told Congress in 2022 that the SEC requires new legislation to regulate the digital assets industry and had later told Congress that the SEC already possesses sufficient statutory authority to regulate the digital assets space. He expressed disagreement with SEC Chairman Gensler’s view that the SEC can regulate the digital assets space using its existing authority. He commented that SEC Chairman Gensler’s differing statements send “mixed signals” to digital asset market participants. He also discussed how the SEC and the CFTC have been in disagreement over which digital assets are commodities or securities. He commented that this disagreement also sends “mixed signals” to digital asset market participants. He then remarked that the Biden administration had “weaponized” the recent banking crisis to de-bank the digital assets industry. He further stated that the SEC engages in weekly enforcement actions alleging that different tokens constitute securities or fall under the SEC’s jurisdiction. He stated however that the SEC has failed to produce a single rule or regulation to help the digital assets industry come into compliance. He remarked that Congress must pass legislation to provide regulatory clarity, certainty, confidence, and competitiveness to the digital assets industry. He commented that the market structure discussion draft bill could accomplish this objective. He noted how this discussion draft bill would establish a dual registration framework that would enable digital asset projects to pursue crowdfunding and provide digital asset tokens with a mechanism to move from issuance to decentralization. He asserted however that the discussion draft bill conflicts philosophically with his views on digital assets and stated that digital assets are never securities. He commented however that digital assets can be obtained through securities contracts. He remarked that there exists a fundamental difference between an investment contract and an asset involved in an investment contract and stated that his legislation, the Securities Clarity Act, would acknowledge this difference. He expressed concerns that the market structure discussion draft bill would create a regulatory framework where one fungible digital asset can be both a security and a commodity at the same time. He called it impossible for an asset to have two distinct classifications simultaneously. He noted how the SEC does not clearly distinguish digital assets from their investment contracts. He discussed how securities inherently include commodities under current federal law. He mentioned how the orange groves at the center of the U.S. Supreme Court’s SEC v. W. J. Howey Co. decision were a commodity that had been obtained through a securities contract. He noted how the SEC had viewed these orange groves as a security rather than as an asset of a security. He indicated however that the SEC had not deemed all other orange groves to be securities. He remarked that the SEC’s current approach to digital assets would make it impossible for digital assets to be in compliance with the law and to achieve full utility. He mentioned how SEC Chairman Gensler had recently delivered a speech in which he claimed that the asset involved in an investment contract is itself the investment contract. He called this claim “completely bogus.” He remarked that the market structure discussion draft bill needs to clearly assert that a token is separate and distinct from an investment contract. He stated that this approach would enable a regulatory framework in which a digital assets project can crowdfund and still create an asset that can be used for its utility. He also commented that this approach would provide regulatory clarity, certainty, confidence, and competitiveness to ensure that digital assets technology is designed by Americans with embedded U.S. values.

Rep. Jim Himes (D-CT):

• Rep. Himes expressed interest in how the digital assets market structure discussion draft bill under consideration at the hearing would address the commingling of customer funds with firm assets. He noted that while the discussion draft bill does include a prohibition on the commingling of a customer’s funds with a firm’s assets, he highlighted how the discussion draft bill does include exceptions to this prohibition. He mentioned how this exception requires that the non-segregated assets be separately accounted for. He concluded that the discussion draft bill does permit the commingling of a customer’s funds with a firm’s assets provided that the commingling is done for convenience. He commented that the term “convenience” is not defined in the discussion draft bill. He asked Mr. Garrison to indicate whether the discussion draft bill’s language provides him with confidence that there will not occur the commingling of a customer’s funds with a firm’s assets will not occur.
  • Mr. Garrison indicated that he believes that the market structure discussion draft bill provides a specific carveout for a very limited activity. He commented that such a carveout of the commingling prohibition would be sensible so long as the activity in question has a clear purpose.
• Rep. Himes interjected to note that the discussion draft bill only lists “convenience” as a condition for the commingling of customer funds and firm assets to occur. He asked Mr. Garrison to indicate whether this use of convenience as a condition for the commingling of customer funds and firm assets to occur is troubling.
  • Mr. Garrison expressed support for further clarifying the discussion draft bill’s use of the term “convenience.”
• Rep. Himes asked Mr. Kaplan to opine on how the discussion draft bill addresses the commingling of customer funds and firm assets.
  • Mr. Kaplan remarked that the U.S. must address the commingling of customer funds and firm assets to ensure that digital assets innovation continues to occur within the U.S. He asserted that the best way to prevent the commingling of customer funds and firm assets is to apply federal securities laws to digital asset firms. He noted how these laws have many mechanisms (including reporting and ongoing oversight mechanisms) to ensure that the entities holding customer assets do not commingle said assets with firm assets. He stated that SEC Rule 15c3-3 has supported safe custodian services within the U.S. capital markets.
• Rep. Himes asked the witnesses to indicate whether they have objections to modifying the discussion draft bill’s language to ensure that the bill better prevents the commingling of customer funds and firm assets. (Note: None of the witnesses raised objections.)

Rep. Barry Loudermilk (R-GA):

• Rep. Loudermilk noted how SEC staff have asserted that digital assets may or may not be securities based on the condition of their underlying networks. He stated however that SEC staff has not provided clarity regarding the thresholds for determining whether a digital asset’s network is sufficiently decentralized for the digital asset to be considered a digital commodity. He added that most digital assets market participants have requested that the SEC provide such clarity. He asked Mr. Garrison to explain why federal regulators should look at a digital asset’s underlying network (rather than the digital asset itself) when determining if a digital asset is a security or a commodity.
  • Mr. Garrison remarked that federal regulators should assess a digital asset’s underlying network because such assessment will indicate which parties control the network (and more specifically whether the network’s governance is decentralized).
• Rep. Loudermilk asked Mr. Garrison to indicate whether there should exist clear thresholds of network decentralization that can be used to distinguish securities from commodities.
  • Mr. Garrison answered affirmatively.
• Rep. Loudermilk asked Mr. Garrison to propose good measures of network decentralization.
  • Mr. Garrison remarked that policymakers should consider several factors for determining whether a network is decentralized. He indicated that these factors include whether any person or group of persons possess unilateral authority to change a network’s code and whether any person or group of persons can prohibit people from interacting with a network’s code. He also stated that policymakers should consider whether the ownership of a network’s tokens is centralized and whether a person or a group of persons can override the rights of these tokens.
• Rep. Loudermilk then mentioned how Prometheum had recently received approval from the SEC to become the first ever SPBD for digital assets. He noted how Prometheum has subsequently claimed that digital assets have a viable regulatory pathway within the U.S. He highlighted however that most of Prometheum’s potential competitors are awaiting their own regulatory approvals from the SEC. He also commented that many consumers are currently unfamiliar with Prometheum as a digital assets platform. He asked Mr. Kaplan to indicate whether Prometheum’s experience with SEC registration is indicative of the experience of all digital asset market participants considering that Prometheum is currently the only SPBD for digital assets.
  • Mr. Kaplan remarked that Prometheum’s experience with SEC registration can be indicative of the experience of all digital asset market participants. He mentioned how there had existed frameworks for the compliant trading and custody of digital assets under the securities laws. He asserted that the fact that Prometheum had received approval to become a SPBD from the SEC had demonstrated the viability of these frameworks. He commented that other digital asset market participants can learn the lessons from Prometheum’s experience in obtaining SEC approval and that these participants now know that SEC registration is possible. He added that these digital assets market participants can apply these lessons to achieve compliance with federal securities laws.
• Rep. Loudermilk then noted how Mr. Kaplan’s written testimony had claimed that Prometheum had realized that a joint development agreement with Shanghai Wanxiang Blockchain was not viable as early as December 2018. He commented that Shanghai Wanxiang Blockchain has known ties to the CCP. He mentioned how Mr. Kaplan’s written testimony had indicated that Prometheum had begun to independently develop its platform following this realization. He noted however that Prometheum’s June 2021 filings with the SEC had indicated that the company was still conducting development activities with Shanghai Wanxiang Blockchain. He asked Mr. Kaplan to indicate why Prometheum had waited until late 2021 to formally terminate its agreement with Shanghai Wanxiang Blockchain.
  • Mr. Kaplan stated that he would need to review his exact statement to provide a definitive answer to Rep. Loudermilk’s question. He stated that Prometheum had received an investment from Shanghai Wanxiang Blockchain in late 2018 or early 2019.
• Rep. Loudermilk then noted how an ATS cannot facilitate trading for unregistered securities unless the securities have valid exemptions. He asked Mr. Kaplan to indicate how many digital asset tokens have received exemptions to date. He also asked Mr. Kaplan to indicate how many digital asset tokens are considered major tokens.
  • Mr. Kaplan stated that a “significant number” of the 50 most popular digital asset tokens have received exemptions.
• Rep. Loudermilk indicated that his question period time had expired and that he would submit additional questions for the hearing’s record.

Rep. Ayanna Pressley (D-MA)

• Rep. Pressley remarked that Congress should not advance “toothless and feeble” legislation that could worsen the U.S. digital assets industry’s regulatory problems. She asked Mr. Kaplan to estimate how many cryptocurrencies currently exist.
  • Mr. Kaplan estimated that there exist “thousands” of cryptocurrencies.
• Rep. Pressley mentioned how a recent Forbes article had indicated that there exist over 22,000 cryptocurrencies. She added that even more cryptocurrencies will be created in the future. She then discussed how anyone with a smartphone and a bank account can easily become a cryptocurrency investor. She commented that this ability for people to easily access cryptocurrencies explains the popularity of the assets. She asserted that digital assets innovation and opportunity must not come at the expense of the financial well-being of vulnerable populations. She noted how low-income Black and Latino adults invest in cryptocurrencies at higher rates than White adults. She asked Mr. Kaplan to indicate whether cryptocurrency investments have the potential to be scams.
  • Mr. Kaplan remarked that many platforms leverage the internet and innovation to democratize scams to the general public. He commented that these platforms are not properly regulated and lack sufficient disclosures.
• Rep. Pressley interjected to reclaim her question period time. She remarked that Congress’s approach to cryptocurrency regulation needs to be comprehensive given risks and volatility associated with cryptocurrencies. She stated that this regulation should involve public disclosures, clear investor rights, and stringent administrative oversight. She asserted however that Committee Republicans are not including these elements in their digital assets legislative proposals. She mentioned how the U.S. had recently experienced the collapse of digital assets exchange FTX and Signature Bank (which had significant ties to the digital assets industry). She commented that the losses stemming from these collapses were in the billions of dollars. She remarked that the U.S. should not develop a new or weaker regulatory system for digital assets. She contended that the U.S. should empower the SEC and federal regulators to oversee the digital assets industry. She warned that the U.S.’s failure to provide robust regulation for the digital assets sector could result in problems that extend beyond this sector. She then asked Mr. Kaplan to indicate whether non-cryptocurrency firms would be inclined to take advantage of lax regulations on the secondary markets to sell stocks under the guise of blockchain technology.
  • Mr. Kaplan answered affirmatively.
• Rep. Pressley concluded that Congress must ensure that any new federal digital assets legislation would not make the digital assets sector riskier.

Rep. Warren Davidson (R-OH):

• Rep. Davidson commended the Committee for developing its digital assets market structure and stablecoin discussion draft bills that are under consideration at the hearing. He also expressed appreciation for the digital assets innovation that is occurring within the U.S. and expressed interest in ensuring that this innovation remains in the U.S. He then mentioned how he had worked on the bipartisan Token Taxonomy Act since 2018. He asserted that many of the recent problems within the digital assets sector could have been avoided or solved had Congress passed legislation to provide legal clarity to the digital assets sector. He asked Mr. Garrison to indicate whether the U.S. should provide legal clarity surrounding whether a given asset constitutes a security.
  • Mr. Garrison stated that it should be clear whether a given asset constitutes a security. He commented that this clarity enable provide digital asset businesses and investors to operate with certainty.
• Rep. Davidson called it very important for there to exist a “bright line” test for determining whether a given asset constitutes a security. He stated that such a test would benefit digital assets investors, innovators, and regulators. He mentioned how SEC Chairman Gary Gensler had been unable to definitively state whether Ether constitutes a security during an April 2023 Committee hearing. He asserted that SEC Chairman Gensler’s inability to classify Ether demonstrates that the U.S.’s existing laws and regulations do not provide sufficient clarity for the digital assets space. He then asked Mr. Garrison to indicate whether a party may wish to create a digital asset token that represents a security.
  • Mr. Garrison answered affirmatively and added that parties are currently intentionally creating digital asset tokens that represent securities.
• Rep. Davidson asked Mr. Garrison to indicate whether the U.S. could create a digital assets market structure framework that would enable stakeholders to more easily register their digital asset tokens as securities with the SEC.
  • Mr. Garrison answered affirmatively. He remarked that the SEC could unilaterally update its regulations to allow for tokenized equity securities, stocks, and bonds.
• Rep. Davidson commented that Congress could also update the rules to allow such tokenized financial instruments. He then called it important for people to have the ability to self-custody digital assets. He noted how the FTX customers that had self-custodied their digital assets had their digital assets protected when FTX collapsed. He asked Dr. Sirer to discuss the importance of self-custody capabilities for digital assets.
  • Dr. Sirer attributed FTX’s failure to traditional custodians (rather than cryptocurrencies). He stated that decentralized digital asset exchanges (which perform many of the same functions as FTX) have been able to successfully weather market volatility.
• Rep. Davidson called it important for the U.S. to protect the ability of consumers to self-custody their digital assets. He mentioned how he had proposed the Keep Your Coins Act to protect this ability. He expressed hope that the digital assets market structure and stablecoin discussion draft bills under consideration at the hearing would incorporate self-custody protections. He then disputed Rep. Jim Himes’s (D-CT) previous description of the market structure discussion draft bill’s commingling limitations. He noted how Dodd-Frank requires different treatments of futures and swaps funds and allows for commingling of customer funds. He asked Mr. Sexton to explain the rules for commingling swaps funds under Dodd-Frank.
  • Mr. Sexton noted how different assets have different regulatory frameworks. He stated that a customer segregated futures account cannot have its funds be commingled with firm funds. He indicated however that firms can add their funds to customer segregated futures accounts to ensure that these accounts can cover any liabilities.
• Rep. Davidson asserted that the market structure discussion draft bill would not create a “loophole” for digital assets. He stated that this discussion draft bill merely applies existing regulatory structures to the digital assets space. He then noted that his question period time had expired and indicated his intention to submit questions for the hearing’s record on stablecoin issues.

Rep. Sylvia Garcia (R-TX):

• Rep. Garcia discussed how Full Committee Ranking Member Maxine Waters (D-CA) had led meaningful, productive, and “truly bipartisan” discussions on stablecoin legislation during her tenure as Committee Chairman in the 117th Congress. She expressed frustration that the current stablecoin discussion draft bill under consideration at the hearing does not include certain provisions from the 117th Congress’s stablecoin legislative proposal. She expressed relief however that certain “radical” stablecoin legislative proposals from Committee Republicans are no longer being considered. She expressed hope that the current hearing can support productive discussions on digital asset issues. She highlighted how the Committee has been working on digital assets and stablecoin legislation for several years and expressed interest in passing bipartisan legislation on these topics. She then called on the Committee to preserve the separation of banking and commerce and commented that this separation is key for protecting against the unhealthy consolidation of economic power. She explained that this separation would prohibit non-financial commercial businesses (such as Facebook or Walmart) from owning a payment stablecoin issuer. She mentioned how she had previously introduced legislation to address this concern and asserted that permitting private companies to become stablecoin issuers would be very dangerous. She noted however that the stablecoin discussion draft bill under consideration at the hearing does not preserve this separation. She asked Mr. Kaplan to discuss the customer harms that could result from large companies issuing their own stablecoins. She asked Mr. Kaplan to explain the significance of the separation between banking and commerce.
  • Mr. Kaplan remarked that there exists a significant potential for conflicts of interest when a company has both commercial and financial interests offered to the same customers. He also stated that stablecoin issuers pose systemic and contagion risks. He elaborated that the potential for a stablecoin to lose its peg to its reserve assets can have secondary and tertiary impacts that can harm the broader financial markets. He called it essential for the U.S. to maintain stringent standards for stablecoin issuers and to properly segregate stablecoin issuance activities from other business activities.
• Rep. Garcia then criticized the legislative proposals under consideration at the hearing for failing to address the issues of diversity and inclusion. She remarked that the U.S. has a history of building financial institutions that are accessible for wealthy and White consumers and inaccessible for all other groups. She stated that the U.S. has problems with credit inequity, lending inequity, banking inequity, and financial literacy inequity. She also expressed agreement with Rep. Al Green’s (D-TX) concerns that the Committee’s witness panels lack diversity. She asserted that these legislative proposals would further advantage wealth and privileged populations. She asked Mr. Kaplan to discuss the importance of incorporating financial inclusion language into digital assets legislation.
  • Mr. Kaplan called it essential for any industry to ensure that its products and services are available to all segments of society. He asserted that diversity and inclusion support this objective.
• Rep. Garcia asked Mr. Kaplan to provide recommendations for how the legislative proposals under consideration at the hearing could better address the issues of diversity and inclusion.
  • Mr. Kaplan indicated that he did not have any specific recommendations for how digital assets legislation could better address the issues of diversity and inclusion. He called it important for any digital assets legislation to ensure that the digital assets industry (as well as the broader financial industry) incorporates principles of diversity and inclusion.
• Rep. Garcia asked Mr. Kaplan to address how digital asset firms can better include low-income and minority communities in the digital assets space.
  • Mr. Kaplan mentioned how FTX and similar digital assets firms had used the internet and the promise of innovation to attract customers.
• Note: Rep. Garcia’s question period time expired here.

Rep. John Rose (R-TN)

• Rep. Rose remarked that the SEC’s approval of Prometheum’s SPBD license does not prove that the U.S.’s current regulatory system for digital assets is working. He noted how an ATS cannot facilitate trading for any unregistered securities not offered under a valid exemption. He stated that SEC Chairman Gary Gensler, Committee Democrats, and Mr. Kaplan have alleged that nearly all digital asset tokens are unregistered securities. He asserted that the SEC’s approval of Prometheum’s SPBD license would therefore not impact retail investors or the general public. He asked Mr. Garrison to confirm that there currently do not exist any registered digital asset securities with real customer demand and liquidity. He asked Mr. Garrison to indicate whether an ATS could currently offer the trading of Solana or Cardano (which the SEC has alleged are unregistered securities) to retail non-accredited investors.
  • Mr. Garrison stated that an ATS could not currently offer the trading of Solana or Cardano to retail non-accredited investors.
• Rep. Rose asked Mr. Garrison to indicate whether the digital assets market structure discussion draft bill under consideration at the hearing would allow for an ATS to offer the trading of Solana or Cardano to retail non-accredited investors.
  • Mr. Garrison stated that the market structure discussion draft bill would allow for an ATS to list and trade certain digital assets alongside payment stablecoins and digital commodities. He noted that these assets would be regulated under different regimes. He stated that an SEC-regulated ATS could enable all of the aforementioned products to trade.
• Rep. Rose asked Mr. Garrison to indicate whether an ATS can currently offer digital asset securities and digital asset commodities alongside each other on the same platform for retail trading.
  • Mr. Garrison answered no.
• Rep. Rose asked Mr. Garrison to indicate whether the market structure discussion draft bill would permit an ATS to offer digital asset securities and digital asset commodities alongside each other on the same platform for retail trading.
  • Mr. Garrison answered affirmatively.
• Rep. Rose then reiterated how Prometheum has been approved to custody digital assets under a SPBD license. He indicated that the SEC had issued its SPBD regulatory framework in 2020. He noted how digital assets may be classified as either securities or commodities under current law. He asked Mr. Garrison to indicate whether a SPBD can custody both digital asset securities and digital asset commodities on behalf of retail investors.
  • Mr. Garrison answered no.
• Rep. Rose asked Mr. Garrison to indicate whether the SEC’s approval of Prometheum’s SPBD license has any impact on retail traders.
  • Mr. Garrison remarked that the SEC’s approval of Prometheum’s SPBD license does not have a significant impact on retail traders.
• Rep. Rose also noted how the SEC has indicated that it expects for digital assets to be registered by a promoter, sponsor, or other third-party that “provides essential managerial efforts that affect the success of the enterprise.” He called this position problematic given how certain digital assets are open source peer-to-peer digital currencies that are transferred through decentralized public ledgers that are maintained by networks of computers operated by individuals that may never interact. He asked Mr. Garrison to indicate who the SEC would expect to register the cryptocurrency Dogecoin.
  • Mr. Garrison stated that he did not know who would be expected to register Dogecoin with the SEC.
• Rep. Rose mentioned how SEC Chairman Gary Gensler had stated in 2021 that there exist some regulatory gaps within the digital assets space and had requested additional Congressional authorities to ensure that transactions, products, and platforms are regulated. He stated however that SEC Chairman Gensler now claims that federal securities laws are clear and that the SEC does not require additional Congressional authorities. He asked Mr. Garrison to indicate whether he agrees with either SEC Chairman Genlser’s 2021 statement or SEC Chairman Gensler’s current claim.
  • Mr. Garrison commented that he did not agree with either SEC Chairman Gensler’s 2021 statement or SEC Chairman Gensler’s current claim. He remarked that the SEC has the authority to regulate digital assets that are sold pursuant to investment contracts in a clearer way than they have. He stated however that the application of federal securities laws to the sale of digital assets is unclear.
• Rep. Rose then remarked that the U.S. Federal Reserve had demonstrated “incompetence” during the U.S. banking sector’s most recent turmoil. He asked Mr. Allaire to indicate whether the U.S. Federal Reserve will be able to regulate stablecoin issuers under the stablecoin discussion draft bill under consideration at the hearing.
  • Mr. Allaire remarked that the stablecoin discussion draft bill is effective in clearly establishing the core standards that are important for a stablecoin to function.
• Note: Rep. Rose’s question period time expired here.

Rep. Ritchie Torres (D-NY):

• Rep. Torres remarked that the U.S. must decide whether SEC Chairman Gary Gensler (who is unelected) or Congress (which is composed of elected officials) should dictate the future of emerging technologies (such as cryptocurrencies and blockchain technology). He asked Mr. Allaire to indicate whether an act of Congress would constitute the most democratic means for deciding the future of digital assets.
  • Mr. Allaire answered affirmatively. He highlighted how the President’s Working Group on Financial Markets (PWG) Report on Stablecoins had called on Congress to act “urgently” to establish a regulatory framework for stablecoins.
• Rep. Torres accused SEC Chairman Gensler of failing to distinguish between digital asset companies that seek to comply with federal laws and rules and digital asset companies that seek to evade federal laws and rules. He described the SEC’s enforcement actions against digital asset companies as indiscriminate in nature. He specifically criticized the SEC’s recent lawsuit against digital assets exchange Coinbase. He asked Mr. Garrison to explain why the SEC had approved Coinbase as a public company if it sincerely believed that Coinbase is operating an unregistered securities exchange. He added that the SEC should have required Coinbase to disclose its status as an unregistered securities exchange as a material risk to the investing public if it believed that Coinbase is an unregistered securities exchange. He asked Mr. Garrison to indicate whether there exists a contradiction between the SEC’s 2021 approval of Coinbase as a public company and the SEC’s 2023 enforcement action against Coinbase.
  • Mr. Garrison stated that the SEC’s 2021 approval of Coinbase as a public company and the SEC’s 2023 enforcement against Coinbase are contradictory. He noted how the SEC’s filing review process requires a public interest finding for a filing to be made effective under federal securities rules. He acknowledged that while a public interest finding is a “very loosely defined term,” he stated that an act from a company that is inconsistent with federal securities laws would likely not be in the public interest.
• Rep. Torres interjected to note that the SEC had claimed in their lawsuit against Coinbase that declaring effective a Form S-1 registration statement does not constitute an SEC staff opinion on or an endorsement of the legality of an issuer’s underlying business. He commented that the SEC in this instance is asserting that it has no opinion on whether an issuer is complying with the laws that the SEC is charged with enforcing. He described the SEC’s assertion as “strange.” He asked Mr. Garrison to provide his opinion on the SEC’s assertion.
  • Mr. Garrison expressed agreement with Rep. Torres’s description of the SEC’s assertion being strange. He stated that a public interest finding in the SEC’s filing review would likely seek to provide assurances that a public company’s business model is legal. He commented however that the SEC is likely arguing that they are not responsible for all of the items in a given filing.
• Rep. Torres then noted how SEC Chairman Gensler had stated that all digital assets except for Bitcoin are securities in a New York Magazine interview. He highlighted how the SEC’s lawsuit against Coinbase only identifies 13 of Coinbase’s over 200 listed assets as unregistered securities. He commented that this low number of assets mentioned in the SEC’s lawsuit against Coinbase contradicts SEC Chairman Gensler’s claim that all digital assets except for Bitcoin are securities. He asked Mr. Garrison to indicate whether he viewed there being a contradiction between SEC Chairman Gensler’s claim that all digital assets except for Bitcoin are securities and the SEC’s decision to state that Coinbase is listing just 13 unregistered securities (when the platform offers over 200 listed assets) in their lawsuit against the company.
  • Mr. Garrison remarked that the SEC Chairman Gensler’s statement and the SEC’s lawsuit against Coinbase are contradictory. He stated that the SEC should provide guidance on the digital assets it views as securities and not merely rely upon enforcement actions to convey its views.
• Rep. Torres expressed support for the establishment of a “safe harbor” to protect good faith digital asset companies from arbitrary and capricious enforcement actions. He asked Mr. Garrison to address how Congress could stop bad faith digital asset companies from exploiting a “safe harbor” to prevent legitimate enforcement actions.
  • Mr. Garrison noted how the digital assets market structure discussion draft bill under consideration at the hearing contains anti-fraud protections that exist under federal securities and commodities laws. He noted how this discussion draft bill would therefore subject digital assets sold through its new SEC exemption to the SEC’s anti-fraud authority. He added that the CEA’s anti-fraud provisions would apply to digital commodities under the discussion draft bill.
• Rep. Torres further asked Mr. Garrison to indicate whether there has ever been a statute, regulation, or court case that expressly affirms that the Howey test applies to secondary market transactions.
  • Mr. Garrison answered no.
• Note: Rep. Torres’s question period time expired here.

Rep. William Timmons (R-SC):

• Rep. Timmons discussed how the digital assets market structure discussion draft bill under consideration at the hearing would provide an exemption that would allow for non-accredited investors to participate in primary issuances of digital assets. He explained that this exemption would allow for a non-accredited investor over a 12-month period to purchase digital assets issued in a primary sale that equal 5 percent of the investor’s net worth or 5 percent of the investor’s income (whichever is greater). He asked Mr. Garrison to indicate whether this exemption appropriately balances the provision of retail investor access to a new asset class with traditional consumer protections.
  • Mr. Garrison remarked that the market structure discussion draft bill appropriately balances the provision of retail investor access to a new asset class with traditional consumer protections. He stated that this exemption is largely based on SEC Regulation Crowdfunding and SEC Regulation A. He noted how both of these existing SEC regulations contain individual investor limits and commented that these limits can provide valuable protections.
• Rep. Timmons then discussed how a digital asset project may engage in broad distributions of digital assets to users in order to support the development of a digital asset’s network. He asked Mr. Garrison to discuss how the market structure discussion draft bill treats digital assets that are broadly distributed. He also asked Mr. Garrison to explain why this treatment more accurately corresponds to the operations of digital asset markets.
  • Mr. Garrison noted how the market structure discussion draft bill acknowledges that some digital assets are created through the normal functioning of a digital asset’s network. He indicated that this normal functioning can involve a validating transaction or staking. He stated that this discussion draft bill makes clear that federal securities laws are not needed to protect these activities and that these activities do not constitute securities transactions. He commented that this discussion draft bill thus separates the transactions that need consumer and investor protections from the transactions that are not in need of consumer and investor protections.
• Rep. Timmons then mentioned how the market structure discussion draft bill includes tests for determining the decentralization and functionality of blockchain networks. He asked Mr. Garrison to opine on these tests.
  • Mr. Garrison stated that the discussion draft bill constitutes a “really great first effort” in developing a construct for decentralization for blockchain networks. He noted how the digital assets industry has faced challenges when trying to determine whether a blockchain network has become decentralized because there do not exist third-party standards for measuring decentralization. He mentioned how SEC Commissioner Hester Peirce had developed token safe harbor proposals that include frameworks for determining when a blockchain network is decentralized. He noted how some of these frameworks had considered whether the ownership of a blockchain network’s tokens is concentrated, who is contributing to a blockchain network’s code, and the number of participants in a blockchain network. He commended the discussion draft bill for seeking to identify when a blockchain network becomes decentralized. He noted how the bill ultimately concludes that the degree to which a blockchain network is controlled by a small number of parties determines whether the network is decentralized.
• Rep. Timmons then remarked that the market structure discussion draft bill would create “light touch” regulation for digital assets. He stated however that the bill seeks to apply the same rules to current SEC- and CFTC-registered intermediaries with adjustments as needed for the unique characteristics with digital assets. He commented that the requirements for digital asset firms can be more onerous than the requirements for traditional intermediaries. He asked Mr. Garrison to discuss how this bill would apply equal or stronger standards to digital asset firms.
  • Mr. Garrison remarked that the market structure discussion draft bill would bring digital assets into the regulatory ambit of the SEC and the CFTC. He commented that digital asset transactions currently do not fall under the jurisdictions of these regulators. He discussed how the bill would have the SEC oversee the initial issuance of digital assets and the secondary trading of digital assets through an ATS. He noted how traditional securities are traded through ATSs and commented that traditional ATS protections would apply to digital assets under the bill.

Rep. Bill Foster (D-IL):

• Rep. Foster asked the witnesses to indicate whether the U.S. could prevent ransomware attacks and other illicit activities involving digital assets while allowing for the self-custody of digital assets. He asked the witnesses to indicate whether these two objectives are mutually exclusive.
  • Dr. Sirer called it “entirely possible” to control blockchain systems at the ingress and egress points. He asserted that blockchain systems can therefore support self-custody capabilities while protecting themselves.
• Rep. Foster interjected to comment that a person could convert their U.S. dollars into self-custodied cryptocurrencies, use the cryptocurrencies for illicit activities, and perform a series of conversions involving the cryptocurrencies to evade monitoring. He asked Dr. Sirer to explain how digital assets do not enable money laundering schemes.
  • Dr. Sirer expressed disagreement with Rep. Foster’s characterization of how people can use self-custodied digital assets for illicit activities. He stated that there exist very sophisticated tools for tracking money flows across cryptocurrencies and mentioned how there exist firms (such as Chainalysis and TRM Labs) that can trace the flow of funds that are used in anonymizing transactions. He stated that law enforcement agencies have used these tools to support ransomware recovery efforts.
• Rep. Foster interjected to comment that these tracking technologies have mainly focused on Bitcoin and similar cryptocurrencies. He indicated that he had received classified briefings on this topic that he cannot provide additional details on. He expressed doubts however that the U.S. can fully trace the flows of digital assets that make use of newer anonymizing technologies. He commented that the Committee should continue looking into this challenge in a non-public setting. He then expressed interest in preventing market abuses (such as frontrunning and wash trading) within the digital assets space. He mentioned how there are estimates that more than half of all Bitcoin transactions are wash trades. He asked Mr. Sexton to indicate whether these market abuses could be prevented without having a regulator that can access the true identities of all of the participants involved in a given digital asset transaction. He noted how there currently exists trader ID mechanisms in some markets.
  • Mr. Sexton remarked that the prevention of trading abuses will necessitate that a regulator knows the identities of the parties involved in a given transaction.
• Rep. Foster expressed agreement with Mr. Sexton that a trusted regulator must know the identities of the parties involved in a given transaction. He stated however that the parties involved in a given transaction do not need to know the identities of the other parties involved in the transaction. He also remarked that a trader ID mechanism must be biometrically de-duplicated so that one person is not operating multiple trader IDs.
  • Mr. Sexton remarked that digital asset intermediaries need to know who their customers are and who will be on the opposite sides of trades. He remarked that this identification capability is the “bedrock” of the CFTC’s regulated trading environment.
• Rep. Foster noted how digital assets often involve trades on both spot and derivatives markets. He asserted that a regulator must be able to see the true identities of both spot market participants and derivatives market participants. He commented that spot market prices influence derivatives market prices. He stated that this need for oversight of both spot and derivatives markets spans the current jurisdictions of the SEC and the CFTC.
  • Mr. Sexton remarked that there must exist cooperation between the SEC and the CFTC so that these regulators know what a market participant is doing in both the spot and futures markets.
• Rep. Foster further remarked that this oversight of both spot and derivatives markets must be international given how digital assets can be traded internationally. He commented that there exists an international solution to this issue in the options market.
  • Mr. Sexton called it “essential” for there to be international cooperation in overseeing the spot and derivatives markets.
• Note: Rep. Foster’s question period time expired here.

Rep. Bryan Steil (R-WI):

• Rep. Steil mentioned how SEC Commissioner Hester Peirce had stated that a digital asset may be offered and sold initially as a security because it is wrapped in a transaction involving an investment contract. He noted however that SEC Commissioner Peirce had also stated that this digital asset may later be emphasized and sold outside of an investment contract. He remarked that the Committee should be cognizant of this principle when considering how its digital assets market structure discussion draft bill under consideration at the hearing should categorize different types of digital assets (regardless of their classification during their initial issuance). He asked Mr. Garrison to elaborate on this principle and to comment on how the discussion draft bill would address the issue of digital asset categorization.
  • Mr. Garrison remarked that a digital asset itself does not constitute a security when it is sold pursuant to an investment contract. He stated that courts have developed an analysis to determine when a transaction, contract, or scheme may be sold in a manner that is a securities transaction. He commented that this analysis differs from the test for determining what is an equity security, a stock, or bond. He stated that current case law is clear that the object of the investment contract (such as orange groves at the center of the U.S. Supreme Court’s SEC v. W. J. Howey Co. decision) is not a security itself. He remarked that the distinction between an object and an investment contract is especially important within the context of digital assets. He noted how a person may hold a digital asset to participate in a network. He stated that the realization of a digital asset’s functionality (i.e., the ability to participate in a network) would mean that there is no longer a central party with control over the network. He commented that this evolution would render securities laws inapplicable to the digital asset in question.
• Rep. Steil then noted how Mr. Kaplan’s testimony had indicated that Prometheum had terminated all co-development work and strategic relationships with its Chinese affiliate in late 2021. He asked Mr. Kaplan to indicate when Prometheum had taken full control of its product development.
  • Mr. Kaplan stated that Prometheum had concluded that its endeavors with Shanghai Wanxiang Blockchain would not result in a productive output. He also stated that global “decoupling” trends between China and the rest of the world had led Prometheum to terminate its strategic relationship with its Chinese affiliate. He indicated that this termination agreement was dated on October 20, 2021.
• Rep. Steil asked Mr. Kaplan to indicate whether the SEC or FINRA had raised concerns about the relationship between Prometheum and its Chinese affiliate.
  • Mr. Kaplan testified that Prometheum had been the subject of both a CFIUS inquiry and an SEC investigation. He noted how Prometheum had been required to submit all of its communications with foreign entities to the SEC for review. He stated that the SEC had ultimately closed this investigation into Prometheum.
• Rep. Steil asked Mr. Kaplan to indicate whether Prometheum has ever needed to adjust its policies or procedures at the request of HashKey or representatives of the Chinese government.
  • Mr. Kaplan answered no.
• Rep. Steil expressed concerns that federal regulators have pushed digital asset firms to relocate abroad while providing approval to a digital assets firm with Chinese relationships. He asserted that this situation underscores the need for regulatory clarity and consistency within the digital assets space. He then asked Mr. Garrison to indicate whether the market structure discussion draft bill’s modifications would “upend” federal securities laws.
  • Mr. Garrison answered no and stated that the discussion draft bill is based on existing federal securities law provisions.
• Rep. Steil then discussed how the stablecoin discussion draft bill under consideration at the hearing would provide the U.S. Federal Reserve with backstop authority over state-chartered payment stablecoin issuers. He asked Mr. Allaire to explain why this backstop authority is important and to discuss the rules governing this authority.
  • Mr. Allaire discussed how the stablecoin discussion draft bill would provide standards for stablecoin reserves, reporting, disclosures, and asset segregation. He further noted how this bill would set standards for capital adequacy, risk management, and safety and soundness.
• Note: Rep. Steil’s question period time expired here.

Note: The Committee took an approximately 55-minute recess at this point.

Rep. Wiley Nickel (D-NC):

• Rep. Nickel commended the Committee’s progress on federal stablecoin legislation. He stated that the stablecoin discussion draft bill under consideration at the hearing contains many of his suggestions, including protections for state regulators, the inclusion of consumer protections, and the ability of banks to custody digital assets. He expressed hope that the Committee could reach bipartisan agreement on federal stablecoin legislation. He remarked that federal stablecoin legislation is key to protecting consumers, encouraging innovation, and providing “much needed” regulatory clarity. He stated that the SEC’s “regulation by enforcement” approach would drive digital asset companies offshore. He warned that the movement of digital asset companies abroad will result in U.S. digital asset consumers having no protections. He also stated that federal stablecoin legislation can reinforce the U.S. dollar’s dominance as the world’s reserve currency while making the U.S. dollar stronger, more accessible, and more globally competitive. He asked Mr. Allaire to discuss the benefits that the U.S. receives from having the U.S. dollar be the world’s reserve currency.
  • Mr. Allaire remarked that the U.S. dollar’s status as the world’s reserve currency presents the U.S. with “exorbitant” privileges. He stated that these privileges include low borrowing costs for the U.S. government, U.S. households, and U.S. businesses, strong preference in commerce and trade internationally, and soft power influence. He commented that the U.S.’s soft power influence is currently being challenged, which underscores the importance of having the U.S. strengthen the U.S. dollar’s global competitiveness. He remarked that the stablecoin discussion draft bill constitutes a “significant step” toward increasing the U.S. dollar’s global competitiveness.
• Rep. Nickel also noted how Mr. Allaire’s testimony had asserted that technical competition is increasingly defining currency competition and that China is very cognizant of this dynamic. He asked Mr. Allaire to provide recommendations for how Congress should approach the issue of currency competition as it designs federal stablecoin legislation. He also asked Mr. Allaire to indicate whether the stablecoin discussion draft bill would ensure that the U.S. dollar remains competitive, safe, and accessible.
  • Mr. Allaire remarked that the stablecoin discussion draft bill would help the U.S. dollar to remain competitive, safe, and accessible. He discussed how the U.S. currently competes with technology companies, financial companies, and open, free, and fair markets in a rules-based system. He stated that this system has served the U.S. well in the development of the internet and in the realm of payment technology innovation. He remarked that the U.S. can be a global leader within the stablecoin space. He stated that the discussion draft bill would create the safest digital U.S. dollar in the world and a mechanism to ensure that there exists a competitive market for the issuance of digital U.S. dollars by banks and non-banks. He further commented that this bill would enable stablecoin firms to compete with state-driven actors (such as China).
• Rep. Nickel then discussed the digital assets market structure discussion draft bill under consideration at the hearing and indicated that he is still reviewing this proposal. He stated that while this discussion draft bill demonstrates progress, he stated that he still has some concerns regarding the current version of the bill. He remarked that everyone should support federal digital assets market structure legislation, regardless of their views toward cryptocurrencies. He stated that such legislation would safeguard consumers while updating federal securities laws to work with modern technological innovations. He asserted that inaction on the subject is not an option. He asked Mr. Garrison to explain the dangers of Congressional inaction on digital assets market structure legislation. He also asked Mr. Garrison to address how the absence of clear regulations for digital assets that encourage companies to remain in the U.S. would harm consumers.
  • Mr. Garrison remarked that a continuation of the status quo would harm investors, consumers, digital asset market participants, and the U.S. economy. He noted how the U.S. currently lacks a federal regulator for the digital asset spot markets. He commented that anyone trading on a digital asset platform in the U.S. is therefore at the mercy of the platform’s own controls, procedures, and processes, as well as the platform’s compliance with other laws.
• Note: Rep. Nickel’s question period time expired here.

Rep. Mike Flood (R-NE):

• Rep. Flood recounted how Prometheum had sent a comment letter to the SEC in April 2021 in response to the Commission’s December 2020 SPBD framework. He noted how this letter had called for regulatory clarity regarding which digital assets constitute securities. He indicated that this comment letter had been signed by Prometheum’s Co-CEO Ben Kaplan. He remarked that this concern from Prometheum’s comment letter is the exact same concern that many previous witnesses before the Committee have raised. He questioned how broker-dealers can register with the SEC if they do not know which assets are securities and which assets are not. He stated that Prometheum’s comment letter also makes a common argument that the SEC’s lack of regulatory clarity for digital assets imposes an undue burden on the digital assets industry. He noted how Mr. Kaplan’s testimony had asserted that no new federal legislation is needed within the digital assets space to clarify which digital assets constitute securities. He asked Mr. Kaplan to explain what had changed between Prometheum’s 2021 comment letter and the current hearing.
  • Mr. Kaplan noted how the SEC had taken additional enforcement actions and made additional statements in the period between Prometheum’s 2021 comment letter and the current hearing. He stated that these enforcement actions and statements have clarified Prometheum’s questions related to the process for designating digital assets as securities.
• Rep. Flood noted how Prometheum’s website says that Prometheum ATS supports “many tokens that mostly trade on crypto exchanges.” He asked Mr. Kaplan to indicate whether Prometheum customers can trade Ether on the company’s platform. He further asked Mr. Kaplan to explain how Prometheum customers can trade Ether if possible.
  • Mr. Kaplan testified that Prometheum customers cannot currently trade Ether on the company’s platform.
• Rep. Flood also asked Mr. Kaplan to indicate whether Prometheum customers can trade Bitcoin on the company’s platform. He further asked Mr. Kaplan to explain how Prometheum customers can trade Bitcoin if possible.
  • Mr. Kaplan testified that Prometheum customers cannot currently trade Bitcoin on the company’s platform.
• Rep. Flood highlighted how Ether and Bitcoin comprise over 60 percent of the digital asset market. He asked Mr. Kaplan to explain why Prometheum’s customers cannot trade the most popular and widely used digital assets if the U.S.’s current regulatory system for digital assets is working.
  • Mr. Kaplan remarked that federal regulators, new ATSs, and new custodians should take a “crawl, walk, run approach” and stated that this approach would enable regulators, ATSs and custodians to add new capabilities and digital assets over time.
• Rep. Flood interjected to reclaim his question period time. He asked Mr. Kaplan to indicate whether Prometheum had received any additional exemptive relief from the SEC that has not been publicly shared.
  • Mr. Kaplan answered no.
• Rep. Flood remarked that Prometheum’s SPBD license does not address the fact that there does not exist a consistent definition of a digital asset security within current law. He commented that SEC Chairman Gary Gensler’s inability to definitively state whether Ether is a security demonstrates this lack of a consistent definition. He stated that the questions raised in Prometehum’s April 2021 comment letter remain unanswered. He remarked that federal legislation is required to answer this question and commented that the digital assets market structure discussion draft bill under consideration at the hearing would address this question. He emphasized how Prometheum’s charter only enables it to facilitate trading in a small number of digital assets and asserted that this situation demonstrates the need for federal digital assets legislation. He stated that the fact that Prometheum’s customers cannot trade some of the most popular digital assets demonstrates the broader challenges that are present within the U.S. regulatory environment for digital assets.

Rep. Zach Nunn (R-IA):

• Rep. Nunn expressed support for the Committee’s efforts to provide regulatory clarity for the digital assets space. He mentioned how he serves on the U.S. House Committee on Agriculture, which also has jurisdiction over digital assets. He noted how CFTC Chairman Rostin Behnam had recently told the U.S. House Committee on Agriculture that federal legislation is needed to provide regulatory clarity for the digital assets space. He noted however that SEC had filed a lawsuit against Coinbase for improperly listing digital asset securities on its platform right before CFTC Chairman Behnam’s recent testimony before the U.S. House Committee on Agriculture. He mentioned how SEC Chairman Gary Gensler had also asserted that the U.S. does not require more digital currencies and that the U.S. dollar, the Euro, and the Yen already constitute sufficient digital currencies. He remarked that blockchain technology innovation is already present and will remain a key innovation for the foreseeable future. He contended that the U.S. market must be able to appreciate this innovation. He stated that Congress must resolve the current lack of consensus among federal regulators surrounding the appropriate regulatory treatment of digital assets. He called on Congress to provide “clear rules of the road” for both digital asset market participants and regulators. He warned that Congressional inaction on this topic will undermine U.S. trade and national security. He stated that Europe, the UK, and Singapore have all become leaders in the digital assets space. He mentioned how venture capital investments in European digital asset projects are up 1,000 percent in the past year and attributed this increase to the EU’s adoption of its Markets in Crypto-Assets Regulation (MiCA). He lamented how this investment and innovation could have occurred within the U.S. market had the U.S. possessed a clear regulatory framework for digital assets. He called the digital assets market structure discussion draft bill under consideration at the hearing “highly important.” He then noted how SEC Commissioner Hester Peirce had noted how a digital asset may be offered as a security based on how it was sold pursuant to an investment contract and may later be offered outside of the investment contract. He asked Mr. Garrison to explain how the market structure discussion draft bill would address this situation.
  • Mr. Garrison discussed how the market structure discussion draft bill would provide a clear exemption for issuers that would like to sell a digital asset pursuant to an investment contract. He explained that the bill would permit an exempt transaction of up to $75 million within a 12 period to support parties seeking to build digital asset networks and sell the digital assets that are required for the network. He also noted that the bill would allow for individual investor limitations for non-accredited investors to purchase the newly issued digital assets, provide “robust” disclosure requirements that are tailored to the unique needs of digital asset purchases, and permit Americans to engage in new digital asset activities in a regulated fashion.
• Rep. Nunn remarked that the market structure discussion draft bill would provide a clear regulatory framework for digital assets. He stated that the absence of this bill would require digital asset firms to register their offerings with the SEC. He asserted however that the SEC has not provided guidance as to what they are looking for from digital asset firms. He asked Mr. Garrison to comment on his description of the status quo.
  • Mr. Garrison expressed agreement with Rep. Nunn’s description of the SEC’s current approach toward digital asset firms.
• Rep. Nunn also remarked that the market structure discussion draft bill would adopt “significant” consumer protections and require that all digital asset commodities, securities, and intermediaries register with the SEC. He further highlighted how this bill would require digital asset firms to segregate customer assets from firm assets. He asked Mr. Sexton to provide his views on the customer protections included in the bill.
  • Mr. Sexton remarked that the market structure discussion draft bill’s proposed customer protections mirror the existing customer protections in the regulated futures markets. He indicated that these protections relate to customer asset segregation and capital disclosures.
• Rep. Nunn asked Mr. Sexton to indicate whether the NFA could implement the market structure discussion draft bill’s new standards alongside the CFTC.
  • Mr. Sexton answered affirmatively.
• Rep. Nunn concluded that the market structure discussion draft bill would benefit digital asset consumers and providers, improve the regulatory process for digital assets, and bolster the U.S.’s national security.

Rep. Ralph Norman (R-SC):

• Rep. Norman noted how Mr. Kaplan’s testimony states that Prometheum provides Americans participating in the digital assets and Web3 space with the investor protections of federal securities laws. He asked Mr. Kaplan to indicate the assets that Prometheum plans to offer.
  • Mr. Kaplan stated that Prometheum plans to offer digital asset securities.
• Rep. Norman asked Mr. Kaplan to confirm that Prometheum offers a limited number of digital asset securities.
  • Mr. Kaplan remarked that a “certain number” of the top digital asset tokens qualify as digital asset securities.
• Rep. Norman asked Mr. Kaplan to indicate the percentage of the top digital asset tokens that qualify as digital asset securities.
  • Mr. Kaplan estimated that between 30 percent and 40 percent of the top digital asset tokens qualify as digital asset securities. He stated however that this figure may be even greater. He added that SEC Chairman Gay Gensler has stated that the “overwhelming majority” of digital assets (which include all digital assets except for Bitcoin) can potentially be securities. 
• Rep. Norman commented that Mr. Kaplan’s response would suggest that as much as 60 percent of digital assets would not be regulated under federal securities laws.
  • Mr. Kaplan indicated that he would need to conduct further analysis to provide a more accurate assessment of the percentage of digital asset tokens that qualify as digital asset securities. He remarked that almost every smart contract-based blockchain network token had been issued with the intention to raise capital from the general public. He also stated that investors in these tokens intended to make money based on the efforts of a common enterprise.
• Rep. Norman then questioned Mr. Kaplan’s claim that Prometheum provides robust investor protections. He then expressed concerns over how a Chinese firm has a sizable ownership stake in Prometheum. He asked Mr. Kaplan to indicate whether it is problematic that a Chinese firm may have access to Premetheum’s information. He called it shocking that FINRA and the SEC had approved the Chinese investment into Prometheum.
  • Mr. Kaplan mentioned how Prometheum had undergone a series of SEC inquiries and CFIUS investigations regarding its Chinese investments. He testified that Prometheum had changed its bylaws and terminated its co-development work and strategic relationships with its Chinese affiliate. He stated that Prometheum has no involvement with China regarding its code.
• Rep. Norman asked Mr. Kaplan to confirm that a Chinese firm has a representative that sits on Prometheum’s board of director and owns 20 percent of Prometheum.
  • Mr. Kaplan mentioned how many U.S. companies have Chinese members on their boards of directors. He reiterated that both CFIUS and the SEC had investigated Promethuem’s actions and noted that these investigations included a review of all of Prometheum’s communications with foreign investors. He stated that both CFIUS and the SEC did not find any wrongdoing on the part of Prometheum and had closed their investigations into the company.
• Rep. Norman expressed skepticism toward Mr. Kaplan’s claim that Prometheum is compliant with federal securities laws given how a Chinese firm has a sizable ownership stake in the company. He then mentioned how there is bipartisan and bicameral legislation to prohibit Chinese entities from acquiring U.S. digital asset companies. He asked Mr. Garrison to provide his opinion of this legislation.
  • Mr. Garrison indicated that he is not familiar with the particular legislation that Rep. Norman is discussing. He remarked however that the U.S. should take national security concerns into account as part of any digital assets legislation or regulation. He expressed general support for legislation that would seek to prohibit Chinese investments in U.S. digital asset companies.
• Rep. Norman reiterated his concerns over China’s involvement with U.S. digital asset firms. He asserted that there do not exist robust protections that prevent China from accessing the data of U.S. digital asset firms that are the recipients of Chinese investments.